Learning how to estimate the equity in your home is a vital skill for homeowners, partly because it helps you stay on top of your finances but mainly because it is the first step to successfully applying for a home equity loan.
You can use a home equity loan to pay for home improvements, consolidate your high-interest debts and put the money you’ve already invested in your house to work for you.
What is Home Equity?
Equity is the amount of stored value you have in your house. If you deduct the amount of money you still owe on your property from the assessed value of it on the market, any positive value you have left is the equity on your home.
If you need money for basically any purpose, from a kitchen remodel or emergency repairs, or even if you just want a new car or to help with your kids’ tuition fees, you can access that equity with a home equity line of credit (HELOC).
When Can You Take Out a Home Equity Loan?
There’s no set length of time you have to have your mortgage before you apply for a HELOC. Some people have taken out equity loans in the first 1-2 months after closing on a mortgage, while many more people gradually build equity for years before they try to access it.
Every lender has a unique set of standards for home equity borrowers, but in general you should meet the following criteria for a successful application:
- A personal credit score of 700 or higher
- A debt-to-income ratio of no more than 45%, preferably below 30%
- At least 15-25% equity currently in your property
Calculating Your Home Equity Line of Credit
If you’re not clear about whether or not you’re ready to take out a HELOC, or you think you can get approved but want to know what your payments will probably be, it’s helpful to run your numbers through an online HELOC calculator.
Using the HELOC payment calculator, you can plug in numbers for your current home evaluation price, your mortgage balance, the amount you wish to borrow and a rough range for your credit score.
This is a fairly simple calculator to use, and results should appear right away. Obviously the answer you get from an online calculator isn’t definitive, since it doesn’t check your credit score or evaluate your home’s financial history to confirm the price.
Interest rates can also fluctuate over the short term and seriously change the overall loan value and your payoff amount. Always talk to a loan officer about the specific terms of the HELOC you’re looking into before signing on to any loan agreement.
Ways to Grow the Equity in Your Home
If your calculations aren’t working out because there isn’t enough equity in your home, there are a few things you can do to improve the situation.
You can start by making a bigger down payment when you buy your home, which tends to kickstart your equity building and might even leave you qualified for a HELOC before the ink is dry on the original loan documents.
You can make your payments on time, if possible for more than the minimum payment due. Finally, if you need a reliable method for how to estimate the equity in your home, you can make a point of keeping accurate records from the beginning over the life of your loan, so that you have something like a running tally of the relevant numbers available at your fingertips for when you need to start your application.
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Author: Jen Robbin