HELOC loans differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, which is similar to a credit card. HELOC funds can be borrowed during the draw period, typically from 5 to 25 years. Repayment is of the amount drawn plus interest. There is another difference from a conventional loan in that it is a line of revolving credit with an adjustable interest rate, whereas a home equity loan often has fixed interest rate. The interest rate on a HELOC is generally based on an index, such as the prime rate. So, the interest rate can change over time.

As HELOC is considered to be a second mortgage, the rate is higher than a fixed-rate mortgage which means higher monthly payments. If the borrower fails to make his/her payments, then he/she puts his/her home at risk for foreclosure.

Many people don’t understand which one is the best for him, Home Equity Loan (HEL) or Home Equity Line Of Credit (HELOC). Experts say that there are three principal factors to weigh to make the decision.

First one is: Which do you value the most between certainty and flexibility? Certainty is the main virtue of a fixed-rate home equity loan. A home equity line of credit is short on certainty but long on the virtue of flexibility. Second factor is your amount of money needed. Do you need money for a one-time, lump-sum payment or will your cash needs be intermittent over several months or years? And the final factor is your financial self-discipline for a HELOC.

Whichever you decide on be certain to shop for the best deal possible. The market is extremely competitive and there may be many non-traditional options, including on-line lenders and credit unions. These should be considered in addition to your local bank.