Helping you plan your home improvement project, from start to finish

If you’ve decided to use a home equity loan or line of credit to finance a home renovation, calculating your equity will give you an idea of how much is available to borrow.

Calculating equity is simple. Take the market value of your home and subtract any outstanding mortgages or liens. So if you have a $100,000 home and have $60,000 left to repay on your mortgage, your equity would equal $40,000.

The amount of equity you have is not constant, however. It changes depending on your home's value, market conditions and the terms of your mortgage. The simplest way to increase your home equity is to pay off your mortgage. The more you pay towards the principal, the more equity you will accrue. In the beginning, most of your payments will likely go toward the interest, so you will build equity much slower in the first couple of years in your new home. You can build equity faster if you shorten the term of your mortgage, as more of your payments go toward principal. Once you have paid off your mortgage, the lien on the title will be cleared and you will own 100 percent of your home.

You can also increase your home's equity by making improvements that increase its value. Be careful here, however, as renovations rarely recoup their full cost. A good strategy is to make renovations that bring your house up to par with other houses on the block.

Your equity may also increase without you doing anything, though this hasn’t been the case with the recession up until this past year. If property values in your area increase, so will your equity, as it is based on market values. Housing market conditions are affected by a number of things, including interest rates, inflation and the economy. While houses tend to appreciate over time, it is possible for these conditions to lower property values and result in a decrease in your equity, as seen during the recession. In a worst-case scenario, this could result in negative equity, where the amount of your mortgage exceeds the value of your home. To help avoid negative equity, make sure at least some of your mortgage payments are paying down the principal and try to buy a home in an area where property values are increasing.

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