The equity value of your home determines the amount and the costs of home equity loan you get. Lenders base your loan application on the equity you have on your home. They will decide your equity by subtracting fair market or appraised value of the home with the amount of mortgage you still owe.
If you have positive equity in your home, you may borrow money against the equity to consolidate debt or remodel your home at a good price.
However, if you’re in negative equity value, which is worth less than the amount you still owe to your lender, you may be difficult to get any loan. Or, if your home is considered unusual and you can find a loan against equity, you most likely will pay high rates of interest and mortgage repayments.
How Lenders Determine Home Equity Value
Lenders find your home equity value based on appraisal and comparative market analysis. With appraisal, a certified appraiser calculates the value of your home based on construction quality, design, floor plan, neighborhood, and available public facilities at a given time.
A comparative market analysis is made by a real estate agent based on the sales of comparative homes in the neighborhood.
The term equity value is often used synonymously with the entire equity of a given home loan. When you consider equity loans, lenders will consider the equity built-in your home. If the home is not worth the amount applied for, you’ll pay higher rates of interest and mortgage payments because lenders will bear a higher risk.
What If You Have a Negative Home Equity Value?
If your equity is negative — usually only happens if property prices fall after you buy your home — you will be considered as a higher risk borrower. This is usually a temporary situation because the equity is factored by current market value, where the value of the home is higher than the market value.
Therefore, if the lender suggests that your home has negative equity, you may want to find the causes. You may ask a surveyor to test your home’s value to confirm that the lender is realistic.
The surveyor will help you to decide the equity on your home, and if negative equity exists due to a drop in market value, you may want to negotiate with the lender.
However, if negative equity exists due to structural damage, mites, or other damage to the property, you may want to consider a different amount of loan to borrow.