When you’re looking to refinance your home in Michigan, you’ll hear two important terms a lot: Loan-to-Value (LTV) and Home Equity. These two terms are super important because they often decide if you can refinance, what kind of loan you can get, and even the interest rate you’ll pay.

Let’s break them down simply.

What is Home Equity?

Home equity is the difference between how much your home is worth and how much you still owe on your mortgage.

Example: Let’s say your house in Sterling Heights is currently worth $300,000. And you still owe $200,000 on your mortgage. Your Home Equity = $300,000 (Value) – $200,000 (Owed) = $100,000

You build up equity over time in a couple of different ways:

• Making Mortgage Payments: Each month, a portion of your payment goes towards paying down your loan’s principal (the actual amount you borrowed).
• Home Value Going Up: If homes in your Michigan neighborhood become more valuable, your home’s worth increases, which also adds to your equity.

What is Loan-to-Value (LTV)?

Now, Loan-to-Value (LTV) is a percentage that lenders use to figure out how much risk they’re taking by lending you money. It’s a simple way for them to see how much of your home’s value is covered by your loan.

Here’s the math:

(Amount You Want to Borrow for Your New Loan / Home’s Current Value) x 100 = Your LTV Percentage

Example for a Michigan Homeowner: Using our example above, if your house in Rochester Hills is worth $400,000 and you want to refinance to a new loan of $300,000. Your LTV = ($300,000 / $400,000) x 100 = 75% LTV

Why LTV and Home Equity Matter for Your Refinance:

Lenders love to see a lower LTV (which means you have more equity!). Here’s why:

1. Easier Approval: A lower LTV (meaning more equity) shows lenders that you have a bigger “stake” in your home. This makes you look less risky, making it easier to get approved for a refinance and you may not need an appraisal, automated underwriting dependent.
2. Better Interest Rates: Lenders often offer lower interest rates to borrowers with lower LTVs. Why? Because there’s less risk for them if the home’s value greatly exceeds the loan amount.
3. Avoiding PMI (Private Mortgage Insurance): If your LTV is higher than 80% (meaning you have less than 20% equity), you might have to pay Private Mortgage Insurance (PMI). PMI is an extra fee added to your monthly payment that protects the lender if you stop making payments. If you can refinance and get your LTV below 80%, you can get rid of PMI, which saves you money every single month!
4. Cash-Out Refinancing: If you want to do a “cash-out” refinance (where you get extra money back), your equity and LTV are key. Lenders only allow you to cash out up to 80% of your home’s value. So, the more equity you have, the more cash you might be able to access.

How to Find Your LTV and Equity for Your Michigan Home:

To figure out your current LTV and equity, you’ll need:

• Your current mortgage balance: You can usually find this on your latest mortgage statement.
• Your home’s estimated value: A licensed appraiser will give an official value during the refinance process, but you can get a rough idea from online tools, recent sales of similar homes in your Michigan neighborhood, or by talking to a local real estate agent.

Understanding these numbers helps you see if now is a good time to refinance and what kind of options might be available to you.

Curious about your home’s equity or what your LTV means for your refinance options? Don’t navigate these numbers alone! As an experienced mortgage lender and CDLP who’s been helping Michigan homeowners for 25 years, I can accurately assess your home’s value, calculate your LTV, and show you exactly what refinance options are available to you. Contact me today for a personalized analysis of your equity and refinance potential!