Calculating your home equity

Calculating equity is simple: You take the market value of your home and subtract any outstanding mortgages or liens. So if you have a $100,000 home and there's $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 equity is to pay off your mortgage. The more you pay towards the principal, the more equity you 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've paid off your mortgage, the lien on the title will be cleared, and you'll 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 you rarely recoup the full cost of renovations. The best strategy is to make renovations that bring your house up to par with other houses on the block and to avoid souping up your house with upgrades and designer appliances the rest of the neighborhood doesn't have.
Best of all, your equity may increase without you doing anything. If property values in your area increase, so will your equity, as it's based on market values. Using the above example, if property values in your area increase by eight percent, your equity would equal $48,000.
But housing market conditions are affected by a number of things, including interest rates, inflation, and the economy. And while houses tend to appreciate over time, it is possible for these conditions to lower property values, resulting in a decrease in your equity. In a worst-case scenario, this could lead to negative equity, where the amount of your mortgage exceeds the value of your home.
Negative equity can also result from an interest-only mortgage. In these cases, your monthly payments may be covering just the interest or only a portion of it. At the end of the interest-only term, you still owe the lender the principal as well as any unpaid interest, making it possible that you owe more than the market value of your home.
To help avoid negative equity, make sure at least some of your mortgage payments are going towards the principal, and try to buy a home in an area where property values are increasing.
The good news is that national home values generally appreciate by an average rate of five percent per year. And on the whole, home prices have risen steadily since 1968, increasing by 8.8 percent in 2004, according to the National Association of REALTORS®. This wealth is readily accessible through home equity loans, which tend to have lower interest rates and may have tax benefits.