Mining Your Home Equity

Sitting atop a gold mine does even the most experienced prospector little good if he doesn't have the proper tools to dig up the gold. To make the equity in your home work for you, you must first arm yourself with the proper tools--starting with the knowledge of how much equity is at your disposal.

Determining Your Equity

To determine how much equity you have in your home, you must first determine its market value. For a rough estimate, you can look at your most recent tax assessment, or simply look up sales listings for houses that are similar to yours in your area. Important factors to look for when comparing homes are overall square footage, number of bedrooms, number of bathrooms and such amenities as swimming pools and spas. Or you can save time by using one of a number of online market value calculators that will do the work for you. Remember, this is just an estimate. When you actually apply for a home equity loan, you'll likely have to enlist the services of a professional appraiser, who will determine a more exact dollar amount specific to your house.

Once you've established your home's market value, you need to determine how much you owe on the home. Either check your amortization schedule in your mortgage paperwork or call your lender and ask for a payoff amount. Add to that any other loans or liens that are tied to your home.

Now subtract the amount you owe from the home's market value. The dollar amount that remains represents your home's equity. For example, if your home is worth $200,000 and you owe $120,000 on your mortgage, you have $80,000 worth of equity that you can borrow against.

How Much of that Equity Can Be Converted into Cash?

The amount of equity you have in your home doesn't necessarily equal the amount of money you can borrow. Most lenders have a limit of 75 percent to 80 percent. So, using the aforementioned example, someone with $80,000 worth of equity in his or her home should be able to borrow about $64,000.

All Equity is Not Created Equal

The amount of equity you have in your home is dependent upon several factors. As market conditions fluctuate, so might your home's value. Another variant could be the terms of your mortgage. In the first few years of a long-term mortgage, much of the borrower's monthly payments are applied to interest and not principal--or the actual dollar amount that went to buy the home. With a short-term mortgage, however, the payments aren't as lop-sided and equity builds more quickly. And, of course, the bigger the down payment that was made on the home when it was purchased, the more built-in equity you'll have right from the start.