Home equity line of credit vs. home equity loan

There a a few ways to borrow money for improvements or emergencies using your home as collateral. 

Homes prices have rebounded. That means homes have equity in them again. And data shows more people are taking out loans against their homes. It's great that this option is available, but borrow wisely.

There are two ways to take out loans using your house as collateral. There is the home equity line of credit and the home equity loan.

A home equity loan is often referred to as a second mortgage. It's issued as a lump sum that has a fixed interest rate and you immediately start to repay it. 

The home equity line of credit - also called a HELOC - is more like a credit card, generally, with a variable interest rate. You can also find them with hybrid rates. Part of it is fixed, part of it is variable.

Once approved for a set amount of money, it's waiting if you want to use it. But you don't have to use it. You can just have it there in case of an emergency.

OK, some things to know before you consider either of these loans. 

Let's say you have a big renovation project. Well, the home equity loan is often considered your best bet. Its fixed rate will give you a monthly payment that is the same each time. That's manageable.

The HELOC or credit line is best used as a back-up emergency fund.  You can get the loan and just let it sit. Don't use it unless you need it. And you don't pay for it unless you use it. 

Too often folks will turn to their 401K or other retirement savings in a pinch. This will replace that. And in some cases, the interest is tax deductible.

Lenders are allowing you to borrow 80 to 90 percent of the home's value. The home's value would be the total of your mortgage and loan. But, Consumer Reports magazine recommends you don't go higher than 70 percent. This will give you padding if home prices dip.