Home equity is basically the value of your home minus the amount owed on your mortgage loan. In order to determine the amount of home equity you have (i.e. your vested interest in the property), there are some relatively simple steps to follow. By understanding the basic procedure outlined below, you should be able to come up with a home equity figure that’s reasonably close to what a lending institution or bank will calculate.
Step 1: Determine the Current Market Value of Your Home
To calculate your home equity, you must first determine the current market value (CMV) of your home. To accomplish this, you may choose to have your house appraised by a professional. If your goal is to obtain a Home Equity Loan (HEL) or Home Equity Line of Credit (HELOC), you should check if the mortgage lender charges a fee for the appraisal. Most likely, the lending institution will have a list of approved property appraisers from which you can select.
Another way to assess your home’s value, for the purpose of determining home equity, is to check with the local County Property Appraiser’s Office for the most recent tax assessed value (TAV). Note that this number is typically adjusted from fair market value.
An alternative method for determining the market value of your house is called the Comparable Sales Approach. This is used (mainly by real estate agents) to check the recent sale prices of comparable properties in the same neighborhood. A comparable property will have features that are similar to your home ― including the year built, square footage, amenities, lot size, and general condition.
Step 2: Calculate the Amount of Debt Owed Where Your Home is Collateral
To compute your home equity, you must know what the remaining principal balance is on your (first) mortgage loan. This can be as simple as looking at your most recent mortgage statement. You must also include any additional amounts of debt on loans that use your home as collateral (such as second mortgages, Home Equity Loans, Home Equity Lines of Credit, liens, or back taxes).
Step 3: Calculate Your Home Equity and Loan-to-Value (LTV) Ratio
Your home equity is equal to the current market value of your home minus the amount still due on your mortgage (i.e. any debt owed that is secured by your home).
FOR EXAMPLE: Say your home’s current market value is $165,000 and your remaining mortgage balance is $83,000. That means you have $82,000 of home equity (because $165000 – $83000 = $82000).
Your loan-to-value (LTV) ratio is the amount of your home equity divided by the current market value of your home.
FOR EXAMPLE: Say you have $82,000 of home equity and the market value of your home is $165,000. That means your LTV ratio is 49.7% (because $82000 ÷ $165000 = 0.497).
If you are looking to secure financing using your home as collateral, it’s important to note that most lending institutions will require a loan-to-value ratio that does not exceed 75% or 80%. To lower your LTV, you will need to build home equity.