How Do You Calculate How Much Equity You Have in Your Home?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Have you ever wondered how much equity you have in your home? One of the biggest benefits of homeownership is that you build equity with each monthly payment. Homeowners can eventually escape the cycle of monthly mortgage payments and use their home equity as an extra funding source. Accumulating home equity gives you more versatility, and knowing your position can help you make optimal financial decisions. In addition, understanding what goes into home equity can help you calculate your current equity and how long it will take to achieve the next milestone.

Access Your Home Equity

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Learn how Unison can help you leverage the equity in your home to unlock financial success without accumulating extra debt.
Learn how the Unison HomeOwner co-investment program can help you tap into your home’s equity to finance your lifestyle without added debt.

Factors That Determine How Much Equity You Have in Your Home

Your home equity accumulates due to several factors. Understanding how these factors impact your equity buildup will help you determine your current position.

Your LTV Ratio

Your loan-to-value ratio indicates how much of your loan you have paid off. You can also use this percentage to discover your equity. For example, if you have a 60% loan-to-value ratio on a $500,000 home, you still owe $300,000. Subtracting this debt from the home’s value will help you arrive at your home equity which is $200,000 in this case.

Your loan-to-value ratio changes when your loan amount and property value change. Making monthly mortgage payments will reduce your LTV ratio, but so will a rising home value. If your home’s market price increases by $25,000 in 10 years, you get that added value as home equity. 

Your Down Payment

Most lenders will require a down payment, and contributing a larger sum will help you get better interest rates and lower monthly payments. Your down payment builds immediate equity into your home and lets you skip the interest rates on those proceeds. Higher down payments are more beneficial during economic periods of higher interest rates. Higher interest rates lower housing prices, making it easier to afford a 20% down payment and avoid interest on those funds.

Your Monthly Payments

Each mortgage payment reduces your principal balance and helps you unlock more equity. Making the minimum monthly mortgage payment will keep you in good standing and help you become debt-free at the end of the loan’s term. However, some homeowners make larger monthly payments than the minimum. This strategy helps them reduce the loan’s principal faster and accelerate their equity position’s growth. Some homeowners pay off their mortgages several years early with this strategy and avoid excess interest in the process.

Your Loan Terms and Length

Interest payments do not build home equity, but you have to pay interest each month. It makes up a small percentage of your monthly payment, but your loan terms can make interest less burdensome. A shorter loan term lets you build home equity sooner and pay less interest, but these reduced terms come with higher monthly payments. Some homeowners accept slower home equity growth for lower monthly payments. You can also refinance your loan in the future to secure a lower interest rate or change the loan’s duration. Both of those changes will impact your home equity’s growth over time.

Ways You Can Calculate Your Home’s Equity

Homeowners have several tactics to calculate their home equity. You can use one of these methods to discover your position.

Use the Equation

Home equity is the difference between the home’s market value and the remaining mortgage balance. You can deduct the mortgage from the home’s value to determine your equity. For example, suppose you have a home worth $700,000 with $500,000 remaining on your mortgage. You would subtract $500,000 from the home’s value to arrive at a $200,000 equity position. This simple equation will help if you want to tap into home equity.

Access Your Home Equity

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Learn how Unison can help you leverage the equity in your home to unlock financial success without accumulating extra debt.
Learn how the Unison HomeOwner co-investment program can help you tap into your home’s equity to finance your lifestyle without added debt.

Use a Home Equity Calculator

Online home equity calculators let you plug in the details about your home to determine your equity. These calculators run the same home equity equation we discussed, but these home equity calculators provide additional insights. You can get monthly payments for your home equity financing. Most of these home equity calculators let you run calculations for home equity loans and HELOCs.

What is Typically Considered a Good Amount of Home Equity?

While more equity is better, and value is in the eye of the beholder, each homeowner should strive for at least 20% equity in their homes. Achieving this milestone frees you from private mortgage insurance premiums. Private mortgage insurance (PMI) can increase your total costs by 1% of the loan’s value.

Many homeowners make a 20% down payment to avoid private mortgage insurance. If you can’t make the 20% down payment, you can get this insurance removed from most financing options after reaching 22% equity in your home. Federal Housing Administration (FHA) loans with an initial down payment below 10% are more complicated. Current laws require FHA borrowers to pay the entire mortgage or pay it for 11 years to get rid of private mortgage insurance premiums, depending on which is shorter. 

A lower down payment gives home buyers a quicker path to homeownership since you don’t need 20% equity. However, it’s strongly encouraged to reach this threshold as soon as possible because you’ll get rid of PMI. Homeowners can make larger upfront monthly payments to reach the 22% threshold. If you have to take out an FHA loan, making a 10% down payment will reduce how much you pay in private mortgage insurance.

How Much Do Lenders Let You Borrow from Your Home’s Equity?

Lenders won’t let you borrow all of your home’s equity. They want to minimize risk while giving homeowners access to additional funds. Lenders provide homeowners with cash based on their current equity positions and the type of financing.

Home Equity Loan

Most home equity lenders will let you borrow home equity loans between 80%-85% of your home’s equity, minus the remaining mortgage balance. So, for example, if you have a $500,000 home with no debt, you can borrow between $400,000-$425,000. If you have a $100,000 mortgage balance, you can only borrow $300,000-$325,000 from the bank.

HELOC

You can get a home equity line of credit that ranges from 80%-90% of your home’s equity. Homeowners only have to use HELOCs when they need extra funds, while home equity loans provide an immediate lump sum payout. Just like a home equity loan, homeowners will have lower HELOC maximums if they have a remaining mortgage balance on their houses.

Cash-out Refinance

A cash-out refinance changes the terms and rate of your current loan. You end up with a new loan and extra cash based on the agreement. Lenders will let you cash out on up to 80% of your home’s equity minus the mortgage balance.

Equity Sharing Agreement

An equity sharing agreement lets you tap into varying percentages of home equity. You can typically unlock less home equity, but you also don’t have to deal with monthly payments and interest rates. An equity sharing agreement with Unison, the innovative home equity provider, enables you to borrow up to 17.50% of your home’s equity or $500,000, depending on which is lower. 

Unison issues equity sharing agreements to primary residences and some second homes. Your loan-to-value ratio cannot exceed 75%. Other home equity financing strategies will increase your debt, but you only pay Unison after selling your home. You can fill out the form on Unison’s website to learn more about this option.

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