How to calculate your home equity

Having said that, every lender has their own guidelines to decide how much money they can loan to you. However, the most critical determination a lender will make is which CLTV ratio it can offer.  

Home equity loan example

Most banks or credit unions offer a maximum CLTV ratio of 80%. If the value of your property is $300,000, then the most you could borrow would be $240,000. If, however, you owe $150,000 on your first mortgage, you would have to subtract that from the total since the lender will not lend you money you have yet to earn. Since $150,000 subtracted from $240,000 is $90,000, that would be your maximum loan amount.

Other factors

While it is important to understand this example, there are other factors that could determine your eligibility for a home equity loan, such as your credit score, income, employment history, and whether you take out a reverse mortgage. Those factors will dictate the interest rate you are offered on the loan, since a lower credit score, for instance, may signal to the bank that you are at a greater risk of defaulting.

Before determining if it is a good idea to take equity out of your house, it is important to first understand the risks involved. One major reason for this is that these types of loans are tied to your house.