A home equity loan allows you to access the equity in what may be your greatest asset -your home. If you've been paying on your mortgage for several years, and if real estate in your area has appreciated, the equity in your home may have had a chance to really build. With a home equity loan, you can use that money to finance many things, but you need to make sure to use this money wisely.

With a home equity loan, you can borrow a lump sum at a fixed interest rate. Just as with your mortgage, you pay in monthly installments. This loan probably carries a slightly higher interest rate than your first mortgage and may also include closing costs. Some lenders will waive these costs or allow you to roll them into the loan. This type of loan is usually considered smart debt if it's used for the right purpose. Here are some of the reasons you might want to consider a home equity loan.

Home renovation

A much-needed update or addition can add value to your home, making the home equity loan well worth it. But make sure that you don't price your home out of your neighborhood with any renovations, making it hard to resell.

College tuition

If your kids are headed to college and you're in need of funds fast, you'll be able to get a good interest rate with a home equity loan. But unlike with student loans, you'll have to begin repaying the loan immediately.

Debt consolidation

Perhaps you've accumulated some debt on high-interest credit cards. You can use a home equity loan to consolidate your debt, get a much better interest rate, and pay off the amount more quickly. Keep in mind that this is not a wise strategy if you continue to charge up your credit cards.

A major expense

A home equity loan can also be a good way to finance a major expense. For example, if you plan to buy a new car, you may want to get a second mortgage and avoid the high rates associated with car loans. You can also use a home equity loan to help purchase a second home. If you don't have enough equity to cover the purchase price, you can at least put down a sizeable amount to lower your monthly payments.

An important point to remember

A home equity loan is not free money. You have to make monthly payments toward this loan in addition to your first mortgage. Also, if you sell the house, the balance of the second mortgage is due.

For example, say you owe $150,000 on your mortgage when you sell your home for $250,000. Without a home equity loan, your profit would be $100,000, minus the fees associated with selling the house. If you also have a home equity loan for $50,000, you'll only receive $50,000, minus those same costs.