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How to calculate the property owner’s equity when underwriting a refinance loan for an investment property

When underwriting a refinance loan for an investment property, calculating the property owner’s equity is an important step to determine the overall financial position of the property owner and assess the risk associated with the loan. Here’s how you can calculate the property owner’s equity:

  1. Determine the Current Market Value of the Investment Property: Obtain an updated appraisal or valuation report for the investment property to determine its current market value. This can be done by hiring a professional appraiser or using comparable sales data in the area.
  2. Calculate the Outstanding Loan Balance: Gather information on the existing loan(s) on the investment property, including the outstanding principal balance(s) of the loan(s) being refinanced. This information can be obtained from the current mortgage statement(s).
  3. Subtract the Outstanding Loan Balance from the Current Market Value: Subtract the outstanding loan balance(s) from the current market value of the investment property to calculate the property owner’s equity. The formula is:

Property Owner’s Equity = Current Market Value – Outstanding Loan Balance

For example, if the current market value of the investment property is $500,000 and the outstanding loan balance is $300,000, the property owner’s equity would be:

$500,000 – $300,000 = $200,000

So, the property owner’s equity in this example would be $200,000.

  1. Express Equity as a Percentage: You can also express the property owner’s equity as a percentage of the current market value. To do this, divide the property owner’s equity by the current market value and multiply by 100. The formula is:

Property Owner’s Equity Percentage = (Property Owner’s Equity / Current Market Value) * 100

For example, using the previous example where the property owner’s equity was calculated as $200,000 and the current market value was $500,000, the property owner’s equity percentage would be:

($200,000 / $500,000) * 100 = 40%

So, the property owner’s equity percentage in this example would be 40%.

Calculating the property owner’s equity is an important step in underwriting a refinance loan for an investment property as it helps assess the property owner’s financial position and the amount of equity they have in the property, which can affect the loan terms and conditions. It’s important to accurately calculate the property owner’s equity to make informed lending decisions.

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