Illinois real estate math
How to calculate real estate equity
Start with two numbers from the same date: what the property is worth and what it secures. Then check what the question actually wants. Equity, sale proceeds and additional borrowing can produce three different answers from the same property.
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The short answer
For a simplified equity calculation, subtract the current debt secured by the property from its stated current value: equity = value - secured debt. Include the actual balances the question identifies, without counting the same debt twice. Equity percentage = equity / value x 100, when value is positive. A negative result means debt exceeds value. Equity is not automatically sale cash, taxable gain or an approved borrowing amount.
PSI lists equity in National XI.B.1. The whole Real Estate Calculations area has 7 of 100 scored national broker questions, not seven on equity alone. Reviewed October 26, 2026. These original problems use simplified stated balances and assumptions. A real transaction also requires current valuation, payoff, lien and program information.
Use the right balance, then solve the requested question
- Name the unknown. Equity dollars, equity percentage, change in equity, seller cash and borrowing headroom use different calculations. Write the requested result before collecting numbers.
- Match the value and debt dates. Use the stated current value and current balances for a current equity snapshot. Do not substitute an old purchase price, the original loan amount or an unrelated valuation just because it appears in the question.
- Build one secured-debt subtotal. Add the included first mortgage, junior loans, drawn HELOC balances and other stated liens against this property. A car loan secured only by the car does not reduce this property's equity. A loan and the lien securing that same loan are not two separate debts.
- Subtract and check the sign. Equity = value - included secured debt. Reverse-check by adding the equity back to the debt. Preserve negative equity instead of reporting it as positive wealth.
- Use consistent ratios and changes. Divide equity by the same positive value for its percentage. For a change, calculate both snapshots, or reconcile value change plus principal reduction minus new secured borrowing. Round only the final percentage as requested.
- Apply any stated borrowing rule separately. A hypothetical cap gives calculation headroom, not approval. Some lending ratios use different value bases or credit commitments. If existing debt already exceeds the supplied cap, do not describe the negative headroom as a new loan available to borrow.
| Requested result | Calculation | Check |
|---|---|---|
| Current equity | Stated current value - included current secured debt | Same date; no duplicated debt |
| Equity percentage | Equity / same positive value x 100 | Value is the denominator |
| Change in equity | Ending equity - beginning equity | Update both value and debt |
| Reconciled change | Value change + principal reduction - new borrowing | No duplicated principal change |
| Raw headroom under a supplied balance cap | Value x stated cap - existing counted debt | Negative means the counted debt exceeds this cap |
| Candidate additional principal under that simplified cap | The positive headroom, or zero if headroom is negative | Still subject to the actual program and costs |
| Simplified seller cash | Sale price - stated payoffs - stated selling charges | Use all supplied credits or adjustments separately |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| Current equity and the original down payment | A down payment is an acquisition contribution. Later value changes, principal reduction and additional secured borrowing change equity. Closing costs or repair spending do not automatically add the same amount to current value. | Use the supplied current snapshot. |
| The mortgage payment and principal reduction | Interest, tax and insurance amounts do not reduce principal merely because they are included in a payment. Use the actual balance reduction. Some loan terms can increase the balance despite a payment. | Paid cash is not automatically added equity. |
| A HELOC limit and its current balance | The limit is credit capacity under the line's terms. The drawn balance is currently owed. An unused portion is not automatically another current debt, although a lending test may count a credit commitment. | Use the input appropriate to the question. |
| Equity and cash from selling | Equity is a value-and-debt snapshot. Sale cash also depends on the actual sale price, dated payoffs and transaction charges or credits. Positive equity can coexist with a closing cash shortfall. | Do not label a residual-value estimate the seller's check. |
| Equity and taxable gain | Equity uses secured debt. Tax gain or loss starts with amount realized and adjusted basis; the taxable portion requires additional applicable rules. Paying off a mortgage does not by itself set tax basis or taxable gain. | Keep tax analysis separate from the equity formula. |
| Current equity and a lending ratio | A lending measure may count different obligations or use a different value base. Its complement is not automatically the owner's current equity percentage. | Compare the actual inputs before subtracting a ratio from 100%. |
Work through the facts
Start with a current snapshot
The stated current value is $520,000. The only included secured debt is a current $315,000 mortgage balance.
- $520,000 - $315,000 = $205,000.
- Reverse-check: $205,000 + $315,000 = $520,000.
Answer: Current equity is $205,000.
Add the balances, not the unused credit
A $600,000 property has a $360,000 first mortgage, a separate $45,000 home-equity loan and a $30,000 drawn HELOC balance. The HELOC limit is $100,000. No other included debt is supplied.
- Current secured debt: $360,000 + $45,000 + $30,000 = $435,000.
- Equity: $600,000 - $435,000 = $165,000.
- The undrawn $70,000 is not currently owed in this snapshot.
Answer: Current equity is $165,000. Do not subtract the $100,000 limit in place of the $30,000 balance.
Use the principal portion
Value is unchanged. Of a stated $1,800 payment, $400 reduces principal, $1,000 pays interest and $400 covers taxes and insurance. No other balance change occurs.
- $400 + $1,000 + $400 = $1,800.
- Only the stated $400 reduces the secured principal.
Answer: Equity increases by $400, not by the full $1,800.
Reconcile value change and borrowing
Value rises from $400,000 to $440,000. The old mortgage falls from $320,000 to $295,000. A new, separate $20,000 secured loan is also outstanding at the end.
- Beginning equity: $400,000 - $320,000 = $80,000.
- Ending debt: $295,000 + $20,000 = $315,000. Ending equity: $440,000 - $315,000 = $125,000.
- Increase: $125,000 - $80,000 = $45,000. Check: $40,000 value growth + $25,000 principal reduction - $20,000 new borrowing = $45,000.
Answer: Equity increased by $45,000 after including the new borrowing.
Keep the negative sign
Current value is $275,000 and the included secured debt is $290,000.
- $275,000 - $290,000 = -$15,000.
- Debt exceeds the stated value by $15,000.
Answer: Equity is negative $15,000. That snapshot alone does not establish a final sale shortfall or forgive the debt.
Calculate the equity percentage
Use the first example: $205,000 equity on a $520,000 current value. Report the percentage to two decimal places.
- $205,000 / $520,000 x 100 = 39.423076923...%.
- Round the final percentage to 39.42%.
- The matching $315,000 debt-to-value share is approximately 60.58%; it uses the same debt and value.
Answer: The equity percentage is approximately 39.42%.
Apply the supplied borrowing cap
A hypothetical problem caps total counted secured debt at 80% of a $500,000 value. Existing counted debt is $300,000. Ignore fees and all other constraints for this calculation.
- Permitted total under the supplied cap: $500,000 x 0.80 = $400,000.
- Raw headroom: $400,000 - $300,000 = $100,000.
- Current equity is $200,000, but the cap does not permit borrowing that entire amount.
Answer: The stated simplified cap leaves $100,000 of candidate additional principal. It is not a loan approval or a universal 80% rule.
Two lending ratios
Fannie Mae purchase example: price and appraisal both $500,000; new first mortgage $300,000; unmodified HELOC limit $80,000, with $30,000 drawn. No other financing.
- CLTV = $330,000 / $500,000 = 66%; HCLTV = $380,000 / $500,000 = 76%.
- Using the same $500,000 current value, equity is $170,000, or 34%.
Answer: The full credit line differs from the amount currently owed.
Positive equity, but a sale cash shortfall
Current value and the sale price are both $300,000. Principal debt is $290,000. The dated payoff is $292,000, and all other selling charges total $12,000. No credits or other adjustments apply.
- Current simplified equity: $300,000 - $290,000 = $10,000.
- Simplified sale cash: $300,000 - $292,000 - $12,000 = -$4,000.
- The payoff and charges consume more than the current equity estimate.
Answer: Equity is positive $10,000, but the supplied sale calculation has a $4,000 shortfall. It is not a complete tax calculation or authority to proceed with a particular closing.
Mistakes to avoid
- Use the original loan whenever it appears. Current equity uses the stated current balances. A particular origination ratio may require different inputs.
- Subtract the same loan and its recorded mortgage separately. Count an obligation once; its security document is not a second debt.
- Call every household loan unsecured, or subtract all of them from the home. Ask whether the particular debt is secured by this property.
- Subtract an entire unused HELOC limit as current debt. Distinguish current equity from a lending test using commitments.
- Add the full mortgage payment or renovation bill to equity. Use actual principal reduction and the stated resulting value.
- Turn a negative number into cash the owner can borrow. Preserve negative equity; interpret negative borrowing headroom separately.
- Treat equity, cash proceeds and taxable gain as interchangeable. Choose the calculation the question requests.
Check your understanding
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. Current value is $475,000 and included current secured debt is $298,000. What is equity?
- $157,000
- $177,000
- $298,000
- $773,000
Show answer and explanation
Answer: B. $177,000
$475,000 - $298,000 = $177,000. Use the current snapshot.
2. A $600,000 property has separate included debts of $360,000, $45,000 and $30,000. What is equity?
- $205,000
- $195,000
- $165,000
- $435,000
Show answer and explanation
Answer: C. $165,000
The debt subtotal is $435,000; subtract it from $600,000.
3. A separate car loan is secured only by the car. How does it affect this home's simplified equity calculation?
- Exclude it from the home's secured-debt subtotal
- Treat the car as a second mortgage
- Subtract it twice
- Add it to the home's value
Show answer and explanation
Answer: A. Exclude it from the home's secured-debt subtotal
The relevant question is what secures this property. A car-secured loan is not an unsecured loan merely because it is excluded here.
4. A $500,000 home has a $300,000 mortgage and a $30,000 drawn HELOC with a $100,000 limit. No other included debt exists. What is current equity?
- $170,000
- $100,000
- $200,000
- $70,000
Show answer and explanation
Answer: A. $170,000
Current drawn debt totals $330,000, so equity is $170,000. The credit limit answers a different question.
5. With value unchanged and no other balance change, $400 of a $1,800 payment reduces principal. How much does equity increase?
- $1,400
- $1,000
- $1,800
- $400
Show answer and explanation
Answer: D. $400
Only the stated $400 principal reduction changes the debt side of this snapshot.
6. Value rises by $40,000 while all included secured debt remains constant. What happens to equity?
- It increases by $40,000
- It cannot change until a sale
- It increases by the interest paid
- It falls by $40,000
Show answer and explanation
Answer: A. It increases by $40,000
The $40,000 increase in value raises the residual by the same amount when debt is unchanged.
7. Beginning equity is $80,000. Ending value is $440,000, with $295,000 old debt and a new $20,000 loan. What is the equity increase?
- $65,000
- $45,000
- $125,000
- $25,000
Show answer and explanation
Answer: B. $45,000
Ending equity is $440,000 - $315,000 = $125,000; the increase from $80,000 is $45,000.
8. Value is $275,000 and included secured debt is $290,000. What is equity?
- $565,000
- Positive $15,000
- Zero
- Negative $15,000
Show answer and explanation
Answer: D. Negative $15,000
Subtracting debt from value gives -$15,000. Do not reverse the sign.
9. Equity is $205,000 and value is $520,000. What is the equity percentage to two decimal places?
- 63.46%
- 60.58%
- 39.42%
- 2.54%
Show answer and explanation
Answer: C. 39.42%
Divide equity by value and multiply by 100; round only the final 39.423076923...% to 39.42%.
10. The same snapshot has $180,000 equity and $320,000 total secured debt on $500,000 value. Which percentages match?
- 64% equity and 36% debt
- 30% equity and 70% debt
- 36% equity and 64% total debt
- 36% equity and 60% debt
Show answer and explanation
Answer: C. 36% equity and 64% total debt
Both ratios use the same value and complementary amounts. $180,000 / $500,000 is 36%, and $320,000 / $500,000 is 64%.
11. An LTV ratio counts only the first loan, while current equity also subtracts an outstanding second loan. Can you always use 100% minus that first-only LTV as the equity percentage?
- Yes, regardless of the second debt
- Yes, if the owner has insurance
- No; the debt inputs do not match
- Only if the second loan is electronic
Show answer and explanation
Answer: C. No; the debt inputs do not match
The complement works only with the same debt coverage and value base. A first-only ratio omits a debt included in total equity.
12. The supplied cap is 80% of $500,000, with $300,000 counted existing debt and no fees or other constraints. What additional principal fits this cap?
- $80,000
- $100,000
- $400,000
- $200,000
Show answer and explanation
Answer: B. $100,000
The cap is $400,000 of total counted debt; subtract $300,000. This is a stipulated calculation, not a universal program rule.
13. The same hypothetical cap permits $400,000 total debt, but existing counted debt is $420,000. What is the correct interpretation?
- The owner must receive $420,000
- No positive additional principal fits; existing counted debt exceeds the cap by $20,000
- The owner may borrow negative $20,000 as cash
- The existing loan is automatically forgiven
Show answer and explanation
Answer: B. No positive additional principal fits; existing counted debt exceeds the cap by $20,000
Raw headroom is -$20,000. The candidate new amount under this simplified cap is zero; no particular legal consequence for the existing loan is established.
14. In the supplied Fannie-style purchase example, the basis is $500,000, the new first loan is $300,000 and an unmodified HELOC limit is $80,000, with $30,000 drawn. What is HCLTV?
- 34%
- 24%
- 76%
- 66%
Show answer and explanation
Answer: C. 76%
For this stated HCLTV calculation, use the full line: ($300,000 + $80,000) / $500,000 = 76%.
15. Current value and sale price are $300,000. Principal is $290,000, the stated dated payoff is $292,000 and all other selling charges total $12,000. No credits or other adjustments apply. What is simplified sale cash?
- Negative $4,000
- Negative $2,000
- Positive $10,000
- Positive $8,000
Show answer and explanation
Answer: A. Negative $4,000
Sale cash is $300,000 - $292,000 - $12,000 = -$4,000, even though simplified value-minus-principal equity is positive $10,000.
16. Does current equity by itself establish taxable gain from a sale?
- Yes, if the mortgage was repaid
- Yes, equity is always taxable gain
- No; amount realized, adjusted basis and the applicable tax rules are different inputs
- Only the HELOC limit matters
Show answer and explanation
Answer: C. No; amount realized, adjusted basis and the applicable tax rules are different inputs
The equity formula is not a tax-gain formula. Even gain before exclusions is not necessarily the taxable amount.
Common questions
What is the real estate equity formula?
In a simplified current snapshot, equity equals the stated current property value minus the included current secured debt. Add the relevant separate balances first and count each obligation once. Reverse-check that equity plus that debt equals value.
Which debts belong in the subtotal?
Use the debts the problem identifies as secured by this property, including applicable junior loans and liens. Household debt secured by another asset is different. Do not assume an ordinary personal balance is a property lien without supplied facts.
Do I use the original purchase price or today's value?
For current equity, use the supplied current value and matching debt date. At acquisition, a simplified question may equate price and value. Actual valuations can differ by purpose, date and information; an underwriting ratio can also use a program-specific basis.
Is an unused HELOC limit currently owed?
No. Distinguish the actual outstanding balance from unused credit capacity. A separate lending test may count the commitment, so read which calculation is requested. Available credit is not a guarantee that future draws or a new loan will be approved.
Does my whole mortgage payment increase equity?
No. Use the actual principal reduction when value is held constant. Interest, taxes and insurance are different components. Read the balance rather than assuming every payment reduces it; some loan terms can produce negative amortization.
Does an improvement add its full cost to equity?
Not automatically. Spending is not the same as market-value contribution. Use the resulting value stated in the problem and the actual debt change. Do not add the cost again if it is already reflected in the stated value.
How do appreciation and additional borrowing affect equity?
With debt constant, value growth raises equity dollar for dollar. With value constant, an increase in included secured debt reduces it. If both change, calculate two snapshots or reconcile value change plus principal reduction minus new borrowing.
How do I calculate the equity percentage?
Divide equity by the same positive value used in the dollar calculation and multiply by 100. Do not divide by the loan balance. Preserve precision in intermediate work and round the final answer to the precision requested.
Is equity percentage always 100% minus LTV?
Only if the debt amounts, value basis and timing match. A first-only LTV excludes junior debt. A particular lending calculation may also use original loan amounts or a different value base, so do not assume it complements current total equity.
What does negative equity mean?
Included secured debt exceeds the stated value. Keep the minus sign. It does not by itself establish a final sale cash shortfall, authorize a short sale, forgive the debt or determine a borrower's legal liability.
Can positive equity still leave the seller needing cash?
Yes. Actual payoffs can exceed principal balances, and selling charges can consume the residual. Use the actual sale facts and all supplied charges or credits. A current equity estimate is not a promised closing check.
How much equity can an owner borrow?
That cannot be determined from equity alone. For an exam, apply the exact stated cap and counted-debt rule, then separate principal capacity from any fees or cash proceeds. Real underwriting and the applicable program impose additional requirements.
What if the borrowing-cap calculation is negative?
That means existing counted debt exceeds the supplied cap. No positive additional principal fits that simplified calculation. Do not describe a negative headroom figure as cash available, debt forgiveness or automatic acceleration of an existing loan.
Why might a lending test count a full HELOC limit?
Check the program. Fannie Mae distinguishes drawn-balance CLTV from full-line HCLTV for ordinary HELOCs.
Is equity the same as taxable gain?
No. Gain or loss uses amount realized and adjusted basis. The taxable portion requires further applicable rules, including any relevant exclusion or other adjustment. Current equity and mortgage payoff do not supply that complete tax calculation.
Are these official exam questions or a lending recommendation?
No. These are original simplified practice problems. A score is not a validated readiness measure, and the borrowing examples do not establish approval or recommend a loan. Use the supplied assumptions to practise the mathematics.
What if the supplied property value is zero?
The dollar subtraction can still be performed, but an equity percentage cannot be calculated by dividing by zero. Do not report 0% just because the denominator is zero. Establish the proper valuation input; the percentage formula here assumes a positive property value.
Keep practising
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Official sources and scope
CFPB guidance explains equity, credit lines, valuations and loan balances. The Fannie Mae references illustrate one investor's different loan-ratio inputs. IRS Publication 523 is the current linked 2025 edition and distinguishes gain or loss from a later taxable-gain calculation. The numbers here are original simplified teaching examples, not a lender decision, payoff quote or tax return.
- PSI June 24, 2026: equity and transaction calculations
- CFPB: home equity and home-equity loans
- CFPB: home-equity loan versus HELOC
- CFPB: different mortgage valuations
- CFPB mortgage key terms: principal and amortization
- CFPB: negative amortization
- Fannie Mae B2-1.2-02: CLTV calculation
- Fannie Mae B2-1.2-03: HCLTV calculation
- CFPB: payoff amount versus current mortgage balance
- 12 CFR 1026.38: closing costs and buyer/seller ledgers
- IRS Publication 523 (2025): figuring home-sale gain or loss
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.