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Before applying for a home equity loan or HELOC (Home Equity Line of Credit), it is helpful to understand how much equity you have in your home. Knowing your estimated home equity can give you a clearer picture of your potential borrowing options.

What Is Home Equity?

Home equity is the portion of your home that you own. It is generally calculated by subtracting your outstanding mortgage balance from your home's current market value.

Home Equity Formula

Home Equity = Current Home Value − Outstanding Mortgage Balance

For example, if your home is currently worth $450,000 and your remaining mortgage balance is $275,000:

$450,000 − $275,000 = $175,000

In this example, your estimated home equity is $175,000.

How Do You Determine Your Home's Value?

To calculate your equity accurately, you need a reasonable estimate of your home's current value. You can look at recent sales of similar homes in your area or use available online home-value estimates.

For lending purposes, however, the value used by a lender may be determined through a valuation or appraisal, depending on the loan and lender requirements.

Check Your Current Mortgage Balance

Next, review your latest mortgage statement to find your outstanding principal balance. Make sure you are using the remaining loan balance rather than the original amount you borrowed.

Once you have both figures, subtract the mortgage balance from the estimated property value to calculate your approximate equity.

Does All Your Equity Become Available to Borrow?

Not necessarily. Having $175,000 in home equity does not automatically mean you can borrow $175,000.

When considering a home equity loan or HELOC, lenders may also review factors such as your credit profile, income, existing debts, and loan-to-value (LTV) or combined loan-to-value (CLTV) requirements.

Understanding your equity is an important first step when exploring home equity financing. If you are considering a home equity loan or HELOC, Today’s Home Mortgage can help you better understand your available mortgage options based on your individual financial circumstances.

Disclaimer: This article is for informational purposes only and is not a commitment to lend. Mortgage approval, rates, terms, and program availability are subject to credit approval and applicable requirements.