Making monthly mortgage payments can feel like chipping away at an iceberg, especially in the beginning. Savvy homeowners take heart that each payment earns them a little more ownership in their property. But do you know exactly how much ownership, commonly called “equity,” you currently have?
Simply put, home equity is the difference between the value of a property and the outstanding balance of all mortgages, liens, and other debt on the property. Read on to determine how much of your home you really own, what you can do to increase your equity, and how you can leverage that equity to make it work harder for you.
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Access up to 95% or $500k of your home’s equity to finance almost anything.
How To Calculate Your Home Equity
As noted above, home equity is the difference between your home’s current value and the outstanding balance of your mortgage and other debt on the property. It’s a simple equation:
Home Equity = Home Value – Home Debt
You can find your mortgage payoff amount (which is different from your balance) on your lender’s online portal. Add to that the outstanding balances of any second mortgages, liens (for unpaid taxes or child support, for example), home equity lines of credit, and any other loans that use your home for collateral. The sum of these items is your home debt, the last figure in the equity equation.
To estimate your home value, you can use the list price of your home, but that doesn’t account for any appreciation in value. For a precise calculation of your home equity, you’ll need to know your home’s current value with appreciation:
How Do You Find the Value of Your Home
Your home’s current value is what you paid plus appreciation. You can get an estimate of your home’s value with an online property tracking tool. These calculators approximate the appreciation on your home by comparing it with similar properties in the area. While helpful, these tools can’t provide an exact measure.
To determine your real-time home value, you’ll need to contact your mortgage lender and request an official appraisal. Your lender will conduct an inspection and evaluation of what your home is worth in the current market. The appraiser may ask you for documentation of any work you’ve done on your home to come to a more exact figure.
Using the Loan-to-Value Ratio To Represent Home Equity
The loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed — it’s like the opposite of equity. Lenders set maximum LTVs, typically 80%, for home equity loans. This means homeowners cannot borrow more than 80% of their home’s value.
You can calculate your LTV by dividing your outstanding home debt, discussed above, by your home’s appraised value:
LTV = Home Debt ÷ Home Value
For example, if your home is worth $375K, and you still owe $200K. Your LTV is 53%. Your available equity is then 27%, or $101,250.
Examples of Home Equity After 1, 3, 5, 10 Years
The table below shows how much equity a fictional homeowner accumulates over the first 10 years of their mortgage. This assumes an initial home value of $300K, with annual appreciation of 10%*, a mortgage APR of 7.5%, and a monthly payment of $1678.11. The LTV is rounded to the nearest whole percentage.
*Actual annual appreciation for American homes over the last 10 years on average was 7.4%.
| Year | Home Value | Loan Balance | Home Equity | LTV |
|---|---|---|---|---|
| 0 | $300,000 | $240,000 | $60,000 | 80% |
| 1 | $330,000 | $237,596 | $92,404 | 72% |
| 2 | $363,000 | $235,196 | $127,803 | 65% |
| 3 | $399,300 | $232,611 | $166,689 | 58% |
| 4 | $439,230 | $229,825 | $209,405 | 52% |
| 5 | $483,150 | $226,822 | $256,327 | 47% |
| 6 | $531,470 | $223,587 | $307,882 | 42% |
| 7 | $584,620 | $220,101 | $364,519 | 38% |
| 8 | $643,080 | $216,343 | $426,736 | 34% |
| 9 | $707,380 | $212,294 | $494,085 | 30% |
| 10 | $778,120 | $207,931 | $570,188 | 27% |
Recommended: How Much Will a $300,000 Mortgage Cost You?
What Is a Good Amount of Home Equity?
Common wisdom says that it’s smart to keep at least 20% equity in your home. This is why many lenders limit your LTV to 80%. To borrow against your home, however, you’ll need more than 20% equity.
Fortunately, that’s not a problem for most homeowners. Research firm Black Knight recently estimated that Americans have $185,000 of “accessible” home equity on average, over and above the recommended 20%. This is mostly due to rising home values.
Recommended: How Home Ownership Can Help Build Generational Wealth
How Much Home Equity Can You Take Out?
The amount of equity you can take out depends on the lender and the type of loan. However, most lenders will allow you to borrow 80%-85% of your home’s appraised value. The other 15%-20% remains as a kind of financial cushion.
Tips on Increasing Home Equity
Your initial home equity is determined by your down payment. The larger the down payment, the more equity a homeowner has right off the bat. The average down payment among American homebuyers is currently 13%. But a down payment of 20% or more can qualify borrowers for more favorable mortgage rates.
After the down payment, home equity typically accumulates in three ways: monthly mortgage payments, appreciation, and home improvements. Beyond waiting for their home to appreciate, homeowners can increase their equity in several ways:
Pay more than your minimum mortgage payment each month. The extra money will go toward your principal, increasing your equity more quickly. Learn how to pay off a 30-year mortgage in 15 years.
Make biweekly payments instead of monthly. Your mid-month payment will incrementally lower your interest due. And by the end of the year, you’ll have made an extra mortgage payment.
Make strategic home improvements. Certain updates increase your home’s value more than others. Learn which home improvements have the best ROI.
Refinance to a shorter-term loan. By refinancing to a 10- or 15-year mortgage instead of a standard 30-year, each mortgage payment will increase your equity at a faster rate.
The Takeaway
Home equity is calculated by subtracting your mortgage payoff balance (found on your lender’s website) from your home’s current value. To get an accurate idea of your home’s market value, you’ll need an appraisal by your mortgage lender, which can cost $300-$450. Homeowners typically can’t borrow more than 80%-85% of their home equity.
If a homeowner doesn’t want to take out a home equity loan but needs cash, they might consider a Home Equity Line of Credit (HELOC). A HELOC allows owners to pull from their property’s equity continually over time. Borrowers can take only what they need at the moment. HELOCs use the home as collateral, which might not appeal to all borrowers.
A HELOC brokered by SoFi allows homeowners to access up to 95% of their home’s equity, or $500,000, and offers lower interest rates than personal loans. Borrow what you need to finance home improvements or consolidate debt.
Learn more about turning your home equity into cash with a HELOC brokered by SoFi.
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