Understanding the equity you have in your home is essential for numerous financial decisions, from remortgaging to considering a home equity line of credit (HELOC) or even determining if it’s the right time to sell. If you’re curious about how to calculate the equity in your home, you’re in the right place. Here, Remortgaging.ca takes you through the step-by-step process to determine this critical figure.
1. What is Home Equity?
Home equity represents the portion of your home’s value that you truly own, free and clear of any mortgages or other liens against it. As you pay down your mortgage and/or as your home appreciates in value, your equity typically increases.
2. Simple Equation for Calculating Home Equity
The most straightforward way to determine your home’s equity is through this simple equation:
Home Equity = Current Market Value of Your Home – Remaining Mortgage Balance
Let’s break down each component:
- Current Market Value of Your Home: This is an estimate of how much your home would sell for if it were placed on the market today. You can obtain this figure through a professional appraisal, using online home value calculators, or by comparing recent sales of similar homes in your neighborhood (known as comparables).
- Remaining Mortgage Balance: This is the total amount you still owe to your lender. You can find this number on your most recent mortgage statement.
3. Example Calculation
Imagine your home’s current market value is CAD 500,000, and you have a remaining mortgage balance of CAD 300,000.
Home Equity = CAD 500,000 (Current Market Value) – CAD 300,000 (Remaining Mortgage Balance) Home Equity = CAD 200,000
In this scenario, your home equity would be CAD 200,000.
4. Factors That Influence Home Equity
Several factors can cause your home equity to increase or decrease:
- Mortgage Payments: As you make payments towards your mortgage, especially ones that cover the principal amount, you decrease the loan balance and, thus, increase your equity.
- Home Value Appreciation: If property values are on the rise in your area, your home’s value (and subsequently your equity) might increase even if your mortgage balance remains unchanged.
- Home Improvements: Enhancements like renovations or additions can increase your home’s market value, boosting your equity. However, it’s essential to ensure the cost of improvements will be reflected in an increased home value.
- Market Fluctuations: Just as property values can increase, they can also decrease due to economic factors, affecting your equity negatively.
5. Why Knowing Your Home Equity Matters
Understanding your home equity is crucial for several reasons:
- Refinancing or Remortgaging: If you’re considering refinancing, lenders will often require a minimum amount of home equity to qualify for specific products or rates.
- Securing a HELOC: To tap into a home equity line of credit, knowing your available equity is crucial.
- Selling Decisions: If you’re thinking of moving, knowing your equity can help determine whether now is a financially opportune time to sell.
- Wealth Assessment: Your home equity represents a portion of your overall net worth.
Calculating home equity is a straightforward process, but it’s crucial to have accurate figures and be aware of factors that can influence it. By understanding your home equity, you’re better positioned to make informed financial decisions. For more insights, resources, and support, turn to Remortgaging.ca, your trusted partner in navigating Canada’s mortgage landscape.