Understanding the definition of a home equity loan helps distinguish different loan types.

By definition, a home equity loan is a loan that you borrow against a second deed of trust on your house. It is secured by the value of your home that you own.

In other words, take the market value of your home and subtract the principal balance on your current mortgage. The result is how much equity you have in your home. A home equity loan is one that is secured by the value.

So, if the fair market value of your home is $75,000 and the principal balance on your mortgage is $50,000, you have $25,000 equity in your home. Equity loans work much like your mortgage. In fact, they are often referred to as "second mortgages".

A home equity line of credit is a bit different in that you essentially assure yourself that you will be able to receive money as you need it. Like a loan, it is secured by your home equity. However, lines of credit carry an adjustable interest rate which means you may eventually pay higher interest on the principal. The loan length is usually shorter than an equity loan.

One other type of loan that should be discussed is the 125% loan. This type of loan basically allows the borrower to get a loan up to 125% of the home value. The loan will carry higher rates. 125% loans usually offer a cash out option, where you can elect to take part of the loan in cash.

So, when you think of equity, make sure you know the difference between the types of equity loans available. A home equity loan is one that is borrowed against the value you own in your home.