Home Equity Formula
Home Equity = Value of home – Mortgage Balance
Home equity plays a key role in many of your real estate decisions. Whether you cash out your home’s equity to buy an investment property or fix up the home or you want to know how much you’d make selling the home, it’s an important number.
So how do you calculate your home equity? Check out the steps below.
How To Calculate Home Equity
Step 1: Workout how much your home is worth?
First, you need to know your home’s current value. There are a few ways to figure this out.
One option is use New Silver’s ARV Calculator. This will allow you to view the last known selling price of houses similar to yours.
Alternatively you can pull the value from a site like Zillow or Redfin. This is usually an estimated or ballpark value, so don’t put too much credibility into it, but it can be a good starting point.
Lastly, you can also talk to a licensed appraiser or real estate agent in your area. Professionals have a good idea of the values in the area based on recent sales. They can give you a ballpark figure or you can pay for an appraisal or home valuation from a real estate agent.
Step 2: What is your mortgage balance?
Your outstanding principal balance plays a role in your home equity too. This includes all outstanding mortgages. If you have only a first mortgage, you only need that balance. If you have a first mortgage and home equity loan or home equity line of credit, you need that balance too.
The mortgage balance(s) take away from your home’s equity because you must satisfy that debt before you realize any profit.
Step 3: Subtract the total mortgage balance from the home’s value
Once you have these two figures you simply subtract the total mortgage balance from the home’s value and have your home equity.
Home Equity Calculation Example
- Your home is worth $300,000
- Your mortgage has a balance of $140,000
Applying Home Equity Formula
- Home Equity = Value of home – total mortgage balance
- Home Equity = $300,000 – $140,000
- Home Equity = $160,000
Can You Use Your Home Equity?
Now that you know how much home equity you have, the bigger question is, can you use it?
First, how does it compare to your home’s value? This is the loan-to-value ratio or LTV. Before you can use your home equity, you’ll need to leave some equity untouched. This is the lender’s collateral for the loan.
You may be able to use your equity in a variety of ways:
- Pay for home renovations
- Use the money to buy an investment home
- Consolidate debt
- Pay for other large expenses
How Much Can You Borrow?
How much equity you can borrow depends on a variety of factors, starting with the type of loan. Standard lenders typically allow you to use up to 80% of your home’s equity. The 20% cushion is their collateral should you default on the loan.
Hard money lenders may allow the use of more of your equity, it depends on the circumstances. Some allow you to borrow as much as 90% of your home’s equity, giving you more use out of the money invested in your home.
Should You Use Your Home’s Equity?
The bigger question is should you use your home’s equity?
The answer will depend on your goals.
Why are you using it? Are you trying to further your investment either in your own home by increasing its value or by buying an investment home? It could be a great use of your funds.
If you’re using the funds to pay for a large expense, such as a college education, consolidate debt, or high medical bills, it could be a good use too, especially if you can stay out of high-interest credit card debt.
The fact is that it depends on your circumstances and the terms you can obtain. Compare your options, the total costs, and how you’ll use the funds. If you’ll use the home equity to increase your net worth by investing your funds in other investments – it could be a great time to do it. Investing in real estate is a great way to diversify your portfolio, increase your profits, and help prevent a total loss by putting all your money in one investment.