By equity we mean the value of a property above any mortgage or other liabilities relating to it. Consider the following example. Suppose you buy a house for $200,000 and make a down payment of $20,000 and borrow the rest of $180,000. On the day you bought the house, the equity is same as the down payment that is $20,000: $200,000 (purchase price) - $180,000 (debt owed) = $20,000 (equity).
After a period of four years, let's assume you have paid down $13,000 of the mortgage debt, now you owe $167,000. However due to the increase in real estate prices, the value of your house increases and now becomes worth $300,000 instead of $200,000.
The equity now is $133,000: $300,000 (new purchase value) - $167,000 (amount owed) = $133,000 (equity).
A home equity loan is a loan which let's you borrow cash money on this increased equity. These loans are a smart way to borrow money. Unlike credit card and other installment loans, interest rates in home loans are a lot less. Another compelling reason to take these loans is that tax deductions can sometimes be taken on the interest paid.
Your home equity loan can be used for other important areas in your life. You could invest the money in home improvement. This can lead to more comfortable living and may increase the resale price of a house. Another smart way of using home equity is to use it for debt consolidation. If you are under a high debt from a high interest loan or credit card loan it is sensible to pay off the debt from a lower interest home equity loan. The loan could also be used to finance your child's education. Life sometimes comes up with unforeseen emergencies and home equity loan could be your best option at this time.
Home equity loans can be used even in case of medical expenses or unemployment. However you should be aware that if in the future you declare bankruptcy, you would be disarming yourself in battle against the creditors. In a chapter 7 bankruptcy you can walk away from an unsecured credit card debt but if your house secures these loans you are stuck paying these loans.
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