One of the advantages of owning a home is that you’ll build up equity as a homeowner, and you can potentially use it to finance other things. You may need or want to do some remodeling, or you might have other life events that require some amount of cash. Whatever the case, it’s wise to know how much equity you are building in your home in case you ever need to leverage it. Here’s how to calculate equity in your home. The good news is, it’s relatively straightforward and only takes two calculations (and you can use Mr. Cooper’s mortgage calculators to check your math).
Loan to Value Ratio
The first calculation you will need to make is your loan to value ratio ( LTV). LTV is another way of getting a picture of how much you still owe on your home relative to its current appraised value. Most lenders require that you have an LTV of 80% or less, which essentially means that you must owe no more than 80% of the value of your home in your current mortgage in order to refinance. The LTV percentage will also affect the home loan amount you might be able to get.
To calculate the LTV, divide your current loan balance by your home’s appraised value. You will get a decimal figure, which you should then convert into a percentage. For example, if your current loan balance is $200,000 and your home is valued at $250,000, your LTV would be .80 (80%).
Combined Loan to Value Ratio
Another percentage that lenders evaluate when determining what loan products you might qualify for based on your home equity is combined loan to value ratio (CLTV). CLTV is calculated by adding your current mortgage loan balance to your proposed equity loan amount, and then dividing it by the value of your home.
For example, let’s say you want to borrow $20,000. You would add $20,000 to your current loan balance, say $175,000, then divide that number by $250,000 (the value of your home). In this example, your CLTV would be .78 (78%).
Home values change over time, so the value of your home could’ve fluctuated between your purchase date and present day. Many factors affect home value, including the economy and neighborhood factors. Professional appraisals can help you estimate the value of your home, and mortgage lenders often require you to hire an appraiser when you apply for a mortgage. Independent appraisals can be done before you apply and give an idea of a value to use in your estimates.
If you’re interested in learning more about tapping into your home equity or need help doing the math to determine whether a cash-out refinance is right for you, contact one of Mr. Cooper’s expert mortgage professionals.