Introduction

Home equity represents your ownership stake in a home and a sum you may be able to borrow from using a home equity loan or home equity line of credit (HELOC). Calculating your home equity is a straightforward process that can provide valuable insights into your financial standing. In this article, we will guide you through the steps to determine your home equity and discuss the pros and cons of using it.

How to Calculate Your Home Equity in 3 Steps

Home equity builds over time as you pay down your mortgage and the value of your home increases. Here are the steps to calculate your home equity:

1. Know Your Home’s Value

The first piece of information you need is your home’s value. Websites like Zillow, Redfin, and Realtor.com offer home value estimates that can give you an idea of how much your home is worth. If you decide to borrow against your equity, a lender will typically require a formal appraisal before approving your application.

2. Find Your Current Mortgage Balance

The next step is to add up all of the debt secured by your house, including the balance on your primary mortgage and any second mortgages. You can find these balances on loan statements or by logging into your mortgage account.

3. Subtract Your Remaining Debt From Your Home’s Value

Subtract your mortgage debt from your home’s market value. For example, if your home’s estimated market value is $500,000 and all of the debt you owe on your home totals $400,000, your home equity is $100,000.

4. Turn That Into a Percentage

To calculate home equity as a percentage, divide your home equity amount by your home’s value, then multiply that result by 100. In this scenario, your home equity would be 20%.

Pros and Cons of Using Home Equity

Using home equity can be beneficial, but it also comes with risks. Here are the advantages and disadvantages of borrowing from home equity:

Pros

• Flexibility: You can use the money borrowed from home equity to cover major expenses, such as medical bills or a home improvement project. You could also use a low-interest home equity loan to consolidate other high-interest debt.
• Potential for low interest rate: HELOCs may offer a low-interest introductory period, and interest may be lower than unsecured loans and credit cards.
• Interest paid may be tax-deductible: If you use a home equity loan or HELOC to improve your primary residence or a second home, you may be able to deduct mortgage interest from your tax bill.

Cons

• Lender limits: Lenders may limit you to borrowing only up to 85% of the equity you have in your home. This varies depending on factors like your home value, how much you owe, and your credit.
• You could go underwater: If you draw from home equity and the housing market takes a dip, you could end up owing more on the home than it’s worth.
• Risk of losing your home if you default: If you can’t make payments on a loan or credit line secured by your house, your home could go into foreclosure.
• You’ll make less money if you sell: Home equity loans and HELOCs typically have to be repaid with the sale of your home, which will decrease the proceeds you get in hand.

The Bottom Line

Monitoring home equity is worthwhile even when you don’t want to borrow from it. If you’re paying PMI, you can request to have PMI removed when you reach the 20% equity threshold. Equity also contributes positively toward your net worth. If you decide to sell your home, the equity you have built up (minus any selling fees) goes to you or can be put down on another home.

Finally, home equity provides a way to borrow money using a home equity loan or HELOC. Before you borrow against your home, however, make sure you can afford the extra monthly payment and check your credit score and report to see where you stand. If necessary, take steps to improve your credit so you can ensure you’ll get the best possible rate and terms on your loan.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we are dedicated to helping you navigate the complexities of home equity and mortgage services. Whether you need assistance calculating your home equity or are considering a home equity loan or HELOC, our team of experts is here to guide you every step of the way. Call us today at 213-732-3074 for personalized mortgage solutions tailored to your needs.