How To Calculate Home Equity in Your Home

Home equity is one of the most valuable assets that a homeowner can access. But far too few homeowners know how to calculate home equity and how to determine how much they can take out through a loan or cash-out refinance. 

Today, let's break down how to calculate home equity differently.

Why Do You Need To Know How To Calculate Equity?

You need to know how to calculate the equity you have in your property to use it effectively.

Your home equity is your ownership stake in your property. You increase it through various methods, primarily by making regular mortgage payments toward the principal amount you owe on the mortgage.

If you know how to calculate the equity in your property, you’ll know:

• How much equity you can sell for a lump sum payment
• How much equity is available for an equity loan or line of credit

That’s essential information, particularly if you need to dip into your equity for debt purposes and unexpected bills. There are two different ways in which you can calculate equity.

How Do You Calculate Simple Equity?

The streamlined equity calculation is as follows:

• Take the amount you owe on all the loans secured by your house (usually, it's your mortgage loan). However, if you have home equity loans (sometimes called second mortgages), liens, or unpaid balances on home equity lines of credit, you should also include these values.
• Subtract that amount from the appraised value of your home. The appraised value is the fair market value of your home as determined by a third-party home appraisal conducted by professional appraisers before you purchased the home. Using a home value estimator could help you calculate the current property value to reflect any renovations and market conditions that may affect home prices in the current market. 

The formula looks like this:

• The appraised value of your home – value of loans secured by your house = equity

Let’s take a look at an example. Say that you owe $150,000 on your mortgage, and your home’s recently appraised value is $500,000. 

Plug those numbers into the formula, and you get:

• $500,000 - $150,000 = $350,000

This way, you can calculate that you have about $350,000 worth of equity. You can also, of course, turn this into a percentage. With the above example, you have about 70% equity. In this hypothetical example, you would have a 70% ownership stake in your property.

You can also look at this another way. Your current mortgage balance tells you the equity you don’t own in your real estate investment. Depending on your interest rate and the amount of equity you currently have, you could make extra payments to reduce your loan amount even further. 

Not only will this boost your credit score, but it will also open up additional home-equity products to use for home improvement projects, paying high-interest debt, and other financial decisions.

How Do You Calculate the Loan-to-Value Ratio?

However, you can also calculate equity as the banks do, usually via the loan-to-value or LTV ratio.

The loan-to-value ratio tells a bank how valuable a potential mortgage loan is relative to a property’s appraised value. If you already have a mortgage, the LTV ratio is instead based on your current loan balance.

Knowing the LTV ratio is important because it affects whether you pay private mortgage insurance (PMI) or qualify for options like refinancing your loan. A higher LTV ratio indicates a greater risk, while a lower LTV ratio represents a lower risk.

To calculate the LTV ratio:

• Divide the current loan balance by the home’s appraised value
• Multiply that by 100 to convert it into a percentage

Let's keep the same example described above, with a $500,000 property and a primary mortgage with $150,000 still owed by the homeowner. 

• $150,000 / $500,000 X 100 = 30%

In this case, the loan-to-value ratio would be 30%. 

In a traditional refinance, homeowners can take out up to 20% of their equity, so in this instance, the homeowner would have access to 50% if their debt to income allows for the higher balance. 

LTV is the inverse of the amount of equity held by the borrower. So, 100 - 30 = 70%. They can't take out more than 20%, so 70 - 20 = 50%.

Are There Ways To Increase Equity?

Knowing how to calculate equity is one thing. Knowing how to increase it so you get better home equity lines of credit and loan options is another.

Luckily, there are lots of different ways in which you can increase equity. Here are a few examples:

• You can continue to make regular mortgage payments toward the principal or outstanding balance on your mortgage loan. The more you make payments, the more you will own the property outright, and the larger your ownership stake will grow. If you eventually pay off your mortgage, you'll have 100% equity in the property and own whatever it is worth.
• You can make a larger down payment at the beginning of your mortgage term. The more of a down payment you make, the more significant your ownership stake is immediately. That can be beneficial if you use your home’s equity shortly after closing the deal.
• You can make home improvements that add to your property’s appraised value. For example, if you renovate the bathroom or add a backyard deck, you could add several thousand dollars worth of equity to the property. You don’t have to pay for the property beyond the improvement cost, so you automatically add more value to your equity stake.

Contact Balance Today

There you have it: two different ways to give you an idea of your home equity. Both ways can be helpful, but the simplified equity calculation is generally sufficient when deciding whether to take out a loan, pursue a cash-out refinance, or do something else.

Once you’ve calculated your equity, you can explore ways to use it effectively. After all, it’s your money. If you’re looking to use your home equity without running the risk of losing your homeownership status, then Balance could be an excellent option. 

When you contact Balance, we’ll evaluate your home and consider taking out an equity investment. We’ll give you access to your equity and pay off the remaining balance of your mortgage. 

In return, you’ll start making monthly payments to us that cover your share of the monthly expenses and an exclusive occupancy fee. Meanwhile, you’ll keep your name on the deed and retain your home ownership.

Over time, we’ll get a percentage of equity appreciation in exchange for our investment, and you’ll always have the option to buy us out. When you enter a co-ownership with Balance, you can refinance into a traditional mortgage anytime and end our partnership. 

Contact us today to learn more.

Sources:

Understanding your home's equity | Freddie Mac

How to calculate your home equity | Bank of America

On a mortgage, what’s the difference between my principal and interest payment and my total monthly payment? | Consumer Financial Protection Bureau

Loan-to-Value (LTV) Ratio: What It Is, How to Calculate, Example | Investopedia