How To Calculate Home Equity
Updated April 30, 2024 at 3:43 pm
Buying a home is one of the biggest purchases that most of us make. In addition to keeping a roof over our heads, buying a home offers the chance to build equity. As you make payments and home values climb, your home equity can also grow. But you’ll need to run the numbers to understand the exact value of your home equity.
Here’s a closer look at how to calculate equity in a home.
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Vault’s Viewpoint on Calculating Home Equity
- Home equity represents the difference between your home’s current value and your remaining mortgage balance.
- As your home’s value rises and you make mortgage payments, your home equity will increase.
- Depending on the amount of home equity you have, you might be able to tap into the funds through a loan.
How To Calculate Equity in Home: Step-by-Step Guide
If you want to calculate the equity in your home, the math is fairly straightforward. But you’ll need to gather some information to calculate your home equity accurately.
Use the steps below to calculate home equity.
Determine the Value of Your House
The first step is to determine how much your home is worth.
Getting an appraisal done offers the most accurate assessment of your home’s value. But a home appraisal can cost a few hundred dollars.
Luckily, you can opt for a free path by using an online home price estimator to determine the value of your home. For example, Zillow and Redfin each offer home value estimates for most properties. These free estimates can give you a clear idea of what your home is worth, which is a good enough estimate for most homeowners.
Determine How Much You Owe
Next, you’ll need to determine how much you still owe your mortgage lender.
You can find this information by checking your most recent mortgage statement or signing into your loan servicer’s online dashboard. If you have trouble finding how much you owe, you can call the lender directly to uncover the information.
Notably, you may need to add more debt to your balance if you have a home equity loan or HELOC (home equity line of credit). Anything you owe against your home value counts against your home equity.
How Much Home Equity Do I Have?
With both the value of your home and your outstanding mortgage balance, you can calculate your home equity. Subtract your mortgage balance from the value of your home to arrive at your home equity.
How Much Equity Do I Have in My Home? An Example
Let’s say your home is worth $400,000. If you still owe $250,000 to your mortgage lender, then the value of your home equity is $150,000.
You can plug your own numbers into this calculation to determine the value of your own home equity.
When Do You Have Enough Equity To Eliminate Private Mortgage Insurance?
Private mortgage insurance (PMI) is a type of mortgage insurance that protects your lender financially. In other words, if you stop making your payments, PMI helps your lender with the financial fallout. Importantly, it won’t help you during a financial pinch. But most lenders require home buyers who put less than 20% down to purchase PMI.
Since PMI benefits your lender, most borrowers want to eliminate this extra cost as soon as possible. In general, you can ask to cancel your PMI when you’ve reached the 20% home equity mark.
For example, if the home is worth $500,000, you’d need to amass home equity equivalent to $100,000 before a lender might agree to cancel your PMI.
How Much Can I Borrow From My Home Equity?
When you calculate your home equity, it’s common to wonder how much of that value you can borrow. In most cases, lenders only allow you to borrow up to 80% of your home’s value.
Keep in mind that this total amount can change from lender to lender. Your original mortgage balance is included in the loan-to-value (LTV) ratio, which represents your loan balance divided by your home value.
For example, let’s say your home is worth $400,000, and you have $150,000 in home equity. When you divide your mortgage balance by your home value, your LTV ratio is 62.50%.
If you wanted to take out a home equity loan, the lender would consider the combined loan-to-value (CLTV) ratio. Let’s say you wanted to take out a $20,000 home equity loan. When you divide the combined loan amounts by your home value, your CTLV ratio is 67.50%.
While you might be able to borrow up to 80% of the home’s value, a higher LTV ratio represents a higher risk to the lender. In general, lenders account for this higher risk with a higher interest rate.
How To Tap Into Your Home Equity
Homeowners who access their home equity can use the funds for almost any reason. You might tap into your home equity to consolidate debt, pay for a home repair or cover college costs.
The downside to any home equity borrowing option is that you are putting your house on the line. With that, you risk losing your home if you cannot keep up with the payments. Before tapping your home equity, make sure you are confident in your ability to repay the loan on schedule. Otherwise, you could face a painful foreclosure process.
Below are some of the ways you can tap into your home equity.
Home Equity Loan
A home equity loan is a type of second mortgage that uses your home equity as collateral.
When you take out a home equity loan, you’ll receive a single lump sum with a fixed interest rate attached. You’ll usually be expected to repay the loan in fixed monthly payments. Typically, the interest rate is lower than a credit card or personal loan.
Home Equity Line of Credit
A home equity line of credit (HELOC) is another type of second mortgage.
Unlike a home equity loan, a HELOC offers ongoing access to a revolving line of credit for the draw period. In many cases, the draw period lasts for ten years. After that, you’ll enter the repayment period, which doesn’t come with access to the line of credit.
Generally, HELOCs have a variable interest rate attached. During the draw period, you might only have to cover interest charges. But if you avoid paying down the balance during the draw period, expect higher payments during the repayment phase.
Cash-Out Refinance
A cash-out refinance involves replacing your current mortgage with a larger mortgage. You’ll use some of the funds to pay off your existing mortgage, but you can hang onto the remaining balance in cash.
When the dust settles, a cash-out refinance leaves you with a single mortgage payment to keep up with. But you’ll have an influx of cash from your home equity to cover current costs.
Depending on your situation, a cash-out refinance could involve getting stuck with a higher interest rate. If possible, only pursue a cash-out refinance if you can tap into a lower interest rate or at least keep your interest rate stable.
Frequently Asked Questions
What Is the Formula for Calculating Home Equity?
The basic formula for calculating home equity is to subtract your mortgage balance from your home’s value. For example, if your home is worth $500,000 and you owe $300,000 to your lender, then you have $200,000 in home equity.
How Do I Know When I Have 20% Equity in My Home?
You’ll know if you have 20% equity in your home by running the numbers. Consider calculating out your home equity once or twice a year to monitor your progress toward the 20% mark.
Is It a Good Idea To Take Equity out of Your House?
Taking equity out of your home can be a solid financial decision if you are using the funds to push your finances in a positive direction. For example, using your home equity to pay off high-interest credit card debt could lead to savings in the long run.
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