How To Calculate Home Equity: A Step-By-Step Guide
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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% |