Learning How to Calculate Equity
The formula for the equity (of any asset) is as follows:
Let’s break down the parts of the equity equation.
Assessed or Stated Value
This one can get tricky. Determining the value to use when finding equity is where the most legwork is required. For a vehicle, Kelly Blue Book is the standard used for many loan applications. Use a printed version of KBB or go to their website and enter all of your vehicle’s information. You will need year, make, and model as well as engine and transmission specs for some vehicles, and you need to be honest in your assessment of the state of the vehicle.
If you are looking for a simpler calculation that is based on the loan for your vehicle, log into the payment portal for your lender. You should be able to find an assessed value. Alternately some people like to use their state’s records, and the legally assessed value (for tax purposes) should be found on your car’s registration. Once you have located what you consider to be an adequate estimate, you need to find out how much you owe.
Loans against the Asset
When you buy a car and finance it, the car is leveraged against the loan. In other words, if you don’t pay the loan, you lose your car. The car itself is the best insurance that the lender has that you will pay. Before an asset belongs to someone fully, it must be paid off. You need to know how much is left due on the loan because it counts against the equity. Find out how much is owed if you make each payment on scheduled by checking with your lender. If you plan to pay off the loan before using the asset, ask for a payoff balance because that figure will be different.
Once you have these two numbers, subtract the loans from the asset to find your equity. For example, if your home is valued at $200,000, and you have $125,000 remaining on the mortgage, the equity is $75,000. In cases where you have made significant improvements to a home, ask for an evaluation from your lender because you may find that the actual value that a lender will use is higher than what the property tax rolls show.
Equity is, at its core, what you actually own. While many people “leverage” equity, or take out loans against it, to finance other items, doing so is a major risk that should be made only after careful consideration. Having equity means having wealth, and getting rid of it is not something to be taken lightly.
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