Unlocking the Hidden Value in Your Home: A step by step guide
Hi Scherb Home family, friends and clients! If you're like many homeowners these days, you might be wondering about the process of tapping into the equity within your home. With the surge in home values, numerous homeowners are harnessing their property's equity to pay off debts, finance renovations, or pursue other financial objectives. In this article, I'm excited to bring you up to speed on how to make the most of your newfound equity.
Calculating Your Home Equity: The First Step
To understand how much you can borrow against your home's equity, you must first compute your current equity. Two essential figures come into play here: your remaining mortgage balance and your home's current market value. Imagine, for instance, your mortgage balance is $800,000, and your home is now valued at $2,500,000. In this case, you possess approximately $1,700,000 in equity.
However, it's important to note that while you have equity, you can't necessarily use all $1,700,000 of it. Before determining how much equity you can tap into, you must perform a loan-to-value calculation.
Demystifying Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) measures your home's value compared to your outstanding mortgage balance. Your LTV directly influences the amount you can borrow. Lenders impose limits on how much equity you can leverage. While cash-out refinances often adhere to an 80% LTV cap, some lenders might allow up to 95% LTV for a HELOC or home equity loan.
Using our earlier example, if your home is worth $2,500,000 and your mortgage balance is $800,000, your LTV stands at 32%. Applying for a home equity loan or HELOC could potentially enable you to borrow up to 68% of your home's total value, around $1,700,000. This ensures your LTV remains at 80%. However, keep in mind that the specific percentage varies among lenders and loan types.
Many lenders avoid lending beyond this threshold to safeguard the home's positive equity in case of market fluctuations. They want to ensure they can recover their funds if you default on your loan, which wouldn't be possible if you've tapped into all your equity.
Growing Your Home Equity
Even if you're not planning to access your home's equity right now, increasing its value is always a smart move. A higher equity level grants you more financial flexibility. You could use a home equity loan to address unforeseen financial needs or make a profitable sale if you decide to move.
Building Equity Strategically
Boost Mortgage Payments: Regular mortgage payments build equity, but adding a modest $100-200 extra per month accelerates the process. This also shortens your loan term, potentially saving you thousands in interest over time.
Upgrade Your Home: Consider making cosmetic or substantial upgrades. Cosmetic changes like fresh paint and new flooring can boost equity, while more involved upgrades, like kitchen remodels or home extensions, can have a significant impact.
Opt for a Shorter Loan Term: Refinancing to a shorter loan term, like a 15-year mortgage, speeds up equity growth and reduces overall interest payments.
Exploring Equity Access Options
When you're ready to utilize your home's equity, several financial tools are at your disposal.
1. Home Equity Line of Credit (HELOC): Think of a HELOC like a credit card tied to your home's equity. You can borrow as needed within your approved limit, and you only pay interest during the borrowing period. Afterward, a repayment phase begins.
2. Home Equity Loan: This second mortgage lets you withdraw a lump sum based on your equity. Your primary mortgage remains unaffected, and you'll have a new payment for the home equity loan.
3. Cash-Out Refinance: This type of refinancing replaces your existing mortgage with a new one, allowing you to borrow against your equity while potentially securing a lower interest rate.
Remember, the Scherb Home Team is here to guide you through this process. If you're contemplating selling your home or need assistance evaluating your options, reach out to us directly. We can connect you with our preferred lenders to facilitate a seamless experience. Your home's equity holds untapped potential, and we're here to help you unlock it.
~Cliff and the Scherb Homes Group
