What is Home Equity and How to Calculate It

Home equity gets mentioned a lot when talking both about personal wealth and about your ability to borrow.
But what is home equity and how can you tell how much you have?
In the simplest terms, home equity is the difference between the value of your home and how much you owe on it.
But, there is more to the picture than subtracting your loan payments from the price you paid from your home. With the help of Reed Letson, owner of Elevation Mortgage, we dig into the nuances of home equity and help you figure out how much you have, how to increase your equity, and the ways your home equity can benefit you.

$1,000-50,000
Loan Amount
|
8.49-35.99%
APR
|
3–7 years
Terms
|
560
Minimum Credit Score
|
Disclaimer
Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 8.49%-35.99%. All personal loans have a 1.85% to 9.99% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. Loans feature repayment terms of 24 to 84 months. For example, if you receive a $10,000 loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade's bank partners. Information on Upgrade's bank partners can be found at https://www.upgrade.com/bank-partners/.
What affects equity in a home
While your home equity is related to how much you owe and how much you’ve paid, the relationship is more complex than that. There are a number of factors that affect your true equity in your home.
1. The down payment when you buy a home
The first thing that affects home equity is how much of the purchase price you pay as a downpayment. The more you are able to offer at closing, the more equity you will have.
“If you put money down, there’s obviously instant equity,” says Letson. “We’ve had some clients that walk in with $20,000 on a $400,000 home, so there are big bonuses for them they don’t realize.”
2. Paying down your mortgage principal
Your equity will grow as you pay down the principal of your mortgage. In most cases, this does not happen right away, as more of your early payments go toward interest. This amortization calculator shows the example of a $200,000 loan with a 6 percent interest rate. In the first year, only $8,483 in loan payments is applied to the principle, with a whopping $11,769 going to interest. Enter your own numbers to see what portion you can expect to go to paying down the principal of your own loan, and how much goes toward interest each month.
3. Changes in your home’s value
Another time your equity can go up or down is when the value of your home changes. If your home increases in value, your equity goes up with it. As an example, if you bought your home for $400,000 and the value increases to $500,000, that’s a $100,000 increase in equity without you doing a thing.
Unfortunately, it works the other way, too: if you bought when prices were high, your equity will drop when home prices in your area drop, too. So, if you were the one buying at $500,000 and values correct down to $400,000, you could conceivably wind up upside-down on your loan.
4. Your home’s condition
The state of your home will also affect its value and your equity. Home improvements that increase the value will also increase your home equity.
Regular maintenance is also a must. A roof replacement or HVAC upgrade should be done when needed to avoid negatively affecting the value of your home.
How to calculate your home equity
Your home equity is a simple math equation: what your home is worth minus all the existing debt you owe on it. It might look like this:
$400,000 (current home value)
– $250,000 (existing debt on the home)
= $150,000 (your current home equity)
For many homeowners, “existing debt” is just the primary mortgage on the home. But, if you also have a home equity loan or line of credit, that gets included in what you subtract. Likewise, if you have a property tax lien, HOA lien, judgment lien, or any other obligations against your home, those need to be included in your home equity calculation.
How to figure out your current home value
Unfortunately, there is a lot of noise to signal when it comes to the first step in calculating home equity: finding out what your home is worth.
“Don’t look on Zillow,” says Letson. “Those are what we call marketing AVMs.” AVMs are “automated valuation models,” digital guesses on the value of specific homes. “They are there to get you to take an action and contact them. They’re marketing, they’re not an information source.”
Letson advises contacting your Realtor® to learn more about the current valuation of your home. He says Realtors can do a comparative marketing analysis to estimate what your home is worth, as well as what upgrades can increase your home’s value.
Need something more formal than an estimate? Hire an appraiser. They can look at your home and compare it to homes in your area to give you a more accurate picture of what the home is worth. Lenders rely on an appraiser’s analysis of what a home is worth before approving a mortgage application, so their analysis carries more weight than a real estate agent’s.
Should you use your home equity?
Increasing your home equity confers multiple advantages. The first and most obvious is that once you have paid off a home, you no longer have to make mortgage payments.
But you don’t have to wait 30 years to enjoy the benefits. Once you hit 20 percent equity, you can save money each month by canceling your private mortgage insurance (PMI). PMI rates depend on your credit score and range from .5 percent to 6 percent of the loan. On a $300,000 loan, this can save you anywhere from $125 to $1,500 a month.
A third option that increased home equity introduces is the ability to borrow against that equity. There are three main vehicles for borrowing against your home equity:
- home equity loan
- home equity line of credit (also known as a HELOC)
- cash-out refinance (also sometimes called cash-out refi)
Letson recommends applying for a HELOC even if you don’t need the money. “I look at it as an emergency fund. You don’t necessarily have to use it, just have it so it’s there when you need it,” he says. He especially recommends qualifying for a HELOC to lock in rates while they are low.
Be careful about tapping your home equity
However, there are times to avoid touching home equity. Letson recommends being purposeful when tapping equity. “I actually had a client with a personal loan and I asked what it was for. They said ‘Oh, we took a vacation last year.’” He says that loans should only be taken when they address an immediate cash flow need or when they are being used on home improvement projects that will increase your home’s value.
Tapping your home equity for a loan also means you have less equity in the home. This can mean taking a smaller profit when it comes time to sell. It is even possible to lose your home if you use it as security for a home equity loan or cash-out refi.
It’s also worth noting that not everyone will be able to use their home equity the way they hope. You generally need to have at least 20% equity before you can qualify for a loan. Even after that, you may not be able to get all the funds you are looking for. “It’s good to realize they are not going to give you the full amount of your equity. Most banks have a cap between 80 and 90 percent,” Letson says.
How Acorn Finance can help
If you do not have enough equity for the loan amount you need or just want to play it safe, Acorn Finance has options that can help you get the cash you need. We work with over a dozen lenders who can connect you with personal loans in a matter of days.
You do not need to risk your primary residence or go through the extensive paperwork associated with a home equity loan. Simply provide a few pieces of information in our simple portal, and you can get loan offers from multiple lenders. You can compare interest rates and loan terms side by side to pick out the best loan option for you.
Curious about how much you can borrow for your next home improvement project? Our preapproval process allows you to check your rates with no impact on your credit report. Find out more today.
Comparing options on Acorn Finance? See if you prequalify for a personal loan without impacting your credit score.
Just answer a few questions to get personalized rate estimates from multiple lenders.