What is a Home Equity Loan Calculator?
A Home Equity Loan Calculator is an online tool designed to help homeowners estimate how much they can borrow against the equity in their home. It simplifies complex calculations by considering key factors like the home’s current value, the outstanding mortgage balance, and the lender’s loan-to-value (LTV) ratio requirements.
Key Components of a Home Equity Loan Calculator:
- Home Value: The current market value of the home, which is often determined through an appraisal or recent market trends.
- Outstanding Mortgage Balance: The amount still owed on the existing mortgage.
- Loan-to-Value (LTV) Ratio: The percentage of the home’s value that lenders are willing to offer as a loan, typically 80% to 90%.
- Available Equity: The difference between the home’s value and the outstanding mortgage balance, adjusted for the LTV ratio.
- Interest Rate and Loan Term: These help estimate the monthly repayment amount.
How it Works:
The calculator subtracts the outstanding mortgage balance from the allowable percentage of the home’s value (based on the LTV ratio). This gives the maximum amount the homeowner can borrow. Some calculators also provide details on monthly payments, including interest, over the loan term.
Example Use:
If a home is worth KES 10,000,000, and the mortgage balance is KES 4,000,000, with an LTV ratio of 80%, the calculation would look like this:
- Maximum Loan Amount = (Home Value × LTV) – Mortgage Balance
= (10,000,000 × 0.80) – 4,000,000
= 8,000,000 – 4,000,000
= KES 4,000,000.
The calculator shows the homeowner can borrow up to KES 4,000,000