Home Equity Questions…?

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Ok. Lets say you own a home for $ 100K. But you still owe 50% to a mortgage loan. Can you get an equity loan for 50% of the value of the home or for 100%?? Or can you not get one at all since the home is not fully paid for?

Also, how do they determine the value of the home you own? Is it by the price you paid or by an appraisal or something else.. ? Who determines that?


  1. Reply
    May 18, 2011 at 12:14 am

    No, you’ll not be able to get 100% financing. You might take out a second mortgage on your home, but I doubt that you could get 80% loan to value in this market as lenders are very skittish.

    Apply for a second mortgage if you get any encouragement from a lender. They’ll have it appraised at your expense and give you an answer. Make sure first that it won’t accelerate your first mortgage.

  2. Reply
    Peter B
    May 18, 2011 at 12:44 am

    Last questions first…

    The value of a home is based on the market value; in other words, what the property is likely to sell for in the market of the day. This is highly varied. So, an appraiser looks at what similar properties have sold fr in the last quarter or so. Naturally, this is not exact, but it gives a good estimate, based on appearance, location, work required and so on.

    The price you pay is something around the appraisal amount. It might be higher or lower, but will be close to that amount.

    However, there are also rates valuations, or city valuations or government valuations , which are usually intended to calculate how much this asset would earn you, if you rented it out. The rateable value is usually around 5% of the valuation, which may or may not be near the appraised or market valuation.

    Now, you go for a loan (or mortgage). The amount of loan you can get depends on the lender, but it is usually based on the market value (a percentage of the market value). Banks are the primary mortgage lender. At the moment, almost world wide, the standard is about 80% of the market value; there’s usually “hooks” (extra costs) for higher than this. A couple of years ago, most banks would lend up to 100%, with the standard being around 95%.Some places, because they expected prices to increase were lending over 100%

    The equity is the difference between the mortgage amount and the market value. Note, I say market value – the price paid is seldom the market value, so, if you bought a house at $ 98,000 and the MV was $ 100,000, you immediately have $ 2,000 in equity.Normally, you would be expected to also make up the difference between the amount being loaned and the price you paid, so if you borrowed $ 80,000 and had some $ 18,000 to put into the price, you’d have a $ 20,000 equity. To make up this equity, you could have borrowed, say, $ 15,000 as a second mortgage (or equity loan), which is separate from your main mortgage – banks don’t like doing this, but private and small lenders would do so, usually at a higher interest rate.

    Now, getting to the original question…

    After some time, you’ll have paid a large portion of the mortgage and cleared the second mortgage. By that time, the market value may have risen significantly – say from $ 65,000 to $ 100,000. So, if you owe $ 50,000 on the property (the mortgage part), you have $ 50,000 in equity. You could borrow against this equity, but the interest rate is a major problem, since it is likely to be higher than your mortgage rate. What you do is take out another mortgage and clear the old mortgage. So, you might take out a complete mortgage for $ 80,000. You still have $ 20,000 in equity, and you’re still only at the 80% of the market value.

    One thing to note: although the lender has a lien against the property, YOU still are the owners of record, so you can re-finance your mortgage, without taking an equity loan – talk to your mortgagee (the people lending the money) about doing this before you start looking for an equity loan!

    This, by the way, is how many millionaires work things to keep down their income tax – the $ 30,000 extra loan is NOT income, but you have it to spend!

    Hope this helps….

  3. Reply
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