September 21, 2022 | home-buying

How to Calculate Home Equity

Katie Duncan

Finance Writer

If you’ve been paying off your home mortgage for a while, you may be interested in calculating the equity you have in your home. Knowing the market value of your home can come in handy in a number of situations, including when you apply for home equity financing.

Calculating equity is relatively easy. It can be a good idea to reevaluate the value of your home yearly, so you can have a firm understanding of financing options if you need them.

Why Calculate Your Home Equity

So why does home value matter, anyways? Understanding this number is useful when:

• Selling your home: Knowing how much equity you have in your home can give you an idea of how much money you’d make and how much would go towards paying off your existing mortgage if you decided to sell your home.
• Getting home equity financing: If you’re contemplating a home equity loan, whether for home improvements, debt consolidation, or financing another big purchase or expense, you may want to determine how much available home equity you have before you apply.

Let’s break down how it’s done.

How to Calculate Your Home Equity

Calculating your home equity requires a little bit of math.

You’ll need to know two numbers: the current market value of your home and the total sum of debts against it.

To obtain an idea of your home’s value, you can review your tax appraisal. You can search for those in the appraisal district where your home is located:

Next, consider debts against your home. These will be any loans that use your home as collateral, such as your mortgage. To find how much money you owe on your home, refer to your last monthly mortgage statement. If you have another lien (e.g., a home equity loan) be sure to include the principal balance owed on that as well.

From there, the home equity formula is straightforward.

Home equity = Current appraised value – Debts against your home

Home Equity Calculation Example

An appraisal from the Williamson County Appraisal District reveals that your Round Rock home is worth \$300,000. You still owe \$100,000 on your mortgage.

• Home equity = \$300,000 - \$100,000
• Home equity = \$200,000 or 66% of the home’s value

A few years later, your home is appraised at \$350,000. You only owe \$60,000 on your mortgage.

• Home equity = \$350,000 - \$60,000
• Home equity = \$290,000 or 83% of the home’s value

The next year, your home is still valued at \$350,000. You still owe \$50,000. However, you decide to take out a \$80,000 home equity loan to help pay for some much-needed renovations.

• Home equity = \$350,000 – (\$50,000 + \$80,000)
• Home equity = \$260,000 or 63% of the home’s value

Calculating How Much You Can Borrow Against Your Home’s Equity

You might have 100% equity in your home, but that doesn’t mean that you can borrow against the total value of your home— at least in Texas.

This is because Texas has some unique laws when it comes to using your home equity. Here are the basics.

• The state of Texas allows homeowners to borrow a maximum of 80% of their home’s value, minus any first or second lien balances.
• You can only have one home equity or cash-out refinance at a time; if you have a mortgage (a first lien) and a home equity loan (a second lien), you cannot take out another home equity loan.

You can read more about specific home equity rules in Texas here.

If you’re calculating how much you can borrow against your home, you’ll need to keep the 80% rule in mind. This means your calculations will look a little different.

Here are two examples to help you calculate your home equity, whether you have no liens, a single lien, or multiple.

If You Owe Your Home Outright

Understanding your borrowing power is easy if you have 100% equity in your home. In this circumstance, you can borrow 80% of your home’s value.

Borrowable amount = .80 x Current appraised value

Here’s what that would look like if your home was worth \$300,000.

• Borrowable amount = .80 x \$300,000
• Borrowable amount = \$240,000

If You Are Still Paying Off Your Mortgage

If you still owe money on your home, there’s an extra step to consider.

Step 1: Calculate how much you can borrow against your house in total.

Step 2: Subtract your existing mortgage balance.

Let’s say your house has an appraised value of \$300,000 and you have a balance of \$75,000 on your mortgage.

• Borrowable amount = (.80 x \$300,000) – \$75,000
• Borrowable amount = \$165,000

That gives you \$165,000 worth of borrowing power in your home!

If you have more than one lien on your home, you’ll need to add the balances together to come up with your total mortgage balance. Keep in mind that you can only take out two liens on your home at a time.

Using Your Home Equity

Calculating your home equity is a handy skill that can help you better understand your finances and assets.

It’s important to remember that having available home equity doesn’t mean you automatically qualify for a home equity loan or qualify for the entire amount! Your lender will need to review your loan application and credit history. If you have questions about what you may or may not qualify for, contact our experienced real estate team for more details.