The basic definition of a home equity loan is additional financing extended to a borrower based on the equity value of their home. Home equity is calculated by subtracting the fair market value of the home from the mortgages outstanding and registered against the property. As an example, if you had a home worth $500,000 with a mortgage of $200,000 outstanding, the home equity would be $300,000.
A home equity loan or a home equity mortgage is therefore a lending program whereby you are using part of the equity in your home to borrow additional funds which can be used for a purpose of your choosing. The more the lending decision is based on both the strength of the real estate security and the cash flow available for debt service, the lower the potential interest rate will be.
Because home equity mortgages are in second or even third position, they are going to be more expense in terms of debt servicing compared to your first mortgages. That being said, if you have strong cash flow and credit, the interest rate for a home equity loan will only be slightly higher than a first mortgage.
While some bank and institutional residential mortgage lenders will go as high as 90% on their home equity mortgage programs, the majority of conventional mortgage lenders will not go above 80% of the property value in order to make sure their is sufficient equity available to maintain a strong security position for the lender.
As cash flow for debt service and/or credit rating decrease, the interest rates available for an equity mortgage will increase.
Secondary banks and trust companies provide most of the institutional home equity mortgages as their programs are designed to allow for slightly higher mortgage risk scenarios.
A secured line of credit can also be a form of home equity mortgage where the available equity in the property is once again the primary consideration for financing by the lending source.
The more the lending decision is based on the equity in the home, the lower the loan to value available from a lender is likely going to be. For situations where there is very little if any available cash flow for debt service and where the credit is fair to poor, the loan to value ratios you can expect are between 50% and 65% of the value of the property.
Property location and condition can also play a big factor into the amount of loan to value that can be secured. The more remote the location, the more difficult it will be to locate and secure a home equity loan.
If you would like to learn more about home equity loans or have a residential mortgage financing requirement you’d like to go over right away, we suggest that you give us a call and speak with a member of our team so we can get all your questions answered as soon as possible.