HELOC & Home Equity Credit Line LTV Qualifier
Are you thinking about taking out a home equity loan? For as many as four lender loan-to-value ratios, this calculator will help you figure out the credit line you may be able to secure. First enter the appraised value of a property and the total of mortgages owed against the property. Then include up to four different loan-to-value ratios.
Click on CALCULATE and you’ll see four different credit limits for the loan-to-value ratios you provided.
Your Guide to Withdrawing Home Equity
Are you interested in renovating your home? Does the roof need repairs? Do you want to remodel the kitchen or finish the basement? Updating your home can be a wise decision, because it oftentimes increases the value of your property. Plus, there is a feeling of tremendous personal satisfaction in knowing that you have modernized your living space.
While people oftentimes discuss the idea of sweat equity, or increasing the value of your home through your own hard work with renovations, such effort will not help you with the bank. Instead, what you need to do is familiarize yourself with the lending concept of mortgage equity withdrawal. Through this methodology, you can leverage the money you have earned by paying your monthly mortgage into better living conditions.
Understanding the Basics
The first thing you need to know when considering a mortgage equity withdrawal is exactly how the process works. This option is available to consumers with good credit scores who have paid the mortgage enough to build equity. If you live in an area whose housing prices have steadily increased, it is theoretically possible to have equity within a short period of time.
The explanation for this behavior involves the definition of home equity. Simply stated, it is when your house is worth more than the amount of money you owe to your mortgage lender. The type of loan you have will impact your home equity.
For the first decade, payments on a conventional 30-year mortgage largely go toward the interest rather than the principal. On 15-year mortgages, more money is directed toward the principal earlier in the life of the loan. Payments toward the principal are what reduce the actual loan amount, thereby increasing your equity.
There are two ways to boost your equity. The first is for your home to go up in value, which happens almost automatically during a housing boom. The second is for you to pay down the principal of your loan. As long as you have accomplished one or both of those tasks, a mortgage equity withdrawal becomes a viable option.
How Much Can You Borrow?
Simply knowing how much equity you have built over time is not enough. Lenders do not always view your equity the same as cash. They appreciate facets of the borrowing dynamic that you may not. By borrowing a new amount of money against your mortgage, you reduce the overall value of your home.
Yes, the value of your home had previously increased, but second mortgages can be dangerous for lenders as well as borrowers. Failure to repay the new line of credit can lead to foreclosure just as is true of the original loan. Since the amount of money being borrowed is so much less than the initial financial outlay, the second lien against the collateral you use, your home, is worrisome to the lender.
Since the housing market collapsed a few years ago, banks have changed their tune on home equity withdrawal. Previously, the sky was the limit for such transactions. In the more conservative lending era today, the potential loan amount is much smaller. As recently as 2008, borrowing 100 percent of your equity was feasible. Today, 90 percent is the upper limit, and many lenders have much lower thresholds.
Do not be surprised if you are told that 75 percent of your equity is the most you can attain. By forcing consumers to keep more of their equity, banks naturally include safeguards in case the housing market crashes once again. That extra 10 to 25 percent operates as a buffer to prevent consumers from risking foreclosure by winding up underwater on their mortgage.
How Much Can You Borrow for a Mortgage Equity Withdrawal?
Given the parameters above, the calculation the bank makes is easy to determine. The most important factor is the current value of your home. Then, they calculate the percentage of the home value that they would allow for withdrawal. Next, they note the current amount of the mortgage loan owed by the borrower. Finally, they subtract that amount from the borrowing percentage calculation to establish the largest amount of withdrawal possible.
Here is an example. Assume that a home has a value of $300,000 and that the borrower paid $50,000 as a down payment. His or her mortgage loan was initially $250,000. If the bank authorizes 80 percent withdrawal, that is a total of $200,000. After five years of paying more than expected on a 15-year loan, the consumer has reduced his or her amount owed to $170,000. He or she would qualify for a mortgage equity withdrawal of no more than $25,000.
Understanding how much you can borrow is a crucial step in mortgage equity withdrawal. If you do not have enough equity available to pay for your renovation, you can quickly rule out the option. If you have run the calculation and discovered that you have enough to achieve your goals, read on to discover the potential pitfalls of such a withdrawal.
The Dangers of Mortgage Equity Withdrawal
The most alarming one is an element completely beyond your control. In recent years, it has become readily apparent that the entire housing market is tethered together. If a certain segment of the industry suffers a steep decline, it can trigger a chain of events that can impact other, previously stable parts of the industry.
If the housing bubble pops once again, you suffer a double whammy. Your home value is automatically lessened when you perform a mortgage equity withdrawal. Then, your home value further decreases because the overall market has softened. Situations like this one are exactly how a large group of people wound up underwater on their mortgages from 2007 to 2010.
The other catch is that the work that you do to renovate your home has to increase its value enough to maintain its previous value. This may sound tricky, but it's not. If you borrow $20,000 for home improvements, the changes you make to your home have to increase its value by at least $20,000.
Think of the situation in logical terms. If you pay $20,000 for a car worth $15,000, you have overpaid. The same is true of mortgage equity withdrawal. The presumption is that the money you borrow will be counterbalanced by the increase in value of the home. When that doesn't happen, all you have done is decreased the worth of your property.
Finally, there is always the danger of how you handle your money. Some people do better with a line of credit than others. If you are prone to wasting extra money rather than spending it wisely, such a withdrawal is probably a bad idea.
To help protect homeowner equity HUD decided to lower their limits on cash-out refinances. The limit for FHA-backed or USDA-backed loans was lowered from an 85% LTV to an 80% LTV. VA loans also had their limits lowered from 100% LTV to 90% LTV.
Follow the Economy
Historically, the concept of mortgage equity withdrawal has proven most popular in times of extensive economic growth. When the entire country has money, the rising tide lifts the boat of the housing market. The presumption from borrowers and lenders alike is that the continued growth in the marketplace will foster constant growth with regards to home valuation.
This scenario is the inverse of the doomsday depiction above. Now, you are paying $20,000 for something that is presumed to be worth $25,000 soon. Lenders are perfectly comfortable providing 100 percent equity to borrowers because there is no need for the previously discussed buffer. The housing market's natural growth is the only safeguard required, but if the bubble bursts, that optimistic view of the marketplace changes dramatically.
Mortgage equity withdrawal is not without its risks. You have to know how to get the most out of your new loan, and you are subject to uncontrollable market forces. If you handle the process correctly, however, you can use these withdrawals to maximize your home valuation while feeling better about the quality of your residence.