How to Calculate Equity in a Home 

Home equity can be a tremendously valuable asset for homeowners. You can pull out equity to do almost anything: renovate the kitchen, pay off high-interest debt, pay for your kid’s college tuition, and even start a business or invest in real estate.

Before you can get a cash-out refinance, home equity loan or home equity line of credit (HELOC), you need to know how much equity you have. Keep reading to find out how to figure out home equity in your house and related topics. If you want to apply for a home equity program, the RefiGuide can connect you with the best home equity loan lenders that offer many competitive programs and rate options.

What Is Home Equity?

Home equity is the difference between the value of the home and how much you own on your mortgage.

Home equity represents the portion of your house that you fully own. Most lenders define home equity as the difference between your home’s total value and the outstanding balance on your mortgage.

For many individuals, their home is their most significant asset, making home equity a crucial component of their net worth and a valuable tool for reaching other financial objectives.

If you have a home worth $300,000 and your mortgage balance is $200,000, you have $100,000 in equity.

Few home equity lenders will allow you to borrow the full amount, though.

How to Calculate Home Equity

Here are the steps to calculate the equity in a home:

Estimate the house’s value

Calculating equity in your home starts with knowing the home’s current market value. You can use a variety of methods to get a rough property value. An online home value estimator is a free way to get an approximate idea of a home’s market value. These tools, such as Zillow, rely on complex algorithms and public records to provide estimates. But you could potentially sell the home for more or less.

The other major way to find out the home value is to have a professional appraisal. Most homeowners don’t do this until they actually apply for a home equity loan or HELOC. You also can ask your realtor to run comps in your neighborhood and estimate the home’s value.

Learn what you owe

Next, find out the current balance on the mortgage, which is on your latest statement.

Subtract your loan balance from the value

You can calculate your home equity now by subtracting your mortgage balance from the current value. For instance, if you have a home worth $410,000 and owe $220,000, you have $190,000 in equity.

Determine how much equity you can borrow

You cannot borrow the full value of your home equity, except in rare cases. Many lenders may only allow you to borrow 80% or 85%. So, if you have $190,000 in home equity, you could potentially borrow about $144,000. It’s recommended, however, to only borrow as much as you really need. A HELOC or home equity loan is a second mortgage, and you can lose your home if you don’t pay. Also, a 2nd-mortgage comes with closing costs and fees that can be at least 1% or 2% of the loan amount.

What Type of Home Equity Loan or Refi Should You Get?

Interest rates on home equity loans and lines of credit are typically lower than those on other financial products, and the interest may be tax-deductible in some cases. Specifically, if the borrowed funds were used for home improvements or to purchase a new home, you might be eligible for this tax deduction.

Now that you know how to determine your home equity, you can decide if you want to do a cash-out refinance, HELOC or home equity loan:

HELOC

A HELOC is a flexible line of credit. If approved, you will have a maximum line of credit, like a credit card. The draw period usually lasts 10 years and only interest is due. After 10 years, the repayment phase begins and you need to pay interest and principal.

You will pay a variable rate during the draw period. When the draw period is over, you pay interest and principal, usually over 20 years. A HELOC could be preferred for someone who likes the chance of a lower rate, but is also comfortable if the rate increases. A HELOC can be good if you have several projects to fund. You only pay interest on the money you take out. Check the updated HELOC credit requirements.

Home Equity Loan

A home equity loan is a second mortgage that lets you borrow a lump sum of equity at one time. You pay the loan back over 10 or 20 years at a fixed rate. Payments and term are fixed. A home equity loan may be preferred if you like a fixed payment and know when the loan will be paid off.

Cash-Out Refinance

A cash-out refinance is when you replace your first mortgage with another mortgage for more money. The difference between the loans is the equity that you receive in cash. You also can use a cash-out refi loan for any purpose, such as paying off credit cards or home improvements. Most homeowners only get a cash-out refi if they can get a lower rate on their first mortgage, as well as take out cash. But you can also do a cash-out refinance into a different loan term, such as a 15 year to a 30-year loan.

Many homeowners in 2024 have a first mortgage rate that is below current rates. As you probably know, current rates in mid-2024 are well above 6%. If your rate is 4%, it rarely is sensible to refinance. Instead, consider getting a credit line or home equity loan.

More Important Points About Home Equity

Now you know how to pull home equity out of your home and how to calculate home equity. There are other key points to know before you decide to tap your home equity:

First, you don’t need to own your home for 10 years before getting to your equity. Some homeowners could have tens of thousands in equity when they buy the home. For example, if you put down 20% on the home, you will have a 20% stake right away. If the home rises in value soon after closing, you might have well more than 20% equity. Many lenders allow you to pull out equity when you have at least 20% in the home.

Second, you don’t have to only use home equity for repairs and renovations. You can usually use your equity for anything you like. Most people use the money for home renovations,  but others tap equity to pay healthcare bills, pay down credit card debt, or buy real estate. However, current federal tax law states that you must use the equity for home repairs to deduct loan interest.

Third, the loan underwriting process for a home equity loan or equity line of credit isn’t as difficult as for a first mortgage. Many lenders allow you to submit online applications that may be approved relatively quickly, assuming you have been on time with your payments. Some lenders may be able to approve and fund a well-qualified buyer in a few weeks.

Fourth, closing costs and fees on second mortgages are less than for first mortgages. Fees and closing costs vary by lender, but you can expect lower fees than if you do a cash-out refinance with your first mortgage.

Last, remember that you cannot get 100% of your home equity. Lenders have changed their rules after the economic crisis of 2008 and 2009. Today, you can usually tap only 80% or 85% of your home’s value. That way, you have some money left in the property that reduces the chances that homeowners will walk away with little risk.

Summary on Determining How Much Equity You Have in Your Home

Your home’s value might also rise without any effort on your part if it appreciates. Generally, property values tend to increase over time. However, this isn’t a certainty and relies on local market conditions and the broader economy. Monitoring home price trends in your area can be useful to understand the direction of property values.

Understanding how to calculate equity in a home is critical if you are getting a home equity loan or HELOC. You also need to know which type of loan is best for your situation. A homeowner with a high first mortgage rate may want to do a cash-out refinance. But someone with a 3% or 4% mortgage should probably opt for a home equity loan or HELOC.

Now that you understand how to calculate equity in home, you can rely on our dedicated loan professionals at RefiGuide.org for the best loans and rates for your needs. Contact our staff today for fast service!

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