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Home equity loans

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With a home equity loan, by comparison, your lender doles out a lump sum and you're typically charged a fixed interest rate and repay the loan in fixed monthly installments. Home equity loans are best reserved for those times when you need a set amount of cash, for example, to complete a home improvement, start a business, or consolidate high-interest debt.

Line Of Credit

A home equity line of credit is a flexible way to borrow against the equity in your home. Once you open up a home equity line with your lender (in a process similar to, but less involved than, applying for a mortgage) you can borrow from it (up to a set amount) when you decide you need to, and you'll only pay interest on the money you borrow. As long as you don't borrow anything, you won't owe any interest.

Most home equity lines come with variable interest rates, though a few offer fixed rates. And these days, lenders offer many ways for you to conveniently tap your available credit, most often by writing checks or using credit cards linked to the line of credit.

Tax impact

Generally, the money you borrow against your home, either through a home equity loan or line of credit, is tax-deductible. The IRS lets you write off up to $100,000 in interest you pay on these loans (or up to $1 million if you use the money to fix up your home).

Their tax deductibility and their decent interest rates (as of early 2002, 5.2 percent on average for a $10,000 home equity line of credit; 4.6 percent for a larger, $30,000 credit line) make home equity lines of credit worth considering over many other types of personal loans (which are not deductible).

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Using the money wisely

Just because you have easy access to a huge pot of credit doesn't mean you should tap it freely. Take care to use your line of credit responsibly; for example, to help cover your expenses if you exhaust your emergency fund during an extended layoff. Resist the urge to tap it for more frivolous reasons, like to pay for a trip to Europe or to buy the entertainment center you've always dreamed of. Remember, any money you borrow is backed by your home. If you run up big expenses that you're unable to pay back on time, you put your house in jeopardy.And know this: Your stream of credit may not last forever. Many lenders check your credit annually. While your lender cannot accelerate the loan payments or change the terms, it can suspend or reduce your borrowing privileges. Lastly, with so many lenders competing to offer home equity lines and loans these days, you need to be on your guard. The Federal Trade Commission warns consumers that there are a number of abusive tactics out there, including hiding loan terms and coercing homeowners to accept home equity loans they can't reasonably afford. For more on the warnings, visit the FTC's Web site.

Fees and other costs
Cost of the loan
Refinancing home equity loan
How to cancel the deal

Bad credit home equity loans