What is equity and why is it important?
Home equity is the amount of money in your home that is yours, that you don’t owe to anyone else (like a bank). When you first buy a home, your home equity is your down payment. Over time, your equity changes due to your home value going up or down and also simply by paying your mortgage.
For most homeowners, their home equity makes up most of their net worth, far more than their savings, investments and 401k. If you don’t know how much you have, you can’t make decisions that protect it or even use it wisely. And when it comes time to sell your house, knowing your home equity helps you know how much money to expect in a check. All of these things can have a big impact on your financial health.
To learn more, here’s a video I made on what is home equity and why it’s important:
Why is hard to calculate home equity on your own?
Your home equity changes when two things happen: when your home value increases or decreases and when you pay your mortgage. Each month, you pay a different amount of principal vs. interest, even though your monthly mortgage payment stays the same. This is because loans amortize. It’s hard for homeowners to keep track of both the fractional and varying amounts of their mortgage payment that go towards building equity and also what their home value is at any point in time. To learn more about this, watch this video on home equity.
What is LTV (Loan-to-value) and why is it important?
In your home equity report, we give you the percent of home equity you have in your home, and the LTV, or home-to-value. LTV is used by banks to determine if you qualify for refinancing or a home equity line of credit (HELOC) or home equity loan.
LTV is calculated by taking the amount of your remaining loan balance on your mortgage and dividing it by the value of your home. So, if you owe $300,000 on your mortgage and your home is worth $400,000, then you have a 75% LTV.
A high LTV, like 95%, means you have very little home equity in your house. A low LTV, like 60%, means that you have a lot of home equity in your house. The lower the LTV, the more home equity you have.
As a general rule of thumb, banks like to see that you have no higher than an 80% LTV in order to qualify for a refinancing. In some cases, the bank will want to see at least a 75% LTV in your home.
How is future equity calculated in the report?
Since we can’t know how much your home value will increase in the future, we calculate future equity off of the home value you entered into the report form. So, when you see your five year equity and ten year equity in my report, those values are based on an estimate of your equity if your home remained the same in value.
If you want to guesstimate what the value of your home is in five years or ten years, you can adjust the home equity of these timeframes by the amount of money you think your property will increase or decrease.
Can you explain more about my home equity during a home sale?
This report is great for thinking about a home sale, as you are entering what the value of your home is today. The report tells you your estimated home equity today and then you can see how much you’d get back in a check if you enlisted a real estate agent with a fee or not.
We can’t give you exact numbers on what you’d get back in a sale since every state has different fee structures for real estate taxes and closing costs. But the report should give you a good ballpark to work with.
How does Homeownering’s home equity report figure out my equity?
What we do is take the price you paid for your home and your down payment and mortgage information, and create a map of your mortgage. Then, knowing what you think your home is worth today, we calculate your home equity based on your home value and what you owe on your mortgage based on this particular month and year.