How To Calculate Home Equity: Formulas, Steps and Examples
If you’re wondering how to calculate home equity, it’s simple — just subtract your home’s value from any mortgage balances you owe. That number is your total home equity amount, but remember that it can change if you borrow against your equity.
Calculating equity is a little different when you’re taking out a new mortgage or planning to sell your home. We’ll cover how to do all of these calculations, as well as what they mean for you as a homeowner.
- Home equity is the difference between your home’s market value and your remaining mortgage balance(s). Lenders use a home appraisal to determine the market value.
- You can convert your home equity into cash using a variety of loans, such as a cash-out refinance, HELOC or home equity loan.
- You can build home equity by making a larger down payment, choosing a shorter repayment term, making extra payments or increasing your property’s value with repairs and upgrades.
How much equity do I have in my home?
Home equity = Current home value – Outstanding mortgage balance
The most basic way to calculate your home equity is subtracting how much you owe on your mortgage(s) from your home’s estimated value.
For example, if you estimate your home is worth $350,000 and you owe $200,000, you have $150,000 worth of home equity ($350,000 – $200,000 = $150,000).
This way of calculating equity is best if you just need a ballpark estimate, since it’s not based on an official home valuation method. It’s also a good choice if you want to know how close you are to reaching the 20% equity threshold needed to get rid of private mortgage insurance.
There are two other ways to calculate equity that come into play when you tap your home equity or sell your home. We’ll cover both scenarios below.
Scenario 1: How to calculate home equity when considering a new loan
Home equity you can borrow = (Appraised value x Maximum LTV ratio) – Current loan balance
If you want to tap some of your home equity with a cash-out refinance, home equity loan or home equity line of credit (HELOC), you probably want to know how much cash you can access (not just how much home equity you have).
To calculate how much cash you can access, you’ll need three numbers:
- Your home’s appraised value. Hire an unbiased, licensed third-party home appraiser to deep dive into all of your home’s characteristics, which are then compared to similar homes nearby to deliver an “opinion of value.”
- Your verified loan balance. Lenders order a payoff statement from your current mortgage lender to confirm the exact outstanding balance of your loan.
- Your maximum available equity. The amount you borrow compared to your home’s value is called your loan-to-value (LTV) ratio, and it’s expressed as a percentage. The maximum LTV ratio varies depending on your chosen loan type. For example, if you apply for a conventional cash-out refinance, the max LTV ratio is 80%.
Want to skip the math? Let our home equity loan and HELOC calculator do the work for you.
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Here’s an example calculation to determine the total cash amount you could pocket (before closing costs) from your new mortgage. Imagine you’re taking out a cash-out refinance, your home is worth $350,000, you have a $200,000 mortgage balance and the lender sets an 80% LTV ratio maximum.
Note: The calculation works the same way for a second mortgage loan, like a home equity loan or HELOC.
Step 1. Convert your maximum LTV ratio to a decimal by moving the decimal point left two spaces.
80% LTV = 0.80
Step 2. Multiply your maximum LTV ratio by your appraised value.
0.80 x $350,000 = $280,000
Step 3. Subtract your current mortgage balance.
$280,000 – $200,000 = $80,000
You can borrow up to $80,000 of your home equity.
If you already have more than one mortgage on the same house and want to calculate how much equity you could borrow with an additional loan, you’ll need to use a special version of LTV known as a combined loan-to-value (CLTV) ratio. Lenders use a CLTV to account for the equity involved in both your original mortgage and any additional home loans.
To calculate your CLTV ratio, add your loan balances together and divide that amount by your home’s value.
For example, let’s say you have a $350,000 home and still owe $200,000 on your first mortgage balance. You also have an outstanding $20,000 home equity loan balance.
$200,000 + $20,000
——————————— = 0.63
$350,000
Your CLTV would be 63%
Then, to find how much remaining equity you can tap:
Step 1. Convert your maximum CLTV ratio to a decimal by moving the decimal point left two spaces.
80% CLTV = 0.80
Step 2. Multiply your maximum CLTV ratio by your appraised value.
0.80 x $350,000 = $280,000
Step 3. Subtract your current mortgage payoff balance.
$280,000 – $220,000 = $60,000
You can borrow up to another $60,000 of your home equity.
Scenario 2: How to calculate home equity if you plan to sell your home
Home equity via sale = Home price estimate – Cost to sell
If you’re planning to sell your home, you may want to calculate your home equity to estimate how much you stand to make once you sell.
However, because home equity calculations depend on the home’s sales price and closing costs, you can’t really nail down how much home equity you have until your home is under contract and the selling costs are locked in. But even if you’re still in the planning stages, you can make an educated guess about your home equity by taking the following steps:
Step 1. Get a comparative market analysis (CMA).
Your real estate agent typically prepares this report, which identifies a realistic price for your house in the current market. The CMA compares your home to similar properties nearby that have sold recently to give you a more educated guess about your home’s value. A CMA is usually cheaper than a full home appraisal and your agent may even offer one for free.
Step 2. Subtract real estate sales commissions.
Real estate commissions have traditionally been 5% to 6% of the sales price and the seller typically covered them — but things are changing. As of July 2024, sellers are no longer required to pay buyer’s agent fees and, as a result, the idea was that those fees would be much more negotiable than they used to be. Studies show that average fees did drop slightly at that point, but only by about 0.68 percentage points.
To be on the safe side, you may want to budget that full 6%, but you’re likely to come in under that number.
Step 3. Subtract estimated closing costs.
Closing costs vary from state to state, but they usually run between 6% and 10% of your sales price. They can include things like title insurance fees, inspection fees and ownership transfer costs.
Step 4. Subtract home staging and inspection fees.
Depending on your home’s size, it might cost you between $832 and $2,926 to stage your home for prospective buyers, according to HomeAdvisor. You’ll pay another $400 on average for inspection fees to make sure everything from the floor to the roof is in good working order.
Step 5. Subtract any loan balance you have.
If you owe any money on your home, you’ll need to request a payoff statement from your lender. The statement will show the exact amount you need to repay your loan in full, which in some instances can be different from the current balance you see on your monthly mortgage statement.
Here’s how your home equity math looks, using the closing costs we’ve detailed above and assuming the home sells for $350,000. Let’s also assume you owe $200,000 on your mortgage.
| CMA value | Cost (based on $350,000 sale price) | Running balance |
|---|---|---|
| Subtract real estate commissions (6%) | – $21,000 | $329,000 |
| Subtract closing costs (8%) | – $28,000 | $301,000 |
| Subtract home staging and inspection fees | – $2,279 | $298,721 |
| Subtract current mortgage balance | – $200,000 | $98,721 |
| Home equity converted to cash via sale | $98,721 |
How much home equity can I get in cash?
As we mentioned above, there are three standard loans that allow you to borrow against your home equity: cash-out refinances, HELOCs and home equity loans. To find out which will let you access the most cash, just compare the maximum LTV ratios for each loan type below:
| Mortgage type | Maximum LTV ratio |
|---|---|
| Conventional cash-out refinance | 80% |
| FHA cash-out refinance | 80% |
| VA cash-out refinance | 90% |
| Home equity loan | 85% |
| Home equity line of credit | 85% |
We covered the steps to calculate the amount of cash you can borrow based on the maximum LTV ratio for your loan program earlier.
If you need more cash than these options allow, you may want to look into a high-LTV home equity loan or HELOC.
What can you do with home equity?
Build equity
For most people, the ultimate goal of homeownership is to own their house outright. Building equity in your home is the only way to achieve this goal, and it’s also a cornerstone of traditional wealth-building. For about half of U.S. homeowners, home equity makes up at least 45% of their net worth.
Owning a home outright can also increase your personal and financial stability, as it eliminates the possibility of foreclosure.
Leverage equity
“Leveraging” home equity means using it to accomplish other financial goals, and it’s a very powerful financial strategy. Having home equity unlocks access to loans with some of the lowest interest rates available anywhere.
Common ways to leverage your home equity include:
- Making home improvements
- Consolidating debt
- Covering higher education expenses
- Paying for medical care
- Investing in real estate you plan to rent
- Buying a vacation home
How to build equity in a home
There are some very simple things you can do before and after you buy a home to help build your equity.
-
Make a bigger down payment.
The more equity you start with, the faster your equity will grow as your home’s value rises. A large down payment gives you a better home equity starting point. -
Pick a shorter loan term.
If you can afford higher monthly payment, a shorter term like a 15-year fixed-rate mortgage will shrink your balance faster than the popular 30-year fixed-rate mortgage. -
Make extra payments whenever you can.
Even one extra payment a year helps you increase your available equity and pay off your mortgage early. -
Add value with repairs and improvements.
Homebuyers often prefer homes that have been updated, so a home that’s well-maintained and has recent home improvements — like modern flooring and fixtures — usually has a higher price tag.
Frequently asked questions
Generally, 20% equity is considered good, as it eliminates the need for private mortgage insurance. But you may want to keep more — at least 20% to 30% — to ensure you have financial flexibility and security. It can be hard to refinance or take out additional loans in the future if you drain your equity.
You should calculate home equity when considering major financial decisions like refinancing or home equity loans. And if you’re making private mortgage insurance payments, you may want to recalculate more frequently, so you can cancel the mortgage insurance as soon as you meet the 20% requirement.
Yes, you’ll have negative home equity if you owe more on your mortgage than your home’s current market value. This situation, called being “underwater” or “upside-down,” typically occurs when property values decline significantly.
Online calculators can give you a rough estimate, but they aren’t highly accurate if they rely on guesses about your home’s value. For precise equity calculations, you’ll need a professional appraisal or comparative market analysis from a real estate agent.
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