HOME EQUITY 101
How to Calculate Home Equity: A Step-by-Step Guide
With home values on the rise and mortgage rates shifting, home equity has become a powerful financial tool for many homeowners. But here’s the catch: most people don’t actually know how much equity they really have. Relying on outdated tax assessments or overlooking second liens and HELOC balances can lead to serious missteps — like missing out on borrowing opportunities or, worse, overleveraging your home.
Whether you’re looking to consolidate debt or simply understand your financial position, knowing how to calculate your home equity accurately is the first step.
What Is Home Equity?
Home equity is the difference between your home’s current market value and what you still owe on your mortgage. In simple terms, it’s the portion of your home that you truly own.
Equity builds over time in two key ways:
- Paying down your mortgage: Each monthly payment reduces your loan balance and increases your ownership stake.
- Home value appreciation: If the market value of your home rises, so does your equity — without you having to lift a finger.
How to Calculate Your Home Equity
The basic formula is:
Home Equity = Current Market Value – Outstanding Mortgage Balance
Example:
$450,000 – $280,000 = $170,000 in home equity
To calculate your equity:
- Determine your home’s current market value. Use comparable home sales, an appraisal, or a trusted online estimator.
- Find your outstanding mortgage balance. Check your mortgage statement and include second mortgages or HELOCs.
- Subtract your loan balance from your home’s value. The result is your equity.
Understanding LTV and CLTV
What Is LTV?
Loan-to-value (LTV) compares how much you owe to your home’s current value. Lenders use this to assess risk.
LTV = (Loan Balance ÷ Home Value) × 100
Example: (260,000 ÷ 400,000) × 100 = 65% LTV
What Is CLTV?
Combined Loan-to-Value (CLTV) includes all home-related loans, such as a mortgage and HELOC.
CLTV = (Total of All Loans ÷ Home Value) × 100
Example: (300,000 ÷ 400,000) × 100 = 75% CLTV
Most lenders cap CLTV at:
- 85% for primary residences
- 80% for secondary or investment properties
How to Lower Your LTV or CLTV
- Make extra payments toward your loan principal.
- Wait for home appreciation or request a new appraisal.
- Avoid adding new home-secured debt.
How Much Can You Borrow?
Most lenders allow borrowing up to 80–85% of your home’s value, depending on qualifications.
Borrowable Amount = (Home Value × Max CLTV) – Current Mortgage Balance
Example:
- Home Value: $500,000
- 80% LTV: $400,000
- Current Mortgage: $270,000
- Available Equity: $130,000
How to Increase Your Home Equity
- Make extra mortgage payments.
- Avoid taking on new home loans.
- Renovate strategically. Kitchen, bath, and energy upgrades often add value.
- Hold your property long-term. Appreciation builds equity over time.
Why Knowing Your Home Equity Matters
Understanding your equity can help you:
- Qualify for a HELOC without refinancing
- Consolidate debt into a lower monthly payment
- Fund renovations or college tuition
Common Mistakes When Calculating Home Equity
- Using outdated home value estimates. Tax records and old appraisals may not reflect current value.
- Not pulling proper permits for improvements. Unpermitted upgrades may not count toward value.
- Forgetting second mortgages or HELOCs.
- Ignoring fees and closing costs.
- Overestimating borrowing power. Most lenders cap borrowing at 80–85% LTV.