What Is the Available Equity in My Home?

Home equity is a home's value minus the mortgage balance.

Home equity is the amount actually owned by a homeowner. To calculate this figure, homeowners simply need to subtract the amount of their mortgage balance from the value of their home. Equity can change, however. When the real estate market fluctuates, market values fluctuate, too, causing home values to increase or decrease. Therefore, finding the available equity in a home is simple, but will not be a fixed number.

Calculation

To find the current equity in a home, borrowers first must determine the outstanding balance on all existing mortgages on the property--first mortgages, home equity lines of credit (HELOCs) and second mortgages. Then these figures are added together. Finally, a borrower must subtract this number from the value of the home. For example, if a borrower has a home worth $400,000 and a mortgage balance of $250,000, his equity is $150,000.

Loan to Value

Lenders use a ratio called loan-to-value (LTV) when determining mortgage programs, rates and fees. A homeowner with $100,000 in equity cannot necessarily take out a $100,000 loan. Instead, the lender will determine what percentage of that equity is usable. For example, say a customer has a $100,000 mortgage balance on a home worth $300,000. If the lender determines he is only eligible for a loan up to 90 percent LTV, the maximum amount in loans he can have outstanding is $270,000, not the full $300,000.

Increasing Equity

There are several ways to increase the equity in a home. The most common way is to pay down mortgage balances. Some customers use a biweekly payment program (when 13 full payments, not 12, are paid each year) to increase the speed with which they gain equity. Other consumers make home repairs or add additions to increase square footage.

Misconceptions

A home value is a fluctuating figure. Recent home sales in a particular neighborhood can drastically alter the value of a home. Customers cannot bank on an old appraisal as an accurate value. Some customers stay abreast of trends by periodically reviewing their estimated home value on websites such as www.Zillow.com.

Warning

Customers who use all of their equity for mortgage loans run the risk of becoming "upside-down" or "underwater." This occurs when the mortgage balance on a home exceeds the value of the property. This is especially dangerous if a customer has an adjustable rate mortgage. If the rate adjusts and the property is underwater, the customer will be unable to refinance into a fixed-rate loan.

References

• Bankrate: Home Equity Basics