Home Equity
Estimate available home equity.
About the Home Equity
Home equity is the part of your house you actually own: what it is worth today minus what you still owe. It is the number lenders use when you apply for a HELOC or a second mortgage.
How to use it
- Enter your home's current market value.
- Enter the balance remaining on your mortgage.
- The difference is your equity.
The formula
Equity is the part of your home you actually own. What you can borrow against it is a different, smaller number, because lenders will not let you draw all of it.
Equity = Market value − Balance owed
Available = (Market value × max CLTV) − Balance owed
CLTV is the combined loan-to-value ratio — every loan secured on the property, divided by its value. Most lenders cap it at 80% to 85%. On a $450,000 home with $280,000 owed, an 85% cap allows $382,500 of total lending, so about $102,500 is available even though your equity is $170,000.
That gap is the lender's cushion. It is what protects them if prices fall and they have to sell, and it is why a rising market increases your borrowing power faster than your repayments do.
Worked examples
| Home value | Owed | Equity | LTV | Available at 85% CLTV |
|---|---|---|---|---|
| $450,000 | $280,000 | $170,000 | 62.2% | $102,500 |
| $450,000 | $360,000 | $90,000 | 80.0% | $22,500 |
| $600,000 | $300,000 | $300,000 | 50.0% | $210,000 |
| $350,000 | $320,000 | $30,000 | 91.4% | nothing |
The last row is the one worth sitting with. There is $30,000 of real equity in that house and not a cent of it is borrowable, because the existing mortgage is already above the 85% line. Equity and access to equity are different things, and the difference is widest exactly when people most want the money — early in a mortgage, or after prices have fallen.
Common mistakes
- Assuming you can borrow your full equity. The CLTV cap comes off the top. With $170,000 of equity and an 85% limit, $102,500 is the realistic figure — and at 80%, only $80,000.
- Using the price you paid as the value. Lenders use a current appraisal or an automated valuation, not your purchase price and not a listing site's estimate. A valuation that comes in low is the most common reason an approved-looking application shrinks.
- Forgetting a second mortgage already on the property. CLTV means combined. Any existing HELOC or second lien counts toward the cap, even if the balance drawn is currently zero.
- Treating a HELOC's opening rate as fixed. Most lines are variable and often start with a promotional rate. The payment can rise, and at the end of the draw period it jumps again as the line converts to repayment.
Terms explained
- Equity
- Market value minus everything owed against the property. It grows through repayment and through appreciation, and it can fall.
- LTV
- Loan-to-value: the balance divided by the value. Below 80% is where the better rates live.
- CLTV
- Combined loan-to-value, counting every lien on the property. This is the ratio that governs what you can draw.
- HELOC
- A revolving line secured on the home. You draw what you need during a draw period, usually at a variable rate, then repay over a set term.
- Home equity loan
- A single lump sum at a fixed rate with fixed payments. Predictable, and less flexible than a line.
- Draw period
- The years during which a HELOC can be drawn on, often ten, and frequently interest-only. When it ends, payments can rise sharply.
Common questions
- How much equity can I actually borrow?
- Take your home's value, multiply by the lender's cap (usually 0.80 to 0.85), and subtract what you owe. That result, not your total equity, is what is available.
- What is the difference between a HELOC and a home equity loan?
- A loan is a lump sum at a fixed rate. A HELOC is a revolving line at a variable rate that you draw as needed. Fixed suits a known cost like a roof; a line suits staged work.
- Does my home's value have to be appraised?
- Usually. Some lenders accept an automated valuation on lower-risk applications, but the figure that matters is theirs, not a listing site's estimate.
- Can I lose my house?
- Yes. Both products are secured on the property, which is why the rates are lower than unsecured borrowing. Converting credit card debt into home equity debt lowers the rate and raises the stakes.
- Is the interest tax deductible?
- In the United States, generally only when the funds are used to buy, build or substantially improve the home securing the loan, and subject to limits. Using the money for other purposes usually is not deductible. Confirm with a tax professional.
- What if my home value drops?
- Your equity falls with it, and lenders can freeze or reduce an undrawn HELOC. This happened widely in 2008 — a line you are relying on is not the same as cash in an account.
- How is this different from a cash-out refinance?
- A refinance replaces the whole mortgage with a larger one, resetting the rate and term on all of it. A second lien leaves your first mortgage alone, which matters a great deal if that mortgage is at a rate you will never see again.
- Why is my available amount zero?
- Because your current balance already exceeds the lender's CLTV cap on the property's value. You have equity; it simply sits inside the cushion the lender requires.