Home equity is the term used to describe the amount of your home that you’ve already paid off.
Think of it as the percentage of capital you have in your home, something you can tap into for cash to spend on worthwhile expenses.
But before you begin planning how best to spend the money you can get from your home, you need to calculate your home equity.
Your home equity is a valuable financial asset—one you can borrow against to receive a lump sum cash payment. Let’s look at home equity and how you use it in greater detail.
How does home equity work?
The simplest way to calculate your home equity is to take your home’s current market value and subtract any outstanding debt you have against it.
Debts should include the outstanding balance of your mortgage or any other loan that uses your home as collateral.
Home equity—the portion of your home that you own outright—increases over time until you own 100%.
To calculate your home equity, you’ll need to determine your home’s current market value—this is the amount you could sell your home for if you put it on the market today.
Next, subtract any loans that currently use your home as collateral. For most homeowners, this is just the outstanding balance of your mortgage.
What’s your loan scenario?
How do you calculate home equity?
The best way to think of home equity is like this: the amount of money left over if you sold your home today and repaid your mortgage.
You’ll need to know how much your home is worth. You can start your search online to determine your home’s current market value.
A quick review of Realtor.com will give you an idea of what comparable homes in your neighborhood are selling for. While just an estimate, it can give you an idea about whether a home equity loan could work for your situation.
It’s important to note, however, that only a licensed real estate appraiser can accurately assess the current market value of your home.
Let’s look at an example of a home worth $300,000 with $150,000 remaining on the mortgage. To calculate the home equity, deduct the outstanding mortgage amount from the home value:
Home value – Outstanding mortgage amount = Home equity
In this example, you would have 50% home equity, or $150,000, that you could access through a cash-out home loan.
If your mortgage is paid in full, and you don’t have any liens or other loans against your home, your home equity is equal to your home’s assessed market value. You have 100% home equity.
How to build home equity?
Homeowners can build equity in their homes in a number of ways.
If you made a down payment when you initially bought your home, that money counts toward your home equity—for many homeowners, it ranges between 3% and 20%.
Monthly mortgage payments
Each month, as you make your regular mortgage payments, you are chipping away at the outstanding balance, increasing equity.
Increased home values
You also increase your home’s equity when property values rise through market activity, improvements, or upgrades. For example, homeowners might spend $25,000 installing a second bathroom, which could increase their home’s current market value by $30,000 or more.
Homeowners often use the funds they get from a home equity loan to upgrade their homes.
And because home values have skyrocketed nationally, spurred by pandemic activity, many Americans have seen home equity increase without making extra payments.
How much money can I get?
How much money a homeowner can access will depend on several factors, beginning with the amount of equity in your home.
Another major factor will be your lender and the terms they offer.
Traditional lenders consider home equity loan products riskier than initial mortgages. This typically results in stricter credit and debt requirements and borrowing limits—including the amount of equity a homeowner can use for a cash-out loan.
Regardless of the amount of equity you have in your home, traditional lenders typically restrict the amount you can access to 80%. In other words, most conventional lenders require homeowners to always keep at least 20% equity in their home.
In contrast, hard money lenders can be more flexible when it comes to helping homeowners access the value of their homes, basing the loan eligibility amount on the merits of the scenario.
Let’s look at a hard money example with a home worth $200,000 and $100,000 still outstanding on the mortgage. There is $100,00 equity, or 50%, in the home.
For most traditional lenders, the maximum this homeowner could access is $60,000, i.e., 30% of the home equity available.
A hard money lender, however, would evaluate the loan scenario based on its merit and potential for success.
Depending on the underwriter’s assessment, this homeowner could be approved for the full amount of home equity available—or even more than that amount.
How can I get a home equity loan?
If you’re a homeowner in Colorado or California, and you’d like to access the equity in your home, submit your loan scenario today.
Because we’re a private money lender—not a traditional bank or credit union with conventional underwriting—at Marquee Funding, we evaluate each loan scenario separately and consider its individual merits and potential for success.
And because we bring decades of experience and expertise to each scenario we consider, we can offer swift decisions, usually within a few days. This can be especially helpful if your situation is time sensitive.
Marquee home loan products include purchasing and refinancing—rate-and-term and cash-out—between $50,000 to $20 million, and deal-specific loan-to-value of up to 70% to help borrowers use the value of one of their biggest assets.
Home equity is a valuable financial asset, and the right hard money lender can quickly help you turn your home equity into cash.
Tap into your home’s equity with a fast hard money cash-out loan from Marquee Funding Group.