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Bottom Line Up Front

  • Home equity is the actual amount of your home that you own, relative to its appraised or market value.
  • The amount of equity you have and the amount of equity you can access aren’t always the same. 
  • Understanding how much equity you have can help you plan for large life expenses. 

Time to Read

3 minutes

October 18, 2022

For many Americans, their home is the single largest asset they’ll ever own. Unfortunately, it’s also highly illiquid—that means it can’t easily or quickly be converted into cash. Having a home worth $300,000 is very different from having $300,000 in the bank or in stocks and bonds. When we think about a house as an asset, it’s usually from the perspective of home equity—the amount of wealth we can actually access. This number varies depending on how much of your home you own relative to its value. 

Let’s look at how to calculate home equity and why your access to this equity can change in different situations. 

The Basic Formula for Home Equity

On the surface, the process of calculating home equity is actually very simple. You take the amount you owe on your mortgage and subtract it from what your home is worth. For example, if you owe $260,000 on your mortgage and your home is valued at $300,000, there’s a difference of $40,000. That right there is your home equity! 

Now, you’ll find the amount of home equity you have is very different from the amount you can access. For example, just because you have $40,000 in equity doesn’t mean a bank will lend you $40,000 through a Home Equity Loan (HEL) or a Home Equity Line of Credit (HELOC)

Use our home equity calculator to estimate how much money you could get with a home equity loan or line of credit, based on your home's value and how much you owe on your mortgage.

Let's explore how home equity can help homeowners finance renovations or major purchases.

Calculating Home Equity for a HEL or HELOC

If you plan to access and use part of your home equity, you’ll need to apply for a HEL or a HELOC. Your lender will then apply a maximum loan-to-value (LTV) ratio. This determines how much of that equity they’re willing to lend you. The LTV varies depending on the type of mortgage you have. It usually hovers between 70 to 100% for a HEL and 70 to 95% for a HELOC. You’ll also find the range between 80 and 85% for most FHA loans and conventional mortgages

Lenders use the LTV ratio to help make these decisions. They'll apply it to your equity to calculate the maximum amount of money you can access from your home. So, if your LTV is 80% and you've got $40,000 in home equity, your HEL or HELOC may be capped at $32,000.

Your lender can help you find the specific type of home equity product that fits best. For instance, a VA cash-out refinance might have an LTV of 90%, as opposed to a conventional mortgage with an LTV of 80%. That 10% difference represents a substantial portion of equity that you could gain access to with your lender’s help! 

Calculating Home Equity When You Sell Your Home

If you’re planning on selling your home, it’s important to know how much equity you have in it. This is helpful for your next down payment or what you’ll walk away with after you pay off your current mortgage. 

The trick to calculating home equity before a sale is to understand your home’s market value vs. its appraised value. While banks use appraised value for HEL and HELOC calculations, market value is what your home will sell for. This means it represents the actual value of your home as an asset. For example, an appraisal may put your home at $300,000; however, it might sell for $320,000. That $20,000 difference represents additional equity for you, the seller!

While you might sell your home for more than it’s appraised, the closing costs could still eat into your equity takeaway. For instance:

  • Real estate agent commissions can range as high as 6% of the selling price
  • Closing costs can range between 2 to 6% of the selling price of the property
  • Home staging, inspection, repairs and more can also add costs onto your final tally 

Now, subtract these figures and the mortgage value from the selling price of your home and see what you get.

Why Calculate Your Home Equity?

It's a good idea to understand your home's equity, so you know how much money you can access, if you need it. This can apply to home improvements, large life expenses and more. Tapping into equity can help you avoid using credit cards or other high-interest financing options. 

Tracking home equity is a very real way to watch your wealth grow. As you pay down your mortgage or improve your home, your equity will rise. 

Navy Federal Credit Union Helps You Access Home Equity

Ready to improve your home and add to its value or pay for life’s major expenses? Navy Federal can help you understand and access your home equity. After all, your home is your most valuable asset.

Next Steps Next Steps

  1. Estimate your home equity using your most recent mortgage statement and the most recent property appraisal. Subtract the current amount of your mortgage from the appraised value to get your equity figure. Our home equity calculator can help you with these calculations.
  2. Determine the best way to access your home equity based on how you intend to use it. 
  3. Get in touch with your mortgage lender about the difference between a HEL, HELOC and cash-out refinance, and the LTV connected with each. 


This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.