Equity is the portion of your home you own outright, and you might need to know how to calculate it if you want to borrow money, sell your house or refinance the mortgage.
The equation is simple: Subtract your mortgage balance from your home’s appraised value. The more complicated parts might be tracking down that balance, your home’s current value, and figuring out how much of your equity you may tap for a home renovation, emergency expense or other bills.
We at the MarketWatch Guides team will walk you through each step and the pros and cons of each.
Written by Katie Oelker AuthorKatie Oelker is a personal finance writer specializing in insurance, credit cards and travel rewards. She has written for Business Insider, InvestingAnswers, Investopedia, The Balance and VeryWell.
Edited by Andrew Dunn Senior EditorAndrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. He is a two-time “Best in Business” award winner from the Society of Business Editors and Writers.
Our Research Process Edited by Andrew Dunn Senior EditorAndrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. He is a two-time “Best in Business” award winner from the Society of Business Editors and Writers.
Why Trust UsHere’s a breakdown of how we reviewed and rated top home equity lenders
32 Providers MonitoredOur team researched more than two dozen of the country’s most home equity lenders, including large companies like Navy Federal Credit Union, U.S. Bank, TD Bank, Third Federal and Spring EQ.
640 Data Points AnalyzedTo create our rating system, we analyzed each home equity lender’s disclosures, licensing documents, marketing materials, sample loan agreements and websites to understand their loan offerings and terms.
40 Loan Features TrackedOur team regularly collects data on each company’s loan offerings and terms, such as minimum and maximum loan amounts, origination fees and discounts.
13 Professionals ConsultedBefore we began our research process, we consulted with financial advisors and industry experts to ensure our evaluations covered the banking product aspects that matter most to potential customers.
Related Resources BEST FOR HIGH DEBT-TO-INCOME RATIO BORROWERS BEST FOR HIGH DEBT-TO-INCOME RATIO BORROWERS Best For High Debt-to-Income Ratio Borrowers
*Loan-to-Value Ratio
Home equity is the difference between your home’s value and any debts tied to it, including your mortgage. You probably began building equity before the real estate agent even handed over the keys, thanks to a down payment . As you made mortgage payments, that equity grew, slowly at first and then faster as more of your payment went to the loan’s principal instead of the interest.
At the same time, your home’s value may have increased as many parts of the U.S. are experiencing rising home prices . This type of positive appreciation increases your equity as well.
One of the advantages of building equity in your home is the opportunity to borrow against it. This allows you to pay off debt, make home improvements and finance other purchases.
Check out the best home equity loan rates of 2024.
Now that you understand how home equity works at a high level, you’ll need a few pieces of information to calculate home equity for your own situation.
You can get an idea of your home’s worth through online home valuation tools on websites like Zillow, Redfin, and other mortgage or real estate sites. Enter your address, and the tools will give you an idea of your home’s fair market value.
However, these results aren’t the same as a professional appraisal or independent assessment of your property’s value. Finding a professional appraiser can be done through a trusted mortgage lender or real estate agent.
When looking for your outstanding mortgage balance, find your most recent mortgage statement. You may be able to get this through your lender’s online portal or a recent paper statement, depending on your communication preferences.
You should also be able to contact your mortgage broker or lender by email or over the phone for an updated amount.
Now that you have your home’s current market value and outstanding mortgage balance, subtract the outstanding balance from the current market value.
For example, if the value is $495,000 and you owe $330,000, you hold $165,000 in home equity. However, that doesn’t mean you’ll be able to tap all $165,000 if you want to borrow money to replace the roof or pay a tuition bill. A lender will look at this figure and your financial profile to determine that amount.
If you’d like to borrow against your home’s equity, one of the first things a lender will look at is your loan-to-value ratio (LTV).
Your lender will do the math for you, but you can find this percentage yourself. Divide your mortgage balance by the appraised value and multiply it by 100. Using the example above, $330,000 divided by $495,000 is .66 for an LTV of 66%. Put another way, you have about 34% equity in your home, which may put you in a good position to tap your home’s equity. Two of the most popular ways to do that are through a home equity loan or home equity line of credit (HELOC).
A home equity loan is a lump sum of money repaid over a fixed period, typically in monthly payments up to 30 years. When considering your loan application, lenders will probably look at your credit score, income and LTV. Once approved, you may be able to borrow up to 80% of the equity in your home. Using the example above, if you have $165,000 in home equity, you could borrow up to 80% or $132,000.
You could use that cash to repair or renovate a home or pay off high-interest debt, medical expenses, college tuition, or other expenses. If you fail to repay the loan on time, the lender might be able to foreclose on it.
Most lenders require a loan-to-value (LTV) ratio of 85% or less to qualify for a home equity loan. Use our calculator to see if you may be eligible to draw on your home equity and how much you might be able to borrow.
This is the ratio between how much you still owe on your home and how much it is worth. Generally, you need an LTV of 85% or less to tap into your home equity.
This is how much we estimate you can borrow. Lender requirements will vary.
Your outstanding mortgage balance exceeds 85% of your home value.
Since most lenders limit the loan-to-value (LTV) ratio for home equity loans at 85%, you may not be eligible for a home equity loan at this time.
Lenders typically require a credit score (FICO) of 620 or higher to qualify for a home equity loan or HELOC.
Lenders typically require a credit score (FICO) of 620 or higher to qualify for a home equity loan or HELOC.
You’ll likely need to improve your credit score before you can tap into your home equity. Check out some tips to do so here.
Like a home equity loan, a home equity line of credit is secured by your home, which means you once again risk foreclosure if you cannot repay it. A big difference is that HELOCs give you a line of credit you may draw down as needed. Payments typically begin when the draw period ends, though you will probably have to make smaller, interest-only payments in the meantime.
A home equity loan may be more helpful if you need a specific amount and prefer a fixed interest rate. HELOCs usually have variable rates, meaning your payments might fluctuate over time. No matter which you choose, compare lenders to find the lowest rates and fees. Make sure you understand their terms, rates, and fees.
>> Related: Learn more about what is a HELOC
Homeowners who tap their home equity might be able to pay off debt or afford home renovations without dipping into their savings, using a credit card, or taking out a personal loan, but it also has drawbacks. Below is a list of some of the pros and cons of borrowing against home equity:
Ability to make improvements or pay off higher-interest debt
Lower rates than credit cards or personal loans
Interest may be tax-deductible if used for home improvements
If you default on payments, the lender might foreclose.
Potential fees, including the cost of an appraisal and other closing costs
Lower sale proceeds if you decide to sell your home before repaying the loan or HELOC
If a lender declines your home equity loan or HELOC application it might be because you haven’t built enough home equity to qualify. Increasing home equity takes time, but there are steps you can take, including improving your home’s value and paying extra on your mortgage. We’ll take a closer look at each method.
Conducting home improvements , renovations or repairs has the potential to increase the value of your home, and when your home’s value increases, the equity calculation changes.
Some home improvement projects yield little increase in home value, while other improvements greatly increase it. Exterior home improvements, such as new siding, roofing or a new garage door, typically have a high return on investment. A small kitchen remodel and adding or refinishing hardwood floors can also similarly affect home values.
By making an extra mortgage payment a month (or annually, even) and applying it toward the loan’s principal, you can effectively knock years off the note and save yourself thousands in interest. For example, if you owe $330,000 on the mortgage you took out five years ago at 6% interest and put an extra $500 a month toward it, you could shave more than 10 years and $100,000 in interest.
Of course, if you have that kind of cash, you might not need to borrow, but even a smaller amount builds equity faster and saves you in the long run.
Calculating home equity is straightforward once you understand what information you need. With your home’s value and the mortgage balance, you can get a rough estimate of your home equity. For a more accurate figure, your home might need a professional appraisal. This appraised amount is what lenders use to determine if you’re eligible for a home equity loan or a HELOC. Accepting one means weighing the pros and cons of each and deciding what makes the most sense for your financial goals.
That depends. Accessing home equity might help you make home improvements or pay off higher-interest debt. In these instances, the relatively low interest rates when borrowing against equity could be worth it, but it also comes with risks. If you default on your payments, you risk foreclosure. Anyone considering it should weigh the pros and cons.
Yes. A home equity loan and a home equity line of credit (HELOC) allow you to access your equity without refinancing.
While the exact amount depends on factors such as your income, credit history and home value, most lenders will limit funds to 85% of your home equity while others may have even lower thresholds.
The cheapest way to get equity out of your home depends on your exact interest rate and fees, but in general, a home equity line of credit only charges interest on what you borrow. It’s possible to find no-fee HELOCs. Remember, a lender can take possession of your home if you miss payments.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team at editors@marketwatchguides. com.
