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Your Mortgage Loan and Home Equity: Five Facts

Posted by  on Oct 08, 2009
 

The amount of home equity you have can influence the mortgage rates you're offered. Home equity creates financial security. Here's what you need to know.

  • Loan-to-Value (LTV): This is the ratio of your mortgage loan amount divided by your home's value. If your LTV ratio is higher than 80%, you'll be required to pay for mortgage insurance, which protects your lender against foreclosure losses. The higher your LTV, the less home equity you have.
  • Higher down payment = lower mortgage rates: The larger your down payment, the less risk to the lender. Provided you have good credit and enough income, a larger down payment can mean getting the lowest mortgage rates.
  • Property value affects home equity: Home equity is the difference between your home's current value and the amount of mortgage(s) against it. If your home value decreases, so does your home equity. If property values rise, so does your home equity. This is why local real estate sales trends are important when considering a home equity loan or cash-out mortgage refinance.
  • Home equity improves financial stability: If you can't make mortgage payments and have plenty of home equity, you can sell your home to pay off the mortgage. Many homeowners have gotten into trouble by using home equity financing for everything from flat screens to Ferraris. After the real estate market crashed, many homes were worth a lot less than their mortgages.
  • Your home equity line isn't an ATM: If you have a home equity line of credit (HELOC), it can be tempting to use it as a convenient source of cash. This reduces home equity while increasing your debt.

In addition to getting the lowest mortgage rates, knowing your home equity position can help you find a good match for your mortgage needs.

 

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