You need to know what is the current LTV (Loan to Value) if you are considering securing a home equity loan. And where should it go, in order to meet Your needs.
Difference between appraised value and current mortgage balance is called equity.
In deciding whether to approve your loan, your lender will consider your equity in determining the loan-to-value ratio (LTV). Mortgage insurance is also determined by this information. The LTV threshold for not having to pay insurance (0.5-5%) is generally 80%. However, this does not apply to second mortgages so if you are taking out equity, it won’t be an issue.
Calculating your loan-to-value ratio:
Your home is currently appraised at $400,000 and you currently owe $300,000. Here is the loan-to-value equation:
$300,000 ÷ $400,000 = .75
Loan to value ratio of 75%.
For multiple loans, the combined loan-to-value (CLTV) looks like this:
As you consider a home equity loan, add the sum you want to borrow to your current mortgage balance. The combined loan balance would be, and your loan-to-value would be, the following:
Current combined loan balance ÷ Current appraised value = CLTV
You currently have a loan balance of $300,000 (you can find your loan balance on your monthly loan statement or online account) and you want to take out a $20,000. Your home currently appraises for $400,000. Accordingly, you would have the following loan-to-value ratio:
$320,000 ÷ $400,000 = .80
or 80% loan-to-value.
Very few private lenders will go to as high as 90% LTV. We do! Only as a second mortgage!
Having an understanding of how to calculate your loan-to-value and combined loan-to-value ratio, and how you can vary them, will help you make more informed decisions regarding how to reach your financial goals, regardless of whether you borrow against equity or refinance your loan.