If you’ve diligently reduced your mortgage balance or if your home’s value has appreciated over time, it’s likely that you’ve built up some equity.
If you are wondering how to calculate home equity, or how much equity you have in your house, or even what is equity on a house, then below we offer some answers.
Knowing how to calculate your home equity can help you determine how to use it toward your financial goals, such as making home improvements, paying for a college education, or paying off high-interest debt.
According to Forbes, home prices are showing no signs of slowing down anytime soon. And despite the elevated home prices, the property market remains as competitive as ever.
This means that now is the best time to calculate home equity and leverage it to your advantage.
What Is Equity on a House?
Equity on a house, often referred to as mortgage equity, represents the difference between the estimated home value and how much you owe the lender on your home loan.
Equity is typically built up over time as you decrease your mortgage with repayments and as the market value of the property goes up. It’s a key financial indicator for homeowners, allowing them to gauge the ownership stake they hold in their property.
Understanding estimated equity meaning and how to calculate equity is vital for making informed financial decisions.
How Equity Works
Home equity analysis is a crucial aspect of homeownership.
It reveals the wealth you’ve accumulated in your property over time. Equity increases as you pay down your mortgage and as your home’s value appreciates.
How to Calculate Home Equity
Like any calculation, there’s a bit of math involved in this, but figuring out your home equity is a straightforward process, and we’ll walk you through it step by step.
There are two main ways to calculate your home equity.
Method 1
The first is baseline calculation that involves deducting how much you owe from what your home is worth.
Step 1: Gather Essential Information
To determine your home equity accurately, start by gathering essential information, including your home’s current market value and your outstanding mortgage balance. Getting the information requires a bit of digging.
Step 2: Determine Your Home’s Market Value
Next in calculating your home equity is estimating your property’s current market value. A home’s market value can vary depending on the economy and other factors. Home values typically go up in a strong economy (and vice versa).
You can determine your home’s market value by:
- using online real estate databases such as Redfin and Zillow;
- checking recent home sales in your area; or
- consulting a professional appraiser; there may be fees involved with getting your home appraised.
Step 3: Calculate Your Outstanding Mortgage Balance
Next, determine all of the debt secured by your house. This debt could encompass the outstanding balance on your primary mortgage and any secondary mortgages you’ve obtained.
You can calculate your outstanding mortgage balance by:
- checking your most recent mortgage statement or
- contacting your lender for the current payoff amount.
Step 4: Subtract the Mortgage Balance From the Home Value
Once you have both figures, subtract your outstanding mortgage balance from your home’s market value. The result is your home equity. For example, if your home is valued at $400,000 and you owe $150,000 on your mortgage, you have $250,000 in home equity.
Method 2
The second home equity analysis method involves calculating home equity for a second mortgage or cash-out refinance. Banks may use additional calculations when determining how much they’re willing to lend you.
If you’re considering leveraging your home equity, your lender will perform home equity calculations based on 3 key factors: your property’s appraised value, your verified loan balance, and the maximum loan-to-value (LTV) ratio stipulated for the specific mortgage you’re applying for.
1. Appraised ValueAn impartial, licensed third-party home appraiser thoroughly examines all aspects of your property. They then compare these attributes to similar homes in your vicinity to provide an “opinion of value.” If the appraisal of your home reveals a value lower than the outstanding balance on your mortgage, you won’t have any equity in your home. This situation is often referred to as having an “underwater mortgage.”
Lenders obtain a payoff statement from your existing lender to ascertain the precise amount that will be settled, which helps determine the net amount you’ll receive.
Here’s a practical example to illustrate the calculation of the total equity you can access (prior to factoring in closing costs) on a home valued at $500,000 with an outstanding mortgage balance of $300,000:
- appraised value: $500,000
- multiplied by 80 percent maximum LTV ratio: x 0.80
- maximum loan amount: $400,000
- (minus current mortgage payoff balance): - $300,000
- home equity you can borrow: $100,000
In summary, adhering to the lender’s LTV ratio guidelines permits you to borrow up to $100,000 from the $200,000 home equity you possess. It’s important to note that borrowing from your home equity transforms it into debt that you’ll be responsible for repaying when you eventually sell your home.
How to Calculate Home Equity Percentage with Example
You can take the home equity calculation a step further by converting home equity as a percentage.
Understanding your home equity percentage provides valuable insights into your property’s financial health. To calculate it, follow these steps:
Example: Let’s assume your home’s market value is $300,000, and your outstanding mortgage balance is $200,000. How much equity can I pull out of my home?
- Deduct your mortgage balance from your home’s value: $300,000 - $200,000 = $100,000.
- Divide the result by your home’s market value: ($100,000 / $300,000) x 100 = 33.33 percent.
Your home equity percentage is approximately 33.33 percent.
Knowing how much equity you have in your home as a percentage helps you gauge your ownership stake in your property and evaluate options like home equity loans or lines of credit.
Pro tip: If your initial down payment on your home was less than 20 percent, achieving a 20 percent equity position is significant. This is because it’s the point at which you can apply to have your private mortgage insurance (PMI) eliminated. The removal of PMI can lead to a reduction in your monthly payments and long-term expenses.
How to Use Equity in Your Home
Once you’ve calculated your home equity, you might wonder about the best way to use home equity.
You can use it to pay for college tuition, consolidate debt, or help you through a rough financial patch.
Here are some ideas on when to use a home equity line of credit (HELOC):
- cover the cost of home repairs/renovations
- down payment on an investment property/a second home
- pay off student loans
- added cushion for an emergency
FAQ
1. What can I do with equity in my home?
You can use home equity for various purposes, including home improvements, paying off other debts, education expenses, settling huge medical bills, or as a financial safety net. Remember, your bank may impose specific limits and conditions on how you can utilize your equity, which can vary depending on your intended purpose.
2. What does estimated home equity mean?
Estimated home equity refers to the approximate value of ownership you hold in your property. It is calculated by taking away your mortgage balance from your home’s market value.
Key Takeaways
In conclusion, understanding how to calculate home equity is essential for homeowners, even when you don’t want to borrow from it. It empowers you to assess your financial standing, make informed decisions, and potentially unlock opportunities to achieve your financial goals.
By grasping the concept of what is equity on a house and determining how much equity you have in your home, you can navigate the real estate market with confidence and make the most of your property’s value.
The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
