Essentially, your home equity is the market value of your home minus what you owe on your mortgage. If you owe money on your mortgage, you only own the percentage of your home that you have paid for, plus any appreciation your home has acquired, while your lender owns the remainder until it is fully paid off.
In the early days of your mortgage, your home equity will grow slowly because most of what you’re paying will go toward interest. But as time goes by and you pay down your balance, a higher percentage will go toward the principal instead of interest. This process is called amortization and means you will build equity faster toward the end of your loan term!
Mortgage amortization is the gradual shift from paying mostly interest every month to paying more toward your principal balance. Creating a mortgage amortization schedule can help you visualize what percentage of your monthly payment is going toward your principal versus interest.
How to Calculate Your Home Equity
To calculate your home equity, you will need to estimate how much your home is worth – not necessarily what you paid for it. To get an estimate, you can look at the sale prices of similar homes that have sold in your area, but an official appraisal is the only way to know your home’s value for sure. Next, you will subtract your current mortgage balance from the current appraised value of your home to get your home equity!
For example, say you owe $100,000 on your home, and you believe your home is worth $180,000. Simply subtract $100,000 from $180,000. You have an estimated $80,000 in equity in your home.
