Over the duration of your loan, you might wonder about your equity. At a basic level, home equity is simply the homeowner’s interest in their home. This might increase over time if the property value also increases or if the mortgage loan balance is paid down.
In other words, home equity is the part of the home you actually own. While you might think you own your entire home, if you’re still paying for your mortgage loan, the bank actually owns a percentage. The lender has an interest in your property until you fully pay off the loan. That makes your home equity your most valuable asset as a homeowner. Make sure you understand not only how it works, but also how you can check whether you have good equity in your home.
How Does Equity Work?
First, let’s take a closer look at how home equity works. Your equity is an asset, so you’ll include it in your overall net worth. A simple way to calculate home equity, not including any other factors, is to take the market value of your home and subtract what you still owe on your mortgage.
If you want to improve your home equity, you have two options. First, you can pay down the principal balance on your loan. This, in turn, will increase how much of your home you actually own. Your second option is to increase the market value of your home or wait for it to improve naturally.
You can think about home equity as a long-term investment. Your money is locked up both in your home and in your loan. You can’t easily spend this money, but you can increase its value. However, home equity isn’t guaranteed. Many people make the mistake of thinking a home investment is always a good investment. In reality, things can go wrong which will give you “bad equity” in your home.
Bad equity would be any negative balance. For instance, if you have very little equity in your home (aka you’ve made very little payments), then there isn’t much to improve upon. In addition, if the value of your home decreases rapidly as it did during the 2008 housing crisis, you might end up in the negatives. Ultimately, owning a home is a long-term investment, and it isn’t always guaranteed to be a good one depending on the market and your loan terms.
How to Calculate Your Home Equity
As we said before, your home equity is determined by subtracting how much you still owe on your home from the current value. Essentially, what this number tells you is how much you can make from selling your home right now or how big of a home equity loan you’re able to take out.
Here’s a step-by-step strategy to check if you have good equity:
- Market Value – First, uncover your home’s current market value. This isn’t necessarily the price you paid for your home. You can get an up-to-date estimate on the worth of your home using a tool like Zillow.
- Subtract Your Balance – Next, subtract your mortgage balance from your current home value. This is the balance of what you still owe on your mortgage as well as any related loans.
- Your Equity – The number you’re left with is your home equity. If it’s a positive number, this is a good sign that your home is a good investment. You can now choose to sell your home, improve it to increase equity, or even take out a home equity loan.
It’s important to regularly take a close look at your home equity to keep track of your home value and mortgage process. As an investment, owning a home is far from a get-rich-quick scheme. As you can see from the calculation above, earning equity on your home takes time.
While there are things you can do to improve your home equity, you could also end up with negative equity. That’s why it’s important to always pay close attention to your mortgage, repayment schedule, and home value.