What is Home Equity and How Do I Calculate Mine?

Posted by

If you are a home buyer and you are starting to get confused by everything you need to know its okay, everyone feels that way the first time they buy a house. It can be a complicated process with a lot of moving parts and you might find yourself getting lost in all the terminology thrown around by realtors, brokers, and banks. We will try to make the process a little less confusing for you by explaining what exactly the equity you have in your home is and how you can calculate it once you own your new home so tha you can watch it grow.

What is Home Equity?

Home equity is the value of your (the homeowner’s) interest in your home. You can also think of your home’s equity as the property’s current market value. This value, the amount of equity you have in your home, will change over time as the market impacts your home’s current value and as you continue to make payments on your mortgage over time.

How Does Home Equity Work?

If you use a mortgage loan to help you purchase a home then the lending party also has an interest in your home. This means that your home equity will not necessarily be equal to the total market value of the home until after you completely pay back the entirety of your debt to your lender. Your home equity will only be a portion of the property’s current value that you actually possess at any given time.

In the beginning you acquire the first big chunk of equity in the home with the deposit payment you make during the mortgage loan process. Moving forward, you will increase your equity from the initial value of your deposit by making regular payments on your mortgage loan. Overtime the proportion of your regular payment that goes toward building equity rather than paying interest will increase, until the mortgage is completely paid off and the entirety of the home equity value lies with you, the homeowner.

How Do I Calculate My Home Equity?

Your home equity is calculated as the difference between as your home’s market value and the total sum of outstanding debts (most of which will be your mortgage) registered against your home.

For example, if the current market value of your home is €315,000, you still owe €190,000, and you have no other outstanding debt to add to the total debt registered against your home, then your current home equity will be €125,000.