Have you wondered how much financial value is embedded in your home? Calculating your home equity is a simple process in theory. Take the current value of your home and deduct outstanding loan balances associated with its purchase and improvements, such as your mortgage and any home equity loans. Use this formula: Current Market Value – Equity-Based Loan Balances (First Mortgage + Home Equity Loans + Home Equity Lines of Credit) = Home Equity.
Start by figuring the current market value of your home
Determining the present value of your home can be done in a variety of ways. The most accurate method is to obtain a certified appraisal from a licensed real estate appraiser. This approach may cost you a few hundred dollars or more.
Free but less precise methods of determining home values include using valuations generated by real-estate websites such as Zillow, Trulia, and Realtor.com. These calculations are typically based on assessed values, recent sales of nearby properties, and property descriptions drawn from public records. Recent updates to your home may not be included. Plus, certain nearby properties may not be appropriate for use as comparable homes; for example, an estate in an exclusive gated community less than a mile from a more traditional neighborhood could skew valuations.
Learn about Loan-to-Value Ratios (LTV)
Finally, a simple, though much less accurate method, is to consider the assessed value of your home for property tax purposes. This number may be more reflective of the practices of your local city and county government, rather than true market value. Plus this amount can be influenced by individual homeowner’s requests to alter valuations through an appeals process.
Subtract outstanding loan balances associated with your home
Your home equity is reduced by debt associated with your home’s purchase, upkeep, renovation, or any loan in which your home is used as collateral. To determine this amount, find the outstanding balances on your mortgage loan, home equity loans, and home equity lines of credit. Your mortgage servicing company should be able to provide you with this information. Generally, this number changes monthly as you pay off loans and the principal amounts are reduced.
Your home equity influences your borrowing capacity and net worth
Why would you want (or need) to know what your home equity is? This information is useful for a variety of reasons.
Should you decide to refinance your mortgage, your home equity may be a crucial number. If your equity is high at a time when interest rates are low and your credit is excellent, you may be able to get a more favorable mortgage loan with lower monthly payments and, possibly, a shorter term.
The market value of your home and your mortgage loan balance may be important numbers if you decide to borrow money using your home as collateral. Generally, the more equity you have, the more you are eligible to borrow using a home equity loan or home equity line of credit (HELOC). Individual lender guidelines vary but some financial institutions will lend as much as 85% of your home’s appraised value less your current mortgage balance, if any.
From a personal perspective, you may want to track your net worth to see if you are making progress in your financial life. Your investments such as your brokerage account funds, IRAs, and 401(k) plan add to your worth, as does the value of your home. Indebtedness, such as your credit card balances and student loans along with your mortgage loan, reduce this number. As your home equity grows, your net worth is likely to increase at the same time.