How To Calculate And Access Your Home Equity

Understanding home equity can help with your financial strategy, whether you're looking to make home improvements, consolidate debt or plan for future expenses. We’re here to walk you through the process of calculating your home equity and provide insights on accessing and maximizing its potential. By gaining a clear understanding of your home equity, you can make informed decisions that align with your financial goals.

How Much Equity Do You Have In Your Home?

Home equity is the amount you own in your home. You can determine how much equity you have in your home by deducting how much you owe on your mortgage from your home’s value, which you can accurately determine with an appraisal. Any loans secured by your house should also factor into your calculation.

This ownership stake affects your potential profits from a home sale, your borrowing capacity, how lenders view you and more. Building equity is crucial for financial advantages, making it essential to increase your ownership in your property whenever you can.

How To Calculate Home Equity 

There are three essential steps you’ll need to take to calculate your home equity.

Step 1: Determine The Appraised Value Of Your Home

Start calculating your home equity by determining the appraised value of your property. The easiest and most accurate way to do this involves hiring a professional appraiser or requesting an appraisal from your lender. Typically, the cost for a single-family home appraisal ranges from $300 – $400, depending on factors such as size, condition and overall value.

For a rough estimate, you can also assess your home's value by examining recent sales of comparable properties in your neighborhood or using online tools. These won’t be exact numbers, but they can give you an idea of your home’s value.

Step 2: Find Out How Much You Owe On Your Mortgage

Determine your mortgage balance by checking your latest mortgage statement. If your lender provides online access, log in to your mortgage dashboard and request the payoff amount. Or, you can reach out directly to your lender to obtain the current amount you owe on your mortgage.

Step 3: Subtract Your Remaining Mortgage Debt From Your Home’s Value

After you find out the appraised value of your home and determined the outstanding mortgage balance, calculate your home equity by deducting the mortgage balance from the home value.

Your loan-to-value ratio, or LTV, is an important factor when using equity. LTV compares the borrowed amount to the value of an asset. It indicates the remaining equity a borrower would have if they sold the asset and paid off the loan.

How To Use The Formula For Home Equity

To figure out your home equity, start with the value of your home, then subtract the total amount you owe on the property. The difference will be the amount of equity you have available. Let’s say your property is worth $200,000, and your remaining mortgage balance is $100,000. After subtracting what you owe from your home’s value, you’ll have $100,000 in accessible home equity.

How Much Home Equity Can You Borrow? 

The amount you can borrow with home equity depends on the lender, typically ranging from 80% – 85% of your home's available equity. Your eligibility is influenced by factors such as your credit, income, employment history, debt-to-income ratio and loan-to-value ratio.

How To Access Your Home Equity 

There are several ways you can access your home equity to meet financial goals. Here are a few examples:

Home Equity Loan 

A home equity loan is a form of second mortgage that enables homeowners to borrow against the equity in their home. By using the house as collateral, the risk for lenders is reduced, leading to generally lower interest rates compared to other financing options. This makes home equity loans a favorable choice for various projects, ranging from consolidating debts to making home improvements.

Home Equity Line Of Credit

A home equity line of credit, or HELOC, is a second mortgage that allows homeowners to borrow against their home equity in the form of a credit line. HELOC funds can be utilized for various purposes, such as home improvement projects, education expenses and consolidating high-interest credit card debt.

Cash-Out Refinance 

Cash-out refinancing is another option that allows you to borrow against your home's equity. This process involves obtaining a new mortgage that exceeds your current mortgage balance. The original mortgage is paid off by your lender, and you receive the surplus amount in cash between the two loans.

What You Can Do With Your Home Equity 

You have some flexibility when it comes to using your home equity. Some of the most common ways people put their equity to good use includes:

• Contribute toward home improvements: If you’re looking to renovate your home but lack immediate funds, you can use your home equity to cover home improvements. Financing renovations with the equity in your home allows you to pay for them at a significantly lower interest rate compared to using a credit card or a personal loan.
• Pay off debts: Another way to use home equity is to pay off or consolidate debt. While this may be a good option for some because of a lower interest rate, it’s not for everyone. Consider the interest rate offered, your current home equity, and your qualifications such as credit score and debt-to-income ratio.
• Pay for college tuition or a wedding: College and wedding expenses can be high, and student or personal loans may not always offer the most cost-effective solution. Leveraging your home equity can provide a cash source for tuition or a wedding or allow you to consolidate existing loans into a single, lower-interest loan.
• Buy a second home: A home equity loan can reduce the cost of purchasing a second property and enhance the buyer's assets. Some advantages include being able to increase your down payment and potentially get a lower interest rate.

Ways To Grow Equity In Your Home

There are many ways to build equity in your home, including:

• Choosing a shorter 15-year loan term for your mortgage
• Making a larger down payment
• Making extra payments toward the mortgage principal
• Making repairs or renovations that add value

The Bottom Line: Tap Into Your Home’s Value By Accessing Home Equity 

Understanding and managing your home equity is a valuable financial tool. By calculating it correctly and finding ways to increase it, you open doors for funding projects, consolidating debts, reaching long-term financial goals and getting the most out of your homeownership benefits. If you’re ready to buy a home and start building equity, start the application process with Rocket Mortgage^® today.