How much equity do you have in your home?

Couple calculating how much equity they have in their home so that they can apply for a home equity loan for home improvement.

Equity is the difference between the current appraised value of your home and the balance of your mortgage. If you have a second mortgage, or a loan against your mortgage, you’ll need to subtract that as well.

The more equity you have, the better shape you’re in to borrow against the value of your home. More equity can help you get a larger home equity loan, potentially better rates on second mortgages or mortgage refinancing, and possibly even additional refinancing options.

How to calculate the equity you have in your home

To see how much home equity you currently have, first look online to research and estimate your home's current market value or hire an appraiser to get an official estimation of your home's value.

Once you have an estimate of your home’s value, add up any outstanding mortgage debt on your home (including any second mortgages). Your available home equity can be calculated by subtracting what you owe on your home from the current estimated value of your home.

As an example, if your home is currently valued at $300,000 and you owe $120,000 on your mortgage, you have $180,000 available in your home's equity.

Using a tool like a loan amount calculator may give you an idea of how much you might be able to borrow from your equity for home improvements, consolidating high-interest debts, or paying for life’s next big adventure.

Once you have a loan amount in mind, a monthly payment calculator can show you estimated monthly payments on a loan, depending on its term length.

Both tools may help you budget effectively and find the solutions that work best for your financial future.

Combined loan-to-value (CLTV) ratio and home equity

When you want to have more than one mortgage secured by your home, lenders look at equity by using the combined loan-to-value (CLTV) ratio to determine how much you can borrow or if you qualify. Your CLTV will determine the loan amount you can secure.

The CLTV is calculated by taking your current mortgage balance(s) plus your potential new home equity loan amount, then dividing that number by your home value. Typically, the lower the CLTV, the better.

For example, say your home is valued at $300,000. You have $120,000 remaining on your mortgage. That means you have $180,000 in home equity. If you would like to borrow $75,000 of that through a home equity loan, your CLTV would be as follows:

($120,000 + $75,000) / $300,000 = 65% CLTV

LEARN MORE: What is a loan-to-value ratio and how is it calculated?

Lenders typically set CLTV limits that will be a factor for them to determine how much you may be eligible to borrow. These limits vary between lenders, so if you want to borrow money from your home equity, it’s a good idea to research and compare different options before you apply.

Discover Home Loans offers low fixed rates on home equity loans up to 90% CLTV with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.

How to determine your home's value

Both standard equity and CLTV depend on a home appraisal that evaluates the current market value of your home. Even if you have ordered your own appraisals in the past, a lender will likely order a new professional appraisal when you apply to use your house as security for a loan or second mortgage. Usually, a professional comes to your home and looks at the exterior. If there are any unique features or concerns, lenders will usually work with you to find a time for an interior inspection as well.

Some of the factors that determine your home’s value include the size of your home, its location and your neighborhood, the assessed taxes you pay each year, comparable homes in your area, upgrades you have made to the home, the curb appeal, and the construction quality of the home.

Some lenders use data to determine your home’s value. One standard model that’s used is called the automated value model (AVM), which estimates value based on comparable data, like the most recent listings and sale prices of similar homes in your area.

LEARN MORE: Understanding the home appraisal report

How to increase your available home equity

You’ve worked hard to own and care for your home, and with each mortgage payment, you’re building equity. But did you know there are several other things you can do that may increase the available home equity you have? By employing a few savvy strategies, you can tap into even more of your property’s hidden potential. Here’s a list of some practical areas to boost your home equity and make the most of your investment:

Home improvement projects: One of the most effective ways to increase your available home equity is by investing in home improvement or renovation projects. Not only do these upgrades bring the opportunity to enhance your living space, but they may also boost the overall value of your property. Consider renovating a kitchen or bathroom, adding a fresh coat of paint, or replacing outdated fixtures. These improvements may increase your home’s market appeal and result in a potentially higher appraisal value and greater equity.
Market trends: Here’s where your patience may pay off as you ride the wave to higher equity. Even though you can’t have control over the housing market and what it means for the value of your home, it’s still vital to stay informed about market trends in your area. Pay close attention to the value of properties in your neighborhood and take note of any upswings in the market. When you see an opportunity, seize it by refinancing your mortgage or applying for a home equity loan. By leveraging favorable market conditions, you might be able to access larger loan amounts to do things like invest in additional home improvements or pay off multiple high interest debts.
Loan repayment strategies: Want to speed up the equity building process? Are you able to make extra payments towards your mortgage’s principal balance? If so, take advantage of this opportunity to accelerate your equity building. By paying more than your regular monthly mortgage amount, you’re not only reducing the overall interest costs but also increasing your ownership stake in the property. Just be sure to check with your mortgage provider beforehand to ensure there are no penalties for early payment.
Smart financial management: Another effective way to increase your capacity to build up your home equity is by actively managing your debt. When you reduce high-interest debt, such as credit card balances, you may improve your credit score and save money on monthly payments that you can then use to pay down your mortgage. Both of these results may heighten your chances of getting offers from lenders for home equity loans with more favorable interest rates.
Regular property maintenance: To preserve and enhance your investment in your home, maintain your property with regular upkeep to keep it in good condition and minimize risk of costly repairs down the line. Simple tasks like cleaning gutters, performing routine inspections, and addressing minor issues may help keep your property’s value intact. A well-maintained home typically sees a higher market value, which may translate into an equity boost.

DIG DEEPER: The benefits of paying extra on your mortgage

What types of loans use your home equity to secure approval?

When you purchase a home, the down payment you provide will represent the starting amount of equity in your home. Depending on the loan program you choose, you will typically need to provide at least 3.5% of the home’s sale price as a down payment but contributing anything less than 20% of the sale price may result in a private mortgage insurance (PMI) requirement. That percentage represents the portion of your home that you own outright, while the remaining value is mortgaged.

In addition to purchase mortgages, there are a few loan products that use your home's available equity to secure approval:

Home equity loans

A home equity loan is a type of second mortgage that provides you with a lump sum of money based on the amount of equity you have in your home, your credit score, and your lender’s requirements. These typically come with fixed interest rates – meaning once you receive the funds from the loan, you will typically pay it back in fixed monthly payment over a set term.

Home equity lines of credit (HELOCs)

Home equity lines of credit (HELOCs) are like home equity loans, but instead of receiving the loan as a lump sum, you will be given a withdrawal limit that you can pull from during a set time known as the draw period. During the draw period, you might only be required to pay interest charges on the amount you borrow, but requirements may vary by lender. Once the draw period is closed, a HELOC enters a repayment period where the outstanding principal balance is amortized over a set number of years, and you will be expected to make minimum monthly payments on the principal and interest. Unlike home equity loans, HELOCs often come with variable rates, so your monthly payment amount may go up or down depending on rate changes. HELOCs may also include extra annual fees or transaction costs when you make withdrawals.

Mortgage refinance

When you refinance your mortgage, you’re basically replacing your current home loan with a new one. The new loan may come with a lower interest rate, different loan terms, or both. When applying for a mortgage refinance, a lender will look at your personal financial details including your CLTV ratio to determine the loan amount you may qualify for. This generally means that a higher amount of available home equity helps to improve your chances of being approved for a refinance.

Cash out refinance

A cash out refinance is a mortgage refinancing option that allows you to replace your existing mortgage with a new one while also accessing some of the equity you’ve accumulated in your home. When you opt for a cash out refinance, you borrow more money than your current mortgage balance, and the extra amount if given to you in cash.

Closing thoughts: How to figure out your home equity

The tools and tips in this article should help you find the value of your home’s equity, along with giving you some inspiration on how to potentially grow that value over time.

Increasing your home equity doesn’t have to be a costly or complex endeavor. By implementing the strategies mentioned above, you may unlock the full potential of your property and watch your equity grow. Remember to make financial decisions that work in your favor, stay informed about market trends, and take proactive steps to enhance the value of your home. With a little effort and planning, you may be able to leverage your current home equity to invest in a brighter financial future.

Please note: Discover Home Loans offers home equity loans and mortgage refinance opportunities, but does not offer HELOCs.