Making monthly mortgage payments can feel like chipping away at an iceberg, especially in the beginning. Savvy homeowners take heart that each payment earns them a little more ownership in their property. But do you know exactly how much ownership, commonly called “equity,” you currently have? Knowing how to calculate home equity can help you feel a growing sense of satisfaction as you make those mortgage payments.
Simply put, home equity is the difference between the value of a property and the outstanding balance of all mortgages, liens, and other debt on the property. Read on to determine how much of your home you really own, what you can do to increase your equity, and how you can leverage that equity to make it work harder for you.
Key Points
• Home equity represents the difference between a property’s current market value and the outstanding mortgage balance, calculated using the formula: Home Equity = Home Value – Home Debt.
• To accurately determine home value, homeowners can use online property tools or request a professional appraisal from their mortgage lender.
• The loan-to-value ratio (LTV) helps represent home equity, indicating the percentage of a home’s value that is borrowed, with lenders typically allowing a maximum LTV of 80%.
• Increasing home equity can be achieved through larger down payments, making extra mortgage payments, or refinancing to shorter-term loans, alongside strategic home improvements.
• Homeowners can usually borrow 80%-85% of their home equity, and options like Home Equity Lines of Credit (HELOCs) allow for flexible borrowing against property value over time.
How to Calculate Your Home Equity
As noted above, home equity is the difference between your home’s current value and the outstanding balance of your mortgage and other debt on the property. It’s a simple equation:
Home Equity = Home Value – Home Debt
How to Find Your Home’s Value
To estimate your home value, you can use the purchase price of your home, but that doesn’t account for any appreciation in value. For a precise calculation of your home equity, you’ll need to know your home’s current value with appreciation. You can get an estimate of your home’s value with an online property tracking tool. These calculators approximate the appreciation of your home by comparing it with similar properties in the area. While helpful, these tools can’t provide an exact measure.
To determine your real-time home value, you’ll need to contact your mortgage lender and request an official appraisal. Your lender will conduct an inspection and evaluation of what your home is worth in the current market. The appraiser may ask you for documentation of any work you’ve done on your home to come to a more exact figure.
How Much Is Left on Your Mortgage?
Calculating home equity also involves knowing what you owe on your current home mortgage loan. You can find your mortgage payoff amount (which is different from your balance) on your lender’s online portal. Add to that the outstanding amount you owe on any second mortgages, liens (for unpaid taxes or child support, for example), home equity lines of credit, and any other loans that use your home for collateral. The sum of these items is your home debt, the last figure in the equity equation.
Using the Loan-to-Value Ratio to Represent Home Equity
The loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed — it’s like the opposite of equity. Lenders set maximum LTVs, typically 80%, for home equity loans. This means homeowners cannot borrow more than 80% of their home’s value.
You can calculate your LTV by dividing your outstanding home debt, discussed above, by your home’s appraised value:
LTV = Home Debt ÷ Home Value
For example, if your home is worth $375,000, and you still owe $200,000, your LTV is 53%. (200,000 ÷ 375,000 = .53) This means you still owe 53% of the equity in your home. Subtract 53 from 100 to see how much equity you have built in your home: Your available equity is 47%.
Examples of Home Equity Calculations After 1, 3, 5, 10 Years
The table below shows how much equity a fictional homeowner accumulates over the first 10 years of their mortgage. This assumes an initial home value of $300,000, with annual appreciation of 10%, a mortgage APR of 7.5%, and a monthly payment of $1678.11. The LTV is rounded to the nearest whole percentage. (The actual annual appreciation for American homes over the last 10 years on average was 7.4%.)
| Year | Home Value | Loan Balance | Home Equity | LTV |
|---|---|---|---|---|
| 0 | $300,000 | $240,000 | $60,000 | 80% |
| 1 | $330,000 | $237,596 | $92,404 | 72% |
| 2 | $363,000 | $235,196 | $127,803 | 65% |
| 3 | $399,300 | $232,611 | $166,689 | 58% |
| 4 | $439,230 | $229,825 | $209,405 | 52% |
| 5 | $483,150 | $226,822 | $256,327 | 47% |
| 6 | $531,470 | $223,587 | $307,882 | 42% |
| 7 | $584,620 | $220,101 | $364,519 | 38% |
| 8 | $643,080 | $216,343 | $426,736 | 34% |
| 9 | $707,380 | $212,294 | $494,085 | 30% |
| 10 | $778,120 | $207,931 | $570,188 | 27% |
Recommended: How Much Will a $300,000 Mortgage Cost You?
What Is a Good Amount of Home Equity?
Common wisdom says that it’s smart to keep at least 20% equity in your home. This is why many lenders limit your LTV to 80%. To borrow against your home, then, you’ll typically need more than 20% equity.
Fortunately, that’s not a problem for most homeowners. Research firm Black Knight recently estimated that Americans have $193,000 of “accessible” home equity on average, over and above the recommended 20%. This is mostly due to rising home values.
Recommended: How Home Ownership Can Help Build Generational Wealth
How Much Home Equity Can You Take Out?
The amount of equity you can take out depends on the lender and the type of loan. However, most lenders will allow you to borrow 80%-85% of your home’s appraised value. The other 15%-20% remains as a kind of financial cushion.
A homeowner who doesn’t want to take out a home equity loan but needs cash might consider a Home Equity Line of Credit (HELOC). A HELOC allows owners to pull from their property’s equity continually over time. Borrowers can take only what they need at the moment. HELOCs use the home as collateral, which might not appeal to all borrowers.
Tips on Increasing Home Equity
Your initial home equity is determined by your down payment. The larger the down payment, the more equity a homeowner has right off the bat. The average down payment among American homebuyers is currently 13%. But a down payment of 20% or more can qualify borrowers for more favorable mortgage rates and also helps you avoid paying for private mortgage insurance.
After the down payment, home equity typically accumulates in three ways: monthly mortgage payments, appreciation, and home improvements. Beyond waiting for their home to appreciate, homeowners can increase their equity in several ways:
Pay more than your minimum mortgage payment each month. The extra money will go toward your principal, increasing your equity more quickly. Learn how to pay off a 30-year mortgage in 15 years.
Make biweekly payments instead of monthly. Your mid-month payment will incrementally lower your interest due. And by the end of the year, you’ll have made an extra mortgage payment.
Make strategic home improvements. Certain updates increase your home’s value more than others.
Refinance to a shorter-term loan. By refinancing to a 10- or 15-year mortgage instead of a standard 30-year, each mortgage payment will increase your equity at a faster rate.
The Takeaway
Calculating home equity involves subtracting your mortgage payoff balance (found on your lender’s website) from your home’s current value. To get the most accurate idea of your home’s market value, you’ll need an appraisal by your mortgage lender, which can cost $300-$450. Homeowners typically can’t borrow more than 80%-85% of their home equity. Knowing how to calculate equity in your home can be a first step in determining how to use that equity to fund renovations or another important expense.
SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.
FAQ
How do you determine your home equity?
To quickly estimate your home equity, subtract the amount you owe on your current mortgage from your home’s current value.
What is the formula to calculate home equity?
To figure out home equity, simply subtract the amount you owe on your home mortgage loan (and any other loan you may have that is secured by your home) from your home’s current value.
How much equity can you borrow from your home?
A lender will generally let you borrow 80%-85% of your home’s value, minus the amount you owe on your mortgage. Some lenders allow you to borrow more.
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