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How and Why to Calculate Your Home Equity

single family home with white sidings and back porch

The average home equity in the US is currently around $300,000.

Equity comes in various forms, and it can prove incredibly useful. If you know how to calculate home equity or how to calculate common equity, you can use this to put yourself in a better position financially.

With these, you can pay off high-interest loans, make large purchases, invest in home upgrades, and more. Before you can do any of these, however, you need to know what your equity is.

For a rundown of how to calculate equity value and what factors can affect it, keep reading.

Your Home Equity Is Based on Your Homes Value

Home equity varies from owner to owner because it depends on a couple of factors. The first of these is the value of your home, and the other is how much you have left to pay on your mortgage. So when you’ve got both of these, how do you calculate home equity?

How to Calculate Home Equity

Home equity is fairly easy to figure out. You just need to determine the amount you owe on your mortgage (and any other loans) for your house and subtract this from the overall value of your home.

If you owe more than the appraised value of your home, you won’t have any equity. This is known as an “underwater mortgage”. If you owe $300,000, for example, and your home has a value of $500,000, then your home equity would be $200,000.

What Is My House Worth Now?

The first step to calculating equity in your home is determining the value of the property. You’ll also want to know this if you’re considering selling your home. There are various ways to get an estimate of your home value, but mortgage lenders will want to know the professionally appraised value before giving out any loans.

To simply get an idea of how much your home is worth, you can use an online estimator. There are plenty of these available, and they use algorithms alongside other information to provide fair home market value estimates.

Wondering what your home’s worth in the current market? Get a free online home valuation!

Bear in mind, however, that an online estimate isn’t the same as an appraised value. For an accurate home equity level, you’ll need to get a professional to appraise your home. Once you have an appraised value, you can use it alongside your loans to calculate your home equity.

Consider Your Loan to Value Ratio

After you’ve determined your home equity, you need to figure out whether it’s actually sensible to borrow from it. You can get a better idea of this by using your LTV (loan to value) ratio.

This is a percentage found by dividing your mortgage value by your appraised home value. For the example mentioned above, this would be:

$300,000/$500,000 = 0.6 (60%)

The higher an LTV is, the more risk it represents for the lender. CLTV (combined LTV) includes your mortgage as well as any other home loans you have, including the one you’re currently applying for. Most lenders generally have a CLTV limit of 85%, and won’t consider anything over this.

Types of Home Equity Loans

The amount you can borrow will depend on your home equity, your CLTV, and the lender you’re requesting a loan from. Most lenders will offer loans up to a maximum of 75%-90% of your total home equity. There are also two different types of loans that lenders will offer.

Home Equity Loan

This works in the same way as most standard loans. You’ll be able to borrow an amount, and the lender will give you this as a lump sum. You’re then expected to repay it in regular installments with interest.

This type of loan is ideal if you want to know how much you’ll need to pay back each month or if you don’t know the exact amount you need to borrow in the first place.


A HELOC (home equity line of credit) has a draw period (typically up to 10 years), and you can borrow multiple times during this period. There will be a set limit on how much you can borrow at a time, and once you’ve paid it off you can borrow again. You’re able to do this as many times as you like throughout the draw period.

With HELOCs, the interest rate isn’t fixed, so you need to keep track of it so that you can work out how much you need to pay back. At the end of the draw period, you can then pay the principal back over a certain period. This period is usually up to 20 years.

Cancel Your Private Mortgage Insurance

Something you can do to make the most of your home equity is canceling your PMI (private mortgage insurance). This is something that your mortgage lender might charge each month on top of your mortgage. It’s typically applied when someone pays less than 20% of the value of their home in their down payment. 

PMI is required as long as your LTV ratio is above a specified level. When you get your LTV below this level, you’ll be able to cancel your PMI, saving you some money each month. The Homeowners Protection Act dictates that lenders need to cancel someone’s PMI when their LTV gets down to 78% as long as other specified requirements are met. 

How to Increase Your Equity

There are several ways to increase your home equity, and some are easier than others. The easiest actually requires no work at all.

1. Wait for Home Value to Increase

With time, the value of homes generally rises. If your home’s appraised value goes up and your mortgage amount doesn’t change, your home equity will increase. The issue with this is that it’s a very slow process, so won’t help you if you want to increase your equity in the short term.

2. Make Home Improvements

Another similar way to increase home equity is to raise the value of your home through home improvements. Remodeling rooms or adding features like a garage or pool will make your home worth more.

This will cause your home equity to go up, but it’s worth bearing in mind that it may not increase the value of your home by the same amount that you spend on the improvements.

3. Make Extra Mortgage Payments

You might be accustomed to making one payment a month on your mortgage, which will gradually increase your home equity. You can speed things up by making more payments each month. If you do this, you need to make sure your servicer knows that this money is for the loan principal and not interest.

4. Refinance Your Mortgage

You may be able to refinance your mortgage to one that has a shorter term and lower interest. If you do this, a higher percentage of each monthly payment will go towards paying off the loan rather than paying interest.

5. Make a Large Payment on Your Principal Balance

You can choose to pay off a large chunk of your mortgage in one lump sum. Doing so will lower your mortgage and therefore your monthly repayments while keeping the same term. This is only viable if you have a sizable sum of money that you can afford to put toward your mortgage.

Pros and Cons of Borrowing Equity

One of the main advantages of borrowing equity is that you can choose how to spend the money. In most cases, people do this to make home improvements, but you may have another reason, such as consolidating high-interest debts or emergency expenses. It’s worth noting that if you use funds from a HELOC for home improvements, then the interest may be tax-deductible.

The biggest disadvantage is that you need to use your home as collateral. If you have any issues in terms of making repayments, the lender may be able to foreclose on your home.

You also need to be aware that your home might decrease in value after you’ve borrowed. It may then be worth less than what you owe on your mortgage. This will make it more difficult to get approved for a better loan, potentially putting you in a difficult situation.

Borrowing against your home can be very useful, but you should only borrow equity if you’re confident you can pay it back on time.

If You Want to Sell, We Can Help

Now that you have an understanding of how to calculate home equity, you’re probably interested in knowing how much your home is worth. You might even be considering selling if you can get a good offer.

At iBuyers, we can give you a quick estimate and cash offer for your home. All you need to do is enter your postcode, and we’ll let you know what we can offer. Click here to use our home value estimator today.

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