Below Grade Area

• Most lenders follow guidelines set by the Federal National Mortgage Association, commonly known as "Fannie Mae." According to these guidelines, any area of a home that is even partially surrounded by dirt, including both traditional and "daylight" basements, is considered "Below grade." Officially, the below-grade square footage does not count toward your appraisal value, which means that finishing your basement may not affect its value on paper.
  
  

Comparable Sales

• Another determination of your home's value is the sales prices of comparable homes in your area. Appraisers, lenders and real estate agents generally look at three homes in your area that match yours as closely as possible to determine your home's value. If other homes in your area with finished basements have recently sold for higher amounts than your home's appraisal, finishing your basement may also drive up your home's perceived value.
  
  

Cost vs. Gain

• Finishing your basement can cost significantly more than any equity you gain based on comparable sales. For example, if you pay $60,000 to finish your basement, you may only gain $40,000 in equity based on comparative values. In this case, you will have essentially lost $20,000. Unless comparative sales show that you can gain back more than your basement finishing costs in the current housing market, consider other home improvements to increase your equity, such as updating an above-grade kitchen or bathroom.
  
  

Deciding to Finish

• Ultimately, each home must be assessed on a case-by-case basis. If you are considering finishing your basement to add living space for your family, you can gain value from the decision even if your bank does not recognized the equity. If you want to increase the resale value, talk to real estate professionals in your area about whether the local market will treat such improvements favorably, or if it's better to focus your efforts on other ways to increase equity in your home.