Home Equity

How equity calculations for home values work.

Do you have equity in your home?   Home equity is used to figure out where you stand on your housing investment.

At the most basic level, home equity is determined by finding out what the current market value of your home is and subtracting what you owe on the house to your bank.  Determining the house value is typically done through an appraisal process.   If you’re equity is a positive number this represents an invested asset which can be borrowed against.  

If the home equity is negative, which may be as a result of declining real estate prices in your area, then you are in a position referred to as “upside down” on your mortgage.    If the market changes upwards, then your position can change dramatically.   Anticipating market trends in housing is a complex thing and the market and the media tend to react to short term influences that cause a reaction that either raises or lowers your property value.

In equity home calculations there are some other factors.   Any outstanding debts against your home, such as tax liens, second and third mortgages or loans against the value of your home, must be subtracted from your basic home equity calculation.

Equity Formula

The formula for determining if you have equity in your home is this.
Market Price - (owed to bank + liens + other loans against the home)

If you have owned your house for a while and haven’t been subject to hard downswings in the real estate market there is a good chance you have established a reasonable amount of equity in your home.

The advantage of equity is that it represents a resource that you can draw a line of credit against.  This can be useful for handling expenses such as home efficiency improvements, redesigns, starting a new business, college loans, and large unexpected expenses such as medical bills.    Many banks and lending institutions will extend credit from between 75% and 100% of your equity value.   Banks may vary significantly in what they can offer in terms of accepting any equity home considerations as collateral.  However, it is critical to remember that whatever you borrow against your home will increase what you owe in the future and affect your ability to simply pocket that cash difference when you move to sell your home.  

Effects of Debt

Outstanding debt has various interest rates depending on the source, and any move that involves refinancing or changing your loan structures and investment should be discussed with a financial advisor that is an expert on the subject and can help you in your individual situation.  

A large amount of time, effort and money goes into building home equity.   Some people choose to apply equity in their homes to acquire additional properties and increase their land holdings.  This can be extremely successful or a disaster waiting to happen, depending on factors such as market conditions in the larger scale economy, ability to repay and how much of a safety factor you have to work with.   Fortunes have been made and lost in real estate speculations and it is an area that it pays to take the time to educate yourself in before you invest what may well be your life savings in.

To learn more about equity home values, real estate and the fascinating world of finance enjoy our site and check out our partner sites as well.

Thank you for visiting, we hope we have helped you understand the value of your home investment

Equity Home Price Calculations