Home Ownership

Evaluating the Equity in Your Home

•	Couple calculating how much equity they have in their home so that they can apply for a home equity loan for home improvement

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, you’ll need to subtract both mortgages.


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.


Combined Loan-to-Value Ratio


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 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 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 loans from $35,000-$200,000 with CLTV less than 90%.


The Home Appraisal Process


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 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:


  • Size Location/Neighborhood
  • Taxes you pay each year
  • Comparable homes in your area
  • Upgrades you’ve made
  • General look of your home, including paint, curb appeal and proper construction

Some lenders instead 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 loan for home improvement can also potentially improve your home’s overall value.


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, Remodeling magazine has provided regional and national statistics on which current home improvements are sound investments. You can see the 2016 list here. You can expect an increase in value from any project with a cost recoup of 60% or higher.


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, request a no-obligation quote online and we’ll call you back.

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