Figuring out the amount of equity in your home is, in theory, a relatively simple task. Take the amount of money your home is worth and subtract the amount of money you still owe on the home, and this number is the amount of equity in your home (value - outstanding liens = equity). When all factors are taken into consideration, however, the task of determining equity gets a little more complex.
Your Home's Value
Your home may not be worth what you think it is worth. While the amount of money you paid for your home initially can certainly be a factor in the value of your home, when figuring out the equity in your home you must consider the market value of your home.
Factors Impacting Market Value
The market value of your home is the amount of money a buyer would be willing to pay for your home right now. Real estate agents estimate market values based on a variety of factors, including:
- Comps: Comparable values (comps) of recent sales in the same neighborhood of similar homes can be an indicator of value. For example, if your home is similar to two other homes in your neighborhood that recently sold for $200,000, unless there are big factors that make your home worth more, it's likely your home's market value is also close to $200,000.
- Condition: If one or two (or more) significant repairs are needed in your home, its market value may drop.
- Appeal: Factors that can sway the appeal of your home, such as its overall 'look' and the school district the home is in, can impact market value.
Determining Market Value
There are a few options for determining the market value of your home:
- Realtor Assessment: Contact a real estate agent and ask for a market value assessment. Most real estate agents can give you a ballpark figure of the market value of your home by telling you what amount they think it would sell for.
- Tax Assessment: Review your most recent tax assessment. Most mortgage professionals agree that the tax assessment value is actually a little less than the actual market value, but this can be a good estimate starting point.
- Online Estimator: Websites like Zillow will provide a market value estimate based on several factors including recent tax assessments and comps.
- Appraisal: For the most accurate estimate of your home's market value, hire a professional home appraiser to do a thorough appraisal of your home.
Mortgage and Loans
After you have a good idea of the market value of your home, you next must consider the amount of money you owe and subtract that from the market value to determine your equity. To do this, consider all loans that you would have to pay off when selling the home.
Your first mortgage is the primary mortgage you have on your home. This is either the original mortgage you obtained when buying the home, or a refinanced mortgage.
To find out the amount you owe on your first mortgage, contact your lender or servicer. They will likely offer you two balances: the mortgage balance, and the payoff balance.
- The mortgage balance is the actual amount of your first mortgage loan at the time you ask.
- The payoff balance is an amount that takes into consideration any interest that will accrue before the payoff is made. So, for example, the lender or servicer may offer you a ten-day payoff balance, which is the amount you can pay within ten days in order to pay off the mortgage in full. After those ten days, that payoff balance expires.
For the purposes of figuring out how much equity you have in your home, the regular mortgage balance should be sufficient.
Second mortgages, also referred to as equity loans and equity lines of credit, are additional mortgage you obtain based on the equity in your home. These loans use the equity in your home as collateral, and therefore must be considered when determining how much equity you have now.
Equity lines of credit are a little tricky when it comes to figuring out your remaining equity. Since these are revolving lines of credit, and the credit balance is available to you even if you don't use it, the entire amount of the available credit line may be considered when figuring your total mortgage debt obligation.
Example: Suppose you have a home with a market value of $200,000. You have a first mortgage loan in the amount of $100,000 and an equity line of credit available to you in the amount $25,000. You have a balance on the equity line of credit of $5,000.
- If a lender looks at this and is considering approving another loan based on the equity of your home, it is likely the lender will subtract the entire amount of the available balance to you ($25,000) from your available equity instead of just the amount you owe on the equity line of credit ($5,000).
- Instead of having $95,000 worth of equity ($200,000 - $100,000 - $5,000 = $95,000), the lender considers your equity amount to be $75,000 ($200,000 - $100,000 - $25,000 = $75,000).
Equity grows when the value of the home increases or the balance of the mortgages associated with the home decrease. Equity can also shrink if a home depreciates in value, whether that's due to a market fluctuation, or the home falling into disrepair or some other reason.
If your main objective is to try to build up equity in your home, you have a few options:
- Pay down the mortgage (and any second mortgages) you have on the home.
- Ensure the home is in good repair.
- Ensure the home is updated and visually appealing, keeping in mind that some home improvements have a bigger impact on value than others.
Time is also a way to build up equity, as long as you make your payments as scheduled and your home appreciates in value, but you can speed up the process with extra payments and home improvements designed to increase your home's value.
A Simple, Yet Complex, Equation
What should be a relatively straightforward equation is much more complicated that it seems, in part because the real estate can market fluctuate greatly. Your home's value can increase and decrease based on many factors, such as recent nearby developments, needed repairs and more. Until a seller actually agrees to buy your home, you can't really know what your home is worth down to the penny. Because of this, your estimate of how much equity your home has is just that - an estimate.