The formula
Example: your home is worth $400,000. You owe $250,000 on your mortgage and $30,000 on a HELOC. Equity: $400,000 − $250,000 − $30,000 = $120,000, or 30% of the home's value.
LTV and CLTV
Lenders usually describe equity the other way around, as how much you owe compared with the home's value.
CLTV = (first mortgage + all other liens) ÷ home value × 100
In the example, LTV = $250,000 ÷ $400,000 = 62.5% and CLTV = $280,000 ÷ $400,000 = 70%. For a purchase, Fannie Mae uses the lower of the sales price or appraised value as the value. Fannie Mae counts only the drawn part of a HELOC in CLTV.
How you build equity
- Your down payment is your starting equity.
- Paying down principal. Each payment repays a bit of principal, slowly at first and faster later. See it month by month with the amortization calculator.
- Extra payments. Money that goes to principal builds equity faster; the CFPB notes even $100 more a month may cut years off a loan.
- Rising home values add equity without any payment, though values can also fall. Estimate it with the house appreciation calculator.
- Improvements can raise value, though rarely dollar for dollar.
Example: equity over time
You buy a $375,000 home with $75,000 down and a $300,000, 30-year loan at 6.5% (an example rate). Your starting equity is $75,000, or 20%. If the home's value stayed flat, payments alone would bring the balance to about $280,833 after 5 years and $254,328 after 10, so equity would grow to about $94,000 and then about $121,000. If the home also gained value, equity would grow faster; if it lost value, slower. The amortization calculator shows the balance for any month.
Why equity matters
- Removing PMI. On a conventional loan you can ask to cancel private mortgage insurance when your balance is scheduled to reach 80% of the original value, and it ends automatically at 78% if you're current.
- Borrowing. Equity is what HELOCs and home equity loans lend against.
- Selling. Equity, minus selling costs, is roughly what you walk away with.
- Refinancing. More equity usually means better refinance terms.
Using your equity
You can borrow against it with a HELOC or home equity loan, take cash in a cash-out refinance, or, if you're 62 or older, use a reverse mortgage. Each turns equity into debt secured by your home. Compare them with the HELOC calculator and the home equity loan calculator, and read how to get equity out without refinancing.
Negative equity
If you owe more than the home is worth, you have negative equity (you're "underwater"). Selling would mean bringing cash to closing or asking your lender about a short sale. See selling a house with a mortgage.
Sources: CFPB (definition of home equity); CFPB: key terms (LTV); Fannie Mae B2-1.2-02 (CLTV); CFPB: servicer rules (extra payments); CFPB: removing PMI.
Every worked example on this page was checked with Calcist's own engine and an independent reference.