How to Calculate Home Equity
Complete step-by-step guide to understanding and calculating your home's equity
The Simple Formula
This basic formula gives you your total equity amount, but there's more to understand about how lenders calculate your available borrowing power.
Step-by-Step Calculation Process
Determine Your Home's Current Value
Your home's current market value is the foundation of equity calculation. This isn't the price you paid, but what your home would sell for in today's market.
Methods to determine value:
- •Professional appraisal: Most accurate, costs $400-800
- •Automated Valuation Models (AVMs): Zillow, Redfin estimates
- •Comparative Market Analysis (CMA): Real estate agent analysis
- •Recent sales data: Check similar homes in your area
Valuation Tips
Where to Find Your Balance
Find Your Current Mortgage Balance
You need the current principal balance, not your original loan amount. This balance decreases each month as you make payments (assuming it's not an interest-only loan).
Important considerations:
- •Use the principal balance, not the payment amount
- •Include any second mortgages or HELOCs
- •Don't include escrow balances
- •Account for recent payments that may not be reflected
Calculate Your Total Equity
Subtract your total mortgage debt from your home's current value. This gives you your total equity position.
Example Calculation:
Equity vs. Available Borrowing
Your total equity and available borrowing are different. Lenders typically limit loans to 80-90% of home value, minus existing mortgages.
Factors That Affect Your Home Equity
Market Appreciation
Rising home values in your area increase your equity automatically, even without paying down the mortgage.
Mortgage Payments
Each payment reduces your loan balance, increasing equity. Early payments reduce principal faster.
Extra Principal Payments
Additional payments toward principal directly increase equity and reduce interest costs over time.
Home Improvements
Strategic renovations can increase home value, though not always dollar-for-dollar with the cost.
Market Decline
Falling home values reduce equity and can lead to negative equity if values drop significantly.
Additional Borrowing
Taking cash-out refinances, HELOCs, or second mortgages reduces available equity.
Calculate Your Home Equity
Home Equity Calculator
Calculate your borrowing power and estimated payments
Your Information
Maximum available: $160,000
Your Results
* Rate Disclaimer: Estimated rates shown are for illustrative purposes only. Actual Annual Percentage Rate (APR) may vary based on credit profile, loan-to-value ratio, loan amount, and other factors.
* Example: For a $$100,000 home equity loan with a 15-year term at 7.25% APR, estimated monthly payment is $913. APR and payment shown assume excellent credit (740+ score), combined loan-to-value of 80% or less, and owner-occupied primary residence.
* Payment shown is principal and interest only and excludes property taxes, insurance, and other fees. Actual payment will be higher.
* Rate and approval subject to credit and property approval. Rates are subject to change without notice.
Licensed in 15 states: AL, AR, CO, DE, FL, IN, MI, ND, OH, PA, RI, SC, SD, TN, WV. NMLS ID #1987891
Understanding Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio is a critical metric lenders use to assess risk and determine borrowing limits. It's calculated by dividing your total mortgage debt by your home's current value.
LTV Calculation
LTV Impact on Borrowing
≤ 60% LTV
- • Best rates available
- • Maximum borrowing potential
- • Easiest approval process
- • May waive some fees
60-80% LTV
- • Standard rates
- • Good borrowing options
- • Normal approval process
- • Standard fee structure
80-90% LTV
- • Higher rates
- • Limited borrowing
- • Stricter requirements
- • Additional fees possible
Combined LTV (CLTV)
When you have multiple mortgages (first mortgage + HELOC/second mortgage), lenders calculate the Combined Loan-to-Value (CLTV) ratio. This includes all debt secured by your home and typically can't exceed 90% for most home equity products.
Common Equity Calculation Mistakes
❌ Using Purchase Price Instead of Current Value
Mistake: Calculating equity based on what you paid for the home years ago.
Reality: Your home's current market value may be significantly higher (or lower) than your purchase price.
❌ Forgetting About Second Mortgages
Mistake: Only subtracting the first mortgage balance.
Reality: All mortgages, HELOCs, and liens against the property reduce available equity.
❌ Overestimating Home Value
Mistake: Using optimistic online estimates or wishful thinking.
Reality: Lenders use conservative appraisals that may be lower than online estimates.
❌ Confusing Equity with Borrowing Power
Mistake: Thinking you can borrow your full equity amount.
Reality: Lenders typically limit borrowing to 80-90% of home value, minus existing debt.
❌ Not Accounting for Closing Costs
Mistake: Expecting to receive the full loan amount in cash.
Reality: Closing costs (2-5% of loan amount) reduce the cash you actually receive.
What to Do After Calculating Your Equity
If You Have Substantial Equity (20%+)
- •Consider your borrowing options (HELOC vs Home Equity Loan)
- •Shop rates from multiple lenders
- •Get pre-qualified to understand terms
- •Plan your intended use of funds
If You Have Limited Equity (<20%)
- •Focus on building equity through payments
- •Consider home improvements that add value
- •Wait for market appreciation
- •Explore alternative financing options
Frequently Asked Questions
Get answers to common questions about calculating and using home equity
Ready to Access Your Home Equity?
Now that you know your equity, explore your borrowing options