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How Much Equity Do I Have in My Home?
By Martha C. White MONEY RESEARCH COLLECTIVE
Home equity can be a valuable tool for improving your financial standing. Funds received from borrowing against your home can offer a great opportunity to pay down high-interest debt or invest in needed renovations or upgrades to the property.
To access these benefits, though, it’s important to get an initial grasp of the equity you have in your home. Before you shop around for the best rates on a home equity loan, then, you first need to know how much you can reasonably expect to borrow.
Table of Contents
- How do I calculate the equity in my home?
- What is a home equity loan and how does it work?
- Calculating the size of your home equity loan
- How much equity do I have in my home FAQs?
- Summary of how much equity do I have in my home?
How do I calculate the equity in my home?
Equity in your home is an asset you build up over time as you pay down your mortgage. It also increases if the value of your home goes up. The basic math to calculate the equity in your home is simple: Start with the appraised value of your home and subtract your remaining mortgage balance, including the outstanding loan balance of a second mortgage or home equity line of credit, if you have one of those. The resulting figure is the amount of equity you have in your home.
Naturally, if you’ve owned your home for quite a while, have remodeled or live in an area where home prices have appreciated rapidly, you might not have the appraised value of your home at your fingertips. If you’re applying for a home equity loan, the lender will conduct a home appraisal, but Shawn Telford, chief appraiser at CoreLogic, says you can also get one on your own.
“The appraised value is a professional opinion of the value of the home,” Telford says. “The goal of that professional opinion is to estimate the current market value of the home by looking at activity in the marketplace.”
Telford says to keep in mind that there are different kinds of home appraisals, from full walk-throughs to drive-by assessments to ones that are conducted entirely online.
What is a home equity loan and how does it work?
A home equity loan is a lump-sum installment loan with a fixed rate that lets you tap into the value accrued in your home. If you haven’t fully paid off your home and are still making mortgage payments, a home equity loan is effectively a second mortgage.
There are many ways to use home equity. Among the most popular are to use a home equity loan to achieve personal-finance goals like remodeling your house or other debt consolidation.
If you decide to take out a home equity loan, make sure you’ll be in the home long enough after you get the loan to make it worth your while financially. As with a mortgage, the costs associated with a home equity loan, including fees for the bank origination, appraisal, underwriting, documentation, title and escrow services can really add up — to easily between 2% and 5% of the loan amount.
A home equity loan is similar to a home equity line of credit, or HELOC, but there are important distinctions. A HELOC is a revolving loan that lets you borrow against the equity built up in your home. You draw on it as needed during the draw period — typically five to 10 years before you have to start repayment — rather than take the borrowed amount as a lump sum.
HELOCs typically have lower initial interest rates than home equity loans, but the variable interest rate you pay on a HELOC can rise, which can be a drawback. With a fixed-rate home equity loan, your monthly payments will stay the same.
Another alternative to a home equity loan is a cash-out refinance, a process by which you originate a new mortgage and replace your current loan in order to tap into a portion of your available equity. Mortgage refinancing was a very popular option for homeowners over the past several years when mortgage rates were at historic lows. Now, in an environment of higher interest rates, refinancing is a less attractive option.
Calculating the size of your home equity loan
A home equity loan lets you access some of the value you’ve built up in your home over the years without the hassle and expense of getting an entirely new mortgage. Similar to a conventional mortgage, the amount a mortgage lender will let you borrow as a home equity loan depends on the following:
- How much equity you have in your home
- The loan-to-value ratio (sometimes abbreviated as LTV)
- Your debt-to-income ratio
- The total amount of debt you owe to all creditors
How can you increase the equity in your home?
You can build equity in your home by making extra payments on your mortgage, but that isn’t the only strategy you can use.
“In almost all cases, there are improvements that can be made to increase the value of your home by appealing to the market,” says Telford. “In your particular area, there may be things that are very desirable for a purchaser,” such as a swimming pool, central air-conditioning or a screened-in porch. These home improvements can increase your home’s equity.
“Talk to a real estate agent who is talking with potential buyers and can tell you what they’re looking for. That local market knowledge is very important,” Telford advises.
How much equity do I have in my home FAQs
What is the difference between the market value and the appraised value of a home?
The "market value" of your home is a subjective term that depends on how much someone is willing to buy or sell a home for — it's a product of negotiation. The appraised value is an assessment by a lender to determine what your home is worth. The lender looks at the appraised value to make sure it doesn't underwrite a mortgage for more than that home could be sold for, if the need arose. A nationwide divergence between these two sets of numbers ultimately triggered the real estate crisis that snowballed into the financial crisis of 2008.
What are the benefits of owning a home with equity?
The benefits of building up equity in your current home are numerous. First, as you build equity, you move closer to owning your home free and clear.
There are tangible financial benefits, as well. Equity in your home is an asset that can be sold or borrowed against if you so choose. For many Americans, the value of their home comprises a significant portion of their household net worth. While not as liquid as cash in a bank account or a portfolio of stocks, bonds and mutual funds, your home can still be valuable collateral. If the need arises, you can borrow against the accrued equity on considerably better loan terms than you could get from an unsecured loan like a credit card or personal loan.
Of course, borrowing against your home is also a risk. In a worst-case scenario, if you can't pay back your debt, the mortgage lender could foreclose and you could lose your house. Originating a home loan or line of credit also does come with upfront costs, which is why financial experts advise homeowners to have a cash cushion or emergency fund they can tap in the event of an emergency or unexpected expense.
What is the value of my home?
When you talk about the value of your home, you might mean a few different things: If you're planning a move, you could be talking about the selling price. If it's a home you're seeking to buy it, you might be referring to the amount you're willing to spend. Other valuation metrics include assessments made to levy property taxes or appraisals for borrowing against the property.
If you're seeking the best home equity loan, you need to know the appraised value of your home.
How much equity should your home have before you sell?
There's no hard-and-fast rule for how much home equity you must have before you sell your property, but there are a few guidelines that can be helpful to keep in mind. Make sure you have enough equity to cover your current mortgage's outstanding balance, keeping in mind that some lenders will let you roll closing costs into your mortgage, which increases your outstanding balance.
A summary of our guide to equity I have in my home
A home equity loan is a second mortgage that lets you access the equity accrued in your property. Unlike a HELOC, a home equity loan has a fixed interest rate and you get the loan proceeds in a lump sum.
A home equity loan can give you funds for a home improvement project, paying off high-interest credit card debt or achieving other major money goals.
It is important to know how much equity you have in your home before you borrow. To figure that out, you need to know the appraised value of your home and your mortgage balance. Subtracting your balance from the appraised value will give you the equity you have.
Home prices can be volatile so it’s a good idea to have a professional appraisal conducted to know how much equity you have in your home. You can increase the value of your home and your equity stake by adding or renovating popular features in your local housing market.
