How to Calculate Home Equity & LTV? Mistakes to Avoid: Owning a house is a financial advantage since the value of houses generally increases. As the years go by and you pay off your mortgage, the liquid value (also known as the net value) of your home may increase. Also, whenever you need a 2D floor plan or 3D floor plan designs, you might think to sell the house or renting or renovating, in such cases, floor plans are helpful and we can help you out.
What is Home Equity
Home equity is the difference between the value of your home and the amount you still owe for it. That means you may be able to borrow money using your home as collateral.
Among the reasons why you could borrow using your home as collateral are those of investing in debt consolidation with high-interest rates, home renovations and the payment of large expenses.
If you borrow on the basis of home equity in your home, be sure to make loan payments on the liquid value of the home on time and in full. Otherwise, there is the possibility of losing your home. Use this borrowing capacity responsibly and you will have a completely new level of flexibility to reach your financial goals.
How Do I Calculate Home Equity?
So basically, Home equity is the amount you really own in your home. The price you paid for it may not be the same at present, so to calculate it, you must do the following
- Check the current value of your home (research the regional market).
- Subtract the amount you still owe from the mortgage from the updated value.
Why is it important to know the Home Equity?
The amount you own from your home is crucial to request a line of credit. This value is used to calculate the LTV (Loan-to-value ratio), which is the way in which a lender will verify whether or not you are applying for the credit.
Ok now, what is LTV?
Lenders use the loan-to-value ratio (LTV) as a measure to compare the amount of the first mortgage against the appraised value of the property. The higher the down payment, the lower the loan to value ratio.
Typically, evaluations with high LTV rates are generally seen as a higher risk and, therefore, if the mortgage is approved, the loan generally costs the borrower more to borrow. In addition, a loan with a high LTV ratio may require the borrower to purchase mortgage insurance to offset the risk to the lender.
How is the LTV ratio calculated?
The LTV ratio is calculated as the amount of the mortgage lien divided by the appraised value of the property, expressed as a percentage.
For example, a borrower who takes a $92,500 mortgage to buy a house priced at $100,000, so the equation would go like this:
92,500 ÷ 100,000 = 0.925
That shows as 92.5%. That is the loan-to-value ratio.
The loan-to-value ratio is a critical component of the mortgage subscription, either for the purpose of buying a residential property, refinancing a current mortgage on a new loan or borrowing against the capital accumulated within a property.
I already know what the LTV ratio of my home is, but I don’t know what it means
Most lenders offer mortgage applicants and capital on the property the lowest possible interest rate when the loan-to-value ratio is at or below 80%.
For example, a borrower with an LTV coefficient of 95% may be approved for a new mortgage, but the interest rate may be up to a percentage point higher than a borrower with an LTV coefficient of 75%. In addition to the higher interest rate, lenders can add a mortgage insurance requirement for high-ratio LTV transactions.
So, in summary:
- An LTV ratio of less than or equal to 85% = Good.
- An LTV ratio greater than 85% = Not so great.
Knowing how to calculate the value of your living and the LTV ratio will be very useful tools for making wise decisions about your finances. You should always be one step ahead in terms of your economy and property.
Mistakes to avoid while calculating Home Equity & LTV
In recent years, home costs and values have considerably increased, making it possible for homeowners to improve their financial stability. Home equity is a method of borrowing money for big-ticket items having a broad knowledge about this loan will be beneficial in helping you make the right decision for your finance.
LTV is an acronym that means ‘LOAN TO VALUE’. It is the ratio of the loan amount compared to the appraised Market value of a property. We recommend knowing how to calculate them with caution and that’s why we compiled a list that will educate you on mistakes you should avoid when calculating your home equity and LTV.
- IMPROPER NUMBERS AWARENESS: From the estimated value of the house subtract the current mortgage, which is the home equity. Not having enough equity will not help you in a cash-out refinance. Home equity assists mortgage lenders decide the ratio of LTV which is a major factor lenders consider in determining if they will approve the loan application or not. The LTV regulates the cash out you get after you refinance. Your credit score is most important for refinancing because the higher the score, the more you qualify for a cash-out refinance, though it isn’t the only determining factor.
- INABILITY TO WEIGH OPTIONS: Sometimes it could tempt you to continue with your friend who is a mortgage broker or your current lender for a cash-out refinance because of its convenience, familiarity and because your instinct considers it a better option, but it might affect your chances of getting the best rate. For a more accurate Refinance, contacting multiple lenders with good communication skills and who understand your choice is often a better option.
- FAILURE TO LOCK RATE: When communicating with lenders make enquiries concerning lock rate. Inquire about the process involved in rate locking during the loan application. Most times, the locking rate is a better option, as you won’t be at risk of rates increasing before you close. A lot of lenders lock a rate for 30 to 60 days.
- CLOSING COST: Having enough savings for a down payment is a huge achievement, and it is one that comes with pride. It is important to always remember that the down payment is not the expense gained when purchasing your first new home. Just as it sounds, closing costs are additional costs added with closing the sale of the home. These could also include broker’s fee, insurance, appraisal fee and background costs and credit reports necessary for you to qualify for a loan. Sometimes closing costs are lesser than the cost of the down payment and they add up but if they are not in your budget, you could be in a position where you are starting life with debts you didn’t expect or worse it might be difficult for you to close on the home purchase.
- WRONG COST ANALYSIS: There are specific costs that accompany cost out refinance that could include closing costs along with other fees that apply. Sometimes there are possibilities of rolling some closing costs with the new mortgage, but it is also necessary you contact a mortgage lender to have your options communicated to you.
- SECURING LARGE CREDIT PURCHASES: One mistake to avoid in a large credit refinance is the opening of new credit account or making large credit purchases on credit when you are also trying to qualify for a refinance. Creating a new account can drastically lower your credit score because it reduces your credit age.
- REVENUE REPLACING PROFITS: Calculating your LTV using revenue instead of profits can drastically overvalue customers, which tricks you into believing you can spend a larger amount to gain them than is usually sustainable. Note: We should base LTV on profits and not revenue.
- CUSTOMER LIFELINE CHOICES: You may not know your customer lifeline, especially as a beginner. It changes continuously and might change continually as products change. Sometimes it entails guessing so you will have to guess. Most times, you do not regard the first number you decide on with great importance. You can reevaluate as more data gets involved. One key point is to always endeavor to pick a reasonable number.
- CUSTOMER SEGMENTATION: Having a clear understanding of LTV passed across all customers is very good, but the main performance comes from segmentation. Segmentation involves separating customers based on important information and according to different characteristics, which could include demographic information or purchase behavior. You can calculate LTV differently as it provides you with interesting insights about each of these segments.
- IMPRACTICABLE PROJECTION TIMEFRAMES: The projection for maximum customer life is an important input for your LTV calculation. Avoid pushing to an unreasonable period or timeline.
- INCORRECT INPUTS: One important essential is correctly getting the base inputs for accurately calculating an LTV. By identifying a customer, it is easier to connect them to their associated orders.