A home equity loan calculator eliminates some of the guesswork when it comes to how much of your equity you can tap into for big-ticket home expenses.
With our home equity calculator, you’ll see the home equity loan amount you might qualify for and what range your payments will probably be in based on your equity utilization cap, repayment period, interest rate, and remaining mortgage balance.
How to calculate home equity
[Current home value] - [Remaining mortgage principal] = [Your home equity]
For example, let’s say the property’s value in today’s market is $280,000 and the unpaid principal on your mortgage loan is $115,000. Here’s what the calculation would look like:
[$280,000] - [$115,000] = $165,000 in home equity
What is home equity?
Home equity is the difference between the home’s current market value minus the amount you still owe on the mortgage loan. It’s ultimately your ownership stake in your home.
As you make your monthly mortgage payments and chip away at your principal balance, your equity grows incrementally. Understanding how home equity works can help you strategically use the investment you’ve put into your home to fund home renovations, repairs, or funding other large life events or expenses.
How to use your home equity
There are two common ways to use the home equity you’ve built: a home equity loan vs. a home equity line of credit (HELOC).
Home equity loan
A home equity loan is a second mortgage loan that lets you borrow against the equity in your home. This debt is a fixed amount, meaning that you’ll receive the loan funds upfront as a single payout. You’ll then make equal installment payments, plus interest (fixed or variable) and any applicable fees, over a period of time to repay the loan.
HELOC
A HELOC is an open-ended line of credit, usually with a variable interest rate. It’s used like a credit card in that a HELOC has a maximum credit limit on the account and you only owe the amount you’ve borrowed, plus interest.
You can continue borrowing against the account during the “draw period”. Once that time frame expires, repayment begins either as a lump-sum payment or as installments, depending on your HELOC agreement.
Which option is right for you?
Deciding on a home equity option, depends on the reason you’re borrowing money. For example, if you’d like to use your equity for debt consolidation, a home equity loan might be the better option since you have a fixed amount in mind. A HELOC can be helpful for financing less predictable costs, such as with a home renovation project.
Remember, both options use your home to secure the debt. If you default on the home equity loan or HELOC, the lender can foreclose on your home to recoup the loss.
How to build home equity faster
There are a handful of strategies that can help you grow your home equity in less time.
- Have a larger down payment: Making a higher down payment when you first buy your home sets you up with greater home equity out of the gate. If you can manage making at least a 20% down payment, you could also avoid private mortgage insurance (PMI) so more of your monthly payment pays down your mortgage principal.
- Make extra mortgage payments: This tactic chips away at your mortgage loan’s outstanding principal faster. When taking this approach, be aware that some lenders might apply the extra payment toward next month’s interest which defeats the purpose of building equity. Always ask if 100% of the surplus payment can be applied to the principal balance only.
- Upgrade your home: Improving your home can potentially boost the property’s resale value. For example, one of the best home improvement projects to make before selling is replacing the garage door, which offers a 93.3% return on investment.
- Refinance to a shorter mortgage term: A shorter repayment term — like a 15- vs. 30-year mortgage — has a higher monthly payment. The higher payment builds your equity faster because more money is directed toward paying off your principal each month.
- Let your home value appreciate: A passive way to build equity is by waiting for rising home values in your local housing market which is called “appreciation.” This, of course, is completely out of your control and isn’t guaranteed. However, if you live in a high-demand market this might be more likely than in a less popular market.
FAQ about home equity
How do I find my home’s current value?
You can find your home’s current value by using online home value estimator tools or by having your home formally appraised. Reviewing comparable home sales (“comps”) of similar homes that recently sold in your immediate neighborhood can also offer insight into what your home is worth.
Is home equity the same as profit when selling?
No, your home equity after selling your home isn’t always necessarily profit. When calculating your home sale profit, consider deducting your out-of-pocket expenses from your home’s equity. For example, your down payment, and closing costs at purchase and upon selling. Some homeowners also deduct home improvement costs for repairs, upgrades or renovations to find their true sales profit.
Can I have negative home equity?
Yes, you can have negative home equity when the amount you still owe on your mortgage exceeds your home’s current market value. This is often called having an “underwater mortgage” or an “upside-down mortgage.” This happens when your housing market goes down or if you overpaid for your home.
Disclaimer: The information provided in this article is for informational purposes only. It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Consult a licensed financial advisor or tax professional regarding your personal financial situation before making any decisions.