How to calculate your home equity — and how much of it you can tap

Your home equity — the amount of your house that you own outright — can be a valuable resource. You can use your equity to renovate some rooms, pay off credit cards, cover college tuition, start your own business or almost anything else.

Before you can explore how to use this source of wealth, though, you need to know how much you have. This figure, along with your loan-to-value (LTV) ratio, determines the likelihood of being approved for a home equity loan or home equity line of credit (HELOC), and how much money you could be eligible for.

Here’s how to calculate the equity in your home and how much of it you can tap. And to what extent you can, and can’t, control the worth of your ownership stake.

How to calculate the equity you have in your home

Calculating home equity is relatively simple math, and if you have accurate figures on hand, all you have to do is plug them into a home equity calculator. You can determine your level of equity on your own, as well. Here’s how.

Step 1: Estimate your home’s value

Calculating equity starts with identifying the property’s market value. You can find out how much your home is worth using a number of methods. Online home price estimators are an easy (and free) way to gauge your home’s worth. These popular online tools rely on algorithms and publicly available information to generate estimates. Keep in mind, though, that the results really are estimates, not necessarily the value amount a lender will assess if you decide to apply for financing.

When you input your address in an online estimator, the dollar amount you’ll get is an estimate of the property’s fair market value, which might not be the same as the home’s appraised value. Home equity lenders rely on a home’s appraised value  — based on a professional appraiser’s assessment — to determine your equity level and how much you can borrow. The fair market value of your home simply refers to what a homebuyer would likely pay for the property today.

If you don’t want to pay hundreds of dollars for a professional appraisal just yet, though, using a home price estimator is a good first step in calculating your home’s value, and your equity.

Step 2: Find out what you owe

The next number you’ll need is the outstanding balance on your mortgage, which can be found on your most recent statement. You could also check your lender or servicer’s online dashboard, assuming it has one, or call directly for this information.

Step 3: Take the difference to determine your equity

Once you have your home’s value and your mortgage balance, you’re almost finished. From here, all you need to figure out how to calculate equity is some simple subtraction.  Your home equity equals the current value of your home minus your current mortgage debt.

Assume your home’s current value is $410,000, and you have a $220,000 balance remaining on your mortgage. Subtract the $220,000 outstanding balance from the $410,000 value. Your calculation would look like this:

In this case, your home equity would be $190,000 — a 46 percent stake.

Step 4: Calculate how much you can borrow

You can’t borrow the full amount of your home equity. Many lenders allow you to borrow only up to 80 percent of your home’s value.

Using our example above, that’s 0.8 x $410,000, or $328,000. Subtract $220,000 (what you still owe on your mortgage), and you’d have $108,000 of tappable equity.

So, to get a rough sense of the amount you could potentially borrow using our example above, your entire calculation would look like this:

Keep in mind: Home equity loans don’t come for free. These loans come with some closing costs, similar to taking out a traditional mortgage. These costs can include fees for loan origination, an appraisal, a credit report and title searches.

Calculating LTV and CLTV ratios

Now that you know how to calculate how much equity you have, you can explore borrowing against it. However, when you approach a lender about this option, they won’t be looking solely at your equity stake.

Specifically, the lender will also look at your LTV ratio, or the size of your loan divided by your home’s value, expressed as a percentage. You can do the math with Bankrate’s LTV calculator. Or, use this equation (we’ll employ the same numbers from our example above):

So far, so good. Unfortunately, with home equity-backed loans or lines of credit, it doesn’t stop there. For this sort of financing, lenders look not just at the LTV, but something called the combined LTV (CLTV) ratio. The CLTV includes your first mortgage and any other loans attached to your home — including the HELOC or home equity loan you’re applying for.

For example, if you wanted a $30,000 home equity loan, your CLTV would come to 60.97 percent:

The higher the LTV ratio, the more risk for the lender. And the higher an interest rate they’re likely to charge you.

In other words, knowing how to determine equity in a home isn’t enough to determine how much money you can borrow. You also want to look at the CLTV you’d have, from your original mortgage plus the new loan. 

How to access your home equity

Once you know how to calculate home equity and how much you can borrow, you’ll need to choose between loan types. The options include:

• Home equity loans: A home equity loan allows you to borrow a lump sum of money upfront and repay it in equal installments at a fixed interest rate. It could be ideal if you know how much you need and prefer a predictable monthly payment and stable interest rate.
• Home equity lines of credit: A HELOC is more flexible and allows you to fund multiple projects over time. Once approved, you can borrow up to a set limit during the draw period, which usually lasts 10 years. As with a credit card, you borrow only what you need when you need it. The difference is, you only pay variable interest during the draw window. Once the draw period ends, you repay what you borrowed and any outstanding interest. Basically, your line of credit converts to a loan that’s repayable over a set period, usually up to 20 years.
• Cash-out refinancing: With a cash-out refinance, you replace your existing mortgage with a new, larger mortgage. The difference between the two balances will be given to you in a lump-sum payment that you can use for any purpose. In terms of interest rate, a cash-out refinance is usually less expensive compared to other products that provide faster cash, like personal loans and credit cards. It also tends to run a few percentage points lower than HELoans and HELOCs. That said, it could also mean trading a lower mortgage rate on your existing loan for a higher one on the new loan, costing you far more over time.

Home equity loans and private mortgage insurance (PMI)

What if you’re paying private mortgage insurance (PMI) on your original mortgage? In most instances, a home equity loan won’t impact your PMI premiums. But it could affect your timetable for getting rid of them.

PMI is imposed on conventional mortgages when the homebuyer puts less than 20 percent down (meaning the LTV ratio on their loan is over 80 percent). Normally, you can request cancellation of PMI when you’ve built up a 20 percent equity stake, and your LTV is down to 80 percent. And by law your lender must cancel it when your LTV reaches 78 percent.

Now, home equity loans and HELOCs don’t directly affect your LTV — it’s calculated just on your primary mortgage — and your new bigger CLTV doesn’t count towards extending the premiums. However, the extra debt could make your mortgage lender a little nervous. It could deny your request to cancel your PMI when you hit that 80 percent LTV threshold, and can insist that you wait until the LTV drops two additional percentage points.

How home prices affect your home equity

You can control one piece of the home equity calculation: your mortgage balance. As you make monthly payments, that balance goes down and your equity goes up.

The big other piece of the puzzle in calculating equity falls less squarely into your hands, however. It relates to your local residential real estate scene.  When prices for homes in your area rise or fall, it directly impacts your home equity.

Let’s go back to our example above. Say you paid $410,000 for your house when you bought it, but its fair market value has since increased to $440,000. That’s an additional $30,000 in your home equity stake. Home-value increases accrue to your side of the ledger, not your lender’s, because your mortgage balance is set when you close on your home. It’ll go down as you make payments, of course, but the size of the debt doesn’t fluctuate with changes in property values.

The opposite could also be true, though. If selling prices decreased in your neighborhood and your home’s value dropped to $390,000, that would give you $20,000 less in equity. 

Fortunately, changes in your local housing market aren’t the only way to move the needle on your home’s value. You can make strategic renovations to make your home worth more.

Just keep in mind that the return on investment there isn’t guaranteed. If you invest $15,000 in improvements but a decline in the local real estate market causes your home to drop by $20,000, for example, it would cancel out any equity gains for you. 

FAQs

• How quickly can I access my home equity after purchasing a home?

  Many home equity lenders require you to have at least 20 percent equity before being eligible for a HELOC or home equity loan. How long it will take to reach that minimum will depend on how much money you put down upfront in your down payment, how home values are appreciating in your market and whether you’re completing value-adding renovations.

• Should I have my home professionally appraised before applying for a HELOC?

  You can apply for a HELOC without getting an appraisal. Once your lender receives your application, it will order its own appraisal to determine your home’s value. Be advised, though, that you’ll probably need to pay for that appraiser’s services.

• How can I increase the equity I have in my home?

  As you follow your repayment schedule and pay down your mortgage, you’re building equity in your home. If you make extra mortgage payments, or complete upgrades that increase the value of your house you can boost your equity level sooner. Another way to preserve your equity: Keep up with home maintenance and repairs. A home’s condition affects its market value.