What is home value and how do you determine it?

What is home value?

Your home’s value is what buyers are willing to pay for it. This number will vary depending on several factors.

If your local housing market is booming, the value of your home might rise. If you’ve renovated your kitchen or added a second bathroom that, too, could boost your home’s value.

Your home’s value could fall, though, if crime rises in your neighborhood and causes owners to flood the market with homes. It could fall, too, if you fail to maintain your home. The repairs your property needs could lower the amount that buyers are willing to pay.

Understanding the value of your home can help you set your asking price when listing your home for sale. The value of your home will also affect how much you’ll pay in property taxes and how much you can borrow with home equity loans or lines of credit.

Types of home value estimates

There's more than one way to determine the value of your home, with each method relying on different factors to come to a final calculation.

Here are some of the more common ways to estimate a home's value:

• Market value: This is the value that is most important to home sellers. It's the amount that buyers are willing to pay for your home.
• Fair market value: Fair market value, commonly referred to as FMV, is similar to market value. But this method includes a key assumption: that both the buyers and sellers of a property understand the local housing market and are not influenced by outside pressures or influences.
• Appraised value: When you buy a home, your lender will require that you pay for an appraisal of the property. Your lender wants to make sure it is not lending you more money than what the home you are buying is worth. When determining a home's appraised value, an appraiser will tour the property and study the sales figures that similar homes nearby have fetched.
• Assessed value: Your home's assessed value determines how much you'll pay each year in property taxes. A professional assessor will determine this value. It's not unusual for a home's assessed value to be lower than its appraised or market value.

How can you determine the value of your home?

Here are several methods that you can use to help determine your home’s value:

Use online home valuation tools

If you want a quick estimate of your home value, you can visit an online home valuation tool. Several companies offer these tools, including Rocket Homes^SM. These online tools usually pull information from recent sales in your area to determine your home’s value.

Be careful, though. Not all online home valuation tools are accurate. Some might give you an inflated figure, while others will underestimate your home’s value. Make sure to use a trusted site.

Hire a professional appraiser

Working with a real estate appraiser will give you a more accurate home value. These professionals are trained in determining how much homes are worth.

While buyers pay for an appraisal when purchasing a home, it’s also smart for sellers to hire an appraiser of their own before listing their residence for sale. This will help them set their asking price.

When determining a home’s value, appraisers will consider:

• The condition of your home
• The demand for homes in your neighborhood
• The price that buyers have paid for similar homes nearby
• Any additions or improvements that you have made to your residence

Consult an agent for a comparative market analysis

If you’re selling, your real estate agent should provide you with a comparative market analysis, or CMA, of your property. In this analysis, your agent will look at recent sales of similar homes to help determine what buyers might be willing to pay for your home. You and your agent can use this information when setting an asking price.

If you would like to list your home at a higher price, your real estate agent can recommend changes that might increase your property’s value. This could include major steps such as renovating your kitchen or adding a second bedroom or smaller steps such as adding landscaping, switching out your home’s front door or applying fresh coats of paint to its living room and bedrooms.

Pull ‘comps’ on similar properties

You don’t have to wait for your real estate agent or an appraiser to provide an estimate of your home’s value. You can do your own research by searching online real estate sites for homes in your neighborhood that have sold recently. These sites will list the prices that these homes were listed at. They might even state their final sales prices.

Just remember that this method won’t provide information that is as accurate as the numbers you’d receive from a real estate agent or appraiser. Be careful, too, to only compare your home with properties that are like yours. Homes that are larger will generally fetch a higher sales price. Owners who have recently updated their properties will also generally sell their homes for a higher amount.

Use automated valuation models (AVMs)

An automated valuation model, or AVM, is a computer program that relies on an algorithm to determine the value of homes. You can log onto any site that offers an AVM -- such as real estate brokerages, banks and home listing sites -- and type in your home's address. The AVM will then compute a market value for your residence.

AVMs use information such as a home's size, location, age and number of bedrooms and bathrooms to come up with an estimate of your property’s value.

These sites are useful if you want an estimate of your home's value. Again, though, the estimates provided by AVMs are not as accurate as the home values calculated by appraisers or real estate agents.

Review property tax assessments

You can gain a rough estimate of your home’s market value by reviewing your property tax bill. When calculating the property taxes that you pay each year, your local assessor will rely on its assessed value.

This assessed value is usually equal to a percentage of your home’s fair market value. This will vary. As an example, in Cook County, Illinois, home to Chicago, a home’s assessed value is equal to 10% of its fair market value.

Be careful when relying on assessed value to help determine your home’s market value. The information governments use to calculate assessed value might not be based on current market conditions.

Evaluate rental potential

Your home might be worth more to buyers if they can rent it out to other tenants. Maybe you are selling a home in a beach town or other tourist-friendly location. You can study the rents that owners are charging on nearby properties. If these rents are high enough, they might boost the value of your home.

Consider home equity loan estimates

If you’ve built enough equity in your home you might apply for a home equity loan or home equity line of credit, loans that let you borrow against the equity you’ve built in your residence.

Equity is the difference between what you owe on your mortgage and what your home is worth. When you apply for a home equity loan or line of credit, your lender will calculate your home’s current market value to determine how much equity you have. You can typically borrow up to 80% of your equity, so calculating your home’s value is an important step in determining the maximum amount you can borrow.

You can use your lender’s calculations to help determine how much your home is currently worth.

Why is it important to know my home’s current value?

There are several reasons why it’s important to know what your home is worth:

• You’re selling your home: If you’re selling your home, you’ll want to set the right asking price. Knowing your home’s value is key to this. It can also help you determine if an offer from a buyer is a fair one.
• You’re applying for a home equity loan or line of credit: You’ll need to know your home’s value to determine how much equity you’ve built in it. And you’ll need to know this if you want to borrow against your home’s equity in the form of  a home equity loan or line of credit.
• You want to refinance your existing home loan: Most lenders require that you have at least 20% equity in your home before they’ll approve you for a refinance. You’ll again need to know the value of your home if you want to determine how much equity you’ve built in it. If you are choosing a cash-out refinance, you might need even more equity, making it more important that your home’s value be high enough.
• You want to appeal your property taxes: Your local assessor will first determine your home’s assessed value before deciding how much you’ll pay in property taxes. If you think your property taxes are too high and you’d like to appeal them, you’ll need to know the tax-assessed value of your property.

How to increase how much your home is worth

Certain factors are out of your control. You can't change your home's location or reduce the traffic on the busy street outside your property's front door. You can, though, make certain home improvements that could boost the value of your home.

Here are some examples of home improvements that make your property more attractive to buyers:

• Bathroom additions or upgrades
• Replacing an old garage door
• Boosting your home's curb appeal
• Adding new, energy-efficient windows
• Renovating your kitchen or upgrading your kitchen appliances
• Adding hardwood flooring
• Equipping your home with smart technology
• Planting trees or flowers in your home's front and back yards
• Repairing or replacing an old roof
• Updating lighting and modernizing older electrical systems
• Enhancing insulation for increased energy efficiency

You might not need to make any improvements for your property to appreciate in value. Maybe your neighborhood becomes more desirable, attracting more buyers. Or maybe mortgage interest rates fall, meaning that a greater number of buyers can afford your home. Both could boost the value of your home without you having to spend money on home improvements.

Which renovations will increase your home’s value the most?

What home improvement projects bring the best return on your investment? According to the 2024 Cost vs. Value report from Zonda, exterior improvements generate the most bang for your buck.

Zonda reported that a garage door replacement will usually bring the best return on your investment. According to Zonda's 2024 report, a garage door replacement cost an average of $4,513 and added $8,751 in value. Homeowners recovered an average of 194% of their costs for such a project, according to the 2024 report.

Replacing a home's steel exterior door ranked second, costing an average of $2,355 and boosting a home's value by $4,430. Homeowners taking on this repair recovered 188% of their costs.

Zonda also recommended adding a manufactured stone veneer to your home, a job that cost a hefty $11,287 on average in the company's 2024 report but that also boosted a home's value by an average of $17,291, meaning that homeowners recovered an average of 153% of their costs.

Zonda said that a minor kitchen remodel costing an average of $27,492 boosted a home's value by $26,406. That's a return on investment of 97%.

The bottom line: It’s wise to keep track of your home value

Before selling your home, it makes sense to determine how much it’s worth. Understanding your home's value will help you set the right price. This will generate more offers and help your home sell faster.

And while it's easy and free to use an online valuation tool, you'll get more accurate results by hiring a professional appraiser to determine your home's value.

Want to increase your home's value before listing it? Consider a cash-out refinance to get the money you need to cover important renovations. You can start your application for a cash-out refinance today with Rocket Mortgage^®.