Key Takeaways
- Home equity equals the current value of your home minus the amount you owe on your mortgage (and any other liens).
- Most lenders require a loan-to-value ratio (LTV) of 80% or lower to refinance without private mortgage insurance, meaning you need at least 20% equity in your home.
- A professional appraisal is typically required to determine your home value during a refinance, and the result directly impacts how much you can borrow.
- You can use your equity through a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC) – each works differently.
- Use a refinance calculator to estimate your potential savings before contacting a lender.
To calculate your home equity, subtract your current mortgage balance from the current market value of your home. For example, if your home is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity. This simple formula is the foundation for understanding your refinance options.
Why does this matter for refinancing? Your equity determines whether you qualify, what interest rate a lender may offer, and how much you could potentially borrow through a cash-out refinance. Let’s walk through the process step by step.
Calculating Your Equity
The basic formula to calculate your home equity is straightforward:
Home Equity = Current Home Value – Total Amount You Owe on Your Mortgage
Here is a quick example. If the appraised value of your home is $350,000 and you owe $200,000 on your current loan, your equity is $150,000. That means you own roughly 43% of your home outright.
To find the amount you owe, check your most recent mortgage statement or log in to your loan servicer’s website. This will show your remaining mortgage balance, not your original loan amount. Your balance decreases over time as you make your monthly payment.
To estimate your home value, you can look at recent comparable sales in your neighborhood, check online valuation tools, or request a comparative market analysis from a real estate agent. Keep in mind that these are estimates. A lender will require a professional appraisal during the refinance process.
Calculating Your Loan-to-Value Ratio
Once you know your equity, the next step is to calculate your loan-to-value ratio, commonly called LTV. This is one of the most important numbers a lender looks at when you apply to refinance.
LTV = (Current Loan Balance / Appraised Value of Your Home) x 100
Using the example above: $200,000 / $350,000 = 0.571, or an LTV of 57.1%. The lower your LTV, the more equity you have and the better your refinance terms are likely to be.
Most lenders prefer an LTV of 80% or lower for a standard rate-and-term refinance. For a cash-out refinance, many lenders cap the LTV at 80%, meaning you need to retain at least 20% equity in your home after the new loan amount is set.
Combined Loan-to-Value Ratio (CLTV) for More Than One Loan
If you have more than one loan secured by your home – such as a current mortgage plus a home equity loan or a HELOC – lenders will calculate your combined loan-to-value ratio (CLTV).
CLTV = (Total of All Loan Balances / Home Value) x 100
For instance, if you owe $200,000 on your first mortgage and $40,000 on a home equity line of credit, your total debt is $240,000. With a home value of $350,000, your CLTV is 68.6%. Many lenders cap CLTV at 80% to 85% for refinancing, so carrying multiple lines of credit can affect your eligibility.
The Appraisal
When you refinance, your lender will typically order a professional appraisal to determine the current market value of your home. This is not a number you get to choose. An independent appraiser visits your property, evaluates its condition, and compares it to recently sold homes nearby.
The appraised value directly impacts your LTV and how much equity you have available. If the appraisal comes in lower than expected, your LTV rises, which could mean a higher interest rate, a requirement for mortgage insurance, or even a denied application.
According to CFPB complaint data from 2024, a common issue borrowers face when applying for a mortgage or refinancing involves unexpected problems during the closing process. Being prepared for the appraisal and understanding that results can vary from online estimates helps avoid surprises.
How to Build Equity
If you do not yet have enough equity to refinance on favorable terms, there are several ways to build it over time:
- Make regular mortgage payments. Each monthly payment reduces your mortgage balance, gradually increasing your equity. Earlier in the loan term, more of your payment goes toward interest, but the principal portion grows over time.
- Make extra principal payments. Even small additional payments toward your mortgage balance can accelerate equity growth and save on interest over the life of the loan.
- Invest in home improvements. Strategic upgrades – like kitchen renovations or bathroom remodels – can increase the value of your home. Not all improvements add dollar-for-dollar value, so research which projects offer the best return.
- Wait for market appreciation. In many markets, home values rise over time. According to FHFA data, U.S. home prices have generally trended upward over the past decade, though local markets vary significantly.
- Choose a shorter loan term. A 15-year mortgage builds equity faster than a 30-year mortgage because a larger share of each payment goes toward principal.
How to Impact Your LTV
Your LTV is driven by two factors: what you owe and what your home is worth. To lower your LTV before refinancing, focus on reducing your mortgage balance through extra payments or increasing your home value through targeted improvements.
You can also use our break-even calculator to determine whether refinancing makes financial sense given your current equity position and the costs involved.
Cash-Out Refinance vs. Home Equity Loan vs. HELOC
If you are interested in using home equity to access funds, you have three primary options. Understanding the differences helps you choose the right approach.
- Cash-out refinance: You replace your current mortgage with a new, larger loan and receive the difference in cash. This gives you a single monthly payment, but you are restarting your loan term and your new loan amount is higher than what you previously owed on your mortgage.
- Home equity loan: According to the Consumer Financial Protection Bureau, a home equity loan provides a lump sum borrowed against the equity of your home. It is a separate loan from your first mortgage, resulting in two monthly payments. Interest rates may be fixed or adjustable.
- Home equity line of credit (HELOC): The CFPB explains that a HELOC works like a credit card – you can borrow multiple times from an available maximum amount, and your available credit is replenished as you repay. HELOCs usually have adjustable interest rates.
Each option has trade-offs. A cash-out refinance may offer a lower interest rate than a home equity loan, but it resets your amortization schedule. A HELOC provides flexibility, but the variable rate means your payment can change. Compare options carefully using our lender comparison tool.
Risks and Considerations
Before refinancing based on your equity, consider these important factors:
- Break-even timeline: Refinancing costs money – typically 2% to 5% of the loan amount in closing costs. If you plan to move before you recoup those costs, refinancing may not make sense. Use our break-even calculator to check.
- Restarting your loan term: If you are 10 years into a 30-year mortgage and refinance into a new 30-year loan, you are adding a decade of payments. This can significantly increase total interest paid even if your monthly payment drops.
- Hidden costs: Appraisal fees, title insurance, origination fees, and potential prepayment penalties on your current loan can add up. Ask every lender for a detailed Loan Estimate so you can compare costs accurately.
- Credit score impact: Applying with multiple lenders results in hard credit inquiries. The CFPB recommends shopping within a focused window (typically 14 to 45 days) so that multiple mortgage inquiries are treated as a single inquiry for scoring purposes.
- Rate lock risks: If your interest rate lock expires before closing, you may face a higher rate. Ask your lender about lock periods and whether float-down options are available.
- Appraisal risk: If your appraisal comes in lower than expected, your equity could be less than you calculated, potentially derailing your refinance plans.
Calculate Your Potential Savings
Once you know your home equity and LTV, you can estimate how much a refinance might save you. Use our refinance calculator to input your current mortgage balance, interest rate, remaining loan term, and estimated new rate. The calculator will show your potential change in monthly payment and total interest savings.
Frequently Asked Questions
How do I calculate home equity for refinancing?
Subtract the total amount you owe on your mortgage (and any other home loans) from the current market value of your home. For a refinance, the lender will use a professional appraisal to determine home value rather than an online estimate.
How much equity do I need to refinance?
Most lenders require at least 20% equity (an LTV of 80% or less) for a conventional refinance without mortgage insurance. For a cash-out refinance, the typical maximum LTV is also 80%, meaning you must keep at least 20% equity after the new loan.
What is the difference between a home equity loan and a cash-out refinance?
A cash-out refinance replaces your existing mortgage with a larger loan and gives you the difference in cash. A home equity loan is a second, separate loan on top of your current mortgage. According to the CFPB, both use your home as collateral, but they differ in structure, rates, and repayment terms.
Does the calculation differ by state, like California or New York?
The formula to calculate your home equity is the same everywhere. However, home values and closing costs vary significantly by location. Property taxes, transfer taxes, and local regulations may also affect the cost of refinancing in states like California or New York.
Can I refinance with less than 20% equity?
Some loan programs allow refinancing with less than 20% equity, but you will likely need to pay private mortgage insurance (PMI), which increases your monthly payment. FHA streamline refinances and VA refinances may have different equity requirements for eligible borrowers.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Wirly is not a lender or mortgage broker. Your individual situation may vary. Consult a qualified financial advisor or housing counselor before making refinancing decisions.
Published by the Wirly Editorial Team. This article was drafted using AI writing tools and reviewed for accuracy by our editorial team. All data claims have been verified against the sources listed below.
Sources
- Consumer Financial Protection Bureau (CFPB) – Home equity loan vs. HELOC definitions and consumer guidance
- CFPB Consumer Complaint Database – 2024 mortgage complaint data and common borrower issues
- Federal Housing Finance Agency (FHFA) – U.S. home price trends and housing market data
Sources
- CFPB (Consumer Financial Protection Bureau) – Official consumer protection guidelines and mortgage resources
- FHFA (Federal Housing Finance Agency) – House price indices and conforming loan limits
Written by the Wirly Editorial Team. Last reviewed: March 30, 2026. Fact-checked against CFPB guidelines (home equity loan vs. HELOC), CFPB 2024 complaint data, FHFA home price data. See our methodology for how we evaluate lenders.