Facts When Determining Home Equity
You can determine the amount of equity in your home if you know how much your home is worth and the balance of all mortgages on the property. These figures can change over time due to a number of factors.
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Equity Formula
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The equity in your home is calculated by taking the fair market value of your home and subtracting all outstanding mortgage balances. If your home is worth $100,000 and you have a mortgage balance of $75,000, then the equity in your home is $25,000.
Significance
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If the value of your home declines, due to a recession or slowdown in economic activity, the equity in your home will also decline in direct proportion.
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Payments
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Large lump-sum payments on your mortgage will help pay your balance off faster and increase the amount of equity in your property.
Loan-To-Value
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Some mortgage companies and banks will only lend you a percentage of the equity in your home. The percent could be 75 or 80, based on the lending institution's credit granting criteria. If your home is worth $150,000 and a lending institution will loan you 80 percent of the value, the amount that you can borrow is $120,000. If your mortgage balance is $120,000, you will not be able to borrow any additional funds. This is called loan-to-value, LTV.
Benefits
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Anything that increases the value of your property, such as adding a room, remodeling a kitchen or bathroom, or any other home improvements, will increase the amount of equity you have in your home.
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