How to calculate home equity

Home equity is the difference between your current mortgage — if you have one — and your home’s fair market value. Calculating how much equity you have in your home lets you see how much cash you can potentially borrow with a home equity loan, home equity line of credit (HELOC) or cash-out refinance. This money can be used for any purpose, such as paying for home renovations or to consolidate higher interest debt.

How much equity do I have in my home?

Calculating your home equity is a straightforward matter: Subtract what you owe on all the secured debt against your home from its appraised value.

Secured debt may include:

• Your primary mortgage.
• A home equity loan.
• A home equity line of credit (HELOC).

For example, if a recent appraisal shows that your home is worth $500,000 and you owe $200,000 on your current mortgage and you have no other secured debt against your home, your home equity is $300,000.

How much can I borrow against my equity?

Even if you have $200,000 worth of equity in your home, you likely won’t be able to borrow the full $200,000. That’s because lenders use something called the loan-to-value (LTV) ratio and combined loan–to-value (CLTV) ratio to determine how much you can borrow.

LTV and CLTV are similar, but the differences are:

• LTV includes your current mortgage balance only. Lenders use LTV when determining how much you can borrow on a primary mortgage.
• CLTV includes your current mortgage balance plus any loans against your property, like HELOCs and home equity loans. Lenders use CLTV when determining how much you can borrow on a home equity loan or HELOC.

Most lenders lend at 80% CLTV when you get a home equity loan or HELOC, but some may go higher — even up to 97% CLTV — depending on your creditworthiness.

How to calculate LTV and CLTV

Calculate LTV using this formula:

LTV% = (Current loan balance ÷ Home’s appraised value) x 100

Calculate CLTV using this formula:

CLTV% = (Current loan balance + Home equity loan or HELOC ÷ Home’s appraised value) x 100

See our HELOC calculator to quickly calculate how much you might be able to borrow against your home with a home equity loan or HELOC.

How does LTV affect private mortgage insurance (PMI)?

Most lenders require that you pay for PMI while your home’s equity is below 20%. However, if the lender cancels your PMI before you get a home equity loan, the servicer can’t require further PMI payments more than 30 days after the termination date.

Theoretically, this means you could get a home equity loan that pushes your equity below 20%, but you don’t need to pay PMI on your primary mortgage once it’s been canceled. Please consult with your lender if you have any questions about PMI requirements.

3 more numbers to keep in mind

Your home equity is only one number lenders look at when you want to refinance your mortgage or take out a home equity loan. They also look at your FICO credit score, your debt-to-income ratio (DTI) and your income.

1. FICO score. Most lenders want to see a minimum 620 to 680 FICO score before extending a mortgage or home equity loan. Borrowers with a FICO score of 740 and up will get the best rates on a home equity loan or HELOC.
2. Debt-to-income (DTI) ratio. Your DTI is your total monthly debt payments divided by your monthly gross income. If your monthly debt is $1,000 and your monthly gross income is $3,000 your DTI is 33.33%. Most lenders like to see a DTI of 43% or less. But the lower the better, as it can increase your chances of approval.
3. Your income. No matter how much equity you have in your home, lenders still want to see proof of income in the form of bank statements and tax returns. They want to make sure you have enough cash flow to make the repayments on your current mortgage plus a new home equity loan or HELOC.

Closing costs and other fees

While getting a home equity loan or HELOC is often cheaper than a cash-out refinance mortgage, there are costs to consider. Here are the costs and fees you’re most likely to run into on a home equity loan or HELOC:

• Closing costs. Most lenders waive closing costs on HELOCs, as long as you keep the line open for a minimum of 36 months. If you close it before that time, you may be required to reimburse the lender for closing costs.
• Origination fees. Most lenders don’t charge origination fees on HELOCs or home equity loans, but some do. Figure is one lender that charges up to 4.99% of the total HELOC line amount, but offers closing times faster than industry standard.
• Annual fees. Many lenders charge an annual fee on HELOCs, which typically run anywhere from $15 to $75 yearly. Some lenders waive this fee for the first year and other lenders don’t charge this fee at all.

Closing costs, origination fees and other expenses — if any — can affect the cost of your loan and reduce the total amount of home equity you have. If you must pay these fees, be sure that the trade-off in the form of lower interest rates or faster loan funding is worth it to you.

Compare interest rates for home equity loans, HELOCs and cash-out refinancing

Use our tool to get personalized estimated rates from top lenders based on your location and financial details. Select whether you’re looking for a Home Equity Loan, HELOC or Cash-Out Refinance.

If you selected a home equity loan or HELOC, enter your ZIP code, credit score and information about your current home to see your personalized rates.

In the Cash-Out Refinance tab, select Refinance and enter your ZIP code, credit score and other property details to see what you might qualify for.

7 ways to increase your home’s equity

Here are some strategies to increase the equity in your home:

1. Make a bigger down payment to build your equity at the outset.
2. Make bimonthly or weekly mortgage payments, which will reduce what you owe on your principal faster and shave thousands of dollars off the total interest paid.
3. Refinance your mortgage and shorten your loan term to 15 from 30 years, which puts more money towards your principal every month.
4. Make substantial improvements to your home, like remodeling your kitchen, as this can increase the value of your home in the eyes of appraisers and homebuyers.
5. Use work bonuses and windfalls to pay down your principal and increase your equity.
6. Buy a home in an area where home prices are rising. Arizona, Florida, Montana and Utah have experienced significant rises in home prices since 2021, according to data from Bankrate.
7. Wait for your home’s value to rise over time. According to a Rocket Homes survey, home prices increased an average of 46.6% for those who owned their homes for seven to 10 years.

Bottom line

Now that you know how to calculate your home’s equity and your loan’s LTV, you may be ready to compare home equity loan lenders and HELOCs or learn more about cash-out refinancing to determine which is the right choice for you. If you’re unsure about drawing upon your equity at this point in your mortgage, consult a professional financial advisor.