WE’VE ALL DONE IT—that mental calculation where you try to figure out how much you’d clear if you were to sell your house and pay off your mortgage. But it can be more than just an idle exercise. Even if you never sell your home, the equity you have in it can help you pursue important personal goals. So understanding how to calculate it—and how banks view it—is critical, especially if you want to borrow money against that equity to pay for a home improvement project, cover emergency expenses or pay for your child’s college tuition, for instance. In fact, it could also affect whether you need to pay private mortgage insurance, and could determine which financing options may be available to you.

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