If you have a home equity line of credit, now may be the time to consolidate it into your first mortgage.
So, how will you know if it is a good time to consolidate it into your first mortgage? Home equity loans tend to be variable rate loans, and with rates rising, so will your monthly payment.
If you have enough net value in your property and can qualify for a mortgage that will pay off your 1st mortgage and your home line of credit, it may be worth your while to approach a bank. To consolidate, most banks won’t allow a mortgage to be more than 80-85% of the home value. Here’s how to find out whether you are in the ballpark.
Home equity is the difference between your home’s current value and the total of all outstanding mortgage or loans.
First, determine the market value of the home. This should be the appraised value of the home when you purchased it. If you prefer a current appraisal, hire an appraiser.
For this example, let’s use $200,000 as an appraised market value.
Next, if there are loan balances on the home, contact your lender(s) to get the current loan balances. If there is more than one, add the balances. For this example, let’s use a $125,000 first mortgage and a $30,000 home equity loan. The total debt is $155,000.
Subtract the total debt from the appraised market value to get the net value. It will look like this: $200,000 – $155,000 = $45,000. Thus, your home equity is $45,000.
Next, divide the home equity ($45,000) by the appraised market value ($200,000) to determine the percentage of home equity. It will look like this: $45,000 / $200,000 = 22.5. Therefore, you have a home equity percentage of 22.5 percent.
In the above example, it is worth it to discuss options with a lender, as you may be able to put that variable home line of credit into a fixed-payment mortgage.
