Before you borrow against your home, it’s worth knowing where you stand on your current mortgage and how much equity you can actually access. No matter which lender you’re working with, they’ll look closely at your Loan-to-Value (LTV) ratio: a simple calculation that shows how much of your home you’ve already paid off and sets the benchmarks for how much you can borrow.
What Is LTV and Why Does It Matter?
Your LTV takes the amount you still owe on your home and compares that to what the home is worth. For a home equity loan, that’s your remaining mortgage balance divided by your home’s appraised value. If your home is worth $250,000 and you owe $200,000, your LTV is 80%.
Most lenders want an LTV of 80% or lower for a home equity loan or line of credit. People Driven Credit Union has options for members with less equity, which we’ll cover below.
If you’re applying for a third mortgage (or more) on your property, your lender will use a Combined Loan-to-Value (CLTV) ratio instead. That adds up all your loan balances, then divides that sum by your home’s value. Lenders usually want a CLTV of 85% or lower, rather than 80%.
Why Is LTV Important?
LTV matters because it shows a lender how much risk they’re taking on in giving you a home equity loan. A lower LTV means less risk, because you have more equity in your home; and less risk usually means a better shot at approval and better terms, like a lower interest rate.
Other Home Equity Factors
LTV is one of the biggest factors in a home equity loan, but it’s not the only factor a lender considers. Your credit score matters too: the higher it is, the better your terms will be. A lender will also want to see proof of income, and they’ll check your Debt-to-Income (DTI) ratio. If your monthly debt payments amount to 43% or less of your monthly income, your DTI is in good shape.
Understanding Your Options
Now that you have a better understanding of how LTV works, here are the options available from People Driven Credit Union for tapping into the value of your home’s equity.
Fixed-Rate Home Equity Loan
A fixed-rate home equity loan uses your home equity as collateral, then requires you to pay the loan back in fixed monthly installments over a set term. Some lenders only take applicants with an LTV of 80% or lower; at People Driven Credit Union, we’ll work with otherwise-qualified applicants up to 90% LTV. Your rate climbs as your LTV increases.
Home Equity Lines of Credit (HELOCs)
A Home Equity Line of Credit, or HELOC, is a form of revolving credit. Instead of a lump sum loan, it gives you a pool of credit you can borrow from, repay, and borrow from again during a set window called the draw period. You only pay interest on what you’ve actually used; and once you repay it, interest stops, even if there’s still time left in the draw period. After the draw period ends, you repay the remaining balance over a set repayment period.
That flexibility makes a HELOC a good fit when you know you’ll need funds in the future, but aren’t exactly sure of how much or when.
Like the fixed-rate loan, People Driven Credit Union offers HELOCs up to 90% LTV, with rates starting at 6.50% APR.
Which Option Is Best for You?
If you want predictable payments at a fixed rate, or if you’re facing a single large expense, a fixed-rate home equity loan is likely the right choice. If you’d rather have flexibility, or if you expect a series of smaller expenses over time, a HELOC may better suit your financial circumstances.
How to Improve Your LTV
If you want to improve your LTV before applying, the simplest option is to wait. Every monthly payment builds a little more equity; over time, your home may gain value on its own as the market shifts.
You can also raise your home’s value directly by renovating or making cosmetic improvements, such as landscaping to boost curb appeal or installing energy-efficient windows and appliances.
Begin Your Home Equity Loan Journey Today
People Driven Credit Union has a long history of serving members across Southeast Michigan. When you’re ready to talk through a home equity loan or HELOC, you can get started online or call 248-263-4100 and ask for our home equity specialist.
Your Home Equity Loan Starts Here
Connect with a home equity loan expert and get your questions answered.
Frequently Asked Questions
A second mortgage is a loan secured by your home on top of your primary mortgage. It lets you borrow against the equity you’ve already built up.
A home equity loan can cover a wide range of needs, such as home improvements, debt consolidation, education or medical costs, and other major purchases.
Timelines vary, but approval usually takes a few weeks. The process includes a property appraisal, a credit check, and income verification.
You’ll typically need:
- Proof of homeowners or flood insurance, if applicable
- Your most recent mortgage or home equity statement
- Proof of income
A refinance replaces your existing mortgage with a new one, often at a different rate or term, changing your primary loan. A home equity loan is different: it sits on top of your existing mortgage and uses your equity as collateral, without altering your first loan.
