If you're a homeowner, home equity is more than just financial jargon — it's a resource you can tap into for various purposes. Knowing how to calculate your home's equity allows you to make smart financial decisions, including potential home improvement or debt consolidation. Once you get the hang of calculating home equity, you'll wonder how you ever managed without it.
Crunching Numbers: How to Calculate the Equity in Your Home Like a Pro
Updated: October 7, 2024
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What Is Home Equity?
Owning a home is a significant milestone, but unless you've paid the full price upfront, you don't own it 100%. That's where home equity comes in. Simply put, home equity is the portion of your home that you truly own. Think of it this way: if your home is worth $300,000 and you still owe $200,000 on your mortgage, you have $100,000 in home equity. Learning how to calculate the equity in your home helps you gauge your financial standing in real estate terms.
Factors Affecting Home Equity
Understanding the variables impacting your home equity can help you be proactive about your financial health. These factors often change over time, and being in the know can position you well for future borrowing needs or even for selling your home.
Home Market Value: If home prices are climbing in your neighborhood, congratulations — your home's equity is likely increasing, too. For instance, if you bought your home for $250,000 and its value now is $300,000, you've gained $50,000 in equity.
Outstanding Mortgage Balance: Every mortgage payment you make that goes toward your principal balance increases your equity. For example, if you initially borrowed $200,000 and have paid off $50,000, that's $50,000 in gained equity.
Home Improvements: Investing in home upgrades can pay off by elevating your home's market value. A renovated bathroom might add $10,000 to your home's value, which adds to your equity.
Economic Indicators: Inflation, deflation and interest rates don't directly alter your home's equity but can affect home prices and market demand. For example, lower interest rates often encourage buying, which could increase your home’s value.
Local Real Estate Trends: A sudden influx of people moving to your area can drive up demand and home prices. If a major company sets up nearby and employees are house-hunting, your equity may see a nice boost.
Calculating equity in a home isn't just a one-and-done equation — it evolves depending on internal and external variables. Knowing these factors lets you make informed decisions, whether you're considering selling, refinancing or taking out a home equity loan. The better you understand the elements at play, the more control you'll have over your financial future.
Why Calculating Your Home Equity Matters
Knowing your equity can come in handy for several financial moves. For instance, if you're considering leveraging your home’s value for a home equity line of credit (HELOC), you’ll need to know your equity to understand how much you can borrow. It’s also important when you're contemplating selling your home or refinancing to secure a lower mortgage rate. Simply put, your home's equity can be the stepping stone for many pivotal financial decisions.
Now that we've established why knowing your home equity is key, let's look at both sides of the coin when it comes to borrowing against that value.
Pros and Cons of Borrowing Against Your Home’s Equity
According to TransUnion's 2023 Credit Industry Insight Report, HELOC originations declined by 29% compared to the prior year. Regardless, leveraging home equity is still more popular than before the pandemic. While there are benefits to borrowing against your property's equity, you'll also want to think through the risks. Our table can help you develop a more balanced view.
Benefits | Risks |
|---|---|
Lower Interest Rates: Home equity loans and HELOCs usually offer lower interest rates compared to other types of loans. | Risk of Foreclosure: Failure to repay can result in losing your home. |
Tax Deductions: Interest on these loans might be tax-deductible. | Variable Interest Rates: HELOCs often come with variable rates, which can increase over time. |
Large Loan Amounts: You can potentially borrow a significant sum, useful for big projects or expenses. | Closing Costs: Just like your initial mortgage, these loans can have closing costs and fees. |
Financial Flexibility: Having access to a larger sum of money can be useful for opportunities or emergencies. | Impact on Credit Score: More debt means higher a credit utilization ratio, which can impact your credit score. |
Streamlined Approval Process: Lenders are often more willing to approve lines of credit, like HELOCs. However, not all equity-related products, like mortgages, will have simplified approval processes. | Reduced Home Equity: Remember, borrowing decreases your home equity. It influences your profit if you sell, affecting your future borrowing power. |
To make the most informed decision, it's important to balance the potential benefits against the inherent risks. That way, you'll be better equipped to make choices that serve your financial well-being in both the short and long term.
MONEYGEEK EXPERT TIP
Your reward for paying down your mortgage and taking care of your home is increased home equity. While it's an exciting prospect to have built up meaningful equity in your home because it allows you to access substantial funds through financial products like a home equity line of credit or a cash-out refinance, these products have the potential to reduce your profits when it comes time to sell your home. So, if you're thinking about tapping into your available home equity, but selling your home is also an option on the horizon, stop and consider your long-term plans and goals and whether selling or using equity is the best move. — Timothy Manni, Mortgage and Real Estate Consultant
Steps to Calculating Your Home's Equity
Understanding your home's equity can unlock many financial opportunities, from securing lower interest rates to providing the freedom to invest in other ventures. Calculating your home's equity is more straightforward than you might think. Here's how to do it:
- 1
Estimate Your Home's Value
Getting an accurate estimate of your home's current value is the cornerstone of calculating your equity. There are multiple ways to assess this:
- Real Estate Websites: Websites like Zillow or Redfin can give you a general idea based on similar homes in your area.
- Appraisal: Consider getting a professional home appraisal for a more precise figure.
- Local Sales Data: You can also look at recent sales of similar homes in your neighborhood.
Let's say that Lisa, a high school teacher in Austin, Texas, wants to find out her home's equity. She first turns to real estate websites and finds that homes similar to hers are listed for around $350,000. To double-check, she also examines local sales data and sees that a house down the street, much like hers, recently sold for $355,000. She decides to be conservative and estimates her home's value at $350,000.
- 2
Find Out What You Owe
Your next move is to determine the remaining balance on your mortgage. You can usually find this information in your latest statement or by contacting your mortgage lender directly.
So, back to Lisa. She logs into her mortgage account and finds that her remaining mortgage balance is $200,000. That’s the amount she needs to fully own her home.
Keep this number in mind, as it will play a key role in the upcoming calculations. Knowing what you owe gives you a clearer picture of your financial standing.
- 3
Determine the Difference
Now that you know both your home's estimated value and what you owe on your mortgage, it's time to find the difference. This figure is your home's equity.
To find your home's equity, use this simple equation:
Home's Estimated Value - Remaining Mortgage Balance = Home Equity
In Lisa's case, she estimated her home's value at $350,000 and knows she still owes $200,000 on her mortgage. Applying the formula, that would be:
$350,000 (Home's Estimated Value) - $200,000 (Remaining Mortgage Balance) = $150,000 (Home Equity)
Lisa now understands that she has $150,000 of equity in her home.
- 4
Calculate How Much You Can Borrow
Once you have your home's equity, you're probably curious about how much of that you can borrow. Lenders typically allow you to borrow up to 85% of your home's equity. To find out what that equates to, simply multiply your home's equity by 0.85.
Here's the formula:
Home Equity x 0.85 = Amount You Can Borrow
For Lisa, this would look like:$150,000 (Home Equity) x 0.85 = $127,500
Following our calculation, Lisa can potentially borrow up to $127,500 against her home's equity. However, remember that not all lenders will offer to loan you up to 85% of your home's equity. It's crucial to consult with multiple lenders and read the terms carefully to know exactly what you're eligible for.
Knowing how to calculate the equity in your home will allow you to explore financial opportunities. That said, always remember that lenders may have varying policies on how much they're willing to loan against your home equity. Do your due diligence and consult multiple financial institutions for the best fit.
THE ROLE OF LOAN-TO-VALUE RATIO
Lenders often consider your Loan-to-Value (LTV) ratio when you're looking to borrow against your home's equity. It measures the amount of your loan against the value of your property. For instance, if you still owe $100,000 on a home valued at $200,000, your LTV ratio is 50%. This ratio matters because a lower LTV usually makes you a less risky borrower, potentially earning you a lower interest rate. It's another number worth crunching when you're eyeing that home equity loan or line of credit.
Accessing Your Home's Equity
Understanding how to calculate the amount of equity in your home opens doors to various financial opportunities, but what are those doors exactly? Knowing your options can make all the difference.
Option | What It Is | Ideal Borrower Profile |
|---|---|---|
A second mortgage on your home where you borrow a lump sum against your equity. | Ideal for those who need a large amount of money for a specific project or expense, such as home renovations. | |
A Home Equity Line of Credit allows you to borrow as needed up to a certain limit using your home as collateral. | Perfect for those who need flexible access to funds for different purposes over time, like tuition payments. | |
Replaces your existing mortgage with a new, larger one, providing you with the difference in cash. | Best for those who want to refinance to take advantage of lower interest rates and also need extra cash for other purposes. |
Understanding your home equity equips you with choices, each tailored for different financial situations. Whether you need a lump sum for home repairs or flexible access for ongoing expenses, there's likely an option that aligns with your needs.
Tips to Increase Your Home’s Equity
Taking steps to increase your home's equity enhances your investment and expands your financial flexibility. More equity means qualifying for more favorable loan options, should you ever need to tap into it. Here are strategies that can help you build up that equity in your home.
Larger Monthly Payments
Paying even $50 or $100 extra each month can make a big difference over the life of your mortgage. It fast-tracks your loan payment and directly pumps up your equity. You could end up paying off a 30-year mortgage several years early, saving a lot on interest.
Home Improvements
Consider upgrades with a strong return on investment, such as renovating your kitchen or adding a bathroom. For example, a major kitchen upgrade could increase your home's value, significantly boosting your equity. Always check whether the improvement cost justifies the potential uptick in home value.
Additional Payments
Instead of making 12 mortgage payments a year, how about making a 13th? Or, even better, break down your monthly payment into bi-weekly segments. By doing this, you’ll end up making the equivalent of one extra monthly payment each year, giving your equity a solid boost without feeling a budget crunch.
Decreasing Debt
Lowering your debt-to-income ratio by paying off high-interest debts like credit cards can make you eligible for better mortgage rates. Refinancing at a lower rate could allow you to pay off the principal more quickly, letting you accumulate equity faster.
Increasing Home Value
Minor enhancements can yield significant results. Fresh landscaping can make your home more attractive to potential buyers, while energy-efficient upgrades, like solar panels, can add long-term value. Even repainting your home's exterior can make a difference in how it’s valued, directly affecting your equity.
Every little bit helps when it comes to growing your home equity. Whether it’s a significant renovation or smaller, consistent extra payments, these actions compound over time to boost your financial standing.
Frequently Asked Questions
Reading through commonly asked questions can provide you with a clearer understanding of how to calculate your home's equity. Remember, knowing your equity can lead to sounder financial decisions, whether it's refinancing your mortgage, investing in home improvements or planning for the future.
What is home equity, and why is it important for homeowners?
Home equity is the portion of your home that you truly own. It's calculated by taking your home's current market value and subtracting any remaining mortgage balance. Home equity is essential as it can serve as a powerful financial tool, allowing you to borrow against it or potentially sell your home for a profit.
How do I calculate the equity in my home using a basic equation?
To determine your home's equity in the simplest form, use the equation:
Home Equity = Current Market Value - Remaining Mortgage Balance
Say your home is valued at $300,000, and you owe $100,000 on your mortgage. Your equity would be $200,000.
What methods can I use to determine my home's current market value?
You could hire a professional appraiser, use online valuation tools or look at comparable sales in your neighborhood. For a more accurate assessment, consider using a combination of these methods.
What factors, aside from mortgage payments, can impact my home equity?
Market conditions, neighborhood development and home improvements can all influence your home equity. For instance, if property values in your area rise, so does your equity. Conversely, if you take out a second mortgage or a home equity loan, your equity decreases.
What's the difference between the simplified and comprehensive methods of calculating home equity?
The simplified method uses the basic equation mentioned above. The comprehensive method considers other variables like home improvements, market conditions and even potential depreciation. It offers a more accurate but complex picture of your home's equity.
Can I use home equity for financial goals, and what should I be cautious about?
Absolutely, you can use your home’s equity to finance various projects or needs, like home improvements, education or even starting a business. However, proceed with caution. Using your home as collateral means you risk losing it if you default on the loan.
About Christopher Boston
Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.
Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.
sources
- Redfin. "Search with Redfin. Tour with a Redfin Agent." Accessed October 7, 2024.
- TransUnion. "Bankcard Balances Surpass $1 Trillion as Millennials Increasingly Turn to Cards." Accessed October 7, 2024.
- Zillow. "Agents. Tours. Loans. Homes." Accessed October 7, 2024.