To figure out how much equity you have in your home, subtract the amount you owe on your mortgage from the current market value of your home. And because the market value of your home can fluctuate as the market changes, your home equity varies as well. It’s important to know the value of the equity in your home, especially if you want to make use of the equity. You can do this through a cash-out refinance, home equity loan, home equity line of credit, or shared equity agreement.
It’s common to think that home equity is calculated by simply adding up what you’ve paid on your mortgage plus your down payment. However, it’s actually a little more complicated than that.
Today we’re going to show you how to calculate how much equity you have in your house, the role market fluctuations play in your home’s fair market value, and how your equity can be put to work for you.
How much equity do you have in your home?
The first step in calculating your home equity is to know the home’s current market value or appraised value. Without knowing the home’s value, it’s impossible to figure out how much equity you have, and it’s not usually based on your remaining loan balance unless you’ve just bought the place.
You do need to know, however, how much money you’ve already paid on your mortgage loan. And remember that early on in your mortgage payments you mostly pay interest, with a smaller portion allocated to the principal. So, to calculate home equity, take the total amount you owe on your mortgage (including any second mortgages) and subtract that from the home’s current market value.
Home equity examples
Let’s say your house’s appraised value is $300,000 and your outstanding loan balance is $200,000. That would mean you have $100,000 in home equity. A lender will typically let you borrow around 80% of that amount, which is $80,000. But, if you also have a home equity loan, for instance, you have to factor that amount in as well.
Continuing with the above example, if you have a home equity loan of $20,000, that figure gets added to your primary mortgage’s outstanding balance for a total of $220,000. That means you now only have $80,000 in equity.
In borrowing terms, that means you can only get a loan for about $64,000, give or take. That said, the exact amount depends on the lender as well as your credit and income details.
How market value fluctuations impact home equity
You might think the value of your home is whatever you paid for it, plus some appreciation over the years. In reality, though, people get great deals on homes and pay well under market value all the time. This might be because the seller is extremely motivated, the house is in foreclosure, or there aren’t enough buyers for all the homes for sale. This last reason is what’s known as a buyer’s market.
On the flip side, other buyers pay for a house well over its appraised value. Oftentimes this is because of a bidding war on a particularly desirable house or, more likely, when there are too many buyers and not enough houses to go around. Basic supply and demand. That describes what is called a seller’s market.
The bottom line is, your home’s worth is variable and depends a lot on what else is going on in the world, the economy, and the housing market.
Examples of U.S. market fluctuations
Let’s take a glimpse at two major U.S. events that played a big role in changing market values and the effect that had on homeowners’ home equity.
- Covid-19. During the midst of the Covid-19 pandemic, we witnessed a major seller’s market as more people moved or began working from home. Add to that a surge in younger home buyers, and suddenly there were way too many buyers and not enough houses. Plus, interest rates were incredibly low for a while, making the home-buying transaction even more attractive. These and other factors caused home prices to soar, often selling for hundreds of thousands over the asking price.
- Housing recession. The “Great Recession” of 2007/2008 saw homeowners losing home equity by the millions. Home prices dropped drastically and a lot of people lost all or most of their home equity. Many homeowners even found themselves upside down on their mortgage loans, meaning they owed more on their home than the current property’s market value. For homeowners preparing to sell their houses, this was a devastating blow. But buyers suddenly found they could afford properties that were formerly way beyond their reach.
What can you do with your home’s equity?
Many people never touch the equity built up in their homes. They let it accumulate and only get the benefit when they sell at a profit. Then they typically turn that profit into a down payment on a new house.
But other people want to take advantage of their home equity while they’re living there. Maybe they plan to use it to pay off high-interest debt, for home improvements, or for other large expenditures. Some of the ways to pull the equity out of the home are through home equity loans, home equity lines of credit, cash-out refinancing, and shared equity agreements.
Home equity loans
Home equity loans are best for homeowners who need a lump sum of money for debt consolidation, home improvements, or maybe to use it for an additional property. While there aren’t restrictions on how you can use the money from a home equity loan, keep in mind that the interest is only tax deductible if you use the loan for “substantial” home improvements, per the IRS.
A home equity loan comes with a fixed interest rate. Along with this, you may have to pay closing costs of 2% to 5% of the home equity loan, although some lenders may waive the closing costs. In addition, a home equity loan is a second mortgage payment, which means borrowers will now have two mortgages to manage.
That said, a home equity loan can be a great use of your home’s equity. If you’re looking for a home equity loan, start by using the comparison tool below.
Home equity line of credit (HELOC)
A home equity line of credit also lets you take advantage of your home equity. This method works by extending borrowers a revolving line of credit secured by the equity in the home and works a lot like a credit card. HELOCs are best for people who want to borrow money but prefer to access it on an as-needed basis rather than all at once.
Unlike home equity loans, home equity lines of credit come with variable interest rates. And, if you’re in the draw period of the line of credit, you’re only required to pay interest on the money borrowed in your monthly payment. Similar to a home equity loan, borrowers may or may not have to pay closing costs on a HELOC.
To compare your HELOC options with those of your home equity loans, take a look at some of the lenders below.
Depending on your financial needs, you might opt for refinancing your home rather than borrowing against the available equity. You can do this by applying for a cash-out refinance, which swaps out your original mortgage for a new one and gives you the difference in cash. Second mortgages like home equity loans can be trickier to budget for, so having only one mortgage balance to deal with can be attractive.
However, you’ll have to cover closing costs on a cash-out refinance and pay for the home’s appraisal. There will probably also be an origination fee since this is an entirely new mortgage. If this sounds like a simpler approach to tapping your equity, compare your refinance options below.
Shared equity agreement
A further option to pull some equity out of your home is with a shared equity agreement. This is when you work with an investor and trade on your home’s future equity in exchange for a lump sum of cash upfront. When you sell your home, or the contract is up, you’ll repay the loan plus a percentage of the house’s current equity.
As explained earlier, your home’s current value, and thus your home equity, can fluctuate, so the investor shares in a portion of those gains or losses. The advantage for the homeowner is no monthly payments or interest rates to deal with. Plus, credit and income requirements are typically less stringent for shared equity agreements, so a less-than-perfect credit score may not be a problem.
If this sounds like your preferred method for tapping your home equity, consider your potential choices below.
Qualifying for a home equity loan or refinancing
Borrowers should be aware that even though the equity is technically your money, you’ll still have to qualify for the loan, similar to when you got your existing mortgage loan. That means having a good credit score, a low debt-to-income ratio, and a low loan-to-value ratio.
Your credit, income, and other indicators will help a lender determine your loan amount, loan term, and interest rate.
Costs of accessing your home equity
It’s important to factor in the costs associated with tapping your home equity because they add to the total cost of the loan. Expenses incurred may include a loan origination fee, closing costs, and the cost of a home appraisal.
Not every lender has the same requirements, so be sure to look into possible costs as you compare multiple offers. For example, no closing costs might compensate for a slightly higher interest rate. Also, check to see if there is a prepayment penalty if you think you might be able to pay the loan off earlier.
How much equity can I borrow from my home?
Lenders will typically allow you to borrow around 80% of the equity in your house. That said, it could be more or less than that depending on your credit history, income, debt-to-income ratio, and LTV ratio. The better your personal finances are, the more likely you are to gain approval for a higher loan amount and better loan terms.
How fast do you build equity in your home?
Since you pay more in interest than toward the principal at the beginning of a mortgage, building equity can be slow going. However, there are things you can do about that.
For example, a higher down payment automatically gives you more equity right from the start. Plus, you can always pay more each month (or whenever you have the extra cash) and designate that money as principal only, which will also help you gain equity faster.
- To calculate how much equity you have, subtract your remaining mortgage balance from the home’s market value.
- It’s important to know how much equity you have in your home in case you need to use some of that equity for a home improvement project or other large expenses.
- Ways to access your home equity are through a home equity loan or line of credit, a cash-out refinance, or a shared equity agreement.
- Market fluctuations mean that the equity in your home is fluid — as your house’s market value changes, your equity increases or decreases accordingly.
View Article Sources
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- What is the difference between a Home Equity Loan and a Home Equity Line of Credit? — Consumer Financial Protection Bureau
- How to Use Home Equity to Buy a Second Property — SuperMoney
- How To Use Equity in Your House To Invest in Your Business — SuperMoney
- Home Equity Loan With Bad Credit: Is It Possible? — SuperMoney
- How To Get Equity Out Of Your Home — SuperMoney
- How to Refinance a Home Equity Loan — SuperMoney
- How to Use Home Equity to Buy Stocks and Diversify Your Portfolio — SuperMoney
- Should I Sell My House Now Or Wait Until Next Year? — SuperMoney
- Best Shared Equity Alternatives to Home Improvement Financing — SuperMoney
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- Noah Home Equity Sharing — SuperMoney
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