# How to Calculate Home Equity in 5 Steps

Do you want to know how much of your home you actually own? Read on to learn how to calculate home equity and make the most of your investment.

Home Equity
May 11, 2023

When major expenses arise, financial troubles rear their ugly heads, or value-vaulting home improvement projects are identified, many homeowners may struggle to find ways to cover these costs. Cracking open the piggy bank may help (depending on the size of the pig), as can a yard sale, but during this time many homeowners will likely look to their greatest asset: their home equity. And while home equity shouldn’t be accessed and spent with reckless abandon, tapping into it through home equity loans and home equity lines of credit (HELOCs) can be the best way for some to secure their financial situation or make major renovations possible. But before you explore these options –– or draw up the plans for your next home improvement project –– you’ll need to know how to calculate home equity.

Read on as we uncover the importance of home equity, and how to determine the equity currently in your home.

## Home Equity Explained

At its simplest, home equity is the current market value of your home minus what you still owe on the loan. So, if your home is worth \$500,000 and your outstanding balance is \$200,000, your home equity is a whopping \$300,000. If your home’s value dips, so does your equity –– but with each on-time mortgage payment you add to the ever-growing home equity pile. Considering home equity agreements can be impacted by both the amount you owe on your loan and the state of the housing market, knowing how to calculate home equity as these changes occur can give you a better idea of your financial standing.1

But your home equity is about more than just your payments ‘till payoff or the amount you’d walk away with if you decided to sell tomorrow, as it can impact your ability to refinance or access your home equity through loans or lines of credit.

## How Do You Calculate Home Equity?

With a clear idea of why home equity matters, here are five steps homeowners can take to calculate their existing home equity.

### Step 1: Determine Your Home's Current Market Value

As mentioned above, determining your home equity will require establishing your home’s existing market value. While this is fairly simple, there are a few ways to determine the current home value:

• Hire a Professional Appraiser: It’s literally a professional appraiser’s job to tell you how much your home is worth, so they will likely be your best bet when it comes to determining your home’s value. During this process, an appraiser will look for things like the condition of your home’s structure, hard figures like square footage and the number of bedrooms, and comparable sales to assign the right price to your home.2 To prepare for your professional home appraisal, review our pre-appraisal checklist
• Look up Recent Sales: Another way you can determine your property value is by looking up recent sales of similar homes in your area to get an estimate of what your home might be worth. Websites like Zillow and Redfin also offer free estimates of the property value based on recent sales and other relevant data –– but note that a mortgage lender will require a professional appraisal to approve a home equity loan.
• Consult a Real Estate Agent: When in doubt, a real estate professional may be able to provide you with a comparative market analysis (CMA) that uses recent sales information (and the realtor’s wealth of professional knowledge) to determine your home’s value.

### Step 2: Determine Your Outstanding Mortgage Balance

With a clear idea of your home’s current value –– whether from your independent research or a professional appraiser –– the second step in calculating your home equity is determining your outstanding mortgage balance. The simplest way to do this, by far, is to reach out directly to your lender and have them send you your full mortgage loan report. However, if you’d prefer to do the math on your own and have information like your original loan amount, your interest rate, and the length of the loan available, you can use an online mortgage payoff calculator to crunch the numbers on your own.

### Step 3: Calculate Your Home Equity

You know your home’s value and how much you owe: all that’s left to do now is the math. Subtract the amount you owe from your home’s value, and the number you’re left with is your home equity. If that’s all you were looking for, you can click away and enjoy the rest of your day! But if you’re planning to apply for a home equity loan or a HELOC, there’s a bit more work to do. Stick with us, it’s worth it.

### Step 4: Calculate Your Loan-to-Value Ratio

Beyond your home equity, your loan-to-value (LTV) ratio is another important factor that lenders consider when you apply for a home equity loan or a home equity line of credit. This ratio, generally expressed as a percentage, is the ratio of your outstanding mortgage balance to your home's market value. To calculate your LTV ratio, simply divide your outstanding mortgage balance by your home's market value and multiply by 100.

For example, if your outstanding mortgage balance is \$200,000 and your home's market value is \$400,000, your LTV ratio would be 50% (\$200,000 ÷ \$400,000 x 100). Lenders typically prefer borrowers to have an LTV ratio of 80% or less –– so if your LTV ratio is higher than 80%, you may find it challenging to qualify for a HELOC.3

See related: HELOC vs Home Equity Loan

### Step 5: Take Other Factors Into Consideration

Beyond home equity and your loan-to-value, there are a number of other factors to consider when applying for a home equity loan or HELOC. Below are some key factors that may impact a lender’s decision.

• Your Credit Score: The number that truly follows you everywhere, your credit score measures your creditworthiness and can affect your ability to qualify for a loan –– in addition to the interest rate you're offered. Lenders typically prefer borrowers to have a credit score of at least 620 for both a home equity loan and a home equity line of credit score, but the higher your score, the better your terms may be.
• Your Income: By extending you a line of credit or lending you money against your home equity, lenders are making a direct investment in you. To ensure this investment is sound, lenders will want to ensure that you have a steady income and can repay the loan. When submitting your application, prepare to provide proof of income: such as pay stubs, W-2s, or recent tax returns.
• Your Debt-to-Income (DTI) Ratio: Lastly, lenders will want to know that you’ll be able to make monthly loan payments when the time comes –– using your debt-to-income ratio to make this decision. If they see a high DTI and think you’re in over your head with regard to your expenses, they’ll feel less confident about investing in you (so they likely won’t).4

If you’re like many Americans, your home equity is your greatest source of wealth. For this reason, it’s important to know where you stand –– whether you’re planning to access your home equity through a home equity loan or HELOC or not. Luckily, there’s an alternative.

Truehold’s sale-leaseback option will help you unlock your equity by selling your home at a competitive rate. Once we buy your home, you can still continue living in it as a renter, without the added stresses of being a homeowner. We’ll handle all major maintenance repairs and property insurance so you don’t have to.

Sources:

1. Nerdwallet. Home Equity: What It Is and Why It Matters. https://www.nerdwallet.com/article/mortgages/home-equity-explained-matters

2. Rocket Mortgage. How Long Does An Appraisal Take, And What Factors Can Affect The Home Appraisal Process? https://www.nerdwallet.com/article/mortgages/home-equity-explained-matters

3. Quicken Loans. Loan-to-Value Ratio (LTV), Explained. https://www.quickenloans.com/learn/loan-to-value-explained

4. Investopedia. Debt-to-Income (DTI) Ratio: What’s Good and How to Calculate It.  https://www.investopedia.com/terms/d/dti.asp

Written by
Nicolas Cepeda
Financial Analyst at Truehold - A Specialist in Real Estate Finance
Nicolas Cepeda specializes in financial analysis and strategic portfolio management, with a keen focus on innovative residential real estate solutions. He leverages this expertise to cover pertinent topics in the real estate and financial sectors.
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