How To Calculate Home Equity, and Why You’d Want To
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 gives you your total home equity amount, but that figure 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.
How much equity do I have in my home?
There are three basic ways to calculate your home equity. The first, mentioned above, is just subtracting how much you owe on your mortgage(s) from your home’s estimated value.
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.
The other two ways to calculate equity come into play when you borrow against your home equity or sell your home — we’ll cover both below.
How to calculate home equity for a new mortgage
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 do so, you’ll need three numbers:
- Your home’s appraised value. An unbiased, licensed third-party home appraiser deep dives 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 lender and use the exact amount when determining how much you’ll net back.
- 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 the type of loan you apply for. For example, if you apply for a conventional cash-out refinance, the max LTV ratio is 80%.
Written in a formula, the calculation looks like this:
(Appraised value x Maximum LTV ratio) – Current loan balance = Home equity you can borrow
If you already have more than one mortgage on the same house, and you want to calculate how much equity you can borrow with an additional future 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 loans.To calculate CLTV, you just 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
Want to skip the math? Let our home equity loan and HELOC calculator do the work for you.
How to calculate home equity if you plan to sell your home
If you’re planning to sell your home, you may want to calculate your home equity to understand how much you stand to make once you sell.
But, 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. However, even if you’re still in the planning stages, you can take steps to make an educated guess about your home equity.
Here’s how we suggest you calculate it:
Home price estimate – Cost to sell = Home equityThe steps below show how you’d do this calculation, and show the costs you’ll likely want to include.
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.
Step 2. Subtract real estate sales commissions.
Real estate commissions have traditionally been 5% to 6% of the sales price and were paid by the seller only — but things are changing. In 2023, a court found that real estate brokerages had conspired to inflate these fees, and as a result the rules around them are changing. Beginning in July 2024, sellers will no longer have to pay buyers’ agent fees and these fees will become much more negotiable than they used to be.
More than 6 in 10 borrowers (64%) were able to negotiate their real estate commission fee under the old system, according to LendingTree survey data. But experts predict that percentage will increase under the new rules, and overall commission fees will drop. 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 $839 and $2,934 to stage your home for prospective buyers, according to HomeAdvisor. You’ll pay another $300 to $500 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 pay off 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 | $350,000 |
|---|---|
| Subtract real estate commissions (6%) | – $21,000 |
| Subtract closing costs (6% to 10%) | – $21,000 to $35,000 |
| Subtract home staging and inspection fees | – $1,139 to $3,434 |
| Subtract current mortgage balance | – $200,000 |
| Home equity converted to cash via sale | $106,861 to $90,566 |
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% |
| HELOC | 85% |
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?
Building 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 is 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, because it eliminates the possibility of foreclosure.
Leveraging 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 — will usually sell for more.