Home equity loans are based on the value of one’s house. Equity is found by dividing your mortgage balance by the price of your home. For instance, say you bought a $200,000 home. You put $40,000 down from your own pocket and covered the remaining $160,000 with a mortgage. Dividing 160,000 by 200,000 gives a loan to value ratio of 80%, leaving you with equity of 20%, or $40,000. The more you have in equity, or the longer you’ve been paying off your mortgage, the more you can borrow in a home equity loan. Simply put, a home equity loan is a second mortgage.

There are two types of home equity loans: fixed rate and a home equity line of credit, or HELOC. Fixed rate loans give you a lump-sum, one time payment that must to be paid back within the agreed term and at the agreed interest rate. Expect the interest rate on any home equity loan to be higher than the rate on your first mortgage.

A HELOC works much like a credit card. You may even receive a special card to use. You may borrow as much or as little as you need, up to the agreed upon limit. The interest you pay depends on how much you have borrowed, and so is a variable rate.

Most commonly these loans are used to consolidate credit card debt. However, if you have poor credit you may have difficulties obtaining a home equity loan. If you are denied by banks, brokerages or on-line sites, consider a debt consolidation company. These companies are in the business of working with lenders to secure low interest loans for those with less than perfect credit. You will pay a higher interest rate, but a reputable company or individual in the business should be able to help you. Most interest paid on equity loans is tax deductible, so a higher payment could be off-set with tax savings.

If you have a need for a home equity loan with poor credit and the means to make regular payments, your next step is to shop around for the best loan terms. Investigate what your local bank offers, but don’t forget about credit unions, brokerages and on-line sites. Each has different qualifications regarding credit scores you’ll need to meet, and an application form. A home equity loan can be very beneficial in these tough economic times if used wisely and properly.