In real estate, the equity you have in your home -- in other words, the percentage of the property you own outright -- can be leveraged through a loan to help you cover big expenses or expand your portfolio.
With that in mind, this guide will show you how to determine equity in a home. Read on to learn how to calculate your home equity, the different ways in which your home equity percentage can help you, and how you can increase the amount of equity you have in a property.
How to calculate your home equity
The first step to learning about home equity is figuring out how to calculate it. Luckily, once you have all the values in place, the actual calculation is fairly simple. We've laid it out for you below, along with an example.
Step 1: Find your current home value
To start, you need to find your home's current value. If you're just doing this calculation to get an estimate of how much value you've built up in your home, use the price you paid for the property when you originally bought it. However, be aware that since home values change over time, that figure probably won't be entirely accurate.
To truly get a sense of your home's current market value, you'll need to have an appraisal conducted. During the appraisal, an appraiser will likely compare your home to other, similar homes that have recently sold in your market to get a sense of how much it's worth.
Step 2: Subtract your outstanding debt
Once you have a firm idea of your home's current market value, the next step is to add up any current outstanding debt tied to the home and subtract it from the property value. In this case, you'll want to add up the outstanding balance on your mortgage loan, as well as any other debts like a second mortgage, home equity loan, or home equity line of credit.
Step 3: Calculate your home equity
Once you have both the current home value and your outstanding debt, the entire formula is as follows:
Current home value - outstanding debt = home equity
For example, if your home is worth $300,000 and you have $125,000 left on your mortgage and no other debts tied to your home, your home equity equation would look like this:
$300,000 - $125,000 = $175,000 home equity
Keep in mind it is also possible to have negative equity in a home. If, for example, you owe more than the home is worth, the answer to the above equation would be negative, meaning you would have negative equity. Notably, that is what happened to many homeowners in the 2008 housing market crash, causing lenders to tighten up their lending standards.
Step 4: Calculate your loan-to value ratio
Speaking of lending standards, when lenders consider the amount of equity you have in your property, they look at it as a ratio. This ratio is known as your loan-to-value ratio (LTV), calculated by dividing an outstanding loan balance (you can find this number on your monthly statement) by your home's current value.
For example, using the numbers above, if your home is worth $300,000 and you owe $125,000 on a mortgage, your loan-to-value ratio equation would look like this:
Outstanding loan balance / home's current value = LTV
$125,000 / $300,000 = 0.416 LTV or 42%