How to Calculate How Much Home Equity You Have

Home equity (the amount of money you own outright in your home) can be a valuable resource. You can use the assets to renovate a room, pay off credit cards, cover college tuition, start your own business, and pretty much anything else.

However, before you can consider what to do with this source of wealth, you need to know how much you have. This number and your loan-to-value (LTV) ratio determine your chances of being approved for a home equity loan or home equity line of credit (HELOC) and how much money you can receive.

Here’s how to calculate your home’s equity and how much of it you can use. And to what extent can you control the value of your ownership rights or not?

How to calculate the equity in your home

Calculating home equity is a relatively simple calculation, and if you have the exact numbers on hand, just enter them into a home equity calculator. You can also decide the level of equity yourself. Here’s how:

Step 1: Estimate the value of your home

Calculating equity begins by determining the market value of the property. You can find out the value of your home using various methods. Online home value estimators are an easy (and free) way to gauge the value of your home. These popular online tools generate estimates based on algorithms and publicly available information. However, keep in mind that the results are actually estimates and may not necessarily correspond to the amount of value that a lender would value if you decided to apply for a loan.

When you enter your address into an online estimator, the amount you see is an estimate of the property’s fair market value and may not be the same as your home’s appraised value. Home equity lenders determine your equity level and the amount you can borrow based on the appraised value of your home, based on a professional appraiser’s appraisal. The fair market value of your home simply refers to the amount a homebuyer would pay for the property today.

However, if you don’t want to pay hundreds of dollars for a professional appraisal just yet, using a home value estimator is a good first step to calculating your home’s value and equity.

Step 2: Check how much you owe

The next number you need is your outstanding mortgage balance. This will be shown on your latest statement. You can also check your lender or servicer’s online dashboard or call them directly to request this information.

Step 3: Determine assets with variances in mind

Once you know the value of your home and your mortgage balance, you’re almost done. From here, all you need to do to understand how capital is calculated is a simple subtraction. Home equity is the current value of your home minus your current mortgage debt.

Assume your home is currently worth $410,000 and your mortgage balance is $220,000. Subtract the unpaid balance of $220,000 from the $410,000 value. The calculation looks like this:

In this case, your home equity would be $190,000, or 46% equity.

Step 4: Calculate the amount you can borrow

You cannot borrow the entire amount of your home loan. Many lenders will only allow you to borrow up to 80 percent of the home’s value.

Using the example above, that would be 0.8 x $410,000, or $328,000. Subtracting the $220,000 (what you still owe on your mortgage) leaves you with $108,000 of tappable equity.

So, to get a rough idea of ​​how much you could potentially borrow using the example above, the overall calculation would be:

Remember: Home equity loans are not free. These loans have closing costs, just like borrowing a traditional mortgage. These costs may include loan origination, appraisal, credit report, and title search fees.

Calculating LTV and CLTV ratios

Now that you know how to calculate how much capital you have, let’s consider borrowing based on that. However, when you approach a lender about this option, they aren’t just considering your equity stake.

Specifically, lenders will also look at your LTV ratio, which is the loan size divided by the home’s value (expressed as a percentage). You can use Bankrate’s LTV calculator to calculate it. Alternatively, use the following formula (using the same numbers as in the example above):

So far, so good. Unfortunately, home equity loans and lines of credit don’t stop there. For this type of financing, lenders not only look at LTV, but also something called the composite LTV (CLTV) ratio. CLTV includes first mortgage and Any other loans attached to your home — including any HELOCs or home equity loans you are applying for.

For example, if you wanted a $30,000 home equity loan, your CLTV would be 60.97 percent.

The higher the LTV ratio, the higher the risk to the lender. And you’re more likely to be charged higher interest rates.

In other words, knowing how to determine the equity value of a home is not enough to determine how much you can borrow. You should also check the CLTV of your original mortgage and new loan together.

How to access home equity

Once you know how home equity is calculated and how much you can borrow, you need to choose a loan type. Options include:

• Home equity loan: With a home equity loan, you can borrow a large amount of money upfront and repay it in equal installments at a fixed interest rate. Ideal if you know how much you need and prefer predictable monthly payments and stable interest rates.
• Home Equity Line of Credit: HELOCs are more flexible and can fund multiple projects over a longer period of time. Once approved, you can borrow up to a set limit during the lottery period, which typically lasts 10 years. Just like a credit card, you can borrow as much as you need, when you need it. The difference is that you pay variable interest only during the drawing period. Once the drawing period ends, you will repay the borrowed amount plus any unpaid interest. Essentially, a line of credit converts into a loan that can be repaid over a set period of time (usually up to 20 years).
• Cash-out refinance: A cash-out refinance replaces your existing mortgage with a new, larger mortgage. The difference between the two balances will be provided as a lump sum payment that can be used for any purpose. In terms of interest rates, cash-out refinances are usually cheaper compared to other products that provide cash more quickly, such as personal loans or credit cards. They also tend to be several percentage points lower than HELoans and HELOCs. However, you’ll also be trading a lower mortgage rate on your existing loan for a higher mortgage rate on your new loan, which could end up costing you much more over time.

Home Equity Loans and Private Mortgage Insurance (PMI)

What if I paid private mortgage insurance (PMI) on my original mortgage? In most cases, your home equity loan won’t affect your PMI premium. However, it may affect the schedule for disposing of them.

PMI is imposed on conventional mortgages when a homebuyer makes a down payment of less than 20 percent (meaning the LTV ratio of the loan is greater than 80 percent). Typically, you can request PMI cancellation if your equity ownership reaches 20% and your LTV drops to 80%. And by law, if the LTV reaches 78 percent, the lender has to cancel it.

Currently, home equity loans and HELOCs do not directly impact LTV. LTV is calculated based on the primary mortgage only. Additionally, new, larger CLTVs do not count toward premium extensions. However, taking on more debt can make mortgage lenders a little nervous. Once you reach the 80% LTV threshold, you can deny your PMI cancellation request and request that you wait until your LTV drops an additional 2 percent.

Impact of house prices on housing equity

You can control your mortgage balance, which is part of your home equity calculation. As you make your monthly payments, your balance will decrease and your equity will increase.

However, another big piece of the puzzle in calculating equity is not so precise. It’s relevant to your local residential real estate scene. When home prices in your area rise or fall, it directly impacts your home equity.

Let’s go back to the example above. Let’s say you paid $410,000 when you bought your home, but its fair market value has since increased to $440,000. This would add an additional $30,000 to your equity in your home. Because the mortgage balance is established when the home is sold, any increase in home value occurs on your side of the ledger, not on the lender’s side. Of course, as you make payments, your debt will decrease, but the amount of your debt will not change due to changes in real estate value.

However, the opposite may also be true. If sales prices in your neighborhood drop and the value of your home drops to $390,000, your equity will decrease by $20,000.

Fortunately, changes in the local housing market aren’t the only way to change the value of your home. You can increase the value of your home with strategic renovations.

Please note that return on investment is not guaranteed. For example, if you invest $15,000 in improvements, but your home depreciates by $20,000 due to a decline in the local real estate market, your equity gains will be offset.

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