Collateral: Collateral is whatever it is that you say the lender can have if you default on your loan. Basically with a home equity loan, your house is the property that you pledge as a guarantee that you will repay your debt. If you don't repay the debt, the lender can take your collateral (your house) and sell it to get its money back. So, if you do not repay your debt, or in other words, your loan, you can lose the home and be forced to move out.

Equity: Equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have more than one on the property).

Home Equity Loan: A home equity loan is the equivalent to a second mortgage that lets you turn equity into cash, allowing you to spend it on home improvements, debt consolidation, college education or other expenses. Basically you can use a home equity loan for whatever you want, but generally the lender will want to know why you are taking out this second mortgage on your home.

There are two types of home equity debt: home equity loans and home equity lines of credit (HELOCs). Both are referred to as second mortgages, because they are secured by your property, just like the original, or primary, mortgage. Many people do not feel like a home equity loan is a second mortgage, but this is something you should avoid, because that is just what it is.

Home equity loans (second mortgages) usually need to be repaid in a shorter period than a typical home loan, or in other words, first mortgages. A typical first mortgage is set up to be repaid over 30 years. Some people opt for different terms of their loan. Home equity loans and lines of credit often have a repayment period of 15 years, although it might be as short as 5 and as long as 30 years.

So what is the difference between a home equity loan and a home equity line of credit? Well, a home equity loan is a one-time lump sum that is paid off over a set amount of time. It generally has a fixed interest rate and the same payments each month. Once you get the money, you cannot borrow further from the loan.

A HELOC works more like a credit card because it has a revolving balance. A HELOC allows you to borrow up to a certain amount for the life of the loan. During that time, you can withdraw money as you need it. As you pay off the principal, you can use the credit again, like a credit card.

A HELOC gives you more flexibility than a fixed-rate home equity loan, but can get you into trouble if you do not use this line of credit wisely. The home equity line of credit has a variable interest rate that fluctuates over the life of the loan. Payments vary depending on the interest rate, the amount owed, and whether the credit line is in the draw period or the repayment period.

During the equity line's draw period, you can borrow against it, and the minimum monthly payments cover only the interest, although you can elect to pay principal. During the repayment period, you can't add new debt and must repay the balance over the remaining life of the loan. The draw period often is 5 or 10 years and the repayment period typically is 10 or 15 years.

With either a home equity loan or a line of credit, you have to pay off the balance when you sell the house.