Before you can take out a home equity line of credit (HELOC), you must first determine the amount of available equity in your home. Home equity is the difference between the current appraised value of your home and your existing mortgage balance. The following post will help you to accurately calculate your home equity so that you can better understand your HELOC options.

Determine what your home is worth

The first step in calculating your home equity is to determine the current appraisal value of your home. Many homeowners use the assessed value in calculating their equity, but the assessed value may not accurately reflect current market conditions. That is why the market value is a better yardstick. The market value is the amount of money that your home could sell for under current market conditions. A quick place to start is on Figure’s Home Appreciation Calculator. This uses what’s known as an Automated Valuation Model (AVM) of your home, and works for most homes. Other popular AVMs include the Zestimate on Zillow. For a more expensive but potentially more accurate estimate, particularly in rural areas, consider a professional appraisal. The appraiser will be familiar with both local and national market conditions, as well as the specifics of your home, including its location, property type and level of required maintenance. Please note that when applying for a Figure Home Equity Line, Figure will use an AVM to assess the value of your home.

How to calculate your loan-to-value ratio

If you want to obtain a HELOC, then you will need to know both the loan-to-value ratio (LTV) and combined loan-to-value ratio (CLTV) of your home. The LTV is calculated by taking your current loan balance and dividing it by the appraisal value of your home. Let's say that you currently have a loan balance of $150K. Your home is currently appraised for $225K. Your LTV equation would be: $150K / $225K = .67 or 67%.

How to calculate your combined loan-to-value ratio

The CLTV is calculated by adding the current loan balance and the amount of the HELOC that you want to obtain and dividing that total by the current appraised value of your home. Let's say that your current loan balance is $145K and you want to take out a $35K HELOC. Let's also say that your home is currently appraised for $300K. Your CLTV equation would be: ($145K + $35K) / $300K = .60 or 60 percent. It is important to note that many lenders require a CLTV of 85% or less before they will approve a HELOC. Figure accepts up to a 95% CLTV, depending on the overall strength of your application.

Is it possible to have negative home equity?

If you make your monthly mortgage payments on time, then your home equity can be expected to increase over time. However, in rare cases, your home equity could decrease and even become negative. Fluctuating market conditions can affect the equity in your home, in some cases leading to negative home equity. Let's say that your home increases in value from $600K to $700K. If you have a $400K mortgage,  your equity rises to $300K. Now let's say that the value of your home drops from $600K to $350K. If you have the same $400K mortgage, your equity now becomes a negative $50K.

Tips to increase your home equity

If you need to increase your home equity to qualify for a HELOC, you might want to consider lowering your LTV ratio by paying down your loan's principal more quickly. You can do this by paying more than your required minimum payment each month. The more you chip away at your loan balance and the more that your home's value increases, the higher your home equity will be.

Choose the right home equity line

Did you know that you can consolidate your debts through a HELOC? Doing so can be a strategic option that has long-lasting positive results.

You could be approved for a Figure home equity line in as few as five days2. All you have to do is complete the application process online. You can make additional draws once you have paid back a portion of the principal. To discover how you can (a) calculate your home equity and (b) take full advantage of that equity through a HELOC, contact a Figure team member today.