Understand loan types

Solid statistics are hard to find, but lenders believe a third or less of home-equity borrowing is used for anything that could be considered an investment, such as home improvements or education. The rest goes for debt consolidation, vacations or purchases of assets that quickly depreciate, such as cars.

If you're thinking of literally betting your house with a home-equity loan or line of credit, you should clearly understand how these loans work, when to use them and how to get the best deals.

First, the basics. There are two types of home equity lending, loans and lines of credit:

• Home-equity loans are installment loans, like regular mortgages and auto loans. You're given a certain amount of money which you typically receive all at once and pay back according to a set schedule, over time. Home-equity loans usually come with fixed rates and fixed payments.

• Home-equity lines of credit, by contrast, work more like credit cards. You're given a credit limit that you can borrow against, and paying down your debt frees up more credit that you can potentially spend. Home-equity lines of credit have variable interest rates that are typically tied to the prime rate.

Unlike credit cards, however, home-equity lines of credit usually aren't open-ended. For the first 10 years or so, you can draw as much as you want from your credit limit, and you only need to pay the interest charges. In the next stage, however, the "draw" period ends and whatever debt you have left is "amortized," which means you need to start paying principal and interest to retire your debt. (Some lenders let you renew your draw period, but eventually the debt has to be paid off.)

With either type of borrowing, you're pledging your home as collateral. If you fall behind on your payments, the lender can foreclose and take your house.