Home equity loans allow you to tap into the equity you've built in your home, whether the equity comes from paying down your mortgage or because your home has appreciated in value. When lenders calculate the loan-to-value ratio for a home equity loan, they take into account the outstanding balance on your mortgage and any other debt secured by the home. Knowing your current LTV ratio allows you to know how much additional debt you could take on based on your home's value, should you need it, or how easy it would be to refinance. If you're just doing informal calculations, you can estimate your home's value. But, before offering you a new loan or refinance, a lender will likely want a home appraisal.
Check your most recent mortgage statement and home equity loan statement to find out the balance on each loan.Step 2
Add the balances of your mortgage and your home equity loan to calculate the total debt secured by the home. For example, if you owe $200,000 on your mortgage and $60,000 on your home equity loan, your total debt is $260,000.Step 3
Divide the debt secured by your home by the value of your home to figure your LTV ratio as a decimal. In this example, if your home is worth $400,000, divide $260,000 by $400,000 to get 0.65.Step 4
Multiply the result by 100 to calculate your LTV ratio as a percentage. Finishing the example, multiply 0.65 by 100 to get 65 percent.
- Many lenders will not let your LTV ratio exceed 80 percent because of concerns that the value of the home could drop. If it did, the lender would be left without adequate security, so if you defaulted the lender wouldn't get the money back by selling the home.
- If a lender does allow you to take out an equity loan that pushes your LTV ratio over 80 percent, you will usually have to pay a higher interest rate. Keeping your LTV ratio under 80 percent makes you a less risky loan and, as a result, gets you a lower interest rate.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."