How to Determine the Equity in Your Home

By Dawn Kellogg

Equity. We hear this term a lot with regards to property. But what exactly is it and how do you determine how much you have?

Home equity is the difference between your home’s appraised value and the amount you owe on your mortgage and any other loans you have against your home.  For most people, it’s a major part of their total net worth and can be a valuable resource for access to funds. If you are thinking about accessing equity with a home equity line of credit or home equity loan, or selling your house, you need to understand how much equity you have in your home.

When you initially purchase a home, your equity is basically your down payment. Each time you make a mortgage payment, a part of your payment goes toward principal, and part goes toward interest. As you pay off your mortgage, payment applied toward the principal is what builds your equity. Your equity also increases through market appreciation, and home improvements.

Most people don’t own their homes outright. According to Zillow Group Consumer Housing Trends Report 2021, 63% of American homeowners are still paying a mortgage on their homes.  

In order to access your home’s equity, you must first find out what your home is worth. Depending upon when you purchased your home, it may be worth more or less than you paid for it. Mortgage lenders rely on the current appraised value.

If you are just exploring options, an easy (and free) way to gauge your home’s worth is to use an online home price estimator. These online tools use a unique algorithm and publicly available information to generate estimates. (Please note: these are just estimates based on the fair market value, not the appraised value.)

To get a more exact value of your home if you are considering selling, contact a real estate agent who can give you a fair market value for your home based on similar recently sold properties in your area.

Once you have an idea of what your home is currently worth, subtract the amount you have left to pay on your mortgage from your home’s current market value. If you have no outstanding mortgage balance, your equity is equal to the current market value.

For example: Let’s say your home’s value is currently $250,000. You have $150,000 left to pay on your mortgage.  The equity you have in your home is $100,000.

Once you determine how much equity you have in your home, you can decide the best way to use that through a home equity loan or home equity line of credit. You can invest in your house and use it to pay for home improvements. You can also use it for other things like big ticket purchases, college expenses (if the interest rate is lower than student loans), high interest debts, or to have an emergency fund available for medical bills or unexpected expenses.

There are two products through which you can access your home’s equity. A home equity loan, in which you borrow a lump sum, is paid back in monthly installments and has a fixed interest rate. A home equity line of credit (HELOC) works much like a credit card and allows you to borrow against the equity on an as-needed basis to withdraw what you need over time. This usually comes with a variable interest rate.

Few lenders will let you borrow against the full amount of your home’s equity. Most lenders allow you to borrow up to 75% – 90% of your available equity, but each lender has a unique formula to determine your borrowing limit.

Using the above scenario, if the lender allows you to borrow 80% you’d use this calculation: $250,000 (home’s value) x .80 (max % borrowed) – $150,000 (amount owed) = $50,000 available to borrow.

It’s important to keep in mind that you will probably have to pay some type of loan origination fee if you take out a home equity loan. Also, interest rates for HELOCs are generally higher than those for your original mortgage. This will affect the overall amount of home equity that you have to use.

The Summit has great rates for Home Equity Loans and Home Equity Lines of Credit. Apply online, schedule a Zoom appointment, visit a branch or contact us at  453-7000 or (800) 836-7328.

NOTE: Race, national origin, and other non-financial considerations should NEVER play a role in determining how much equity you can borrow. Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability or age, there are steps you can take. You can file a report to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).