Your home equity can be a powerful financial tool. Whether you want to renovate, cash-out refinance, or fund a major expense, knowing how much equity you have is the first step. Understanding your loan-to-value (LTV) ratio can also help determine your borrowing power and whether you’ll need private mortgage insurance (PMI).
How to Calculate Your Home Equity
Equity is the difference between your home’s current market value and your remaining mortgage balance. Most lenders require an appraisal to confirm your home’s value before approving a refinance or HELOAN.
For example, if your home is worth $345,000 and you owe $150,000, your home equity calculation would be:
$345,000 – $150,000 = $195,000
In this case, the equity in your home would total $195,000.
What Is the Loan-to-Value (LTV) Ratio?
Lenders use the loan-to-value (LTV) ratio to assess how much of your home’s value is financed through a loan. The lower your LTV, the better your chances of securing a favorable loan with lower interest rates and no PMI.
To calculate your LTV ratio, divide your mortgage balance by your home’s appraised value:
$150,000 ÷ $345,000 = 0.43 (or 43%)
A LTV of 80% or lower can help you qualify for better loan terms and avoid PMI, potentially saving you thousands of dollars over time.
Ways to Access Your Home Equity
Once you know the your equity and borrowing power, you can choose the best loan option for your needs:
1. Cash-Out Refinance
A cash-out refinance replaces your current mortgage with a larger loan. The difference between the new loan amount and your remaining mortgage balance is given to you in cash. Homeowners often use this option for home improvements, debt consolidation, or investments.
2. Home Equity Line of Credit (HELOC)
A HELOC functions like a credit card, allowing you to borrow against your home’s equity as needed. You only pay interest on the amount you use, making it a flexible choice for ongoing expenses like home renovations.
3. Home Equity Loan (HELOAN)
A home equity loan provides a lump sum upfront, making it ideal for large, one-time expenses. Unlike a HELOC, this loan has a fixed interest rate and set repayment schedule.
Tap into Your Equity Today
If you’re ready to explore your equity options, Loan Pronto can help. Get a free rate quote or start your online loan application to get pre-approved today.
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