Home Equity Loan Calculator
Estimate your available equity and borrowing power based on current LTV limits.
Understanding Home Equity Loans and Borrowing Power
A home equity loan, often referred to as a "second mortgage," allows homeowners to borrow against the value of their property. The loan amount is determined by the difference between the home's current market value and the remaining balance on the primary mortgage.
How Is Home Equity Calculated?
To calculate your raw equity, you simply subtract your mortgage balance from your home's appraisal value. However, lenders rarely allow you to borrow 100% of your home's value. Most lenders use a Loan-to-Value (LTV) ratio, typically capping the total debt (primary mortgage + new loan) at 80% to 85% of the home's value.
- Home Value: $500,000
- Current Mortgage: $300,000
- LTV Limit: 80% ($400,000 max total debt)
- Borrowing Power: $400,000 – $300,000 = $100,000
Key Factors Affecting Your Loan Amount
- Appraised Value: A professional appraisal is usually required to confirm the market value.
- Credit Score: Higher scores may unlock higher LTV limits (up to 90%) and lower interest rates.
- Debt-to-Income (DTI) Ratio: Lenders look at your monthly income versus your monthly debt obligations to ensure you can afford the new payment.
- Existing Liens: Any other liens or judgments against the property must be settled or considered during the calculation.
Why Use a Home Equity Loan?
Home equity loans are popular for debt consolidation, home improvements, or large medical expenses because they typically offer lower interest rates than credit cards or personal loans. Since the loan is secured by your home, the risk to the lender is lower, which translates to better terms for the borrower. However, remember that your home serves as collateral; failure to repay could lead to foreclosure.