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Unlocking the Power of Home Equity

As a homeowner, you’ve likely seen your property value increase over the past few years. This surge in home prices can be a blessing in disguise, as it can lead to a significant gain in home equity. But what does this mean for you, and how can you harness this equity to achieve your financial goals?

The Importance of Combined Loan-to-Value (CLTV) Ratio

Your CLTV ratio is a crucial factor in determining your eligibility for a second mortgage or home equity loan. This ratio compares the total debt you owe on your home to its current market value. A lower CLTV ratio indicates a lower risk for lenders, making it easier to qualify for a loan.

Understanding CLTV vs. LTV Ratio

While both CLTV and LTV ratios compare debt to property value, there’s a key difference. LTV refers specifically to your primary mortgage loan, whereas CLTV includes all secured loans against your home, including your primary mortgage and any additional loans.

How to Calculate Your CLTV Ratio

Calculating your CLTV ratio is a straightforward process:

1. Add up the total balance of all loans against your home, including your primary mortgage, home equity loan, and any other secured debt.
2. Determine your home’s current market value through a professional appraisal or by researching recent sales in your area.
3. Divide your combined loan balances by your home’s value.
4. Multiply the result by 100 to convert it to a ratio.

The Impact of CLTV on Loan Approval and Interest Rates

A high CLTV ratio can lead to loan denial or high interest rates. If your ratio is too high, you may face:

• High APR: You might be approved for a loan, but with a higher interest rate and annual fees.
• Loan denial: The lender may reject your application if you don’t have enough home equity.

Strategies to Decrease Your CLTV Ratio

If your CLTV ratio is too high, consider the following strategies:

• Increase your property value through maintenance and upgrades.
• Pay down debt by making extra payments on your mortgage or other loans.
• Borrow less by requesting a smaller loan amount.
• Improve your credit score to qualify for better loan terms.

Finding the Right Lender

Not all lenders have the same CLTV ratio requirements. If you’ve been denied a loan, ask the lender for guidance on how to improve your chances of approval. You may also want to explore alternative lenders, such as credit unions or online lenders, which may have more flexible requirements.

The Benefits of a Lower CLTV Ratio

A lower CLTV ratio can lead to:

• Easier loan approval
• Competitive interest rates
• Increased borrowing power

By understanding your CLTV ratio and taking steps to decrease it, you can unlock the full potential of your home equity and achieve your financial goals.