How to Define Owner's Equity

1). Access owner's equity. The lender sets up a line of credit, in the approved amount, so the homeowner can easily access the money through the convenience of a check.
2). Calculate the amount. In most cases, the amount approved is calculated by first having the home appraised. Most lenders allow 70 to 80 percent of the appraised value, less the amount that is owed on the first mortgage.
3). Set up a balloon account. There are instances where banks will approve more than the appraised value, but this carries serious risks. For instance, if the homeowner loses his job and has to sell the house before he has built equity back up, he is stuck owing more on the house than it is worth. The house will not get appraised for the higher amount, so even if someone is willing to pay it, they could not get a loan. That means the seller would have to pay a significant amount over what a buyer can pay to complete the sale.
4). Assess the risk. If the seller does not have the cash to bring to closing, the house will likely go into foreclosure, causing credit and financial problems for the homeowner and loss for the bank.
5). Use the money. If used wisely, homeowner’s equity is a great tool to afford improvements and maintenance on the house, pay for college or deal with an emergency because the interest rate is generally lower than other loans available. In addition, much of the interest is tax deductible. See your accountant for details.