If you are a homeowner thinking about borrowing against the equity in your home for any reason, there are steps you can take to ensure that you do not overpay for the financing. Here are the basics you need to know about home equity loans and how to avoid common mistakes that can cost you thousands of dollars.

Second mortgage loans allow you access to equity without selling your home. There are a number of different ways to borrow against your equity. The most popular are second mortgage loans and home equity lines of credit. When you borrow against your home you can use the money in any way you seem fit; however, it is important to remember this money is a loan secured by your home. If you fall behind on the payments the mortgage lender could take your home.

Home equity is the difference between what you owe on your mortgage and the appraised value of your home. Your home increases in value as the value of real estate in your neighborhood goes up. (You can lose equity when the value goes down) You also gain equity as you pay down the balance on your mortgage loan.

Many homeowners use equity for repairs or renovations to their homes. Another common reason for home equity and second mortgages is to consolidate debts. While you can use this money for any reason, taking a European vacation might not be the best use of your home equity. Paying for your childs education would be a more conservative use of your equity.

The interest rates you pay on a home equity line of credit are typically higher than your primary mortgage because there is more risk for the lender. They type of interest rate you receive depends on the type of home equity loan you take out. Second mortgage loans generally come with fixed interest rates where home equity lines of credit come with adjustable interest rates. Taking a home equity loan with an adjustable interest rate has more risk than a fixed rate loan. With adjustable rate loans your payments can go up when the lender changes the interest rate.

To learn more about your home equity and second mortgage options, including common mortgage mistakes to avoid, register for a free mortgage guidebook using the links below.