How to Calculate Your Home Equity (Formula + Step-by-Step Examples)
Home equity is one of the most useful numbers in homeownership - and one of the easiest to misunderstand. When you hear “equity,” it sounds like money sitting in a vault. In reality, equity is a calculation: the difference between what your home is worth today and what you still owe on it.
Knowing your equity helps you make smarter decisions about refinancing, HELOCs, selling, budgeting, and long-term planning. In this guide, we’ll walk through the home equity formula, show real examples, explain “usable equity” and LTV (what lenders care about), and help you avoid common mistakes.
If you’re exploring refinancing or using equity for cash flow, start with our broader guide Refinancing & Equity and use our mortgage payment calculator to compare monthly payments under different scenarios.
What Is Home Equity?
Home equity is the portion of your home’s value that you truly “own.” It’s not a separate account - it’s the difference between your home’s current market value and the total amount you owe on home-related loans.
Equity usually increases in two main ways:
- You pay down your mortgage balance (especially principal).
- Your home’s value increases over time due to market appreciation or improvements.
Equity can also decrease if home prices fall or if you borrow against the home (for example, with a HELOC or cash-out refinance).
The Home Equity Formula
The simplest home equity formula looks like this:
Home Equity = Current Market Value − Total Loan Balances
“Total loan balances” includes your first mortgage and any second mortgage or HELOC balance. For planning, you can use your best estimate - lenders will verify later.
If you’re comparing multiple loan scenarios, it helps to keep your mortgage basics clear. Our guide PITI explained breaks down what’s inside a monthly payment so you understand how equity decisions can affect both your balance and your budget.
Step-by-Step: How to Calculate Your Home Equity
You don’t need a lender to get a solid equity estimate. Here’s a clean, practical way to calculate it yourself.
Step 1: Estimate your home’s current market value
Start with a realistic estimate of what your home would sell for today. You can use recent comparable sales in your neighborhood, a reputable home valuation site, or a real estate agent’s estimate. For planning purposes, you want “reasonable,” not perfect.
Tip: If you’re planning a refinance or HELOC, expect your lender to confirm value via an appraisal or an automated valuation model (AVM).
Step 2: Find your current mortgage balance(s)
Look up your remaining balance on your latest mortgage statement or lender portal. If you have multiple loans on the property, gather all balances:
- First mortgage balance
- Second mortgage balance (if any)
- HELOC current balance (if any)
Step 3: Subtract total balances from value
Add up your balances and subtract them from your estimated value. The result is your estimated home equity.
Step 4 (optional): Convert equity into a percentage
Sometimes a percentage is more useful than a dollar number - especially when lenders talk in LTV. You can calculate equity percent like this:
Equity % = (Home Equity ÷ Home Value) × 100
Want to see how changes in rate or term affect your loan balance and long-term costs? Use our mortgage payment calculator to model scenarios, then pair it with refinancing tools under Refinancing & Equity.
Home Equity Calculation Examples
Examples make the concept click fast. Below are common scenarios showing both dollar equity and equity percentage.
Example 1: One mortgage, straightforward equity
- Estimated home value: $450,000
- Mortgage balance: $320,000
- Home equity: $130,000
- Equity percentage: 28.9%
This is the cleanest case - value minus one balance.
Example 2: Mortgage + HELOC
- Estimated home value: $500,000
- First mortgage: $330,000
- HELOC balance: $25,000
- Total balances: $355,000
- Home equity: $145,000
- Equity percentage: 29.0%
Equity is still value minus balances - you just include all balances.
Example 3: Appreciation boosts equity
- Home value (today): $520,000
- Mortgage balance: $360,000
- Home equity: $160,000
- Equity percentage: 30.8%
Even if your balance hasn’t changed much, a higher value increases equity.
Example 4: Negative equity (“underwater”)
- Estimated home value: $280,000
- Total balances: $295,000
- Home equity: −$15,000
Negative equity can limit refinancing and selling options without bringing cash to closing.
Home Equity vs Usable Equity (What You Can Actually Borrow)
Here’s the most important distinction: having equity is not the same as being able to use it. Lenders usually limit borrowing based on LTV (loan-to-value).
What lenders mean by LTV (loan-to-value)
LTV compares your loan balance to your home’s value:
LTV = (Loan Balance ÷ Home Value) × 100
Lower LTV generally means more equity and better borrowing options.
A simple way to estimate usable equity
Many lenders cap total borrowing at around 80%–85% of the home’s value (caps vary). A quick planning method is:
Usable equity ≈ (Max allowed LTV × Home Value) − Total balances
Example: Home value $500,000, max 80% LTV → $400,000 max total loans. If your balances total $355,000, you might have about $45,000 of usable equity.
If you’re considering borrowing against your home, our HELOC calculator can help you model payment scenarios, and our refinance calculator can help you estimate how a new loan might change monthly costs.
How Lenders Calculate Home Equity (Appraisals, AVMs, and Rules)
Your personal equity estimate is great for planning - but a lender’s decision typically relies on their own valuation method and underwriting limits.
Appraisal
An appraisal is a third-party opinion of value based on comparable recent sales, property condition, and local market trends. It’s common for refinances, cash-out loans, and some HELOCs.
Automated Valuation Model (AVM)
An AVM uses data models to estimate value. Some lenders can approve a refinance with an AVM instead of a full appraisal, depending on credit, LTV, and program rules.
That’s why two homeowners can get different results even with similar homes - lender policy, market volatility, and valuation method all matter. If your goal is to reduce monthly payment, pair your equity estimate with a refinance comparison and break-even check:
- refinance calculator for new payment scenarios
- refinance break-even calculator to see how long it may take to recoup closing costs
How Much Equity You May Need for Common Goals
The “right” amount of equity depends on what you’re trying to do. Lenders generally care about LTV, your credit profile, your income and DTI, and how the loan is structured.
Refinancing for a lower rate or term change
Many refinances can work with modest equity, but better LTV often improves pricing. If you’re not sure whether refinancing is worth it, start with Refinancing & Equity and run your payment scenarios.
Cash-out refinance
Cash-out refinances typically require more equity because you’re increasing the loan balance. You’ll also want to compare the new payment to your current one using the refinance calculator.
HELOC or home equity borrowing
HELOC approvals often depend on how much usable equity you have and your DTI. If you want to model different draw/payment outcomes, use the HELOC calculator.
Selling and moving
Equity affects your net proceeds after paying off the loan and covering selling costs. Even if you’re not selling soon, it’s worth understanding that your “take-home” is usually less than your raw equity estimate due to transaction costs.
Common Mistakes When Calculating Home Equity
Small assumptions can lead to big surprises - especially when you’re estimating usable equity for borrowing. Here are the most common mistakes to avoid.
- Forgetting second loans: include HELOCs and second mortgages in total balances.
- Over-trusting online home values: use them for planning, not final decisions.
- Ignoring selling or refinancing costs: closing costs can reduce real proceeds.
- Confusing equity with cash: equity is not spendable unless you borrow or sell.
- Skipping the budget impact: borrowing against equity changes monthly cash flow.
If you’re worried your monthly payment may rise due to escrow or other factors, read why your mortgage payment is higher than expected.
Using Home Equity in Long-Term Financial Planning
Equity can support smart financial moves - but it can also create risk if it leads to higher payments or less flexibility. The best approach is usually to treat equity as one part of your overall plan, not the plan.
When using equity can make sense
- Refinancing to reduce payment or shorten the loan timeline
- Consolidating higher-interest debt (only if the numbers work)
- Funding necessary home improvements with clear ROI or quality-of-life value
- Creating a flexible backup line (some HELOC strategies) when budget-safe
The question that matters most
Before borrowing against equity, ask: “Does this improve my long-term cash flow and reduce risk - or does it increase monthly stress?” If you want a broader budgeting approach around housing costs, see Financial Planning & Budgeting.
Helpful Calculators and Next Steps
Once you’ve calculated your equity, the next step is using it to compare options - not guess. The tools below help you stress-test monthly payments and long-term costs.
Mortgage Payment Calculator
Compare monthly payments with taxes, insurance, PMI, and HOA included.
Refinance Calculator
Estimate a new payment and see how a refinance changes total costs.
Refinance Break-Even Calculator
Estimate how long it may take to recoup closing costs through monthly savings.
HELOC Calculator
Model equity borrowing scenarios and estimate payments during draw and repayment.
If you’re still deciding whether refinancing is a good move, our guide Refinancing & Equity walks through common reasons, tradeoffs, and what to check before you apply.
Home Equity FAQs
How do I calculate my home equity?
Start with a realistic estimate of your current home value, then subtract the total balances of any loans secured by the home. That usually means your first mortgage plus any second mortgage or HELOC.
What is usable home equity?
Usable equity is the portion of equity a lender may allow you to borrow against. Many lenders cap total borrowing around 80%–85% of your home’s value (LTV), so you may not be able to access the full equity amount.
Can home equity be negative?
Yes. If your home value is less than what you owe on the mortgage and other home loans, you have negative equity (often called being underwater).
How often should I recalculate my equity?
A few times per year is common - and any time you consider refinancing, a HELOC, or selling. Equity can change as home prices move and as you pay down principal.
Does paying extra on my mortgage increase equity faster?
Usually, yes. Extra principal payments reduce your balance faster, which increases equity faster. If you’re exploring payoff strategies, use the extra payments calculator to estimate the impact.
What’s the best next step after I calculate equity?
Decide what you want equity to do for you: lower payment, shorter timeline, access cash, or simply track your net worth. Then model your options with the refinance calculator or HELOC calculator, and compare monthly cash flow with your overall budget.
Ready to Put Your Home Equity Number to Work?
Start by estimating your monthly payment under different refinance or equity borrowing scenarios - then choose the option that improves cash flow without adding stress to your budget.
Want the full decision framework? Start with Refinancing & Equity.