What Is Equity?

What Is Equity?

You hear people talk about the “equity” in their home all the time, yet most people don’t even understand how to calculate that number or where it comes from. You will need to know 2 pieces to be able to understand how much equity is in your home and a third piece if you want to know how much is accessible for you to borrow.

1) The first and easy part. How much do you owe on the remaining mortgage of your property. You can find this out by calling or seeing the lender of the mortgage and asking for a mortgage statement. Or if you are moving on from the stone age, you can log into your online banking and find the remaining balance on there. This number will go down every month that you pay off the principle of your mortgage. 

2) The second is a variable that is harder to control and that is, “what is your home worth TODAY”. Yes, you can believe your house is worth 5 million dollars, but what is the fair market value?

We find this out typically by doing a market analysis and finding comparables of your property that have sold in the last few months. Taking into consideration everything from the number of bedrooms and bathrooms to the size of your lot. You can ask a local realtor to give you this information or if you want a more accurate description of what your home is worth you can pay to have an appraisal done on it. Just remember, what you and your agent think the house is worth can sometimes be different than what the bank thinks it is worth.

Once you have these 2 pieces of information you can start doing the math to figure out how much equity is in your home. Its quite simple, subtract the remaining balance of the mortgage from the current value of the home to find out your total equity

Example:

You have $350,000 remaining on your mortgage.
Your local realtor or appraiser says your home is worth $750,000.

$750,000 – $350,000 = $400,000 of equity built up.

3) How much money is accessible from your equity? Typically banks will lend you up to 80% of the value of your home, minus the existing debt, as a home equity line of credit or a refinance. 

$750,000 * .8 = $600,000 of bank loaned equity (if there was no debt)

Subtract what’s currently owed on your mortgage of $350,000

$600,000 – $350,000 = $250,000 of available equity to invest

You now have the tools to find out for yourself how much equity you have built up in your home and take the next steps into finding out how you can turn that equity into investments!