How to determine equity in a home

Your home is more than just a place where you and your family live. It’s also a core part of your overall wealth. A home is the largest asset most people own, after all — and just like any other asset, you can turn it into real cash if you need it. 

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You don’t necessarily have to sell your home and move out if you’re looking to borrow money, though. Many thousands of homeowners take advantage of affordable financing options every month by tapping into their home equity. 

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However, you’ll need a certain amount of equity built up in your home before you’re eligible to use these options. We’ll show you how to determine the equity in your home – and demystify the different terms in the process.

How to determine equity in a home

Determining the amount of equity in your home isn’t a difficult process, but there are a few things to know. “Home equity” can be measured in several different ways, such as a dollar amount or percentage that you own. Many people also confuse their share of home equity with terms that lenders use, such as a loan-to-value (LTV) ratio. 

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We’ll walk you through how to determine your home equity in various ways, along with how to translate that into lender-speak that you can understand when shopping for financing options. 

1. Determine your home’s value

Start by estimating how much your home is worth. There are a few ways to do this:

• Take an average of your home’s estimated value from real estate websites such as Zillow, Redfin, or Realtor.com.
• Ask a realtor to perform a comparative market analysis (CMA) on your home by looking at similar home prices in recent sales. 
• Get a professional appraisal, which you’ll usually be required to do anyway if you apply for home equity financing. 

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A professional home appraisal is the most accurate method because it takes the more factors into account, including any home improvements you’ve made. They’re also the most expensive option, costing hundreds of dollars for an in-person visit, although remote appraisals are often much cheaper. 

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If you’re just looking for a ballpark figure, it’s probably fine to use estimates provided by real estate websites when calculating home equity. Keep in mind that if you apply for home equity financing, your lender will generally require you to get a new home appraisal during the underwriting process. They’ll use your home’s appraised value for any calculations. 

2. Determine how much you owe on your home

Next, you’ll tally up the amount of any debts tied to your home. For most people, this is simply how much you owe on your mortgage. It could include other things, too, depending on the types of liens filed against your home, such as tax debts, PACE loans, court judgments, etc. 

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You can find the current balance on these debts by logging into your online account, checking your most recent statements, or by contacting your creditor directly. If you have more than one lien on your home, add up the total amount you owe. 

3. Calculate your home equity amount

Now, we can start looking at different ways to calculate your home equity. Let’s start with the simplest number; the amount — in dollars — of equity you have in your home. The calculation looks like this:

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Home equity = (Current value of home) - (Amount owed on home)

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For example, let’s consider a home worth $450,000. If that homeowner owes $100,000 on their mortgage and also has a $25,000 PACE loan, their calculation would look like this:

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Home equity = $450,000 - ($100,000 + $25,000) = $325,000 

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This homeowner has approximately $325,000 in home equity. 

4. Calculate your home equity percentage

It’s sometimes helpful to view your home equity as a percentage, the way an investor or business owner measures their equity stake in a company. In this case, we’ll look at the equity stake percentage you have in your home:

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Home equity percentage = (Amount of home equity) / (Current value of home)

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We can calculate this for our example homeowner as follows:

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Home equity percentage = $325,000 / $450,000 = 72%

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This homeowner owns 72% of their home, free and clear of any liens. 

5. Calculate your CLTV ratio

Lenders typically look at your combined loan-to-value (CLTV) ratio when processing your application, so it’s a good idea to know this number as well. To calculate it, simply divide the amount you owe on your home by its total value:

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CLTV ratio = (Amount owed on home) / (Current value of home)

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This is what it looks like for our example homeowner:

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CLTV ratio = ($100,000 + $25,000) / $450,000 = 28%

Here, 28% of the home’s value is secured by liens from other debts. Notice that it’s the opposite of your home equity percentage: you own a 72% stake in your home equity, and your lenders own a 28% stake in your home equity. 

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It’s important to know this number because you can use it to see if you’re eligible for home equity financing, as well as how much you can potentially borrow. 

How much equity can I pull out of my home?

Most home equity financing lenders allow you to borrow up to 80% of your home’s value, minus any other debts tied to your home. In other words, you can generally have a CLTV ratio of up to 80%, including the balance of any home equity debts you might apply for. 

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Lenders use this to see if you qualify for a home loan. If you just started paying off your mortgage and you only put 10% down toward your home, your CLTV ratio is already at 90% — too high to qualify with most lenders. Homeowners who’ve been paying down their debt for many years may be well below this mark and are thus eligible to pull equity out of their home. 

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Lenders also use this to calculate how much you can borrow. You can calculate your potential loan amounts by subtracting your current CLTV ratio from your lender’s maximum CLTV ratio, and multiplying that number by your home’s value. 

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For example, if your CLTV ratio is currently at 28% and you can borrow up to 80%, then you can borrow up to 52% of your home’s value (80% - 28% = 52%). If you multiply this by your home’s value, you’ll find that you can potentially borrow up to $234,000 (0.52 * $450,000 = $234,000).

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Keep in mind that lenders have other requirements you’ll need to meet, too, such as having a certain credit score, income level, and more.

How to access the equity in a home

Knowing how to calculate your home equity in various ways is helpful if you’re looking to track your wealth over time or watch your progress in paying down your mortgage balance, especially if you want to cancel your private mortgage insurance (PMI). If you’re looking to borrow money, however, there are many ways to leverage your home equity to get affordable financing:

• Home equity loan (HEL): A straightforward loan paid out in one large amount and repaid monthly at a fixed interest rate. Interest rates are more favorable than personal loans and credit cards.
• Home equity line of credit (HELOC): An open line of credit that you can borrow against at a variable interest rate. You’ll make interest-only monthly payments to start, then repay the balance plus interest once the draw period ends. 
• Home equity investment (HEI): A partnership agreement allowing you to receive upfront funds that you’ll repay anytime during a flexible 30-year term, along with a share of your home’s future appreciation. Unlike home equity loans and HELOCs, HEIs have no monthly payments and less stringent requirements—500 credit score or higher and no income thresholds. 
• Cash-out refinance: A refinance loan that’s made for a larger amount than you owe, with the difference in loan balances being paid to you as cash. Refinancing not only modifies your loan, but the terms and interest rate as well. Therefore it’s best to explore refinancing options when rates are low. 
• Reverse mortgage: A special type of loan for mature homeowners that draws down against the equity in your home, available as a lump sum, a line of credit, or a monthly payment. Homeowners must be over 62 and own most of their home outright. 

Final thoughts

Determining the equity in your home isn’t hard, but many people get tripped up by the different ways of calculating it. We’ve walked you through each approach, and it’s now up to you to use that information wisely. 

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Keep in mind that there are many pros and cons to tapping into your home equity. Home equity loans and HELOCs generally offer lower interest rates than credit cards, for example, but they come with many closing costs and the possibility of home foreclosure if you default. That’s rare, though, and many homeowners find home equity financing to be a superior option to other borrowing methods.

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