Having home equity gives you more options when you need money. Whether you want extra cash for debt consolidation or to take a dream vacation, understanding your equity can guide your decision-making process. Learn how to calculate home equity when you're considering borrowing money.
Calculating Your Home Equity
Home equity is the value built up in your home. You calculate your home equity by:
- First, assess the current value of your home. Many real estate websites like Zillow and Redfin estimate current home values based on sales in your area. For another assessment of the value of your home, consider hiring an independent real estate appraiser.
- Next, find out how much you owe on your current mortgage. You can find your current balance on your most recent monthly statement. You can also check your account online or call your lender to determine how much you owe.
- To calculate your home’s equity, subtract what you owe on your mortgage from the current value of your home. Whatever remains represents your home equity.
To illustrate, assume your home is worth $300,000 and the remaining balance on your mortgage is $250,000. Based on this, you have $50,000 of equity in your home ($300,000 - $250,000).
How to Determine Your Home’s Value
You can determine the value of your home in the following ways.
- Online tools: Plenty of online valuation tools can estimate the current value of your home. Sites typically use market comparables like recent sales to determine an estimate.
- Comparable properties: You can check the sales prices of similar homes in your area.
- Professional appraisal: Hiring an independent third-party appraiser can give you an official assessment of your home. Appraisers often consider the condition of your home, market conditions, recent sales and the local neighborhood to assess value. Typically these assessments are ordered by lenders who would like an estimate to consider mortgage applications. The appraised value may not equal the market value of your home.
- Realtor: A professional real estate agent can help assess your home’s current market value by relying on comparative market analysis and the current housing market.
Learn More About Market and Appraised Home Values
How to Calculate Loan-to-Value (LTV) and Combined LTV Ratio
The loan-to-value (LTV) ratio compares what you owe on your primary mortgage to the home’s market value. The lower your LTV, the more equity you have in your home.
Lenders use the LTV ratio to determine whether to loan you money based on the equity in your home. Most lenders won’t extend a home equity loan on homes with an LTV of 80% or more.
If you owe $250,000 on a home with a current market value of $400,000, your home's LTV is calculated as $250,000 / $400,000 = 62.5%.
If the lender's maximum LTV is 80%, you may be able to take out a home equity loan for the difference. Using the example above, an 80% LTV on a home worth $400,000 is $320,000. Because you owe $250,000, you may qualify for a home equity loan of up to $70,000 ($320,000 - $250,000).
Alternatively, if you owe $250,000 on a home worth $300,000, your LTV is 83.33%. Lenders who require a minimum of 80% LTV would likely not extend a home equity loan.
Unlike the LTV ratio, which considers just your primary mortgage, the combined LTV looks at all debt secured by your home. Additional debt, such as a second mortgage or a home equity line of credit, is included in the calculation. You also include any liens placed on your home.
Assume your home is worth $400,000. If you owe $250,000 on your primary mortgage and $50,000 on a second mortgage, your combined debt is $300,000. You calculate your combined LTV as $300,000 / $400,000 = 75%.
With a lender limit of 80% or $320,000, you could only take out a home equity loan of up to $20,000 ($320,000 - $300,000).
What’s the Importance of Calculating Your Home Equity?
Calculating your home equity helps you plan and prepare for your future. Benefits of calculating your home equity include:
- Borrow money: If you need cash, taking out a home equity loan may get you a better interest rate and repayment terms than traditional financing.
- Build wealth: Your home is often your biggest asset. Knowing how much equity you have can be helpful if you decide to sell your house. Or you could leverage the equity in your home to buy stocks, bonds or income-producing real estate.
How to Increase Your Home Equity
You can employ several strategies to raise the equity in your home.
- Make extra principal payments: If you get an influx of cash, such as a bonus or gift, consider using this to make an extra principal payment. Your home equity increases as you pay down the principal.
- Set up a biweekly mortgage payment plan: On a biweekly payment plan, you make 26 payments every other week. Under this plan, you essentially make 13 mortgage payments each year, as opposed to 12 payments under a monthly payment plan.
- Refinance at a lower interest rate: When you refinance at a lower rate, you'll pay less interest. When you continue paying the same monthly amount as before refinancing, more of your money goes toward the principal.
- Make upgrades to your home: Long-term improvements can increase the market value of your home. Replacing windows and doors, renovating your kitchen or installing new flooring may raise your home’s value, thus lowering your LTV and combined LTV.
How to Access Your Home Equity
You can tap into the equity of your home in a few ways:
Home Equity Loans
With a home equity loan, you can leverage the equity built up in your home as collateral to borrow money. You get a lump sum of money that you pay back over time. Home equity loans are fixed-rate loans that usually offer better interest rates than other forms of borrowing, like personal loans. A home equity loan is like a second mortgage because it’s separate from your primary one, so you’ll have two payments to make each month.
Home Equity Lines of Credit (HELOCs)
Similar to a home equity loan, you can access the equity in your home through a home equity line of credit (HELOC). A HELOC is different from a loan because you withdraw the money as needed. You won't pay interest on the entire credit line. Instead, you pay interest only on the funds you have taken out. HELOCs typically charge adjustable interest rates, so your monthly payments vary based on changes in interest rates. As rates climb, you could pay more interest.
Cash-Out Refinance
Like a home equity loan, you take out the equity in your home in a lump sum with a cash-out refinance. Instead of having two separate loans, a cash-out refinance consolidates what you owe into one mortgage. You could save money if you refinance your mortgage debt at a lower interest rate. In a cash-out refinance, you get the equity in your home in a lump sum.
Compare the Best Lenders for Your Home Equity From Benzinga’s Top Providers
Tapping into your home equity may be an easier way to borrow money than other forms of financing. Here are some of the best lenders for home equity loans based on rates, flexibility, fees and closing times.
- Best For:Flexible Mortgage Optionssecurely through Angel Oak Mortgage Solutions's website
Available in: CA, CO, CT, DC, FL, GA, IL, MD, MA, MI, NH, NJ, NY, NC, OH, PA, RI, SC, TN, TX, VA, WA
Tap Into Your Home Equity When You Need Money
You can borrow against the equity in your home when you’re short on cash. With sufficient equity, home equity loans may be easier to get and cost less than traditional loans. If you need extra funding to make improvements on your home or consolidate debt, consider a home equity loan.
Frequently Asked Questions
How much is good equity in a house?
While lender qualifications may vary, most lenders consider having 20% equity in your home as a good benchmark.
Do you pay back equity?
Your home has equity when its current value is more than what you owe. When you have equity in your home, you don’t have to pay it back.
Who owns the equity in a house?
As a homeowner, you own the equity you have built in your house.