How do you work out how much equity you have in your home?

Summary

Take the home's value today and subtract every balance still secured by it. A $500,000 house with $350,000 left on the mortgage has $150,000 of equity. The value a lender uses comes from an appraisal or a valuation model, though, not from your own estimate, and the amount it will lend against that equity is smaller again.

The subtraction

The CFPB starts from the property's current value and takes away "the amount of any existing mortgage on your property." Both halves are today's numbers. What you paid for the house does not enter into it, and neither does the size of the mortgage when you took it out.

"Any existing mortgage" includes more than the first loan. A home equity loan or a HELOC taken out while the first mortgage is still in place is, in the CFPB's words, a second mortgage, "a loan you take out using your house as collateral while you still have another loan secured by your house." Those balances come off too.

Why a small price change moves equity a lot

The debt is fixed at whatever you owe, so every dollar the house gains or loses lands entirely on the equity side. On the $500,000 house above, a 10% drop to $450,000 leaves $100,000 of equity, a third less. A 10% rise to $550,000 takes it to $200,000, a third more. Equity as a share of the home's value moves from 30% to about 22% or about 36%.

The value the lender uses

Rocket Mortgage says that on its home equity loan, "a third-party appraiser will determine the value of your home." It also uses automated valuation models for some applications: when a loan qualifies, the AVM value is applied automatically and a traditional appraisal is available on request. AVMs are "valid only for Home Equity Loan products" and not for loan amounts above $400,000.

Whichever method is used, a figure below your own estimate shrinks the equity by the same amount before any lending limit is applied.

Equity is not what you can borrow

Lenders cap the total debt against the house as a percentage of its value, the combined loan-to-value ratio. Rocket's tiers run from 80% at a 680 FICO score to 85% at 700 and 90% at 740. At 80%, the $500,000 house can carry $400,000 in total, and with $350,000 already owed, that leaves $50,000, one third of the $150,000 in equity. The CLTV article goes through the other tiers and lenders.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.