The amount of money borrowed on a loan.
If you’re taking out a home equity line of credit, the amount of available Glossary Term: equity you have in your home plays an important role. Your home equity is the difference between the Glossary Term: appraised value of your home and your current mortgage balance(s). The more equity you have, the more financing options may be available to you.Your equity helps your Glossary Term: lender determine your Glossary Term: loan-to-value ratio (or LTV), which is one of the factors your lender will consider when deciding whether or not to approve your application. It also helps your lender determine whether or not you’ll have to pay for Glossary Term: private mortgage insurance (PMI). To avoid PMI, your LTV typically needs to be 80% or less, but PMI applies only to first liens. So, if your home equity line of credit is a second lien against your house, you shouldn't have to worry about paying PMI.
Current Loan Balance ÷ Current Appraised Value
Example: You currently have a loan balance of $140,000 (you can find this number on your monthly loan statement or online account). Your home currently appraises for $200,000. So your loan-to-value equation would look like this:
$140,000 ÷ $200,000 = .70
Convert .70 to a percentage, and that gives you a loan-to-value ratio of 70%.
Current Combined Loan Balance ÷ Current Appraised Value
Example: You currently have a loan balance of $140,000 (you can find this number on your monthly loan statement or online account), and you want to take out a $25,000 home equity line of credit. Your home currently appraises for $200,000. So your combined loan-to-value equation would look like this:
$165,000 ÷ $200,000 = .825
Convert .825 to a percentage, and that gives you a loan-to-value ratio of 82.5%.
Most lenders require your CLTV to be 85% or less for a home equity line of credit. If your CLTV is too high, you can either pay down your current loan amount or wait to see if your home’s value increases.
Another way to impact your loan-to-value ratio is by protecting the value of your home by keeping it neat and well maintained.
Now that you know how to calculate your loan-to-value and combined loan to value ratios and how you can impact them, you can make more informed choices to help you reach your financial goals, whether you choose to borrow from the equity in your home, refinance, or simply continue to pay down any current home loan balances.