A home equity loan comes in two forms either as a tax-deductible lump sum or as a revolving line of credit and as either a fixed or adjustable rate loan.
Home equity as a source of a line of credit (HELOC)
If you need money you can apply for a Home Equity Line of Credit (HELOC). It will give you a large amount of money with a low interest rate. Compare this to what you might see on your credit card statement. With a home equity Line of Credit you will tender your house as collateral against the loan. Obviously if you default on your loan repayments you put your home at risk.
Beware of loans with balloon payments -- where you pay a larger than normal final payment. If you're finding it tough to pay the normal loan repayments, this final inflated payment may well see you looking at taking out a further loan to pay it off.
Also watch out for any financial penalties when you take out a Home Equity Line of Credit such as closing fees. Closing fees should be refunded, along with any other fees associated with opening the loan. Make sure you shop around as saving a quarter of a percent will save you a great deal of money in the future. So make sure you talk with your lender. Outline worst case scenarios so you understand what might happen.
Home Equity as a loan (HEL)
A Home Equity Loan (HEL) becomes a lien against your home. As the loan is secured against your home, a home equity loan lender may sell your home if the creditor wants the money back that you borrowed.
Home Equity Loans give you a large tax-deductible lump sum of money. Generally, you'll be able to borrow more at a single time with a Home Equity Loan compared to a Home Equity Line of Credit.
Shop around and get the best deal possible. Talk with your lender about different scenarios.
Final thoughts: Only borrow as much as you need. Often people take out home equity loans to rid themselves of bad debt. It's often tempting to ask the lender for a bit more than you actually need. Avoid this if possible. The aim, in the case of eliminating bad debt, is to lower monthly repayments and to get your credit under control as quickly as possible. Resist the temptation and only borrow as much as you need.