The Core Formula
Home Equity = Current Market Value − Outstanding Mortgage Balance(s). Example: Home valued at $445,000. First mortgage balance: $312,000. HELOC balance: $25,000. Total equity: $445,000 − $312,000 − $25,000 = $108,000. LTV ratio: ($312,000 + $25,000) ÷ $445,000 = 75.7%.
Home equity formula components
| Component | Formula | How It Changes |
|---|---|---|
| Current market value | Appraisal or market estimate | Rises with appreciation; falls in declining markets |
| Primary mortgage balance | Original loan − principal paid | Falls each payment (faster over time) |
| Second mortgage/HELOC | Outstanding drawn balance | Rises if you draw; falls when repaid |
| Net equity | Value − all mortgage balances | Rises with value + paydown; falls with new debt |
On a 30-year $350,000 mortgage at 6.5%: Payment 1 is $2,212 total. Of that, $1,896 goes to interest, only $316 to principal. By payment 120 (year 10): $1,640 to interest, $572 to principal. By payment 300 (year 25): $583 to interest, $1,629 to principal. Amortization front-loads interest, which is why the early years build equity slowly through paydown alone.
The Two Drivers of Equity Growth
The two drivers of annual equity growth over time
| Driver | Year 1 Contribution ($350K home, 6.5%) | Year 10 Contribution | Year 20 Contribution |
|---|---|---|---|
| Principal paydown | $3,800 | $6,900 | $12,400 |
| Market appreciation (4%) | $14,000 | $20,700 | $30,700 |
| Total equity added | $17,800 | $27,600 | $43,100 |
The LTV Ratio and What It Controls
LTV = Mortgage balance ÷ Home value. At 95% LTV: minimal borrowing options, potential for negative equity in declining market. At 80% LTV: PMI removal, HELOC access, conventional refinance. At 70% LTV: best refi rates, strong HELOC terms. At 50% LTV: maximum flexibility, reverse mortgage eligibility. Every 5% reduction in LTV meaningfully expands options.
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