Home equity is the difference between the market value of your home and the amount owing to your mortgage lender and other creditors. In other words, it is your share of the proceeds if you were to sell the home today. You should estimate your home equity periodically because it fluctuates. It increases as you make your monthly mortgage payments or if real estate prices rise. The equity could decrease if weak economic conditions result in falling home prices in your area.
Estimate the market value of your home. You can hire a certified home appraiser to inspect your home and prepare a formal appraisal report. You can also estimate the value based on the recent selling prices of similar homes in your neighborhood. Get this information from your real estate broker or by searching real estate websites such as Zillow.com or RealEstate.com.Step 2
Determine the unpaid mortgage principal from your mortgage statement. This unpaid balance is equal to the original mortgage loan that you got from the bank when you bought the home minus the portion of your monthly mortgage payments that have been applied against the mortgage principal. Remember that your monthly payments include principal and interest. If you have made annual down payments on your mortgage, the outstanding principal balance will decrease at a faster rate and you would build more home equity.Step 3
Add any liens on your property to the unpaid mortgage principal. Liens are claims placed on your property by creditors for outstanding debt. Creditors will notify you when they have placed liens on your property. For example, if the unpaid mortgage amount is $80,000 and the total liens are $20,000, the total amount owing on the house is effectively $100,000.Step 4
Subtract the total amount owing to external creditors from the estimated market value of your home. Continuing with the example, if the estimated market value of your home is $119,000, your home equity is $119,000 minus $100,000, or $19,000.
- Negative equity means the market value is less than the sum of the unpaid principal balance and liens. This can happen if real estate prices drop sharply, such as during a severe recession. To conclude the earlier example, if the estimated market value of your home were to drop to $99,000, your home equity would be $99,000 minus $100,000, or negative $1,000.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.