How To Calculate Home Equity: A Step-By-Step Guide
How to calculate home equity? First, you need to understand what home equity is. Home equity is the value of a homeowner’s financial interest in their home. It is the amount of your home that you truly own.
How Much Equity Do You Have In Your Home?
Knowing how much available equity you have in your home can be beneficial in many ways including financial planning, borrowing power, access to funds, refinancing options, selling decisions, financial security, market awareness, and investment opportunities.
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How To Calculate Your Available Equity
How can you figure out how much equity you have in your home? To calculate your available home equity, determine the current market value of your home and subtract your total primary mortgage balance and any other debts secured by your property.
Other debts secured by your property include second mortgages, home equity loans, or unpaid balances on home equity lines of credit. For example, if your home is valued at $400,000 and you have a total primary mortgage balance (which include any other debts secured by your property) of $240,000, your home equity would be $160,000 ($400,000 – $240,000).
1. Estimate The Value Of Your Home
The final determination of the home’s fair market value will be based on the lender’s appraisal, but the current value of your home is determined using a comparative market analysis.
Real estate professionals, such as appraisers and real estate agents, can provide more accurate valuations by considering all relevant factors and comparable properties in the local market.
2. Figure Out How Much You Owe
You can determine how much you currently owe on your home by checking your most recent mortgage statement for all mortgages. This includes your primary mortgage as well as any second mortgages or home equity loans that you currently have on the property. If needed, contact your lender for online account access.
For example, if the estimated value amount is $200,000, the homeowner could possibly have a most recent mortgage statement for all mortgages showing a total mortgage balance of $120,000.
3. Take The Difference To Find The Total Equity
To determine the available equity, subtract the amount owed from the estimated value. For example, $200,000 – $120,000 = $80,000.
Home Equity Formula
Estimated Value – Amount Owed = Home Equity
*Home value – Mortgage balance = Total available equity
*Mortgage balance / Home value = LTV
*(Mortgage balance + Additional amount borrowed) / Home value = CLTV
4. Calculate The LTV Ratio and CLTV
To calculate the loan-to-value ratio (LTV) for the home, take the mortgage balance and divide it by the home value. For example, $120,000 / $200,000 = 60%. When the LTV ratio exceeds a certain threshold, typically 80%, lenders may require homeowners to carry private mortgage insurance (PMI).
The combined loan-to-value (CLTV) ratio is the ratio of all outstanding secured loans on a property compared to the appraised value of a property. It considers both the existing mortgage balance and any additional loans or lines of credit secured by the property. Borrowing against the remaining equity will increase your CLTV ratio.
5. Determine How Much You Can Borrow
Lenders require homeowners to maintain a certain percentage of equity in their home. For a home equity loan or Home Equity Line of Credit (HELOC), lenders typically require you to have at least between 10% to 25% equity in your home.
For example, if a homeowner’s LTV is 60% then they have 40% equity in their home. The maximum CLTV allowed will determine the available equity a homeowner can borrow. See the example table below to see how much a homeowner can borrow when the home’s estimated value is $200,000.
Maximum CLTV Allowed | Available Equity |
|---|---|
95% | $190,000 |
90% | $180,000 |
85% | $170,000 |
80% | $160,000 |
75% | $150,000 |
How To Use A Home Equity Calculator
You can get an estimate of your home equity easily by using a home equity calculator. To use a home equity calculator instead of the formula listed above, gather information, search online for a reliable home equity calculator, enter property information, click on the “calculate” button to obtain the home equity calculation, and review the results.
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How To Use Equity In Your Home
Home equity can be used for a variety of purposes including these:
- Home repairs and renovations
- Paying down and consolidating high-interest credit card debt
- Using as money for purchasing second homes, vacation homes, or other investment properties or opportunities
- Education expenses like paying for college
- Emergency or unexpected expenses
- Retirement planning
How To Access Your Home Equity
Once you know how much equity you can borrow against, there are different ways to do so. These processes involve paying closing costs, which average between 2% to 6% of the total loan amount. In addition to the loan amount, closing costs can also vary depending on additional factors such as the specific lender, location, the complexity of the transaction, and specific circumstances.
It is advisable to obtain a Loan Estimate or Closing Disclosure from the lender, which provides an itemized breakdown of the estimated closing costs, allowing homeowners to compare offers from multiple lenders, make an informed decision, and potentially negotiate certain fees. The timeline for accessing your home equity depends on factors such as the efficiency of the lender, responsiveness of the borrower in providing required documentation, and any potential complexities that may arise during the underwriting process. Choosing a reputable and efficient lender can also contribute to a smoother and faster process.
Cash-Out Refinance
At closing, a cash-out refinance replaces your current mortgage with a new, larger loan converting the difference in the outstanding mortgage balance to liquid funds in the form of cash or direct deposit. The timeline for a cash-out refinance can take 30 to 45 days. Due to the larger loan amount, the closing costs for a cash-out refinance will be higher than a home equity loan or home equity line of credit (HELOC).
Home Equity Loan
A home equity loan, also known as a second mortgage, enables you as a homeowner to borrow money by leveraging the equity you have built up in your property. The specific terms and conditions of home equity loans can vary among lenders and depend on factors such as the borrower’s creditworthiness, loan amount, and the lender’s policies. The overall timeline for taking out a home equity loan can vary between a couple weeks to a couple months.
Home Equity Line Of Credit (HELOC)
With a home equity line of credit (HELOC), you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. It is important for homeowners to carefully consider the terms and conditions of a HELOC, including interest rates, fees, repayment obligations, and potential risks associated with borrowing against their home equity. Applying for and obtaining a HELOC usually takes 2 – 6 weeks.
How To Increase Your Home Equity
A homeowner can increase their home equity by making extra mortgage payments, making home improvements and renovations that can increase a property’s appraised value, getting a shorter loan term by refinancing their mortgage, and avoiding mortgage insurance.
The Bottom Line: Know How Much You Can Really Borrow
Knowing how to calculate your available home equity empowers you to make informed financial decisions, explore borrowing options, evaluate refinancing opportunities, plan for future needs and monitor your net worth.
Conduct your own research on the previously mentioned ways to access your home equity and start a cash out refinance today!
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See recommended refinance options and customize them to fit your budget.
