How to Calculate Home Equity

ResidentialCalendarJanuary 4, 2019

Home equity is the amount of your home that you own in full. Finding out your home equity will tell you how much you could make by selling your home. Or, if you’re not ready to sell your home yet, it could also let you know how much you could be eligible for with a home equity loan.

Many homeowners take advantage of a home equity loan to make improvements on their house in order to boost its value. That way, when you do sell, your home’s market value will be higher, allowing you to ask for more money from buyers. The more sizeable your equity, the more options you’ll have available to you for financing. 

In this article, we’ll walk you through how to calculate your home equity, how to calculate your loan-to-value ratio, and different steps you can take to improve your home’s market value and, therefore, your equity. 

How to Calculate Home Equity

Step one to figuring out your home’s equity is to find out your home’s current value. This can change over time. Sometimes the market value of your home will decrease or increase significantly. Factors that affect home value are general home maintenance and updates as well as trends in the local real estate market. 

Finding your home value is fairly easy these days. You can simply look up your home through a Real Estate website such as Zillow, Trulia, or Realtor.com, to name a few.1 For a more accurate estimate, you could also use the House Pricing Index Calculator provided by the Federal Housing Financing Agency.

The most accurate and up-to-date information for this will come from getting a broker price opinion (BPO), or, better yet, hiring a professional appraiser.2 Of course, this all depends on how deeply you want to dig at this point in your home equity search. 

Once you have a good estimate for your home’s value, simply subtract your home’s mortgage value (the amount you still owe on your mortgage) from the total home value. You can find your mortgage balance on your monthly statement. 

For example, let’s say your house is appraised at $200,000 and your mortgage balance is $125,000. 

$200,000 - $125,000 = $75,000

Depending on the real estate market where you are, and how much of your home’s principle you’ve paid down, this could potentially be negative. For example, let’s say your home is in an old neighborhood where market value has declined over the years. If your home value is $80,000 and your mortgage balance is $125,000, your equity is -$45,000.

$80,000 - $125,000 = -$45,000

Calculating Loan-to-Value Ratio (LTV)

If you are interested in a home equity loan, there are other considerations that lenders look at to help them decide whether to lend to you. One of the most common is your loan-to-value (LTV) ratio. 

In the case of applying for a mortgage for a new house, the LTV compares the loan amount to that of the home value. If you already have a mortgage, the LTV ratio is found by dividing your current mortgage balance by your home’s value. Then you multiply this number by 100 to make it a percentage. 

So, let’s use our original example numbers of $125,000 in the home’s mortgage value and your home is valued at $200,000. 

$125,000 / $200,000 = 0.625 x 100 = 62.5%

Your LTV could determine whether you need to pay private mortgage insurance in the case of initially applying for a mortgage, or if you could qualify to refinance with a mortgage you already have. The higher your LTV, the higher risk you are as a lender and the more likely you’ll have to pay PMI or will have a higher interest rate on your equity loan.3

Can you increase your home’s equity?

Yes! The first thing you could do to increase home equity is to invest a 20 percent or more down payment up front when buying the house. When you already have your home, make payments above your amortized payment schedule to pay down principal faster. 

Home value, and therefore equity, can be improved by generally keeping up on maintenance and doing touch ups and updates regularly around the house. Installing rooftop solar panels may add value to your home as well. Lawrence Berkeley National Lab conducted research which concluded that homes with solar panels sold for more than those without by about $4 per watt, or $15,000 for an average-sized system.*

Homes with solar installed also tend to sell faster than homes without solar, according to Energy.gov.4

For more tips on how to get your home ready to sell, see this article. If you’d like to know more about how solar can boost your home equity, or if you have any other solar home questions, reach out to us today.

*Solar panels installed under a lease or power purchase agreement are not able to be included in the appraised value of a home. Systems purchased through a loan or with cash are able to be included.

 

Endnotes

1 https://www.goodfinancialcents.com/online-home-appraisal
2 https://www.nerdwallet.com/blog/mortgages/how-to-determine-home-value/
3 https://www.thetruthaboutmortgage.com/pmi-private-mortgage-insurance/
4
 https://www.energy.gov/eere/solar/downloads/solar-homes-sell-premium

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