Learn How To Calculate Home Equity

For most homeowners, their house is their biggest financial asset. Knowing how much equity you have in your home is crucial for everything from basic financial planning to refinancing and selling decisions. But how do you figure out your home equity?

The formula for calculating home equity is simple: Deduct the outstanding balance on your mortgage from your home’s current value.

However, understanding how to arrive at an accurate calculation of your equity and how much equity you can borrow requires a bit more explanation. Learn how to calculate home equity below.

How To Calculate Your Home Equity

Home equity is how much of your home that you’ve actually paid off. It’s the difference between what you still owe your lender and what your home is currently worth. To calculate your home equity, you need to find two key pieces of information and then plug them into a formula.

Determine The Value Of Your Home

The first step in your home equity calculation is to determine the value of your home. You can use online estimators, such as the Rocket Mortgage® Property Report, to get an estimated market value; however, an appraisal by a professional will provide greater accuracy. An appraisal may cost somewhere between $350–$550 for a single-family home, but the exact cost will depend largely on the home’s location and size.

If you plan on refinancing your mortgage, your lender will likely require an appraisal. The cost of the appraisal can sometimes be rolled into your new loan along with other closing costs.

Figure Out How Much You Owe

Next, you need to find out how much you owe on your mortgage loan. You can reference your latest mortgage statement, call your mortgage company or log into your online account.

Subtract Your Loan Balance From Home Value

The final step is to plug the values from steps one and two into the correct formula. To determine your home’s equity, take the home’s appraised value and subtract the current mortgage balance.

If you’re not looking to refinance and just want a ballpark estimate of your home equity, you can subtract your loan balance from the estimated market value you find online.

An Example Of Calculating Home Equity

For example, if an appraiser determines your home is worth $400,000 and you find your mortgage balance to be $200,000, you have $200,000 in equity:

Understand Loan-To-Value Ratio

Once you determine your home’s equity, you can see how much you might be able to borrow.

Your loan-to-value (LTV) ratio is the inverse of your equity. So, for example, if you have 20% equity in your home, your LTV will be 80%. LTV ratio, expressed as percentage, is the amount you owe on your home divided by its appraised value and then multiplied by 100.

Here’s an example:

An 80% LTV ratio is a common threshold for being approved to borrow from your home’s equity. The type of loan you’re applying for and the lender you choose will determine how high your LTV can be, however.

Determine How Much You Can Borrow

Your equity is your money, but you typically won’t be able to access all of it at once. Usually, lenders will let you borrow 80% to 85% of your home’s appraised value. However, Rocket Mortgage® might allow you to borrow up to 90% of your home’s value with a credit score of 740 or higher.

Then, you’ll need to deduct the amount you owe your mortgage lender if you still owe anything. The remainder will be the amount of your equity you can take out in cash.

Let’s say your house has an appraised value of $500,000 and a remaining loan balance of $200,000.

Here’s an example of how much you can borrow in equity:

First, determine your approximate maximum loan amount — the highest amount a lender will let you borrow.

80% (LTV ratio) * $500,000 (appraised home value) = $400,000 (maximum loan amount)

Now, subtract the remaining loan balance to get how much you could actually borrow in equity.

$400,000 (maximum loan amount)  -  $200,000 (remaining loan balance) = $200,000 (available equity)

Keep this in mind, too: To determine your LTV, lenders consider your combined loan-to-value (CLTV) ratio. This includes your current mortgage balance plus the new loan amount, divided by your home's appraised value. Consider these factors to see how large of a loan you can get.

What Is My Home Worth?

Your home’s value is based on a variety of factors, only some of which are in your control, and only some of which might have factored into your home’s value when you first purchased it. Some things to consider are:

• Size and number of rooms
• General condition of home, appliances, and utility systems
• Condition of foundation, roof, and land
• Location and amenities
• Comparable homes in the area
• Current market conditions

Ways To Access Your Home Equity

Most homeowners have three ways to access home equity while staying in the home: cash-out refinance, home equity loan, or HELOC.

• Cash-out refinance: This is a new mortgage that replaces your existing first mortgage with a loan that has a higher balance. You then receive the difference in cash to use however you want. Your lender will give you the funds in one lump sum, and you’ll have to pay closing costs.
• Home equity line of credit (HELOC): This is a line of credit you can typically draw on for 5-10 years, depending on the lender. You must pay interest on the amount withdrawn during this time, but you can repay the amount borrowed, too, just like a credit card. After the draw period, you must make principal and interest payments to repay the full amount used. Rocket Mortgage doesn't offer HELOCs at this time.
• Home equity loan: A home equity loan is similar to a HELOC in that it’s a type of second mortgage, but it differs from a HELOC in that it provides all your funds in a lump-sum payment. You’ll be responsible for making payments on the home equity loan as well as your first mortgage.

What Can You Do With Your Home Equity?

You can use your home equity in several ways. Here are some of the most popular options:

• Make home improvements: If you liquidate some of your home’s equity, you can use the funds to pay for home renovations. This is one of the best uses of home equity because you reinvest in the home, increasing its value.
• Pay for tuition: A home equity loan can be used to cover your child’s college tuition or room and board costs beyond any scholarships or financial aid they can receive.
• Consolidate debt: Credit card interest rates are generally much higher than mortgage rates. Using your home equity can help you consolidate your debts into one loan, saving money on interest and paying only one bill each month.
• Start a business: If you need capital to start your dream business, you can borrow the funds from your home equity, paying a lower interest rate than you might for a personal or business loan.
• Build an emergency fund: If you haven’t saved 3 — 6 months’ worth of expenses, a HELOC can provide access to the funds needed in an emergency. You don’t have to spend the funds, but they’re there if you need them. Keep in mind: Some lenders, including Rocket Mortgage, don’t offer HELOCs.

The Bottom Line: It’s Important but Easy to Determine Your Home’s Equity

It’s important to know how to calculate home equity. You can let your home equity accumulate or put it to work with a cash-out refinance, home equity loan or HELOC.

If you’re ready to embark on your journey of building home equity by purchasing a home, start the mortgage approval process today.