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Home equity is the difference between the appraised value of your home and the amount you still owe on your mortgage. The higher the equity in your home, the easier it is to qualify for other financing such as home equity loans and home equity lines of credit. Fortunately, calculating home equity is simple, and there are steps you can take to increase your equity.
Calculate the net value of your property in 3 steps
Understanding the equity in your home can help you make better financial decisions and access cash for home renovations and other expenses. In general, you can calculate the equity in your home by subtracting the amount you owe on your mortgage from the appraised value of your home.
Follow these steps to calculate the equity in your home.
1. Find the value of your home
The first step in calculating your home’s equity is to determine the appraised value of your home. The most accurate way to do this is to hire a professional appraiser or request a home appraisal from your lender. Typically, home appraisal cost between $300 and $400 for a single family home, but it depends on the size, condition and value of the property.
You can also get a general idea of your home’s value by checking recent sales of similar homes in your area or by using an online home value estimator like Zillow. But keep in mind that the accuracy of these estimates depends on the local data available.
Related: How Home Appraisals Work
2. Determine your current loan balance
Next, find out how much you still owe on your mortgage. You can find this information on your most recent mortgage statement. If your lender has this information online, log into your mortgage dashboard and request your mortgage repayment amount. Otherwise, contact your lender directly to find out how much you still owe on your mortgage.
3. Calculate your home equity
Once you have the appraised value of your home and the outstanding balance of your mortgage, calculate the equity in your home by subtracting the mortgage balance from the value of the home.
For example, if your home is valued at $200,000 and you still owe $100,000 on your mortgage, you have $100,000 of equity.
Ways to leverage the equity in your home
There are two main ways to leverage the equity in your homea home equity loan or a home equity line of credit (HELOC). Both products allow you to borrow against the equity in your home, but there are key differences between the two.
Use a HELOC
A HELOC is a revolving line of credit that allows you to borrow against the equity in your home up to a certain limit. You can access the money according to your needs and interest only accrues on the amount you borrow. Since HELOCs are revolving lines of credit, you can continue to access the borrowing limit while you pay down your balance.
A HELOC may be a better option if you need to borrow money over time or if you don’t know how much you will need. This makes HELOCs more useful for pay-over-time home improvement projects or other ongoing cash flow needs.
Use a home equity loan
On the other hand, a home equity loan is a lump sum loan with a fixed interest rate and fixed monthly payments. You borrow a fixed amount of money and repay it over the life of the loan. Interest accrues on the total amount of the loan.
For these reasons, a home equity loan can be a good option if you need a large sum of money all at once and want the security of fixed monthly payments.
How much can I get with a home equity loan or HELOC?
The amount you can borrow on a home equity loan or HELOC will depend on the value of your home, your loan-to-value ratio (LTV) and your credit score. Generally, however, you will be able to borrow up to 85% of the value of your home minus the balance of your mortgage.
If your home is valued at $200,000 and you owe $100,000 on your mortgage, you might be able to borrow around $85,000 (even if you have $100,000 in equity). However, depending on your LTV and credit score, the actual amount might even be lower. If you have a high LTV or a low credit score, you may only be able to borrow a smaller percentage of your home’s value.
If you have bad credit, you may only be able to borrow 50% of the value of your home, although most lenders allow up to 85%. Or, if you have a very high LTV, you may only be able to borrow at 70 or 75%.
Talk to a lender about your situation to determine how much you can borrow.
Related: How much HELOC money can I get?
How to increase the equity in your home
Increasing the equity in your home can give you peace of mind and help you qualify for a larger mortgage or HELOC. Here are some things you can do if you want to increase the equity in your home:
- Make extra payments on your mortgage each month. Making extra mortgage payments will help pay off your mortgage faster and grow your capital faster. Just be sure to make it clear to your manager that you want the extra payments to go towards the principal of the loan rather than interest.
- Refinance your mortgage into a shorter term loan. Refinance a mortgage can help you save on interest payments, so more of your money goes to paying off the loan. This strategy can also shorten the mortgage repayment period without substantially increasing your monthly payment.
- Make a lump sum payment to your main balance. If you have the cash available, repay a large part of your principal in one go. Depending on the lender, you may also be able to recast your mortgage by keeping your original repayment date and lowering your monthly payments.
- Maintain your home. Keeping your home in good condition can help preserve or even increase the value of your home over time, increasing your capital. Also consider making improvements that will increase the market value of the home, such as remodeling the kitchen or adding a swimming pool.