If you are a homeowner, it is important that you understand what is home equity. More than that, you should understand how much home equity you current have in your property and how may be able to use this knowledge effectively in different or strategic ways to achieve goals or to obtain a better financial standing. When you understand how to calculate home equity properly, you can take better control of what may be one of your largest financial assets.
What Is Home Equity
When you think about the current value of your home, you may be inclined to think that your financial asset is worth the full current market value. However, if you have a lien on your home, your home equity will not equal the current market value. When you need to know how to calculate home equity, you simply subtract the outstanding balance of any liens on the home from the current market value. In most cases, this will be a positive number. However, if your property value has declined substantially, there is a chance that you may owe more money on the home than it is worth. This is a negative equity situation.
– How Banks Calculate Home Equity
When you learn how to calculate home equity, you should be aware that the bank may use slightly different figures for home value and for the outstanding loan balances than you use. While these figures may each be slightly off from the figures that you are using, the difference in the total home equity calculation could be offset by a rather substantial amount when all things are taken into consideration.
For example, a bank will not take your word or a real estate agent’s word about a home’s current market value. Instead, a professional appraisal will usually be ordered to determine the value, and this usually needs to be a recent appraisal completed within the last few months. In addition, the bank will typically use loan payoff statements to determine the outstanding loan amount owed. This may include loan payoff fees, prepayment penalties and several other fees obtained directly from your lender and dated within the last few weeks or less.
How to Calculate Home Equity
When you want to know how to calculate home equity, you likely have specific uses of your equity in mind. You may be interested in learning what your home equity is so that you can pull equity out of your home, or perhaps you want to know if you can afford to sell the property. Using an online home equity calculator is an easy way to run the calculations. However, remember that the quality of the numbers that you input into this calculator will play a key role in the output that you generate. For example, you may contact your lend directly to get the current loan payoff amount to determine your current lien balance rather than use an estimate.
After taking time to make this calculation, many homeowners are happy to learn that they are sitting on tens or hundreds of thousands of dollars of home equity. With this money, you may be able to make substantial investments to improve your financial standing, consolidate your credit card debt, send the kids to college and achieve other amazing goals. However, you will first need to tap into that equity by applying for a home equity loan with a bank or a lender.
– How to Raise Your Home Equity
On the other hand, some homeowners may be underwhelmed by the limited amount of equity that they have accumulated in their property since the original purchase date. This most often happens when home values rise slowly or even decrease for a period of time in an area. There are a few ways to raise home equity. For example, you can pay off a large chunk of your outstanding loan balance, or you can take steps to improve your home’s value. A renovation or new addition may add significant value to your home. Some homeowners will take both of these steps for more pronounced results.
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Applications of Home Equity
After you learn how to calculate equity and have learned that you have a sizable nest egg at your disposal, your thoughts may wonder to the many incredible things that you can do with that money. While you may want to immediately tap into the funds by applying for a home equity loan, you need to analyze what your new loan payment will be and determine if you can afford to make that higher payment each month.
If so, you may use your home equity for a wide range of purposes. Some will pour the money back into their home, such as with a renovation. This can directly improve property value. You may also pay off high-interest rate credit card debt with your home equity funds, and the benefit here is that a home equity loan usually has a fixed term and a much lower interest rate than credit cards have. These are only some of the practical applications of home equity use. It is best to have a plan in mind for your use of equity before taking money out of your home. Avoid taking out more than necessary.
– Practical Examples of Knowing Home Equity
When you know how to calculate home equity, you should sit down with paper and pencil to manually crunch numbers. It is important that you analyze how a home equity loan may benefit you. Consider if Joe is currently making high-interest credit card payments of $1,200 per month. He discovered that he is able to consolidate all of his credit card debt into a home equity loan with a much lower rate, and the total monthly payment would drop to $800. Joe may be able to save $400 per month by consolidating his debts using a home equity loan.
Another example of how beneficial it is to know what your home equity is relates to selling the home. Consider if Sarah owns a $500,000 house. She understands that she will need to pay a six percent fee to real estate agents to sell the property. This equates to $30,000. However, she owes $470,000 on the home. Her current equity would pay off the outstanding loan balance, but it would not give her a profit that she could use as a down payment. She may decide to update the home to increase its value or to wait a year or two before selling so that her equity can increase.
As you can see, there are many reasons why you need to know how to calculate home equity. You ideally will calculate home equity as closely to the way banks do as possible so that your numbers are realistic and accurate. Before you apply for a home equity loan, have a plan in mind for the use of funds, and ensure that you can make the new loan payment comfortably. When you walk through these steps, you may discover that your equity can be effective in improving your financial situation or to help you achieve other incredible goals.