Home Loan Equity
Before using a home equity loan for any purpose, you should be aware of the pitfalls of these loans
Before using a home equity loan for any purpose, you should be aware of the pitfalls of these loans
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How much May I borrow |
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Your home equity is calculated by taking the current value of your home and subtracting your mortgage. So if your home is worth $200,000 and you have a $100,000 mortgage, you have $100,000 of equity in your home. A home equity loan allows you to borrow money using your equity of up too $100,000 as security for the loan. Most lenders allow you to borrow up to 80% Loan-To-Value (LTV), which means taking the amount you still owe on your mortgage, adding the loan amount you want to borrow and dividing the loan amount plus mortgage by the value of your home. Very confusing but we can clarify by using the same example we used earlier: Your home is valued at $200,000 and your mortgage is $100,000 and you wish to borrow the maximum $100,000 or up to 80% LTV if the $100,000 is more than the LTV. So to calculate the maximum loan you can get we simply take the amount you want to borrow, $100,000 plus your mortgage, $100,000 and divide it by the value of your home, $200,000. See below : 100,000 + 100,000 / 200,000 = 1 or 100% Which is more than most lenders will allow. Some lenders do go as high as 125% however, with that are higher interests rates. The maximum amount you can borrow using the above example is $60,000 : 60,000 + 100,000 / 200,000 = .08 or 80% There are two kinds of Home Equity loans: Regular Home Equity loan (may be called standard home loan, closed end loan or term loan). This works like any other type of loan, you are given the amount of the loan in one lump some and you pay back the principal plus interest on a monthly basis with usually a fixed interest rate. The second type is a Home Equity line of credit. You are granted the amount you can borrow in a account and only pay what you take out plus interest, which can be a variable rate. It is revolving so when you pay back the loan amount you can borrow against the whole amount again. | ||||||||
| Last Updated ( Sunday, 27 July 2008 ) | ||||||||
