How To Calculate Home Equity

Tapping into your home's equity to cover a big-ticket expense or to pay for higher education can be a great way to access the funds you need. There are different financing options to choose from, like home equity loans and cash-out refinancing. To figure out how much financing you might be eligible for, you'll need to know how much equity is in your home. Let's walk you through how to calculate home equity:

At A Glance: Formulas For Home Equity Calculations

Home equity is the difference between how much you owe on your current mortgage and the value of your home. Your home equity determines your loan-to-value ratio (LTV ratio), a lending risk ratio that lenders and banks look at before they approve a mortgage.

To calculate your home equity, use this basic formula: First, take your home's appraised value. Then, subtract what's owed on the property. The difference is how much equity you have in your home. For example, if you have a property worth $200,000, and the total mortgage balance owed is $150,000, your total equity is $50,000.

An appraised value on a home is what your home is worth based on the assessment of a professional appraiser. It might not match the selling price or actual market value.

3 Steps To Calculating Your Home Equity

Determining how much equity you have in your house gives you an idea of how much value you've built in your property. Here are three steps to calculating the equity you have in your house:

1. Estimate The Value Of Your Home

First, determine the value of your home. You can use a handy online estimator, such as the Rocket Homes^SM Property Report. You can also hire a professional for a home appraisal, which can equate to a more accurate assessment of your home's equity. A home appraisal can hover anywhere between $375 to $600, depending on the location, size and type of property.

There might be a difference between your home's current market value and what you might've paid for the house. Shifts can happen due to a handful of reasons like the current economy and local market conditions and the condition and age of your home.

2. Find Out What You Owe

Next, figure out the remaining balance on your home loan. You can find out your latest mortgage balance by looking at your latest mortgage statement, logging into your online account or contacting your mortgage company. If you have a second mortgage or have leveraged your home equity before, you should also account for those debts in your calculation.

3. Subtract What You Owe From The Value

The last step is to subtract your outstanding total mortgage balance from your home’s appraised value. What remains is your home equity.

Let’s walk through a quick example. Say an appraiser determines that the value of your home is $300,000. You have $200,000 left on the mortgage. In turn, your home equity is $100,000.

$300,000 – $200,000 = $100,000

Loan-To-Value Ratio (LTV): What You Should Know

Your loan-to-value ratio is important to understand if you are taking on a secured loan, such as a car loan, home equity loan or home equity line of credit (HELOC). Your loan-to-value is a ratio that compares the loan amount against the value of the asset that was purchased with that loan.

To calculate your LTV ratio, you'll need to know your loan amount, and how much you can reasonably afford as a down payment.

Let's look at an example: You're buying a home listed for $300,000 and making a down payment of $60,000. In that case, your loan amount would be $240,000.

To find your LTV, divide 240,000 by 300,000 to get 0.8. Next, multiply that 0.8 by 100, and your LTV ratio is 80%.

When you buy your property, your LTV will be based on one of two things: the purchase price or the appraised value, whichever is lower of the two. When refinancing your mortgage, your LTV will also be based on your home's appraised value.

What Is Home Equity And Why Is It Important?

Home equity is an asset that's tied up in your home. It boosts your net worth and, ultimately, your personal wealth. In some ways, your mortgage payments are helping you rack up wealth.

Another reason why home equity is significant is that it gives you access to financing with potentially better rates and more flexible terms, unlike high interest credit card debt.

How To Use Your Home Equity

Now, for the fun part. You can use the power of your home equity access funds to remodel, pay down debt or myriad other expenses. Popular examples of ways to leverage your home equity include home equity loans, home equity lines of credit (HELOCs), and cash-out refinances.

Here are some ways you can tap into your home equity:

1. Make Home Improvements

Tapping into your home equity to spruce up your home is a good idea for a number of reasons. You'll qualify for lower rates. Plus, there may be tax benefits: you may be able to deduct the interest on your home equity loan or HELOC if you use the proceeds toward making home improvements.

Another reason why it's beneficial to use your home equity toward home renovations is that you can choose a fixed-interest loan with a set repayment schedule. Predictable monthly payments make it easier to budget. Plus, going this route can boost the value of your home, so you're getting a return on your investment.

2. Cancel Private Mortgage Insurance (PMI)

While not necessarily a way to access your home equity, reaching a certain percentage of equity can help you save on monthly mortgage costs, adding up to big savings. Once you have 20% equity in your home, you can shave off a few dollars on your housing costs by getting rid of private mortgage insurance.

The cost of PMI varies and hinges on factors such as the down payment, your credit score, and loan type. Expect to pay anywhere from 0.1% to 2% of your total loan amount in PMI. So let's say your PMI is 2% and your loan amount is $200,000. You would save about $4,000 in PMI alone.

3. Establish An Emergency Fund

Home equity loans and HELOCs are flexible on how you can use your line of credit or loan proceeds. Should you find yourself in a financial pinch, you can use the money from a home equity loan to cover an emergency or tide you over during a job layoff.

You can also use part of your proceeds from your home to establish an emergency fund. It can help you steer clear of turning to high-interest debt, such as credit cards.

4. Consolidate Debts

You can also use your home equity to consolidate your debt. If you have a bunch of high-interest credit cards and personal loans, you can use the funds from a home equity loan or HELOC to pay them off.

This can save you money on interest and also streamline payments. Instead of needing to make a bunch of payments to different lenders and creditors each month, you only need to make a single payment to your home equity loan or HELOC.

5. Pay For College Tuition

According to data from the College Board, the average cost of tuition and fees in the U.S. for the 2023-2024 school year for full-time students at in-state public colleges is $11,260. For public, out-of-state tuition and fees: $29,150 a year.

Using your home equity to cover higher education costs can lock you in to more competitive rates and flexible terms.

Home Equity FAQs

Before we wrap things up, let's answer a few questions you might still have about home equity:

How much equity do I have in my home?

To figure out how much equity you have in your home, subtract the loan amounts you've borrowed for your home from the home's appraised value. That number is your home equity. For instance, if you borrowed $150,000 on a home that's valued at $200,000, you have $50,000 of home equity.

Is it a good idea to use my home's equity?

Tapping your home's equity means you may qualify for lower rates and more flexible terms than other forms of financing, such as high-interest credit cards and personal loans. It can be a particularly good idea to use it for home improvements or loan consolidation.

How much equity should I have in my home before I start using it?

Usually, you'll need anywhere between 15% to 20% of equity to apply for a home equity loan or HELOC. For a cash-out refinance, you typically need about 20% of your home equity. Each lender may have different criteria to meet before you can use your home equity.

The Bottom Line: Using Your Home Equity Can Improve Your Personal Finances

Knowing how to calculate home equity and the different ways you can tap into the power of the equity you've built can help you make the most of your home’s value. You can use it to take out a loan with lower interest rates and more attractive terms.