Wondering what home equity is? And how in the world do you calculate your home equity?
You’re in the right place! You are also in luck because this financial concept is very easy to figure out. And, once you get it, you’ll be in a better position to make big financial decisions.
Here is everything that you need to know about home equity:
What is home equity?
Home equity is a fancy way of describing just how much of a home that the owner actually owns. In the real estate industry, you might hear it described as the value of a homeowner’s interest in their home.
Your total equity in your home can change over time based on a few different variables. These are things like your home’s current market value based on a home appraisal and your mortgage balance.
Basically, this means that until you completely pay off your mortgage, your lender (usually the bank) still has a claim to your property. The equity that you have in your home is the portion that you completely own, free and clear, while the bank still owns the other portions.
If at any time you are wondering about your equity, you can always consult your balance sheet. This is because it reports a company's assets, liabilities and shareholders' equity at a specific point in time.
How to Calculate Home Equity
It is easy to calculate home equity. You can start by taking a look at your current mortgage and down payment.
Let’s use this as an example:
Let’s say you buy a house for $250,000 with a typical down payment of 20%. So you pay $50,000 up front. However, you still need a bit of help covering the remaining $200,000, so you take out a mortgage.
From the very beginning, you have equity of $50,000 in your home—the total amount of your down payment.
Next, let’s say that the real estate market remains constant over the next two years and you don’t make any major home improvements. Because of this, the appraised value of your total assets remains the same. So, if you make $10,000 worth of loan payments towards your principal balance during this time, at the end of the two years, you would now have $60,000 worth of equity in your home. Easy, right?
Now, let’s say that there was major urban expansion in your city. The population of your area has exploded and now your home’s location makes it very valuable. If the assessed value of your home increased by $50,000, then you would automatically have $110,000 worth of equity in your home for the exact same amount of mortgage payments.
Because of this, an increase in the value of your home is a significant “pro” for the equity of homeowners.
Loan to Value Ratio
Like home equity, a loan to value ratio is another very easy financial concept to understand and put into practice. Basically, when you are talking about loans, the loan to value ratio stands for the total dollar amount of the loan compared to the value of the asset purchased.
Home lenders are always very careful about loan-to-value ratios. This is because they want to ensure that the value of the collateral from the loan (your house) is enough to back up the amount of the loan (your mortgage).
If you wanted to take out a second mortgage and use your equity in your home as collateral, you can also do this. These loans are usually called home equity loans or home equity lines of credit. Millions of Americans do this annually.
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Wondering about your home equity before you sell your house? The team of professional Realtors at Clever is here to answer all of your questions! Call us today at 1-833-2-CLEVER or fill out our online form to get started.