Example two

In the housing meltdown that began in 2006, many homes lost equity rather than gained it. Instead of increasing, the value of the house dropped after the home was purchased. In many instances, a home equity loan would not be available.

Using the above example, let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. During the next five years, you paid down $13,000 of your mortage debt.

As home prices fell and homes in your neighborhood went into foreclosure, your home's value dropped by 30 percent, or $54,000, to $126,000. Because the value of your home is less than the amount you owe, you have $41,000 in negative equity and would not be eligible for a home equity loan.