Home Equity

One of the most important factors that determine how much you can borrow is home equity.  Home equity is the difference between the appraised value of your house and how much you owe on your mortgage.  For example, if your house is appraised at $700,000 and you have $500,000 left to pay-off your mortgage, then your home equity is $200,000.

The lending market is becoming increasingly competitive and some lenders are offering loans as high as 125% of the equity in your home. Such large loans carry high interest rates and require an excellent credit history. A more typical amount is 80% of the equity in your home.

If you have a bad credit history and a low credit rating, you pose more risk to the lender because you are more likely to default than someone with a high credit rating.  The lender might not approve your loan or look for security by using collateral or raising interest rates or decreasing the amount of your loan.

If you have a good credit history and make a high down payment, the lender may offer you a low the interest rate.  The amount of the loan however, may be too small for your needs.  By negotiating a higher interest rate with the lender, you may be able to qualify for a larger loan.

The LTV is a ratio determined by dividing the loan amount by either the selling price or the appraised value of the property.  It is one of the key risk factors that lenders assess when a borrower is being qualified for a mortgage.

If the appraised value of my house is $300,000 and my first mortgage is $240,000 then the LTV is $240,000/$300,000 x 100% = 80%.

A borrower with a large home equity or one who makes a large down payment poses a smaller risk to the lender since they are less likely to default because they have a lot to loose. Therefore, the lower the LTV, the lower the risk to the lender.

When applying for a debt consolidation loan, to determine your limit, the lender will use an LTV figure which includes all debt. This is best illustrated through an example:

The appraised value of Max’s home is $450,000 and he still owes $300,000 on a first mortgage. When Max applies for a home equity loan to consolidate his debt, the bank decides to use an 80% LTV.  How much would Max be able to borrow?

$450,000 (appraised value of house) x 80% LTV - $300,000 (what is still owed on the first mortgage) = $60,000

• Appraised value of your home

• Amount of first mortgage debt

• Home equity

• Credit history

• Income data

• Employment history

• Requested home equity loan amount