How to calculate home equity: A guide

Few numbers are more important to a homeowner than the amount of home equity they have. Home equity represents your financial stake in your home, after all. Having more home equity means you’re less beholden to a lender, and that you have more options if you need to borrow money or sell your home. 

Many people are confused about how to calculate home equity, though. The truth is that it’s not that hard, requiring just a few numbers. Let’s jump right in to see how it works. 

How to calculate home equity

To calculate your home equity, you’ll need access to a calculator, the internet, and your most recent monthly statements for any debts tied to your home, like a mortgage. We’ll show you how to do the math easily by hand, but you can also use a home equity calculator. Let’s get started.

Step 1: Check your home’s value

There are two ways you can get your home’s current value:

• Informal estimate: If you’re just checking for personal interest, you can get a pretty good idea by taking an average from your home’s listed value on at least three real estate websites, such as Zillow, Redfin, and Realtor.com. Simply add up all three estimated values, and then divide by three.
• Formal appraisal: If you’re applying for financing, you’ll usually need to get an appraisal done as part of the application process. These days, appraisals can often be completed remotely, but in some cases, you may need to pay extra for an on-site home appraiser.

Example: You check your home’s estimated value on three popular real estate websites and find estimates of $356,000, $403,000, and $375,900. Taking the average number, you estimate your home value to be around $381,300.

Step 2: Check your home loan balances

Next, check your online account or retrieve your last paper-stated account for any debts associated with your home. This includes your mortgage, as well as any other debts such as home equity loans or lines of credit (HELOCs). Add up the total balance on these accounts. 

This represents your lender’s financial stake in your home. If you sell your home, or if your lenders foreclose on your home due to default, this is how much they’ll be paid before you get your cut of the proceeds. 

Example: You have a $211,000 mortgage balance and owe $23,000 on a HELOC. Thus, your total home loan debts are $234,000. 

Step 3: Subtract your home debts from your home’s value

Finally, to calculate your home equity, you’ll subtract your home loan balances from your home’s value. 

Home equity = Home value – Home loan balances

This represents the dollar amount of your financial stake in your home; i.e., what you’d receive in cash from a home sale after your lenders are paid back. 

Example: You own a $381,300 home, and have $234,000 of debt tied to your home. Subtracting these two numbers ($381,300 – $234,000) means you have $147,300 in home equity. 

You can also calculate this as a percentage by dividing your home equity amount (in dollars) by your home’s value, and multiplying this number by 100. This shows your home equity as a percentage. People often use this to estimate what percent of their home is “paid off.”

Home equity (%) = (Home equity in dollars / Home value) * 100

Example: You have $147,300 of home equity, against a home valued at $381,300. This means that you have a 39% equity stake in your home ([$147,300 / $381,300] * 100 = 39%).

Why is home equity important?

Home equity is important to track for a few reasons:

• You’ll get a better idea of your options for future financing and home sale proceeds.
• Lenders use your home equity to calculate your eligibility, loan terms, and even interest rates.
• It gives you an idea of your overall wealth; some people include it in their net worth calculation.

Having more home equity simply means more flexibility and opportunities, even for things like consolidating credit card debt or refinancing to get a lower mortgage payment.

What’s the difference between home equity and loan-to-value ratio?

If home equity is your share of your home’s value, then you can think of the loan-to-value (LTV) ratio as your lender’s stake in your home. It’s basically the opposite number. You can calculate it by subtracting your home equity percentage from 100. Alternatively, you can also calculate it by dividing your home loan balances by your home’s value. 

Loan-to-value ratio = 100% – Your home equity %

Or

Loan-to-value ratio = Home loan balances / Home value

Example: If you have 39% equity in your home, then your lenders have a 61% stake in your home. Your loan-to-value ratio is thus 61% (100% - 39%). You can also calculate this by dividing your home loan balances by your home’s value ($234,000 / $381,300).

Lenders use this number to calculate your potential home loan amounts, too. Commonly, lenders may allow you to borrow up to 80% of your home’s value, minus your other debts. This is also known as the combined loan-to-value ratio. The difference between your current LTV ratio and the limit for the combined loan-to-value (CLTV) ratio is how much you can theoretically borrow. 

Potential home equity loan amount (% of home value) = Maximum CLTV ratio – Current LTV ratio 

Example: If your current LTV ratio is 61% and you apply for a home equity line of credit with a lender allowing you to borrow up to 80%, then you can borrow up to 19% of your home’s value (80% – 61%) if you meet other lender requirements. This represents a potential HELOC amount of $72,447 (that’s 19% of your home’s estimated value of $381,300). 

Frequently asked questions

What is the formula for calculating home equity?

Home equity = Your home’s value – Your home loan balances

This formula represents your share of equity in your home, as opposed to your lender’s share. 

Does home equity include second mortgages or HELOCs?

Yes. Home equity is calculated by subtracting all of the debts tied to your home from its actual value. That’s because if a lender forecloses on your home, those debts will need to be paid first before you receive any leftover proceeds from the sale. 

How does a home appraisal affect my equity?

A home appraisal is often used as the basis for calculating your home equity, such as when you apply for financing. It’s a more formal way to calculate your home equity, as opposed to estimating its value online. 

Can I have negative equity in my home?

Yes. If your home value drops, it’s possible to end up owing more on your home than it’s actually worth. This is called a “negative equity” situation, because you have no equity in your home, and instead owe more to your creditors. You can enhance your home's value by making strategic home improvements. 

How much equity do I need to borrow against my home?

You’ll typically need at least 20% equity in your home to qualify for financing options like home equity loans or home equity investments. Some lenders may have even lower equity requirements, but this can be risky in case you end up underwater on your home. 

Final thoughts

Home equity is fairly easy to calculate using back-of-the-envelope calculations, and it’s a good idea to keep tabs on it over time. It represents a significant portion of most homeowners’ wealth, after all. 

Knowing how much home equity you have can offer a sense of security that you have affordable financing options available, or — conversely — help motivate you to pay down your home debts to give you added financial flexibility.

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