Buying a Home | Financing | LendingTree
Mortgage Calculations Anyone Can Do: Home Equity
By Craig Grella
Photo: PNWRA
If you have a mortgage or are thinking about buying a home, you may be confounded by all the different mortgage terms that you hear. Understanding what these terms mean, and how to calculate common things like home equity, can go a long way in helping you become a more savvy borrower.
Here’s a quick overview on how to calculate your home equity.
Calculating Home Equity
Your equity in a home is calculated as the current market value of the home minus any liens on the home. It is essentially the value in the home that is not encumbered by debt. It also represents the amount of money you’d potentially receive from the sale of your home at market value, after paying off any existing loans. For example, consider the following situation:
The current value of your home to be $300,000. You have two loans on the property, a first mortgage of $200,000 and a home equity line of credit for $25,000. Your total liens amount to $225,000 ($200,000 + $25,000). To calculate your equity, you subtract the lien amounts from the value of the home. In this case your home equity is equal to $75,000 ($300,000 – $225,000).
You can also use our home equity calculator and we’ll do the math for you.
Equity is Part of the Loan to Value (LTV) Calculation
The equity you have in your home is particularly important because it is a function of your “loan to value ratio”. Essentially, the lower your home equity, the higher your loan to value ratio (LTV). Your loan to value ratio plays a role in determining how large of a loan you can qualify for, what interest rate you’ll pay, and even if you will be approved for a loan. To calculate your LTV, divide the total amount of your mortgage by the value of the property. So using the example above, $225,000 (total mortgages) divided by $300,000 (value of the property) equals a loan-to value ratio of 75%. Generally, banks look for loan to value ratios of 80% of below.
If you’re buying a home, you should plan on making a 20 percent down payment to achieve an 80% loan to value ratio. (100 percent – 80 percent loan = 20 percent down payment).
If a borrower were looking to refinance their current home and they knew a lender approved loans of up to 80 percent LTV, they could estimate how large of a loan they could qualify for (all other factors being equal).
Getting an Appraisal Can Help Determine Equity
Because the market value of a home is constantly in flux, the equity an owner has in their home can change from day to day. The most accurate calculation of equity comes when the market value has been determined by using a recent appraisal, usually one that is no older than 60 days.
