By Wendy Croix

A homeowner's equity is the fair market value of the property minus the amount the owner owes on the mortgage. The amount owed is easy to determine; the fair market value can take some homework. Fair market home value generally reflects the local housing market and the selling prices of similar properties in the neighborhood. Thus, equity equals the amount paid plus the home's appreciation. Carrying out this refinance tactic gives the owner three options:

Home Equity Loan

A home equity loan is traditionally called a "second mortgage." The homeowner borrows a lump sum of money using the home's value as collateral. Interest and payments kick in immediately, but the interest is tax-deductible. The homeowner's credit rating determines the second mortgage rate, just as it determined the rate of the original mortgage.

Home Equity Conversion Mortgage (HECM)

Also called a reverse annuity, these mortgages allow owners to convert the equity they already have in their homes into cash, usually in the form of monthly payments. Qualification for a reverse annuity is determined by the value of the home. This loan doesn't have to be repaid until the borrower no longer occupies the home.

Home Equity Line of Credit Loan (HELOC)

Home equity credit is a loan (think of it as a credit card) that that allows a borrower to draw cash against the existing equity in the home, up to a predetermined amount. Interest doesn’t accrue till the credit is used. Homeowners sometimes use equity credit to finance major renovations that will significantly increase the value of the property.

Properly using home equity can be a great way to improve your home, free up cash, or adjust your mortgage.