How Many Questions are There?
What exactly is a home equity loan? How do I find the lowest rates for my home equity loan? How much can I borrow against my home equity anyway? These are the question many people are asking themselves while considering applying for it for one reason or another.
How Do They Work?
So what is home equity loan? This is another name for a revolving line of credit that you can get from different lending companies against the equity of your largest and most important asset – your house. It is fairly easy to get this type of credit due to number of reasons. You do not even necessarily need to have an ideal credit history.
A revolving line of credit is like a giant cash credit card. It’s a loan that has a preset limit, let’s say $100,000. Once it’s established you can use the money for anything you like. Typically, you only have to make monthly interest only repayments that are calculated on the balance in the account.
No Repayments Required
Some home equity loans don’t even require you to make any repayments at all. These are called capitalised interest home equity loans. They allow you to capitalise the balance and the accumulated interest all the way up to the approved limit.
We suggest that unless you have a very good reason for having one of these and on top of that you’re a good money manager you stay away from one of these. They can get the unwary into a lot of financial trouble when it comes to paying it off.
When you are applying for a home equity loan you must bear in mind that as any other type of credit you will need to eventually repay this one back, plus any accumulated interest fees.
How Do You Get the Best Rate?
This brings us to the next issue: Why is it so important to find the lowest rates for your home equity loan.
Since there are so many lenders ready to give you this type of credit, you are in a favourable position of negotiating a lower interest rate on your loan. First of all you would have to do your homework: make a list of lenders. Check out their rates (on their websites or call their representatives) and figure out which company might give you the lowest interest rates.
How Much Will They Give Me?
Many people might wonder just how much money they can get on their home equity. This is pretty simple: take the amount of money your home is worth, subtract whatever sum you still owe on your mortgage. Whatever result you get would be the amount of money you may borrow on your home equity. For example, say your home is worth $600,000. You still need to pay $270,000 back to your bank. That means you may borrow $330,000.
Are you wondering; How much Can I Borrow for a Mortgage? If so, then before going through the whole process of going to a Loan Officer, having your credit pulled and having to wait forever to find out how much you can borrow try using these 3 Steps.
Total Your Monthly Expenses/Payments
The first thing we need to do is come up with a Total of your Monthly Obligations. But, you only need to add up things that show up on your Credit Report such as Bank Loans (student, auto, business or personal), Credit Cards (but we only need to use the Minimum Payment for the Monthly Expense) and any other “Revolving” debts you may be paying monthly.
Now you will “not” include payments such as insurance payments (even for House Insurance), mobile phones, utilities (cable, gas, electric, etc.) or anything else that can be cancelled without future obligation.
Also, you will need to calculate your “Proposed Mortgage/Loan Payment” and add that into the Total of Monthly Payments/Expenses.
Quick Note: If you are “Refinancing” then you will not include your “current” mortgage payment because it will be included with the refinance that you are applying for now!
Calculating Your Monthly Income
Next we need to figure out what your Monthly Income you have and anyone else that will be an applicant on the Mortgage/Loan with you
Here are some guidelines…
- Overtime- income generated by working overtime can only be applied to your monthly income if and only if, you have worked overtime on a regular basis for a minimum of 6 months and with some lenders 2 years. There are exceptions in instances where the overtime is mandatory, like police, nurses, bus drivers, construction workers etc.
- Rental Income- to use “Rental Income” when calculating your Monthly Income, then you must have a “Lease” which is signed to show that you will be receiving rent for a “guaranteed” amount of time. If you do not have a lease then you can show a licensed real estate agents rental statement or “bank statements” clearly showing monthly deposits every month.
Now that we have your “Total Monthly Expenses & Income” we can move on to the 3rd and final step…
Calculating Your D.T.I (Debt To Income Ratio)
The “DTI” is what the banks use to see if you qualify for a Mortgage/Loan. It is the percentage that your total monthly expenses will be of your Total Monthly Income.
We calculate this by…
Taking your “Monthly Debt” and dividing it by your “Monthly Income”.
E.G. A family with $4,000/month in expenses and $10,000 in Monthly Income would have a DTI of .40 (which is a 40% DTI).
Depending on the “Loan Program” you are applying for, the DTI will differ from program to program. But a Safe Bet would be a 38% DTI. Now this, in the past few years, was as high as 50 or even 60 (which is one of the reasons for the recent “economic crisis”).
However, if you are a First Time Home Buyer with a good deposit and you apply for a Mortgage then I have seen DTI’s as high as 48% getting approved a great deal of the time if the Credit and other factors are good overall.
That’s it, now there is no need to wonder… “How Much Can I Borrow”? Because now you are equipped with the knowledge and understanding to find out how much you can borrow for yourself.
If you want to take the guesswork completely out of the equation check in with a professional mortgage broker who has great software tools that cover most lenders borrow capacities.
How Can You Know What Your Borrowing Capacity is?
Are you thinking about taking out a mortgage or refinancing your current mortgage? Are you curious to know the answer to, mortgage how much can I borrow? There are a few factors that go into figuring how much you will be able to take out and here is the breakdown of what you are looking for.
Are You a First Home Buyer?
One important factors lenders look at with first home buyers is how much deposit they have. The more cash a buyer puts into the deal can reflect on how much the lender is willing to give. If the loan valve can be kept to 80% or less of the property purchase price this will in most instances help the borrower to increase their borrowing capacity
Are You Looking to Refinance for Cash Out?
The first factor is how much your home is worth. This will determine how much equity you have and will give you an idea of what the maximum is that is available for you to borrow. For example, if your home appraises for $600,000 and you still owe $425,000 on your home, then most lenders will allow you to borrow up to 90% of the value. This would give you approximately another $115,000
Have You Checked Your Credit Rating Lately?
The second factor is your credit rating. This will determine which category you fall under and if you have a low credit score you will not be able to borrow as much as if you have a high credit score. It works on a percentage system and the better your credit the closer to 100% of your home’s value you will be.
How are Your Money Management Skills?
The last factor that mortgage companies consider is your debt to income ratio. This is the amount of gross income you make compared to your monthly payments for your mortgage, cars, credit cards, and other things that show up on your credit report. This will not include utility payments. The maximum debt to income ratio for most companies is 55% and the lower your debt to income ratio the more you will be able to borrow.
It is a pretty simple formula that weighs the risk of lending you money against the rewards. The worse your credit and debt to income ratio is, the less they will be willing to lend to you and the higher your rate could be.
If you’re trying to maximise your borrowing capacity and get the best deal at the same time, check with a professional mortgage broker. Their services are free and they have software tools that take all of the hard work out of the process.
How Much Can I Borrow For a Mortgage?
It’s important to know how much you can borrow in order to help determine what type of abode you should be looking for. By knowing what your borrowing power is in advance it can determine where you live or what you should be living. If you wanted a house in a certain area, but don’t have the borrowing capacity for one, you might have to settle for a townhouse, or an apartment might be a less expensive compromise.
An important first step is to get a loan preapproval so you know what your borrowing capacity is going to be prior to committing to a property purchase. Otherwise it could mean losing any deposit already paid if you can’t get the loan amount required to make that purchase.
What is Your Debt Profile Like?
If you’re looking to maximise your borrowing capacity you should try and to reduce as much existing debt as possible (such as car repayments, credit card limits and any other personal loans) as this will increase your borrowing capacity for a home loan.
Another benefit to reducing existing debt will also help make it easier for you to make your new mortgage repayments on time as there will be fewer demands on your cash flow. Keep in mind when you buy a property there will be added expenses that you didn’t have when you were a renter. These could include insurances, council rates, water rates and maintenance costs.
As different lenders have different borrowing capacity ratios, it’s a good idea seek out a mortgage broker. Mortgage brokers have access to many lenders to find out what your maximum borrowing capacity will be.
The amount of taxable income you earn is the major key to how much you can borrow. Your chosen lender is going to look at how much you earn and also the type and regularity of the income. Overtime, bonus and rental/investment income is only assessed at 80% of its full value.
What Type of Borrower Profile do You Have?
To measure what you can afford to pay, home loan lenders consider the kind of work you do (PAYE, casual, self employed etc.) and the number of people linked to your application, including dependants.
The amount you want to borrow can change according to the loan purpose.
In today’s market property investors can often times borrow less than a owner occupier purchaser with the same financial profile – because a lot of mortgage lenders are charging higher rates for investment property loans and reducing the loan to value ratio on the loans they will provide.
Location and property type
Some lenders can limit the amount they will lend or decline to lend at all in certain areas and with certain property types. It’s smart to contact your lender beforehand if you’re planning to purchase in locations like the inner city or any outlying regional areas. Also, any properties that are ‘non-standard’ in size like small apartments or studio apartments.
Loan Term and Interest Rate
The loan term period and the interest percentage rate can affect how much you can borrow – the higher the interest rate or the shorter the loan period, the higher your repayments. These day’s lenders use a “factored” rate or padded rate when calculating your borrowing capacity. This is the rate you will actually pay and then they add a margin to ensure you can afford to make the repayments in the event that interest rates rise into the future.
How Much Deposit do You Have?
This is usually a key factor in determining your borrowing power as it is linked to the loan-to-valuation ratio (LVR). The higher the percentage of your loan is to the value of the property you are buying the higher the risk is to the lender. Therefore, the lender will seek to reduce their risk by reducing the amount you can borrow.
The Best Rule
The first step is to take all of the hard work out of the exercise and seek out a professional mortgage broker. There services are free and they will save you a lot of time and money.Read More