Home equity is essentially how much of your home you own and is calculated by subtracting the amount left on your mortgage from the market value of your home. So, for example, if after 15 years you have $50,000 paid off on your mortgage and your home's value has risen to $200,000, you now have $150,000 in home equity. When you get a home equity loan, you are borrowing against the equity in your home. Unlike credit cards and most personal loans which are unsecured; the portion of your home that you own acts as collateral. Because the loan is secured, you often get much better interest rates than other loans. However, if you default, the lender can repossess your home.

There are two types of home equity loans: open end and closed end. Closed end home equity loans are much like mortgage loans: the borrower receives a lump sum of money that is paid over a fixed amount of time. An open end home equity loan is a revolving credit loan, much like a credit card. You can use a home equity loan to invest, improve your home or pay off extra expenses. Do make sure you fully understand the terms and fees as well as your long term goals because defaulting on your home equity loan can leave you homeless.