Home finance: The basics of home equity

by Dianne Drinkwater 02/12/2024

Sometimes, loans can be difficult to calculate. Home equity loan figures are no different, but they don’t have to be. All you need is a little understanding of the basics and a reliable equity calculator. Having a trustworthy loan officer available is also a highly valuable resource.

Here’s a quick guide to calculating your home equity loan:

What is home equity?

Home equity means the amount of your home that you own outright. This is typically considered to be the amount of your mortgage you’ve already paid, which is often a driving factor for those searching for short mortgage terms.

Say you’ve purchased a home at $250,000. You’ve already paid 50% of your mortgage, leaving you with $125,000 in home equity, the amount you’ve paid into your home due to your monthly mortgage payments.

What is a home equity loan?

When someone refers to a home equity line of credit or home equity loans, they’re referring to a loan that you take out against your current home equity. These loans are typically taken out for a variety of reasons, like large home improvement projects, home refinancing, finance consolidation, etc.

What else should I know?

Calculating your home equity loan or facets of your loan may seem fairly cut and dry, but there are a few aspects to remember. For example, you’ll need to know your home’s current market value (or appraised value) and the outstanding balance left on your mortgage loan.

Another important facet to consider is your loan-to-value ratio. This number helps lenders determine your interest rates and, in turn, your monthly payments. Your LTV can be calculated by inputting the full mortgage amount and dividing it by the amount the property is appraised for.

So, if you have a property that’s been appraised for $200,000, and you made a down payment of $20,000 (10% of the appraised value) resulting in your mortgage loan being $180,000, your equation would be:

180,000/200,000 = .9 or 90% (LTV)

While 80% or lower is thought to be best, having an LTV of 90% or more does not immediately discredit you as an applicant. You just may face higher interest rates if you meet the rest of your preferred lender’s requirements.

These are just a few simple, yet heavily important, factors in determining home equity loans and home equity lines of credit. However, there will typically be specifics based on your specific circumstances and your lender’s requirements.

About the Author

Dianne Drinkwater

Dianne is a full time, full service, state licensed Realtor®, member of Northeast Florida Regional Association of Realtors® (NEFAR), St. Augustine/ St.Johns County Board of Realtors, National Association of Realtors® (NAR), Florida Association of Realtors® (FAR), and Northeast Florida Regional Multiple Listing Service And St. Augustine/St. Johns (MLS), Shearwater Certified, and Military on the Move Designation.

She provides a unique blend of leadership, sales acumen, project management, technology, and world class customer relation skills to enhance Watson Realty Corporation's values in the real estate sales and mortgage marketplace. She is a decisive take action solution-oriented professional with 25+ years of progressive business experience who efficiently utilizes technology to improve results. She has lived in the St. Augustine/Jacksonville area since 2005 and has seen the area continue to flourish and stays well informed of future growth plans within Northeast Florida.

Let's take a look at the lighter side of Dianne. She loves life is artistic loves music, the arts, yoga and genealogy! She loves to explore and hates to be bored. She loves the outdoors, especially plant life and wildlife. She has been a Master Gardener in Florida and Maine; as a photography enthusiast she has the eye to spot the perfect shot, which spills over to the photos she makes of the properties she markets AND frequently hires the best specialized real estate photographers/drone and videographers who make the difference in the sale. And, she loves to share her knowledge of the local real estate market and all aspects of the process to guide you through each step as a coach rather than a salesperson.

So, let's sum it up. Buying or selling your home is an important life decision. Reasons can vary greatly from change of lifestyle, to relocation or life challenges. You need someone you can trust, count on, respect and help shoulder the stress, anxiety and time commitment involved. Doesn't this sound like someone you want working for you?

So, what's the next step? Contacting Dianne of course. It is all about YOUR needs, goals, timeline and DREAMS! She's here to help you achieve them and she looks forward to hearing from you.

What are you looking for in a Realtor? - Someone who will really listen to your wants and needs? Someone who will expertly market your home until the SOLD sign adorns your front lawn or if you are a buyer tirelessly researches your wish list to find that perfect home? - How about someone who will always be honest, holds ethics in high regard as a realtor, who works aggressively to get you the best price for your home and someone who knows the market?

Selling or buying a home is a partnership with your trusted advisor- Dianne Drinkwater