How is Home Equity Calculated

Ever wonder how much equity you have in your home? It’s actually pretty easy to calculate. Your home equity is the difference between what your home is worth and how much you owe on any mortgages.

Let’s try an example: If Zeke’s home is currently worth $250,000 and he still owes $100,000 on his mortgage, then he has $150,000 in equity.

But it’s more complicated than that, right? Actually, not really. There are some situations that can make calculating equity a bit of a challenge but in most cases, it’s pretty simple. Want to learn a little more?

Home Equity Basics

Home value. A huge piece of the equity puzzle is knowing what your home is worth. Most people have a rough idea, but don’t have exact numbers. If you want to know your home’s current market value then hiring a home appraiser is the way to go. They’ll do an evaluation and home comparisons to see how your home stacks up in the market. Of course, there is a charge to hiring an appraiser. If you want to avoid any extra fees, realtors and mortgage lenders can often come up with a rough estimate for you based on neighborhood listings and sales.

Loan to value ratio. You may hear the acronym LTV or CLTV when discussing equity. That is your loan to value ratio or your combined loan-to-value. These numbers are determined based on the amount of mortgage that still needs to be paid. In the example above, Zeke has an LTV of 40% — that means he still owes 40% on the value of his home.

But what if Zeke took out a home equity line of credit to re-do his kitchen last year? His current balance on that loan is $25,000. This amount is added to the amount he still owes on his mortgage ($100,000) to come up with the combined loan-to-value (CLTV) number of $125,000. That means he doesn’t have as much equity as he initially believed because he has another loan that’s connected to his mortgage. He now only has $125,000 in equity. Which brings his CLTV to 50%.

What about a home equity loan? If you’re interested in a home equity loan your lender will look at how much equity you have and give you a loan based on that amount. This loan works just like a mortgage with a fixed interest rate and regular monthly payments. It becomes part of your CLTV if you want to determine how much home equity you have.

What is a home equity line of credit (HELOC)? A home equity line of credit is more like a credit card than a loan. It’s still based on the value of your home equity, but you only use it when you need it. If you don’t use it then you don’t have any payments to make. Also, only the amount you owe on it will be used in a CLTV. If you’ve been approved for a HELOC but never used it, it won’t count against you.

Your house obviously means more to you than just its monetary value — it’s home to you and your family. Keep your house protected by scheduling annual reviews with your American Family Insurance agent (Opens in a new tab) to make sure your homeowners insurance is up-to-date.