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Published: Mar 28, 2024 10 min read
Illustration Of A Dollar Bill With A House Icon In It's Center
Jose Velez / Money

Despite rising mortgage rates, real estate continues to be a reliable investment. One of the reasons is equity, which homeowners start to rack up as soon as they make a down payment.

Equity is the difference between the current value of a house and the amount still owed on the mortgage, and it can be used as collateral to secure various types of loans at competitive rates.

Read on to understand the basics of home equity, how to calculate how much equity you already have in your home, as well as how to borrow against your equity if you need funding.

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How to calculate your equity

You need to know the current market value of your home in order to know your equity. This means that the first step in calculating your equity is to get an appraisal.

You can get a rough idea of your home’s market value by searching online, but keep in mind that whatever you find will be a rough estimate based on current home prices in your area. Only a proper inspection will provide an accurate sale price, especially if you’ve done work to the house.

If you’re in the process of getting a home equity loan or refinancing, your appraisal may be arranged by the lender, and the fee will be added to the closing costs.

How much equity do I have in my home?

After an appraiser determines your home’s current value, you can just subtract your remaining mortgage balance — what you still owe the bank — from the appraised value and the result will be the amount of equity you have. This is also the opposite of the loan-to-value ratio (LTV), which is your remaining loan balance compared to the current market value of your home.

The value of a home changes constantly due to inflation, housing market demand, changes in your area or renovations and changes to the house itself. While most of the time a home’s value goes up, there are also scenarios that can decrease the value, such as construction projects in the vicinity, rising crime rates or a remodeling project gone bad.

An increase in home value is also known as appreciation. Keep this in mind when purchasing a home and whenever you decide to make home improvements.

Steps to calculate your home equity

Follow these steps in order to calculate your home equity:

  • Get an appraisal from a certified appraiser to get an accurate current sale price for your home.
  • Check your remaining mortgage balance to see how much you still owe on your mortgage loan.
  • Deduct your remaining balance from the current value of the house.
  • Calculate your loan-to-value ratio to see if you qualify for loans or refinancing. Lenders usually require an 80% LTV ratio, which equals 20% equity.

Here's an example.

Let’s say your home was originally worth $350,000, and you gave a $50,000 down payment. At that point, your equity is $50,000, and your mortgage is $300,000.

After several years of making payments, let's assume you've paid off about $50,000 — in addition to your $50,000 down payment — bringing your equity to $100,000; in turn, you owe the lender $250,000.

Then, an appraisal shows the value of your home increased to $375,000, your equity isn’t just that $100,000 but a total of $125,000 ($375,000 of the total appraised value, minus the $250,000 you still owe your lender). So $125,000 is the number you can borrow against — though you won't be able to borrow that whole amount. More on that below.

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Ways to use your home equity

Having equity in your home is important because it represents the amount of money you’d receive if you were to sell the house. It also translates to more borrowing power since that equity can serve as collateral for lenders if you were to get a home equity loan or line of credit. (Putting up your equity as collateral, however, also means lenders can sell the home to recoup their losses if you were to default on a loan.)

Here are some of the ways you can leverage your equity.

Home equity loan

A home equity loan is the most common way to use your equity. It’s a fixed term and fixed-rate loan with repayment terms that can range anywhere from five to 30 years. It’s also commonly known as a second mortgage.

It typically has a lower interest rate and a much longer loan term than personal loans, mainly because it uses the home as collateral, which reduces the risk for lenders.

The loan amount can be up to 85% of your total equity, but it depends on the lender and your creditworthiness; many lenders will not approve up to that amount. As with any other loan, lenders will consider your credit score, your debt-to-income ratio and your current income. Most importantly, you must already have between 15% to 20% of equity in your home in order to apply.

Also, note that the loan amount is meant to cover closing costs as well; these include payment for the appraisal, notary service, credit report and other variable fees. Those can add up to 5% of your loan total. The best home equity loans come with minimal fees, flexible repayment terms and allow a LTV ratio between 80% to 90%.

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Home equity line of credit (HELOC)

A home equity line of credit, or HELOC, is a line of credit that uses your home as collateral. Just as with home equity loans, you can be approved for an amount of up to 85% of your equity, depending on your repayment ability. Unlike home equity loans, lines of credit tend to feature variable interest rates as opposed to fixed.

This line of credit is similar to a credit card, except it only lasts for a limited time. Lenders provide you with a “draw period” (usually from five to 10 years), during which you can take money out of that line of credit up to the original agreed amount; you’ll only need to pay interest during this period. After that time is over, you’ll begin to make monthly payments on the amount you borrowed for a fixed term of five to 20 years.

One of the advantages of a HELOC is the flexibility of borrowing small amounts as you need them (instead of a lump sum), as well as the draw period’s interest-only payments.

Cash-out refinance

As the name suggests, a cash-out refinance is refinancing your mortgage for a higher amount than what you still owe, so that you get cash out of the transaction. The new mortgage will pay off the old one, and you can use the remaining cash as you wish.

Say, for example, that the home appraisal shows your home is currently worth $375,000 and you still owe $250,000.

If you need some cash — whether it be for a home improvement project or debt consolidation — you can take out a mortgage for $275,000 instead of the $250,000 you owe. The $25,000 surplus will be transferred to you in cash, and you’ll repay that additional amount within your mortgage payments.

Keep in mind that this option isn’t always the best choice for funding as the process is timely and the closing costs of refinancing your mortgage can be significant. You may also get stuck with a higher mortgage rate. The best mortgage refinance companies minimize these downsides, but it is still important to consider these factors when in need of a loan. In some cases, a personal loan could be more advantageous depending on your situation.


What is equity in a home?

Home equity is, essentially, the financial percentage of your home that is already yours, as opposed to what you still owe the bank. Take the current value of the home and subtract the remaining balance on your mortgage loan. The result is your available equity. 

How much equity can I borrow from my home?

Most mortgage lenders can approve up to 85% of the available equity for a loan. However, this is still subject to review of your credit score, debt-to-income ratio, LTV ratio and other factors. 

How is the value of a house determined?

In order to determine the value of a house, there must be an appraisal. Lenders will usually arrange one before approving a loan and add the cost of the appraisal to the loan itself.

Can you sell a house before paying it off?

Yes, you can. You can use the money from the sale to pay off the remaining balance, closing costs and receive what's left as profit.

Summary of Money’s guide to calculating your home equity

  • Home equity is the percentage of your home you already own, according to its current market value.
  • In order to know how much equity you have, you’ll need to know the remaining balance of your mortgage and arrange for a professional appraisal.
  • Equity helps you increase your borrowing power because it allows you to use your home as collateral. This raises your approval odds and allows you to borrow at lower interest rates.
  • There are ways to leverage your equity and use that borrowing power — some popular options include home equity loans, home equity lines of credit or cash-out refinance.
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