Home equity is the difference between the current market value of your property and the outstanding balance of all liens on the property (such as your primary mortgage). As you pay down your mortgage principal or as your home's value increases, your equity grows.
A Home Equity Loan, often referred to as a "second mortgage," allows you to borrow against that equity in a lump sum, usually at a fixed interest rate. This is different from a HELOC (Home Equity Line of Credit), which functions more like a credit card.
Understanding the LTV Ratio
Lenders use the Loan-to-Value (LTV) ratio to determine how much they are willing to lend. Most lenders limit your combined loan-to-value (CLTV) ratio to 80% or 85%. This means the sum of your current mortgage and your new home equity loan cannot exceed that percentage of your home's total value.
Example: If your home is worth $500,000 and the lender allows an 80% LTV, your total debt can be $400,000. If you already owe $300,000 on your first mortgage, you could potentially borrow up to $100,000 in equity.
Benefits of Using a Home Equity Loan
Fixed Interest Rates: Unlike credit cards or HELOCs, home equity loans typically offer fixed rates and predictable monthly payments.
Lower Interest Rates: Because the loan is secured by your home, rates are usually significantly lower than personal loans or credit cards.
Tax Deductibility: In some cases, interest paid on a home equity loan may be tax-deductible if the funds are used to buy, build, or substantially improve the home that secures the loan (consult a tax advisor).
Debt Consolidation: High-interest debt can be rolled into a single, lower-interest payment.
Common Calculation Example
Let's say you have the following numbers:
Home Value: $400,000
Mortgage Balance: $250,000
LTV Limit: 80%
First, calculate 80% of $400,000, which is $320,000. Subtract your current balance ($250,000) from that amount. Your maximum loan amount would be $70,000. If you take this loan at a 7% interest rate over 15 years, your monthly payment would be approximately $629.18.
function calculateHomeEquity() {
var homeValue = parseFloat(document.getElementById('he-home-value').value);
var balance = parseFloat(document.getElementById('he-mortgage-balance').value);
var ltvLimit = parseFloat(document.getElementById('he-ltv-limit').value);
var rate = parseFloat(document.getElementById('he-interest-rate').value);
var termYears = parseFloat(document.getElementById('he-loan-term').value);
if (isNaN(homeValue) || isNaN(balance) || isNaN(ltvLimit) || isNaN(rate) || isNaN(termYears)) {
alert("Please enter valid numbers in all fields.");
return;
}
// Total Raw Equity
var totalEquity = homeValue – balance;
// Max Borrowing Power based on LTV
// Formula: (Home Value * LTV%) – Current Balance
var maxLtvAmount = homeValue * (ltvLimit / 100);
var maxLoan = maxLtvAmount – balance;
if (maxLoan 0 && monthlyRate > 0) {
monthlyPayment = (monthlyRate * maxLoan) / (1 – Math.pow(1 + monthlyRate, -numberOfPayments));
} else if (maxLoan > 0 && monthlyRate === 0) {
monthlyPayment = maxLoan / numberOfPayments;
}
// Update Results
document.getElementById('res-total-equity').innerText = formatCurrency(totalEquity);
document.getElementById('res-max-loan').innerText = formatCurrency(maxLoan);
document.getElementById('res-monthly-payment').innerText = formatCurrency(monthlyPayment) + "/mo";
// Show results div
document.getElementById('he-results').style.display = 'block';
}
function formatCurrency(num) {
return '$' + num.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
}