What Do Banks Use to Determine a Home Equity Valuation?

Before offering homeowners loans or lines of credit with the home equity as collateral, banks need to evaluate how much equity the owner has in the home. Equity is defined as the value of the home minus outstanding balances on mortgages and other loans secured by the home.

Property Appraisal

The most accurate way to evaluate how much a home is worth is to appraise the home. The appraisal company inspects the interior and exterior of the home and bases its valuation on the home's design, special features, condition and neighborhood.

Market Analysis

Banks compare the appraised value of the home to the sale price of similar homes in the neighborhood that have sold recently. The appraised value may be adjusted to take into account the expected market value if the home were to be sold.

Significance

The value of a home helps determine how big of a home equity loan or home equity line of credit the lender is willing to approve. In general, lenders try to keep a homeowner's overall debt on the home to no more than 80 percent of the home's value.

References

• DebtFirms: Equity Value and Home Equity Valuation
• Bankrate: Home Equity Basics: What Lenders Look For