Reader question: “I’ve heard that home prices in the United States have dropped a lot since the housing market went bad a few years ago. I’m curious to know how much equity I have in my house right now, if any. What are the steps involved to determine equity levels? Can I get this information online somewhere, or do I have to have someone come out to my house for an assessment?”
You’re not alone in your concern. A lot of homeowners are worried about the amount of equity they have in their homes (and the amount they might have lost). In some cities, property values have dropped significantly since their housing-bubble peaks. You can determine how much equity you have with some basic math. I’ll explain the map in a moment. But first, let’s start with a definition.
What Is Equity?
Equity is the amount of ownership you have in your home, measured by the value of your house and the amount you owe on your mortgage loan(s). If you take the current market value of your house and subtract your existing mortgage balance, you will find out how much equity you have in your home. If you have a first and second mortgage lien on the property, you must take both of these balances into consideration.
Here are some examples:
Let’s say my home is worth $200,000 in the current market. My mortgage balance is $80,000. This is the amount I still owe on the loan. So here I have the two numbers that are needed to determine how much equity I have in my home. Based on these numbers, I would have $120,000 worth of equity (200,000 – 80,000). If only this were true! Expressed as a percentage, I have 60% equity in my home.
A homeowner in this scenario should have no trouble qualifying for a mortgage refinance loan. I’m not sure if that’s your goal — you didn’t say. But it’s worth noting all the same.
Here’s another scenario that is very common right now. It’s also an unpleasant scenario. This is a situation where the homeowner has negative equity in the home:
Once again, let’s assume the home is worth $200,000 in the current market. But in this scenario, the homeowners still owe $250,000 on their mortgage loan. How is this possible? In a word — depreciation. Real estate values have declined across the country since the housing market started to crumble in 2008. So it’s possible the home was once worth $300,000 or more. But the value dropped, so the current market value is less than what the homeowners still owe on their mortgage loan. How much equity do they have in their home in the situation? They have none. In fact, it’s worse than that. They are upside down in their mortgage by 25%. This is because their current mortgage balance equals 125% of their home value.
Doing the Math To Determine Your Home Equity
I said there was some easy math involved in determining how much equity you have in your home. You would simply subtract your current mortgage balance from the market value of your home. The math is straightforward. But where do these numbers come from?
You can get your mortgage balance by contacting your lender, or whoever is currently servicing your loan. Remember, in situations where you have a first and second mortgage on the house, you must combine both of these balances. This is the first number you need to determine how much equity you have.
The second number requires a bit more research on your part. You need to determine the current market value of your home. I explained this process recently, and you can read that article here.
There are several ways to determine your home’s current value. The best way is to have a professional home appraiser come out to evaluate the property. But you might pay around $300 for the service, so you should only do it if you really need to know how much equity you have in your home. For instance, if you are planning to refinance your mortgage, you might want to have the property professionally appraised. But if you’re just curious about the amount of equity you have, there’s no point in spending that kind of money for an appraisal.
You can get a rough idea of your homes value just by looking at recent sales in your area. In fact, this is the same data the appraiser would use to evaluate your home. You can find this information online by looking at recent sales on a website like Trulia.com or Realtor.com. You want to look at houses that have sold recently in the same area where yours is located. You also want to review homes that are similar to yours. These are known as comparable sales or “comps” (more).
When you have these two numbers (your mortgage balance and your home’s current value), you should be able to determine how much equity you have in your home.
How Much Do I Need to Refinance?
When homeowners start asking questions about equity, it’s usually because they are planning to refinance their home. This isn’t always the case. Some people just want to know if their homes have appreciated, depreciated or held the same value over the last few years. I’m not sure what your situation is, because you did not mention anything about refinancing. But in the interest of other readers, let’s talk about how much equity you might need to refinance your home.
You might see the 20% figure mentioned a lot on websites that publish refinancing advice. A lot of people say that this is the rule-of-thumb requirement to refinance a mortgage. They say that homeowners typically need 20% equity or more in order to qualify for refinancing. But this number is not entirely accurate. I know of mortgage lenders who will refinance well-qualified borrowers with 5% equity or more. Granted, the less equity you have, the more interest you will probably pay. And this can throw off the break-even point that determines whether it makes sense to refinance in the first place. But that’s the subject of another article entirely.
Earlier, we talked about homeowners who are upside down in their mortgage loans. These are people who owe more on their mortgages than their homes are currently worth in the real estate market. Believe it or not, even an underwater homeowner has a chance to refinance. The federal government’s Home Affordable Refinance Program, or HARP, allows certain underwater homeowners to refinance their loans. There are several stipulations that go along this program. For instance, the homeowner’s mortgage loan must currently be owned or backed by either Fannie Mae or Freddie Mac. You can learn more about the HARP program in this story on our news blog.
This article answers the question: How much equity do I have in my home? If you would like to learn more about this subject, you can use the search tool located at the top of this website. We have dozens of articles relating to home equity, refinancing, and other topics of concern for homeowners.