Homeownership articles
How to calculate your home equity
It’s important to understand the amount of equity you have in your home if you plan to sell or refinance it
Read, 3 minutes
Home equity is the difference between the appraised value of your home and the amount you still owe on your mortgage. The amount of equity you have in your home impacts your finances in a number of ways— it affects everything from whether you need to pay private mortgage insurance to what financing options may be available to you.
How much equity do you have?
To figure out how much equity you have in your home, subtract the amount you owe on all loans secured by your house from its appraised value. If your home is appraised at a value lower than what you owe on your mortgage, you would not have any equity in your home—this is sometimes referred to as an “underwater mortgage.”
How loan-to-value ratio may affect your loans
One common measure lenders may use to make a decision about loans and financing is loan-to-value ratio (LTV). When you first apply for a mortgage, this equation compares the amount of the loan you’re seeking to the home’s value. If you currently have a mortgage, your LTV ratio is based on your loan balance. LTV ratio can affect whether you are required to have private mortgage insurance (PMI) or if you might qualify to refinance.
To figure out your LTV ratio, divide your current loan balance—you can find this number on your monthly statement or online account—by your home’s appraised value. Multiply that number by 100 to convert it to a percentage.
Quick tip
Getting a professional home appraisal is an essential part of determining your loan-to-value ratio. If an on-site appraisal is needed, your lender will arrange for a qualified appraiser to come to your home and assess its value. While a home appraisal is the most accurate way of determining what your home is worth, you can use free online resources like the Bank of America Home Value Tool to get an estimate of your home’s value.
How to cancel private mortgage insurance
If your down payment was less than 20 percent of your home’s purchase price, your lender may have required private mortgage insurance on your original mortgage, but that requirement exists only while your loan-to-value ratio is above a certain threshold. The Homeowners Protection Act requires lenders to automatically cancel PMI when a home’s LTV ratio is 78 percent or lower (provided certain requirements are met).
This cancellation is often preplanned for when your loan balance reaches 78 percent of your home’s original appraised value. However, if your LTV ratio drops below 80 percent ahead of schedule due to extra payments you made, you have the right to request your lender cancel your PMI.
How to account for a home equity line of credit
If you are considering a home equity loan or line of credit, another important calculation is your combined loan-to-value ratio (CLTV). Your CLTV ratio compares the value of your home to the combined total of the loans secured by it, including the loan or line of credit you’re seeking.
Most lenders require your CLTV ratio to be below 85 percent (though that number may be lower or vary from lender to lender) to qualify for a home equity line of credit. However, your home’s value can fluctuate over time, so if the value drops, you may not be eligible for a home equity loan or line of credit, or you may end up owing more than your home is worth.
How to increase your equity
You can build equity by paying down your loan’s principal and lowering your loan-to-value ratio. If your payments are amortized (that is, based on a schedule by which you’d repay your loan in full by the end of its term), this happens simply by making your monthly payments.
To lower your LTV ratio (and increase your equity) more quickly, consider paying more than your required mortgage payment each month. This helps you chip away at your loan balance. (Check to make sure your loan doesn’t carry any prepayment penalties.)
You can also protect the value of your home by keeping it well-maintained. Making improvements to your home may also increase its value and thereby increase your equity. Consult an appraiser or real estate professional before investing in any renovations to get a better estimate of how they might impact the value of your home.
Remember that economic conditions can affect your home’s value no matter what you do. If home prices increase, your LTV ratio could drop and your home equity could increase, while falling home prices could cancel out the value of any improvements you might make.
