How much home equity do you have?
Equity is the difference between the current appraised value of your home and the balance of your mortgage. If you have a second mortgage, or a loan against your mortgage, you’ll need to subtract that as well.
The more equity you have, the better shape you’re in to borrow against the value of your home. More equity can help you get a larger home equity loan, potentially better rates and possibly even additional refinancing options.
How to calculate your available home equity
To see how much home equity you currently have, first look online to understand your current home's estimated value or hire an appraiser to get an official estimation of your home's value.
Keep in mind, if you decide to apply for a home equity loan, your lender may need to order another appraisal and may not be able to use one that you paid for yourself.
Once you have an estimate of your home’s value, add up any outstanding mortgage debt on your home (including any current home equity loans).
Your available home equity can be calculated by subtracting what you owe on your home from the current estimated value of your home.
For example, if your home is currently valued at $300,000 and you owe $120,000 on your mortgage, you have $180,000 available in your home's equity.
How combined loan-to-value (CLTV) ratio determines what you can borrow from your home's equity
When you want to have more than one mortgage secured by your home, lenders look at equity by using the combined loan-to-value (CLTV) ratio to determine how much you can borrow or if you qualify. Your CLTV will determine the loan amount you can secure.
The CLTV is calculated by taking your current mortgage balance(s) plus your potential home equity loan amount, then dividing that number by your home value.
The lower the CLTV, the better.
For example, say your home is valued at $300,000. You have $120,000 remaining on your mortgage. That means you have $180,000 in home equity. If you desire to borrow $75,000 of that through a home equity loan, your CLTV would be as follows:
($120,000 + $75,000) / $300,000 = 65% CLTV
Loan amounts and CLTV limits depend on the lender. Discover® Home Loans offer home equity loans from $35,000-$300,000 and CLTV less than 90%.
If this seems complex, the loan amount calculator from Discover allows you to input your estimated home value and your remaining mortgage balance to see the most you can borrow with your home's equity.
What types of loans use your home equity to secure approval?
There are three main products that use your home's available equity to secure loan approval:
Home equity loans
With a Discover home equity loan, you can borrow up to 90% of your CLTV. There are few restrictions on how you spend the funds, although putting them towards home improvements may qualify for tax deductions on the interest you pay against the loan. Talk to your tax advisor to see if your circumstances qualify. Additionally, Discover home equity loans feature $0 in costs at closing.
Home equity lines of credit (HELOCs)
Home equity lines of credit (HELOCs) are similar to home equity loans, but instead of receiving the loan as a lump sum, you will be given a withdrawal limit that you can pull from during the withdrawal period.
HELOCs may include annual fees and transaction costs when you make withdrawals, in addition to closing costs when the withdrawal period ends. Discover does not offer HELOCs.
Cash out refinance
A cash out refinance is a mortgage loan that pays off your original mortgage and includes additional funds to use for almost anything.
In addition to home equity loans and cash out refinance, Discover Home Loans also offers a mortgage refinance with zero origination fees, zero appraisal fees and low, fixed interest rates.
How to determine your home's value
Both standard equity and CLTV depend on a home appraisal. You’ll likely need to get a new, professional appraisal when using your house as security for a loan, like a home equity loan. Usually, a professional comes to your home and looks at the exterior. If there are any unique features or concerns, lenders will usually work with you to find a time for an interior inspection as well.
Some of the factors that determine your home’s value include the size of your home, its location and your neighborhood, the assessed taxes you pay each year, comparable homes in your area, upgrades you have made to the home, the curb appeal, and the construction quality of the home.
Some lenders use data to determine your home’s value. One standard model that’s used is called the automated value model (AVM), which estimates value based on comparable data, like the most recent listings and sale prices of similar homes in your area.
A home equity loan from Discover Home Loans for home improvement can also potentially improve your home’s overall value.
While home equity loans are a common way to use your home’s equity to receive financing, equity is also a consideration for home equity lines of credit.
How to increase your available home equity
Increasing your equity may increase the amount you can borrow with your home equity loan. To increase your equity, you must either:
- Reduce the amounts you owe on your mortgage loan or
- Increase the value of your home.
Making extra payments on the principal of your mortgage can help you increase your equity and it may also help shorten the term on your original mortgage and reduce the interest you pay over the life of the loan.
A new assessment of your home may be able to increase your previously assessed value, but another method is to invest in home improvements.
Home improvements can add home value and home equity
There are many upgrades that may improve your home’s value and give you a better return on your loan. If you make improvements to your home that increase its value and don’t hurt resale opportunities, you get the most bang for your buck.