Home Equity Loan Calculator
This home equity loan calculator helps you calculate home equity that can be used by the owner to borrow more funds in case, you have future funds requirement and if the bank is asking for collateral or security.
Home Equity Value
MV - OP
- MV is the Market Value of the home or the property in question
- OP is the outstanding principal balance of the loan that was taken for the property
About Home Equity Loan Calculator
The home equity loan can be defined as the variance or difference between the current market value of the property and the outstanding loan balance which was taken against it. The formula is per below:
Wherein,
- MV is the Market Value of the home or the property in question
- OP is the outstanding principal balance of the loan that was taken for the property
How to Calculate using Home Equity Loan Calculator?
The following steps need to be followed to calculate home equity.
Step #1 – First of all, find out the outstanding loan balance which was taken specifically for the property in question.
Step #2 – Now figure out the value of the property which is nothing but the current market value of the property.
Step #3 – Now, subtract the value arrived in step 2 from the value arrived in step 1, the resulting figure would be the value of home equity.
Home Equity Loan Calculator Example
Example #1
Mr. Kofi had purchased a house for $123,500 around 5 years ago with fully financed by the bank since he was having a good credit score. The rate of interest was 6% and the mortgage was for 15 years and the current monthly installment he is paying is $1,042.16. The house measures 1000. Sq ft and the current market price of the property located in the same is $250 per Sq. Ft. Based on the given information, you are required to calculate the value of home equity.
Solution:
- As a first step, we shall calculate the outstanding mortgage balance for the property in question
- Rate of interest applicable on monthly basis = 6.00% / 12 = 0.50%
- The remaining period will be (15 x 12) – (5 x 12) which is 180 – 60 that is 120.
We need to calculate the present value of the current outstanding balance which can be calculated per below formula:
= $1,042.16 x [1 – (1+0.50%)-120 / 0.50%]
= $93,871.24
The outstanding debt on the property is $93,871.24.
Now we need to calculate the current market value of the property which we are given in per sq ft basis. The value is $250 per sq. ft. and total sq. ft. of the property is 1,000 and hence the current market value of the property is 1,000 x 250 which is $250,000.
Now we can use the below formula to calculate the value of home equity
= 250,000 – 93,871.24
= 1,56,128.76
Since the value of the property has increased substantially and 1/3rd of the principal repayment is done, the owner is in a good position to repay the loan and further, the worry of lender would be less as property value is more than the loan.
Example #2
Mr. JBL has been recently met with a financial crunch and is already repaying the debt on his mortgage property for $1,231.66 when he got a loan for 95% which was for $147,250 and the rate that was applied on the loan was 8% and it was taken for 20 years period. He is yet to pay for 10 years and he has approached the bank to provide additional loans to him on the basis of home equity value. He has a requirement of $100,000 and the bank agrees to provide his loan for 85% of the home equity which would be calculated. The value of the property has increased by 30% since last he purchased. On the basis of the given information, you are required to calculate whether funds required by Mr. JBL would finance fully by the bank or he needs to resort to unsecured debt for any shortfall.
Solution:
- As a first step, we shall calculate the outstanding mortgage balance for the property in question
- Rate of interest applicable on monthly basis = 8.00% / 12 = 0.67%
- The remaining period will be (20 x 12) – (10 x 12) which is 240 – 120 that is 120.
We need to calculate the present value of the current outstanding balance which can be calculated per below formula:
= $1,231.66 x [1 – (1+0.67%)-120 / 0.67%]
= $101,515.08
The outstanding debt on the property is $ 101,515.08.
Now we need to calculate the current market value of the property which we are given in % of the loan. Loan that was borrowed was $147,250 and it was financed 95%, therefore the value of the property will be $147,250 / 95% which will be $155,000 and since then it has increased by 30%, therefore, the current market value of the property is $155,000 x (1+30%) which is $201,500.
Now we can use the below formula to calculate the value of home equity
= 201,500 – 101,515.08
= 99,984.92
- Since the bank will finance only 85% of the home equity which is 99,984.92 x 85% that equals $84,987.19.
- There is a shortfall for the funds required by Mr. JBL and hence Mr. JBL needs to borrow funds from outside as unsecured debt which is 100,000 – 84,987.19 which is $15,012.81
Conclusion
As discussed, the home equity loan calculator can be used to calculate the value of equity which is the remaining value of the owner’s interest against which if owner desires can borrow more funds against the same for his personal or any business use. If the value of home equity is quite high chances are that banks would easily fund 90% to 95% of the home equity and if the case is opposite then the bank would fund lower as below as 40% to 50%.
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