Home equity is the difference between the current market value of a property, and the total amount of debt registered against it, including the mortgage. In other words, equity is the part of the home that the homeowner truly owns. If the homeowner were to sell the home before the end of their mortgage term, the equity would be the amount they would walk away with after settling their outstanding debts with the bank.
Generally speaking, equity can be represented by the following formula:
Equity = Assets – Liabilities
To calculate your current equity on a given home, you need to know 2 things:
- Assets: How much your home is currently worth. This value should be obtained through a market analysis conducted by a real estate professional or an appraiser, since it must match up with a mortgage lender’s determination of fair market value.
- If your home has increased in value since its purchase, you may have more home equity than you expect.
- If you home has decreased in value since its purchase, you may have less home equity than you expect.
- Liability: The outstanding balance on your mortgage loan, plus any other debt registered against your house (such as lines of credit for renovations). Use our mortgage calculator to understand how principal and interest payments are distributed in an amortization schedule along the course of your mortgage term.
Once these two values are obtained, you can easily calculate your equity by subtracting your outstanding debt from the current market value of the home.
An example of how equity works on a home:
Scenario: You buy a condo for $300,000 in 2018, with a 5% downpayment ($15,000), a mortgage loan at 3.09% interest and over a term of 25 years.
Question: How much equity can you expect in 10 years?
- Estimate market value in 10 years. Condos in Montreal appreciate by 3% per year on average. As a conservative estimate, your $300,000 condo will be worth $403,174, an appreciation of $10,3174 over 10 years. Click here to to find out more about calculating appreciation over time.
- Estimate your debt: Use an amortization calculator to find out how much you will still owe on the home in 10 years. In this case, you will owe approximately $204,105 of the original $300,000.
- Calculate your equity:
- Equity = Asset – Liability
- Equity = $403,174 – $204,105
- Equity = $199,070
- If you were to sell your home after 10 years, you would walk away with $199,070.
Home equity percentage
You can also calculate your home equity percentage with the following formula:
- Equity / Market Value = Equity Percentage
- $199,070 / $403,174 = .49
- After 10 years out of your 25 year mortgage, you own 49% of the home.
Loan to Value
Loan to value (LTV) is the flip side of equity – it is the percentage of debt you owe relative to your home’s value. It is calculated by dividing the remaining loan balance by the current market value.
In this case, your LTV ratio would be:
- LTV = Outstanding Debt / Market Value
- LTV = 204,105 / 403,174
- LTV = .51
- After 10 years out of your 25 year mortgage, you still owe 51% of the home to your mortgage lender.
LTV is an important figure that mortgage lenders will look at if you make a refinance request. A high LTV will suggest that you are over-leveraged, reducing your likelihood of being approved for another loan.
Equity as well as loan-to-value ratios are subject to fluctuation, based on interest rate changes, market trends, appreciation, and other changes to the market value of your home.
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