How to Calculate Your Home Equity
Figuring out how much home equity you have is a great first step to leveraging it to accomplish your financial goals.
Many people tap into their home equity to tackle home improvement projects, make a large purchase or pay off debt. If you’ve been dreaming about such things, your home equity could help make them happen.
How much equity you have influences your options. Your home equity and loan-to-value (LTV) ratio are how lenders determine your eligibility for home equity loans, home equity lines of credit (HELOCs), cash-out refinancing and more.
Luckily, getting an idea of your home equity is easy. All you need are a few pieces of information you can find online.
Calculating your equity
A good place to start is with a home price estimator, such as your home’s listing on Zillow or Redfin.
But while these estimates are helpful, the most reliable indicator of your home’s value will be an actual appraisal — part of the loan process.
Once you have your home’s market value, your remaining mortgage balance is all you need to calculate your home equity. You can find your balance in your monthly statement.
With each mortgage payment, a portion goes toward reducing your principal. As the principal goes down, you gain equity in your home. The longer you’ve been making payments, the more equity you have.
To determine your equity, subtract your remaining mortgage balance from your current home value. For example, if your home is valued at $300,000 and you owe $200,000, you have $100,000 in equity.
Calculating your loan-to-value ratio
Your loan-to-value (LTV) ratio helps lenders measure the risk of a new loan. It is a key factor in whether a loan gets approved. The ratio represents the relationship between the loan amount and the total value of the property. Here’s the formula:
Remaining mortgage balance ÷ current home value = LTV
Using the same numbers from above:
$200,000 ÷ $300,000 = .667 or a 66.7% LTV
A note about combined LTV
If you’re seeking a home equity line of credit or cash-out refinance, the LTV math will change.
You’ll add the amount you wish to borrow onto your remaining mortgage balance and your LTV will increase.
Say you want to tackle a home project you expect to cost $25,000. Using the same numbers as before, our new calculation is:
$225,000 (remaining mortgage balance + amount you wish to borrow) ÷ $300,000 = .75 or 75% LTV
In this case, assuming the borrower meets other requirements, the loan would likely be approved. Lenders typically cap LTV around 85% so, if your LTV is less than that, you’re more likely to be approved. In some cases, you may have to pay for private mortgage insurance (PMI).
How to build equity
The most reliable way to boost your home equity is to make your mortgage payments. With each payment, you make a small step toward paying off your home and building equity you can tap into.
If you pay more than your standard mortgage payment each month, the additional amount will be applied to the principal. This means you’re gaining equity while possibly reducing the term of your loan. Just be sure your lender won’t penalize you for prepayment.
You also get a boost when your home value increases. While market forces dictate property values, maintaining your home will help preserve your home value. Making improvements can also give your home value a boost and net you a strong appraisal.