How to Calculate Home Equity

How much of your home do you really own? And how much cash could you tap into if you needed it? That’s what your home equity can tell you.

Whether you’re thinking about a kitchen upgrade, knocking out credit card debt, or investing in your education, your home equity could help you pay for it. A home equity calculator makes it easy to see how much you could borrow. Just enter your home’s value, your remaining mortgage balance, and your credit score to find out how much equity you’ve built.

You can easily calculate your home equity and estimate what you could borrow on your own. Read on to learn how it works and what you can do to grow your equity.

Key takeaways

Your equity can be calculated by subtracting your outstanding mortgage balance from the current market value of your home.
The amount of equity you have directly impacts your borrowing power for a home equity loan or a home equity line of credit (HELOC).
Building equity takes time, but paying extra on your mortgage or making improvements that increase your home’s market value could speed up the process.

How to calculate your home equity

Home equity is the part of your home that you truly own. It’s the difference between your home’s current market value and what you still owe on your mortgage. If your home’s value has risen while you’ve made consistent payments, you’ve likely built up a solid amount of equity.

Learning how to calculate home equity is easy. You can use this formula:

Home equity = (current home value) – (outstanding mortgage balance)

So, for example, if your home is worth $350,000, and you still owe $200,000 on your mortgage, you have $150,000 in equity:

$350,000 (home value) – $200,000 (mortgage) = $150,000 (home equity)

Your equity isn’t just a number. It’s money you can potentially borrow to make home improvements, pay down high-interest debt, or invest in other opportunities. The more equity you build, the more borrowing power you’ll have.

How much can you borrow against your home?

Once you know how much equity you have, the next question is: How much of it can you use?

Most lenders let you borrow up to 80% or 85% of your home’s value, minus what you still owe on your mortgage. The actual amount will depend on your credit and overall finances, but you can get an estimate of what you could potentially borrow by using a home equity calculator or doing the math yourself.

As an example, let’s say your home’s current market value is $350,000 and the balance on your mortgage is $200,000. If the lender lets you borrow up to 80%, that means you could get $80,000. Here’s how it breaks down:

$350,000 (home value) x 80% (0.80) = $280,000
$280,000 – $200,000 (mortgage owed) = $80,000 in available equity

Understanding loan-to-value ratio

Lenders look at several key numbers before deciding the terms of a loan, including your loan-to-value ratio (LTV). This number is a snapshot of how much of your home you still owe compared to what it’s worth.

Here’s how you can figure it out:

Loan-to-value ratio = (mortgage balance ÷ home value) x 100

For example, if your home’s worth $400,000 and you owe $280,000, your LTV is 70%.

A lower LTV means you’ve paid off more of your mortgage, and lenders consider you less risky. Most lenders require an LTV of 80% or less to qualify for a home equity loan. Homeowners with lower LTV usually qualify for better rates and larger loan amounts.

Ways to borrow using home equity

Once you know how much equity you have and how lenders perceive your level of risk, it’s time to decide how to put your equity to work.

You’ve got a few ways to turn your equity into cash — and the best option depends on what you’re trying to accomplish.

Home equity loan

A home equity loan gives you a lump sum of cash up front with a fixed interest rate and set monthly payments. You’ll typically repay it over five to 30 years. This is a good option if you have a specific, one-time expense in mind, such as a major home remodel.

Most lenders want you to have at least 15% to 20% equity in your home and an LTV ratio of 80% or less to qualify.

Home equity line of credit (HELOC)

A HELOC works more like a credit card — but with better rates. If approved, you’re given a revolving line of credit that you can borrow from as needed, usually over a 10-year “draw period.” This is followed by a repayment period.

You only pay interest on what you borrow, and the interest rate is typically lower than a credit card (though it can vary). To qualify, you’ll usually need at least 15% equity in your home and an LTV ratio of 85% or less.

A HELOC might make sense if you’re tackling ongoing expenses, like home projects that happen in phases or college tuition payments.

Cash-out refinance

Another way to tap your home equity is through a cash-out refinance. Instead of adding a second loan like a home equity loan or HELOC, you refinance your existing mortgage for a higher amount and take the difference in cash.

To qualify, most lenders require you to have 20% equity in your home. Your credit score, income, and overall debt will also factor into how much you can borrow and the new mortgage rate you’ll get.

A cash-out refinance can be a good option to free up cash and possibly lower your mortgage rate at the same time.

How to build your home equity faster

If you’re a new homeowner or your loan-to-value ratio is high, you may not be ready to borrow against your home just yet. This isn’t something to lose sleep over. There are plenty of ways to build equity and boost your borrowing power:

Make larger mortgage payments. Any extra money you put toward your mortgage principal helps you lower your balance faster — building equity and reducing the total interest you’ll pay over time.
Switch to biweekly payments. Making half-payments every two weeks results in one extra full payment per year. This also helps you chip away at your principal.
Boost your home’s value. Strategic home improvement efforts, such as kitchen upgrades or energy-efficient windows, can increase your property’s market value and your equity.
Refinance for better loan terms. If you can afford it, a 15-year mortgage builds equity twice as fast as a 30-year loan due to higher monthly payments going toward the principal. A lower interest rate can also help.
Eliminate private mortgage insurance (PMI). If you’re currently paying PMI, part of your monthly payment is going to your lender and not your loan balance. Once you’ve reached 20% equity, request to cancel PMI and put that money toward your principal instead.

If you’re in the process of purchasing a home, keep in mind that making a larger down payment and shopping around for the best possible terms can also put you on a fast track toward growing equity.

Find competitive home equity loan rates

After calculating your home equity, shop around for a loan that fits both your goals and your budget. Remember, rates will vary based on your credit score, LTV ratio, and the type of loan you choose.

Unsure which options are best for you? AmeriSave Mortgage Experts can help by walking you through your choices, calculating your potential cash-out, and helping you compare rates. Get started today.

Frequently asked questions

How do I calculate my home equity?

Subtract your current mortgage balance from your home’s estimated market value. This is your home’s equity.

How does my mortgage balance affect my home equity?

The more you owe on your mortgage, the less equity you have in your home. As you pay down your loan’s principal (the original amount you borrowed), your equity increases over time. Making extra payments or refinancing to a shorter term can help speed up this process.