How home equity is calculated
Example: a $400,000 home with $250,000 left on the mortgage has $150,000 of equity, so you own 37.5% of it and the LTV is 62.5%. A lender that allows 85% combined LTV would let the total debt reach $340,000, so you could borrow up to $90,000 with a home equity loan or HELOC.
What lenders look at
Most home equity lenders cap combined LTV at 80% to 85%, and a few go to 90% for strong credit. They also check your credit score and debt-to-income ratio, and they'll order an appraisal, so use a realistic value here, such as recent sales of similar homes nearby, not the highest online estimate.
LTV also decides private mortgage insurance on a conventional loan. You can ask to cancel PMI once the balance reaches 80% of the home's original value, and it should end automatically at 78%. Paying extra on the principal, or a rise in value confirmed by an appraisal, gets you there sooner.
Frequently asked questions
How much equity do I need for a home equity loan?
Usually at least 15% to 20%, because most lenders cap the combined loan-to-value at 80% to 85%. With 37.5% equity on a $400,000 home, you could borrow about $90,000 at an 85% limit.
What is a good loan-to-value ratio?
80% or lower. Below 80%, conventional loans don't need mortgage insurance and you'll qualify for better rates on refinancing and home equity loans.
Is equity the same as what I'd get if I sold?
Not quite. Selling costs, such as agent fees and closing costs, often take 6% to 10% of the price, so you'd walk away with less than your equity.
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