If you are shopping for a private mortgage solution it’s useful to understand exactly how much money can be made available to you based on the equity in your home. The built up equity in your home is critical to your ability to borrow from a private home equity lender. As the loan amount increases relative to your available equity the interest rate for your private mortgage will also increase.
In this post I’ll discuss how much equity is required to apply for a private home equity mortgage. I’ll explain how we determine available equity and loan to value. I’ll also touch on some of the tiers lenders designate to categorize the risks of their private mortgages to determine pricing and fees.
What Does Equity Mean?
First let’s be clear on exactly what equity means.
Home equity is a measure of ownership based on the difference between the current market value of your home versus any existing encumbrances.
Market Value Of Your Home
To determine equity we must first determine fair market value of a home or property.
Private home equity lenders will require an appraisal, which is performed by an independent certified appraiser. The role of the appraiser is to provide 3rd party analysis of your home’s value using recent sales in your neighbourhood called comparables. The appraiser will then making adjustments on the value of your home up or down based on differences in square footage, quality of finishes and other market factors with the comparables that have actually sold recently.
Existing encumbrances include any existing mortgages (1st, 2nd etc), secured lines of credit and liens.
When it comes to lines of credit secured on your home often they are secured in 2nd position behind an existing 1st mortgage. Even though you might not have any money advanced or owing on the line of credit it will still occupy the 2nd position and be considered as fully drawn when assessing available equity.
In the mortgage origination industry equity and financing is usually talked about in terms of a percentage called loan to value.
What Does Loan To Value (LTV) Mean?
LTV is the percentage of property encumbered by financing.
$500,000 outstanding mortgage balance.
$1,000,000 appraised home value.
LTV = $500,000/$1,000,000 = 50%
Putting together your understanding of equity and LTV we can now discuss how much you can qualify for via a private home equity mortgage.
The more equity you have built up in your home, the stronger your request for financing.
Private home equity lenders serve a very particular niche end of the market with inherent risks. A private lender is only successfully if they get their money back. If default on a loan occurs and they have to take legal action to recover, the more equity available the more likely they’ll exit with all of principal and interest owed.
As loan to value increases, the riskier the mortgage from the private lender’s point of view. This higher risk will get expressed to the borrower with higher rates and fees. Depending on your needs the price of a private home equity mortgage may or may not be worth it.
The mortgage origination industry and private home equity lenders tier their pricing and fees for certain loan to value ratios.
- Up to 65% LTV: you will find plenty of competition and favorable pricing. Lenders will be a bit more flexible in their underwriting. Use your strong equity position to negotiate with lenders and brokers to get yourself the best deal possible.
- Between 65% to 75% LTV: this segment represents the average private home equity mortgage. Pricing may approach double digits and lenders will be more particular about their underwriting. Some private home equity lenders will not exceed 75% LTV.
- Between 75% to 80% LTV: at this loan to value the private lenders available in the market will start to get picky about the terms of the mortgage. Pricing will certainly be double digits with lender and or broker fees as well.
- Over 80% LTV: There are only a handful of private lenders who will go up this high and if you find one to do it they will price for the extreme risks they are taking.
Applying For A Private Home Equity Mortgage
When presenting your request for financing to a private home equity mortgage lender you should be aware of equity and loan to value. This will help you to properly discuss your application and understand pricing for your mortgage.
In my experience a private home equity mortgage is a useful short-term band-aid solution. You should always approach private financing thinking about your short to medium term exit strategy.
If you’re looking for help in understanding if a private home equity loan is right for you please don’t hesitate to reach out.
You can visit my brokerage website tridacmortgage.com or fill in the contact form below. I’ll be in touch right away.