When you want to refinance your home, you need sufficient equity to meet required loan-to-value rules. If you bought your home with a small down payment only a few years before you attempt to refinance, you may face daunting challenges to get a new mortgage. Learning to accurately estimate your equity can save you money and frustration. Calculating your equity is not difficult, once you have a good idea of the value of your home.
Ask your loan officer about the maximum loan-to-value for the refinance loan you prefer. Loan-to-value is expressed as a percentage. For example, most mortgages require a maximum loan-to-value of 80 percent. This means you must have a mortgage loan balance of 80 percent or less of your home's value. There are exceptions, such as FHA and VA loans, which have higher loan-to-value maximums, almost reaching 100 percent.
By subtracting the maximum loan-to-value for your refinance from 100 percent, you'll establish the minimum equity percentage you need. If the mortgage you want has an 80 percent loan-to-value maximum, subtracting 80 percent from 100 percent tells you that you'll need 20 percent equity to qualify for the financing you prefer. If your favored loan permits a 90 percent loan-to-value, you'll need 10 percent equity to qualify.
Estimating the value of your home is the next -- and most challenging -- step in calculating your equity. Before you spend hundreds of dollars for a mortgage appraisal, look at your current assessed value for property tax purposes. But, don't stop there, since tax assessors use different formulas for computing tax value than appraisers use for fair market value. Check out some of the available Internet sites with databases of home values. You may also find data on recent sales of similar homes in your neighborhood from the Internet, real estate agents or at your city, town or county recorder's office.
Finally, multiply your home value estimate by the percent of equity you need for the refinance. For example, if you estimate your home's worth at $200,000 and you need 20 percent equity for the loan, multiply the value, $200,000, by 20 percent. You'll need $40,000 in equity to qualify for this loan. Should your lender allow a 90 percent max loan-to-value, you'll need $20,000 -- $200,000 times 10 percent -- to complete your refinance.
Just as you calculate your debt-to-income ratio, based on what you make versus what you owe, before you apply for a mortgage, calculate the minimum equity you need before making application. Fees start piling up at or immediately after you file an application. You'll pay for a mortgage credit report, more expensive than a credit card inquiry. Mortgage credit reports can easily cost $35 and up. Next comes the appraisal, which can cost you between $300 and $800. You may spend hundreds of dollars before you learn if you have enough equity. Save money by calculating the equity you need before you spend precious cash so you know you have that covered upfront.
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