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? Understanding 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 to calculate equity in your home, what you can do to increase your equity, and how you can leverage that equity to make it work harder for you.
Table of Contents
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.
• 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 a shorter-term loan, alongside strategic home improvements.
• Homeowners can usually borrow 80%-90% of their home equity, and options like Home Equity Lines of Credit (HELOCs) allow for flexible borrowing against property value over time.
Calculating Your Home Equity in 3 Steps
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:
1. 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. You can build equity in your home by paying down your mortgage, but also by making renovations. Or it may build naturally over time as home values in your area increase.
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 request an official appraisal. You might do this through a mortgage lender if you are thinking about borrowing with your home as collateral. The lender will order 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.
2. Determine 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.
3. Subtract Remaining Debt from Your Home’s Value
The final step is to subtract your home debt from your home value. The result is how much equity you have. To convert this dollar amount to a percentage of home equity, divide it by the estimated value of your home.
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. You can calculate your LTV by dividing your outstanding home debt, discussed above, by your home’s appraised 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%.
Why LTV Ratio Matters for Borrowing and Refinancing
Knowing your LTV ratio is important because lenders set maximum LTVs, typically 80%, for home equity loans. This means homeowners cannot borrow — through a mortgage and loans secured by the home — more than 80% of their home’s value.
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. Your initial home equity is determined by your down payment. The average down payment among American homebuyers is currently 14.5%. This table assumes an initial home value of $300,000 and a down payment of 20%, with annual appreciation of 10%, a mortgage APR of 7.50%, and a monthly payment of $1,678.11. 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. (That’s also why lenders usually require private mortgage insurance when a homebuyer doesn’t put down a 20% deposit on a home before purchasing.)
Fortunately, that’s not a problem for most homeowners. Research firm Black Knight estimated that as of 2023, Americans have $195,000 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. Some lenders allow HELOC borrowers to borrow slightly more against their home’s value, up to 90%.
Homeowners looking to fund renovations often explore home equity loans or HELOCs to access funds at more competitive rates than they would get with a home improvement loan, allowing for flexible financing of their projects.
Pros of Borrowing from Home Equity
As noted above, homeowners often find borrowing against their home equity to be an attractive way to obtain funds for a large expense such as home improvement or a child’s college education. Home equity loans and HELOCs often have lower interest rates than unsecured loans, such as personal loans or credit cards.
Cons of Borrowing from Home Equity
Of course, the most obvious downside of borrowing using your house as collateral is that if you fall behind on your payments, you risk losing your home. Another factor to consider: Adding a large home equity loan to your credit report can reduce your credit score by increasing your credit utilization.
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, which can cost $300-$450. 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 partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
FAQ
Can you access home equity without refinancing?
You don’t have to refinance to tap into your home equity — you can apply for a home equity line of credit (HELOC) or a home equity loan. A HELOC provides a flexible credit line that you can borrow against as you need it, usually with a variable interest rate. A home equity loan provides a lump sum with a fixed interest rate, perfect for big, one-time expenses.
Does home equity increase automatically as property value rises?
Your equity rises as the value of your home increases, provided you don’t borrow additional funds using your home as collateral.
Is it a good idea to take equity out of your home?
Whether it’s smart to take equity out of your home with a home equity loan or a cash-out refinance depends on how you use the funds and how diligent you are about repaying what you borrow. For example, some homeowners use a home equity loan or home equity line of credit to fund renovations that increase their property’s value. Others use an equity-based loan to pay off higher-interest debt. Both of these can be a good move, provided you continue to make timely payments on the loan.
Do I need to put 20% down as a down payment?
A 20% down payment isn’t essential for a home purchase. For qualified first-time homebuyers, especially, down payments can start as low as 3% to 5%. The larger your down payment, the lower your monthly mortgage payments, however. And if you put down 20% you do avoid having to pay for private mortgage insurance (PMI). But if you can’t hit the 20% mark, homeownership is still within reach.
Is home equity a hedge against inflation?
Owning real estate can be an inflation hedge, as property values and rental income generally tend to increase with inflation (though not in every local market). But owning a home also involves work, and homes aren’t always easy to sell quickly. Putting money into a real estate investment trust (REIT) can offer exposure to real estate without the need to own a physical property.
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