When homeowners consider home value it's usually because they're thinking about selling their homes. But there's another side to home value, which is "How much is my house worth to me right now?" This is where home equity comes into the picture. In very basic terms, how to calculate equity requires simple subtraction. Home equity is the difference between your home's current value and the total of all mortgage balances against it. To easily calculate your home equity use a home equity calculator.
AVMs, Appraisers and Real Estate Agents
The easiest way of finding an approximate property value is by using LendingTree's home value estimator. Users simply put in their own property address and the estimator generates a report for them showing listings and sales in their neighborhood. Borrowers can also contact mortgage lenders for this information -- many have their own systems called AVMs (automated valuation models), so different lenders might come up with different values. Homeowners can also ask local real estate agents (keeping in mind that an agent wanting a listing might inflate the value a bit). For the most accurate result, consumers can pay for a home appraisal -- either a full appraisal, in which the appraiser comes to the house, or a less-expensive "desk appraisal," in which data is analyzed but factors like recent improvements won't be taken into account. However, that report can't usually be used by a mortgage lender to approve a loan. An additional appraisal will have to be ordered by the lender itself and paid for by the borrower.
Calculating Home Equity
Home equity is simply the difference between the property value and the amounts owed on its mortgage(s). For example, Joe and Marie own a house that's currently worth $300,000. Their first mortgage balance is $127,000, and they have a home equity line of credit with a balance of $30,000. The total amount of the first mortgage and home equity line is $157,000. The amount remaining after subtracting $157,000 from $300,000 is $143,000. This is the approximate dollar value of Joe and Marie's home equity.
Home equity is also associated with the loan to value ratio or LTV. When there is more than one loan against the property, the total of all loans divided by the property value is called the combined loan-to-value, or CLTV.
A property's LTV or CLTV ratio is expressed as a percentage and is calculated by dividing the mortgage balance(s) owed by the home's current value. Using the example of Joe and Marie's home, the CLTV ratio is calculated by dividing their $157,000 by the $300,000 home value, which comes to 52.33 percent. Their equity, then, equals their $143,000 in home equity divided by the $300,000 property value, or 47.67 percent. Estimate your home equity with our home equity calculator.
Home Equity and LTV: This Relationship Isn't Complicated
For homeowners wishing to refinance or take out a home equity loan or line of credit, the question "How much is my house worth" takes on additional implications. For a refinancing homeowner, the loan-to-value of a refinance affects what he or she pays for the mortgage and determines how easily the new loan will be approved. If adding a second mortgage, the combined loan-to-value, which equals the LTV of the first mortgage plus the LTV of the second mortgage, is the driving factor. So if Joe and Marie wanted to refinance both their first and second mortgages into a single new loan, the LTV of the new loan would be $157,000 / $300,000, or 52.33 percent. If they wished to increase their line of credit by $50,000, their new CLTV would be $207,000 / $300,000, or 69 percent.
- Home equity provides a cushion in the event that the homeowner needs to sell, and it may also function as a source of emergency cash. Property values can change, and if the mortgage balance exceeds the home's value, the owner would have to pay the difference if he or she needed to sell the house. This situation is referred to as being "upside down" or "underwater."
- Home equity lenders and combined LTV (CLTV): Most home equity lenders limit home equity loans and lines of credit to a CLTV of 90 percent of a home's current value. Because 90 percent of $300,000 is $270,000 and Joe and Marie already owe $157,000 against their house, they could possibly borrow another $115,000 against their home's value.
- Home equity loans and lines of credit are mortgages; the loans are secured by residential property. This means that if the homeowner can't make the home equity payments, the residence could be lost to foreclosure. Before taking out a home equity loan for any purpose, consumers should determine that they are not taking an undue risk. The Federal Trade Commission cautions that increasing mortgage debt can make it more difficult to save the home if financial disaster strikes.
- Borrowers should compare terms, lender fees and interest rates: The Consumer Financial Protection Bureau encourages consumers to shop and analyze home equity financing options, as loan terms, fees and rates vary.
Shopping for a home equity loan is easier today than ever. Once a homeowner has answered the question, "How much is my house worth?" he or she can check out LendingTree's LoanExplorer, input the loan amount and property value, and get a number of options and lenders to choose from.