How to Calculate Home Equity and Why It’s Important to Know How Much It Is

If you’re a homeowner, it’s easy to guess why you want to know how to calculate home equity. Home values appreciated massively during the hot pandemic market, growing homeowner equity to nearly $30 trillion.

And it’s no surprise that many would like to tap some of that accumulated wealth to fund home improvements, consolidate their debts, or for some other worthwhile purpose.

But what exactly is home equity? One federal regulator defines it as, “the amount your property is currently worth, minus the amount of any existing mortgage on your property.”

In this article (Skip to...)

• Calculate home equity
• Ways to tap home equity
• How much can I borrow?
• What can you do with equity?
• How to build home equity
• Home equity FAQs

Calculate your home equity in 3 steps

That federal regulator’s definition shows how simple the calculation is. But it’s worth going through the process step by step because this is a sum you want to get right.

Step 1: Find the value of your home

Finding the value of your home is closer to an art than a science. It’s primarily based on “comps,” which are comparisons of similar homes recently sold (not currently on the market) within your neighborhood or area.

However, no two homes are completely the same. Even if yours is on a vast development of identical or near-identical buildings, differences will affect its worth. One may have a corner plot, a bigger or smaller backyard, a better or worse view, or an addition. The possible variations are endless. And, of course, condition and amenities will be crucial.

This is where the art of appraisal comes in: recognizing the differences between similar homes and assigning them a value. This is hard for a homeowner to do because they’re not trained to do so or objective. Still, if you’re content with a ballpark appraisal, by all means, give it a go.

Do-it-yourself valuing

As applies to so many things, the quickest and easiest way to get a good idea of your home’s value is to check a reputable online source. Zillow and Redfin might be your first ports of call, but dozens of sites offering free “automated valuation models” (AVMs) exist on the web.

You can also search online public records for recent sales in many places. Check your county or city’s records office website. And call if you need help.

Don’t look at current listings. Remember, you’re looking for recent sales of similar properties to yours as close to your home as possible. Many sellers often seek unrealistically high prices, and you’d be misled if you took those into account.

Once you have your comparisons, do your best to assess the value of the differences between them and your home. You might be able to access old listings for those properties to get a better idea. And Google Street View may give you insights into how the comps stack up against your place.

The temptation at this point is to be over-optimistic about how your home compares with the others. Chances are, your chosen lender will appoint a professional appraiser to deliver the definitive value.

It would be best if you recognized that your valuation is a rough estimate. But, in most cases, an approximate figure is all you need at this point. Only when you plan to borrow the maximum equity allowed, a few thousand here or there becomes critical.

Bring in the professionals

You can skip all that valuation work if you get a professional to appraise your home. Local real estate agents should be expert home valuers, and many will provide a comparative market analysis (CMA) for a small fee. Quite a few may charge nothing if you suggest listing your home with them when you decide to move.

Alternatively, you could pay for a valuation from a professional home appraiser. This typically costs $300-$450 but will vary with your home’s value and size and the complexity of the process. If you live in a large, expensive, unique property somewhere remote with no obvious comps, you might pay much more.

Hiring a pro will provide the most accurate appraisal possible. But be aware that the lender is free to appoint an independent appraiser who might come up with a different figure. And, of course, you’d then be paying twice for the same service.

Whichever route to an appraisal you choose, you should end up with a figure that you hope is close to the final appraiser’s valuation of your home. And you’ll have completed the first and most difficult step in answering your question: How much equity do I have in my home? The rest is easy.

Step 2: Determine your current loan balance

It’s simple to find your current mortgage balance. You can typically just log onto your loan servicer’s online portal and look it up.

This balance may differ from the “payoff amount,” which will include any outstanding fees and prepayment penalties you’d incur if you were to redeem (pay off) the mortgage. So, look for the balance.

If you’re unsure what you’re looking at, reach out to your lender’s call center. Explain to the agent that you need your mortgage balance to calculate your home equity. He or she should give you the figure immediately.

Step 3: Calculate your home equity

Put away your Fields Medal, which is mathematics’ equivalent of a Nobel Prize. You’re not going to need it.

As the federal regulator said, home equity is “the amount your property is currently worth, minus the amount of any existing mortgage on your property.”

So, you simply deduct your mortgage balance from your home’s value, and Voilà! You’re looking at your equity.

How to calculate home equity? That’s the easy bit.

Ways to tap your home equity

Few people were undertaking cash-out refinances when this was written. That’s because new mortgage rates were almost always higher than homeowners’ existing ones. And it rarely makes sense to refinance an entire mortgage to a higher rate.

So, those who wish to tap their equity typically turn to one of two types of second mortgages: home equity lines of credit (HELOCs) and home equity loans (HELs). Remember: with any flavor of mortgage, you risk foreclosure if you fall behind with payments.

Using a HELOC

A HELOC is a bit like a credit card. You’re given a credit limit and can borrow as much as you want, when you want (but read the next paragraph), up to that amount. And you can repay sums at will while paying (variable-rate) interest only on your current balance.

These lines of credit are more complicated than that. So be sure to read What is a HELOC? Guide to home equity lines of credit before you decide on one.

Using a home equity loan

There’s nothing complicated about a home equity loan. You borrow a lump sum. And you make equal monthly payments at a fixed interest rate over your chosen loan term.

So these protect you against rate hikes and simplify budgeting because every payment is the same.

Still not sure which second mortgage to choose? Read a side-by-side comparison of HELOC vs. home equity loan: Compare pros and cons.

How much can I borrow with a HELOC or a home equity loan?

Now you’ve discovered how to calculate home equity, you can work out how much you can borrow. Only VA loans allow you to borrow 100% of your equity. Other mortgage types only allow a portion to be borrowed.

But how large a chunk? That will depend partly on the type of second mortgage you pick and your chosen individual lender.

Traditionally, a HEL allowed the balances on your primary mortgage plus second mortgage(s) to be no more than 80% of your home’s appraised value. And that remains a reasonable rule of thumb. But some lenders now allow you to borrow up to 90% of the value, and a very few insist on no more than 75%.

The similar rule of thumb for HELOCs was a bit more generous: 85%. But, again, you may find individual lenders who are more generous, especially if you have a great credit score and few other debts.

What can you do with your home equity?

Second mortgages are “any-purpose loans.” So, you can do anything you like with the money.

Well, almost anything. If you tell your lender you plan to use the money to gamble during your Vegas getaway, your application will likely be declined.

Sensible people tend to use the money for practical purposes. They might use it to pay for home improvements (the interest on which may be tax deductible), to fund a surefire startup business, to cover tuition or medical expenses, or to consolidate high-interest debts, such as that on credit cards.

How to build home equity

Most home equity is built in two ways:

1. Home price appreciation — As your home’s market value rises, so does your equity
2. Monthly mortgage payments — These slowly reduce your mortgage balance, which is the other factor in your home equity calculation

Of course, you can help that process along. Perhaps most importantly, you can maintain your home well so that it’s competitive with others in your marketplace.

And you can make improvements, such as remodeling or adding more rooms. However, be sure that any upgrades you make will result in a high return on your investment. The Cost vs Value Report compares average costs for 22 remodeling projects with the value those projects retain at resale in 150 U.S. markets.

Another option is to refinance to a shorter term: 10, 15, or 20 years instead of the usual 30. That won’t immediately increase your equity, but the higher monthly payments will drive your mortgage balance lower more quickly over time. Just make sure that current mortgage rates, compared with your existing one, make such an exercise worthwhile.

And finally, a great way to lower your mortgage balance is to pay more than required, either each month or occasionally. Just ensure your lender understands that these payments are to be applied to the “principal” (the amount you owe), and are not advanced future payments.

Next steps

If you’re ready to tap your home equity, let us help. We’ll be happy to introduce you to HELOC and HEL lenders that we believe will provide you with highly competitive quotes.

Home equity FAQs

What is home equity?

Home equity is the proportion of the market value of your home that is yours. In other words, it’s “the amount your property is currently worth, minus the amount of any existing mortgage on your property.”

How is home equity calculated?

You simply deduct from your home’s market (appraised) value the balance(s) currently outstanding on your first and any existing second mortgages.

You’ll find above a detailed guide to how to calculate home equity.

Can you have negative home equity?

Unfortunately, yes. That’s what’s meant by a home being “underwater.”

Periods when home prices fall appreciably reduce equity. And, if your home’s value falls below the current balance(s) on your existing mortgage(s), you’ll have negative equity.

Can you increase your home equity?

Yes. We lay out the main ways above. Your most straightforward option is to pay more than your mortgage agreement requires, either each month or occasionally. For example, you might use your tax refund or bonus to pay down your mortgage.

What happens to equity when you sell your house?

You receive on closing the difference between your home’s sales price and the mortgage balance(s) paid off. Of course, most people in this position use some or all those proceeds as a down payment on their next home.