How Much Equity Do I Have in My Home? Here’s How to Calculate Home Equity

One of the benefits of homeownership is building equity – the amount of the home you actually own. Home equity can be used to help you buy a new home, make improvements to your house to increase its value, or pay off debts. So, how do you calculate how much home equity you have?

In this Redfin article, we’ll outline all the calculations you need to know, how you can tap into your home equity, and what to know if you’re selling your home. Whether you own a home in Sacramento, CA, or a condo in Baltimore, MD, here’s how to calculate home equity. 

Key takeaways

• Home equity is how much of the home you actually own.
• You can tap into your home equity with a home equity loan or a home equity line of credit (HELOC).
• You can calculate your home equity using the following formula: current home value – current mortgage balance

What is home equity?

Home equity is the amount of your home that you actually own. Essentially, this is the amount of home that you’ve paid off toward your mortgage. 

How is home equity calculated?

Home equity is calculated by subtracting the amount you still owe on your mortgage from the current market value of your home. However, there is some information you’ll need to access first. Here are the steps:

Step 1: Find your home’s current market value

The first step in determining your home equity is to find out your home’s current value. The price you paid for your home may not be the current value of your home. To calculate your home equity, you’ll need the most up-to-date estimate of your home’s worth. For example, you can use a calculator to determine how much your home is worth. 

You can find that information by typing your home address into the search box on Redfin.com, and then viewing the page with all the details on your home. An estimated value of your home, the Redfin Estimate, is displayed next to the last-sold price. You can also contact a real estate agent to discuss what your home is worth.

Step 2: Find your mortgage balance

Once you have the current market value of your home, you’ll need to find your current mortgage balance. This should be on your most recent mortgage statement. If your lender has an online portal where you pay your mortgage, you should be able to find it there.

Step 3: Subtract the two to determine your home equity

Once you have your home’s current value and your mortgage balance, you’ll need to subtract the two to determine your home equity. For this example, let’s say your home is worth $500,000 and you have $300,000 left on your mortgage. You’ll subtract $300,000 from $500,000 to determine your home equity:

$500,000 – $300,000 = $200,000

In this example, your home equity is $200,000. 

Step 4: Calculate how much you can borrow

The next step after you’ve determined your home equity is to calculate how much you can borrow from it. While you can’t borrow the total amount, most lenders allow you to borrow up to 80% of your home’s value. Using the same example, your home’s value is $500,000. You’ll need to multiply this by 0.8 and subtract what you owe on the mortgage to see how much you can borrow.

$500,000 x 0.8 = $400,000

$400,000 – $300,000 = $100,000

In this case, you may borrow up to $100,000 in home equity. 

Step 5: Calculate your loan-to-value ratio (LTV)

A key calculation in understanding your home equity is the loan-to-value ratio (LTV). LTV is the ratio of your current mortgage loan to the home’s appraised value. The number is a percentage, calculated by dividing the amount you currently owe on your mortgage by the appraised value and multiplying it by 100. Lenders use this number to determine the risk of giving you a loan.

Using our original example, your home is worth $500,000 and you have $300,000 left on your mortgage. 

$300,000 / $500,000 = 0.6 x 100 = 60% 

In this example, your LTV would be 60%. Your LTV will change over time as you make more mortgage payments toward the home. 

Step 6: Calculate your combined loan-to-value ratio (CLTV)

The final calculation you need to know if you’re interested in your home equity and want to borrow against it is the combined loan-to-value ratio (CLTV). The CLTV is a comparison between your home’s value against your current loan amount and any loans you’re seeking. 

Using the same example as above, your home is worth $500,000, you have $300,000 left on your mortgage, and you want to get a $60,000 home equity line of credit. 

$300,000 + $60,000 = $360,000

$360,000 / $500,000 = 0.72 x 100 = 72%

After calculating, the CLTV would be 72%. Most lenders want to see a CTLV below 85% in order to approve the line of credit.

How to access your home equity

If you want to tap into your home equity, there are a few ways you can do so. You can do so through home equity loans, a home equity line of credit (HELOC), and a cash-out refinance. 

Home equity loans

A home equity loan is a lump sum of money that you repay over time, typically 5 to 15 years. These loans are usually at a fixed interest rate and you’ll owe interest on the entire amount. Your payments will vary depending on how much you take out. A home equity loan can be a good idea if you have a specific amount of money that you need.

Home equity line of credit (HELOC)

Commonly called HELOC, a home equity line of credit, allows you to withdraw funds on an as-needed basis for a designated period of time (known as a draw period). Draw periods typically last between 5 to 25 years, with the repayment period beginning as soon as it ends. This means you only repay what you borrow, including interest on that amount. 

HELOCs give you the benefit of a flexible schedule, but interest rates vary from month to month and funds can be frozen without warning if your home value drops. This loan is best if you need various loan amounts for multiple projects or you don’t know exactly how much you need to borrow. 

Cash-out refinance

A cash-out refinance is a bit different as you replace your current mortgage with a new, larger mortgage loan. You’ll receive a lump sum of the difference between the two loans. Interest rates on a cash-out refinance are typically lower than a home equity loan or HELOC. However, if your current mortgage has a lower interest rate and your new mortgage’s interest rate is much higher, you could pay more over time. 

Common reasons to tap into your home equity

There are several common reasons why people may tap into their home equity, whether through a loan or HELOC. These are some of the reasons:

• Pay for home renovations to improve your home’s value
• Use the funds to invest in other investments
• Pay for college or higher education, particularly if the interest rates are lower than student loans
• Pay off other debts, like car payments, credit card debt, or student loans
• Build an emergency fund

How much equity do I need to sell my home?

If you’re considering selling your home, it’s also a good idea to know how much equity you have. Ideally, you would have enough equity to cover commissions, any liens, and closing costs. If you don’t have enough equity to pay these costs, you’ll have to bring your own funds to pay them. 

If you have negative equity in your home due to missed payments, you may face foreclosure. Foreclosure can damage your credit score, so you may want to consider a short sale if this is the case. However, your lender will need to agree to a short sale so it’s best to speak with them as soon as you can. 

What happens to your home equity when you sell?

When you sell your home, any equity you have will be given to you in cash. Any proceeds from your home sale will need to cover the following expenses first:

• Mortgage and any additional liens
• Transaction fees like commission, property and transfer taxes, and HOA fees
• Any fees you agreed to pay as part of the seller concessions

Once these expenses are paid, you’ll receive the remaining profits which you can use toward anything else.

FAQs about home equity

Can you have negative equity?

Yes, you can have negative equity. With standard loans, your home equity will increase over time. With negative-amortizing loans — a loan with monthly payments less than the interest rates — your equity decreases over time as your owed balance increases. Home equity also fluctuates depending on current market conditions, such as if your home’s value decreases.

Can you increase your home equity?

Yes, you can take steps to improve your home equity by performing touch ups and making modern updates. There are plenty of ways to increase your home value, whether you’re looking for an extensive project or minor upgrades. 

How soon after buying a home can I access home equity?

On average, lenders expect you to have at least 20% equity in your home before applying for a home equity loan or HELOC. Your ability to access your home equity will depend on your down payment amount, home values in your area, and any upgrades you make to your home.

Do home prices affect your home equity?

Yes, home prices can affect your home equity in both good and bad ways. For example, if home values are increasing in your area or you’ve made valuable improvements in your home, then your home value can increase. If your home value increases, then it increases the home equity you have.

On the flip side, if home values in your area decrease, your home equity can also decline. Reasons for home values decreasing include market conditions, increased or poorly managed construction, increased number of foreclosures, and natural disasters, among others. Some home improvement projects or overspending on projects may also decrease your home value – especially if they’re not valuable projects. 

What happens if I have PMI?

If you have a conventional mortgage and paid a down payment below 20% then you’re likely paying PMI. If you’ve reached the point where you no longer pay PMI, usually at 20% equity, it won’t affect your ability to get a home equity loan or HELOC. Usually, lenders will automatically cancel PMI when your LTV hits 78% or you can request a cancellation at 80%.

If you’re still paying PMI, then it can impact your ability to pay it off. It will increase your LTV and many lenders will expect you to pay PMI until your LTV hits 78%. Having PMI can also reduce the amount you’re able to borrow in a loan since your debt load is higher. Speaking with your lender can help you understand your options. 

What happens if I have a reverse mortgage?

A reverse mortgage is a type of home loan that allows you to receive your home’s equity in the form of a payment each month. You can usually get a reverse mortgage once you’ve paid off – or are close to paying off – your mortgage, but you need to be 62 years of age. As a result, you’re able to tap into your home equity without a HELOC or home equity loan.

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