Home equity is the difference between what your home is currently worth and what you still owe on it. If your home’s market value is $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity. The math is simple, but getting accurate numbers for each side of the equation takes a bit more work.
The Basic Formula
Home equity equals your property’s current market value minus all outstanding liens secured against it. “Liens” just means any debt that uses the home as collateral. For most homeowners, that’s a single mortgage. But if you have a second mortgage, a home equity loan, or a home equity line of credit (HELOC), those balances reduce your equity too.
Here’s how it looks:
- Home equity = Current market value − Total mortgage and loan balances
Say your home is worth $350,000. You owe $180,000 on your primary mortgage and $30,000 on a HELOC. Your equity is $350,000 − $210,000 = $140,000. Every payment you make on those loans increases your equity (assuming the home’s value stays flat), and every new loan you take against the property decreases it.
How to Find Your Mortgage Balance
This is the easier half of the calculation. Your most recent mortgage statement shows the remaining principal balance, which is the number you need. If you have online access through your lender or loan servicer, the current payoff amount is usually listed on your account dashboard. The payoff amount may be slightly different from the statement balance because it includes interest accrued since the last payment date, but for an equity estimate the statement balance is close enough.
If you have more than one loan secured by the property, add all those balances together. That total is what you subtract from your home’s value.
How to Estimate Your Home’s Market Value
Market value is what a buyer would realistically pay for your home today. This is where most of the guesswork enters the equation, and the method you use depends on why you need the number.
Online Home Value Estimators
Sites like Zillow, Redfin, and Realtor.com offer automated estimates based on public data: recent comparable sales, tax assessments, listing prices, and property characteristics. These tools are free and instant, which makes them useful for a quick ballpark. They can be off by 5% to 10% or more, though, especially if your home has upgrades the algorithm can’t see or if there haven’t been many recent sales in your neighborhood. For a rough check on your equity position, they’re a fine starting point.
Comparative Market Analysis
A comparative market analysis (CMA) is a report a real estate agent puts together by reviewing recent sales of similar homes nearby, adjusting for differences like square footage, lot size, condition, and features. Most agents will do this for free, especially if you’re considering selling. A CMA gives you a more nuanced estimate than an algorithm because a local agent understands your market’s quirks, but it’s still an opinion, not a formal valuation.
Professional Appraisal
A licensed appraiser inspects your property, reviews comparable sales, and produces a formal valuation report. This is the gold standard. Lenders require an appraisal before approving a home equity loan or refinance because they need a defensible number. An appraisal typically costs a few hundred dollars and takes a week or two. If you’re borrowing against your equity, you’ll go through this process regardless, so the lender will order it for you.
A Worked Example
Suppose you bought your home five years ago for $300,000 with a 20% down payment, giving you an initial mortgage of $240,000. You’ve been making payments and your remaining balance is now $210,000. Meanwhile, home values in your area have risen, and a recent online estimate puts your home at $370,000.
Your estimated equity: $370,000 − $210,000 = $160,000. That’s a combination of the $60,000 in down payment you started with, roughly $30,000 in principal you’ve paid down, and about $70,000 in appreciation.
What Lenders Consider “Usable” Equity
Having $160,000 in equity doesn’t mean you can borrow $160,000. Lenders use a ratio called loan-to-value (LTV) to limit how much of your home’s value can be tied up in debt. LTV is calculated by dividing your loan balance by the appraised value and multiplying by 100. In the example above, your LTV is ($210,000 ÷ $370,000) × 100 = about 57%.
If you want to take out a second loan, lenders look at combined loan-to-value (CLTV), which adds up all loans against the property and divides by the appraised value. Most lenders cap CLTV at 80% to 85%, though some go higher. At an 80% cap on a $370,000 home, total borrowing can’t exceed $296,000. Since you already owe $210,000, the maximum new loan would be around $86,000, not the full $160,000 in equity you technically have.
This gap between your total equity and your borrowable equity is worth understanding before you apply for a home equity loan or HELOC. The lender’s appraised value, not your online estimate, is the number that determines your limit.
How Equity Changes Over Time
Your equity isn’t a fixed number. It shifts with two variables: your loan balance and your home’s value.
Your loan balance drops with every monthly payment, but the pace depends on where you are in your amortization schedule. In the early years of a mortgage, most of each payment goes toward interest, so the principal shrinks slowly. As the loan matures, a larger share of each payment chips away at the balance, and equity builds faster. Making extra principal payments at any point accelerates this.
Your home’s value, meanwhile, moves with the real estate market. A strong local market can add tens of thousands of dollars in equity without you doing anything. A downturn can erase it just as quickly. If your home’s value drops below what you owe, you’re in what’s called negative equity or being “underwater,” meaning you’d need to bring cash to the table to sell.
Home improvements can also increase value, though not dollar for dollar. A $30,000 kitchen renovation might add $20,000 to $25,000 in market value, depending on your area and the scope of the work.
Net Equity If You Sell
The equity figure from the basic formula tells you your ownership stake on paper. If you actually sell the home, transaction costs reduce the cash you walk away with. Agent commissions typically run 5% to 6% of the sale price, split between the listing agent and the buyer’s agent. Seller closing costs, which include things like title insurance, transfer taxes, escrow fees, and recording fees, generally add another 1% to 3%.
On a $370,000 sale, that’s roughly $22,000 to $33,000 in total selling costs. If your equity was $160,000, your net proceeds after paying off the mortgage and covering those costs would be somewhere between $127,000 and $138,000. This “net equity” number is what matters when you’re deciding whether selling makes financial sense.
Tracking Your Equity Over Time
You don’t need to calculate your equity every month, but checking once or twice a year gives you a useful snapshot of your financial position. Pull your current mortgage balance from your lender’s portal, run a quick online estimate of your home’s value, and subtract. That five-minute exercise tells you how much of your largest asset you actually own, whether you have enough equity to refinance on better terms, and how much you could potentially borrow if you needed to.