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There are two types of loans that can be taken out using the equity in your home as collateral: A home equity loan which is somewhat like a regular term mortgage loan or a line of credit which is almost like a credit card. Both of these loans are often referred to as second mortgages.

Typically, consumers take out a home equity loan for a short term. Perhaps they need money to buy a car, make a home improvement, or pay for college expenses. Since the loans are secured by your property, the rates are typically lower than a bank loan or a personal loan. Often the interest is tax-deductible too (consult a qualified tax advisor).

Most home equity loans have terms of 5 to 15 years. You receive a lump sum amount of money and you pay it off over the agreed upon term. If you want to pay it off sooner, you often can. The interest is usually not much higher than a typical mortgage loan, the interest is often tax deductible, and the rate is often fixed for the entire term. An equity loan like this is often used to "cash-out" on your home's appreciation. Investors, instead of selling a piece of property, will often take out an second mortgage and use the money to buy another property. Consumers often use the money for home improvements or other personal expense.

The other type of home equity loan is called a home equity line of credit (HELOC). It works just like a credit card. The bank looks at the equity in your home and determines your "limit". You then are able to write checks against this line of credit whenever you need the money. You can pay the loans off whenever you want or just pay the minimum monthly payment. It is better than a credit card because the rates are usually much lower, and the interest is often tax-deductible (again, talk to your CPA or other tax advisor). A home equity line of credit is very flexible. If you do not have cash in the bank for emergencies a HELOC can be your safety net. However, like a credit card, the interest rate varies. If you like certainty, a home equity loan might be a better option.