30 Jul 2020 Home Equity Loans
In Canada, many borrowers use online home equity loan calculators to determine feasibility, establish loan rates, and confirm their borrowing capacity. Home equity loan calculators help automate the calculation process for borrowers by using personal information to provide estimates ahead of the application process.
This article will highlight the questions you can expect to encounter when calculating a home equity loan and why they are necessary.
1. What is the estimated value of your home?
Home equity loans leverage the borrowers home equity (amount a homeowner has paid off or owns of their house) as collateral. Providing this estimate helps determine the amount a borrower may be eligible to receive on their loan. The higher a home is valued the greater the borrowing capacity, depending on how much of the house is owned vs. owed.
Generally, an estimate based on neighbourhood compatibles is sufficient. When moving onto the application process, a lender will generally require a formal home appraisal to confirm the estimated home value.
2. Where is your home located?
Much like the estimated value of your home, the location is important from a resale perspective. Because the home is used as collateral in a home equity loan, should a borrower default on the loan, lenders want to ensure the home has both strong resale value and a quick turnaround should they take possession. Because of this, homes located in urban areas are generally more appealing to lenders.
3. How much are you looking to borrow?
A borrower’s loan capacity is largely based on the value of their home and how much equity they have in it. In Canada, banks and other primary lenders will generally provide financing up to 80% of the loan to the value of the home. Borrowers requiring more than 80% loan-to-value (LTV) will need to resort to private lenders who provide financing up to 90% LTV.
Loan-to-value can be calculated by dividing the amount needed for your home equity loan by the appraised value of your property.
LTV = Home Equity Loan Amount / Appraised Property Value
4. How is your credit score?
Credit scores will help determine a borrower’s eligibility for a home equity loan, as well as their interest rate.
5. Do you have any existing mortgages on your property?
Existing loans or mortgages on a property help determine a borrower’s equity. Existing mortgages will reduce a homeowner’s equity on the property and therefore their borrowing capacity. If a property is free and clear a borrower can maximize their borrowing eligibility.