Home Ownership

How Much Equity Do You Have in Your Home

Couple evaluating the equity that they have built in their home considering taking out a home equity loan

Equity is at the core of many secured financial products, and the home equity loan is no exception. It is helpful to know how to properly calculate the equity in your home, so you know how much you can reasonably expect to borrow.

Equity is essentially 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 (HEL), better rates and even additional refinancing options.

Knowing your combined loan-to-value ratio: How much can you borrow from your home's equity?

Lenders prefer another way to look at equity, called the combined loan-to-value (CLTV) ratio, when determining 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 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-$200,000 and CLTV less than 90%.

 If this seems complex, our loan amount calculator 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.

How to Determine the Value of Your Home

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:

    1) Size

    2) Location/Neighborhood

    3) Taxes you pay each year

    4) Comparable homes in your area

    5) Upgrades you’ve made

    6) General look of your home, including paint, curb appeal and proper construction

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 for home improvement can also potentially improve your home’s overall value.

How to increase your home’s equity

Increasing your equity may increase the amount you can borrow. To increase your equity, you must either:

  1. Reduce the amounts you owe on your mortgage loan or
  2. 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. 
What types of loans can be used to tap your home equity?

Home equity loans, home equity lines of credit and even cash out refinance are all common ways to use your home’s equity to receive financing.

In addition to Home equity loans, Discover Home Loans also offers a Mortgage Refinance with zero origination fees, zero appraisal fees and fixed interest rates from 3.99% - 11.99% APR.

Home Improvements Sometimes Mean Equity Improvements

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.

Since the 1980s, statistics have been published on which current home improvements are sound investments. You can see the 2020 list here

Get out there and look into a loan that capitalizes on the equity in your home so you can get started on that next home improvement project. Happy hammering!

Talk with a Discover Personal Banker today at 1-855-361-3435 to learn more about home equity loans or mortgage refinance. Or, start your application online. 

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