How to Determine the Amount of Money You Qualify For

You’ve heard of home equity. Maybe you’re unclear about how it actually works. If you are considering a loan and using your home as collateral, you must first make sure you understand what that means.

It means that if you cannot make the payments the lender has the right to take the home. Of course, no legitimate lender wants to do that, but it’s still a possibility.

Building Home Equity

If you’re comfortable with that risk, then the next step is to determine how much might be available to borrow.

• When your down payment was applied to the sale price of the home, you received instant equity
• Each month when you make the house payment, a bit of the principal is chipped away further increasing the equity in your home
• Finally, if the property has increased in value, the amount you can borrow using your home as collateral will also have increased.

Calculating What You Can Borrow

There is a formula you can use to calculate how much you might be able to borrow. To use it, you have to know two things. You need a good estimate on how much the home is worth (what it will appraise for) and how much you still owe on the home.

One other factor can impact the amount of money you’ll be able to borrow. Most lenders will only lend a percentage of what the home is worth. For example, if the home is worth $200,000, the lender might only lend 70, 80 or 90% of it. (Note: If you look hard enough, you might even be able to borrow 100% or even more against your home!)

In general, 80% appears to be a common percentage. So, using 80%, the limit available for you to borrow would be $160,000 on a home worth $200,000. That would be the case if you didn’t owe anything on the house.

However, if you owed $60,000 on the home, it appraised at $200,000 and the lender is willing to lend 80% of the value, you might be able to borrow up to $100,000.

$200,000 value of the home

X .80 (80% of the value)

$160,000 available to borrow

-$60,000 what you owe

$100,000 borrowing potential

If you have substantial equity in your home, an excellent credit rating and are willing to take the risk of using your home as collateral, you might want to consider a home equity loan to help achieve your financial goals.