Home Equity Lines of Credit (HELOCs) and home equity loans are similar in that you’re borrowing against the value of your home and how much you owe. Example: Your home is valued at $150,000 and you owe $110,000, so you may be able to borrow up to $40,000.

A loan typically gives you a sum of money all at once, while a HELOC is similar to a credit card: You have a specfic amount of money available to borrow and pay back, but you can take what you need as you need it up to the approved amount. Home equity lines of credit are commonly used for college tuition, home improvements, vacations, weddings, or just to have access to cash whenever you need it.

Home equity loans typically have a fixed interest rate, making the payment the same each month; that makes them easier to factor into your budget. But remember: That home equity loan payment will be in addition to your usual mortgage payment.  Since it’s a lump-sum equity draw, a home equity loan is a good source of money for major projects and one-time expenses. However, there are no restrictions on how you use the money. 

With a (HELOC), your credit line is based on how much equity you have in your home. You can then access your credit line whenever you want, up to your credit limit. When you make your payment each month, that credit becomes available for use again, much like a credit card. HELOCs often begin with a lower interest rate than home equity loans but the rate is adjustable, or variable, which means it rises or falls according to the interest rate. That means your monthly payment can rise or fall, too.

The interest rate on a home equity line of credit is variable, which means it can change to reflect current economic conditions. Because your outstanding line balance changes and the interest rate are variable, your payment could be different each month. You’ll pay interest only on the amount you draw.

How a HELOC works

With a HELOC, you can borrow as much of your available equity as you want during an initial draw period, typically around 10 years. You’ll make payments in this phase, but they might be interest-only. When the draw period ends, things get serious.

During the repayment phase, HELOC payments include principal and interest. Payments during this time may be drastically larger than your draw-period payments — a shocking change if you’re not ready for it.

Home equity loan pros and cons

• Pro: A fixed interest rate.

• Pro: Get a lump sum amount

• Pro: Monthly payments won't change and are for a set period.

• Con: Tapping all the equity in your home at one time can work against you if property values in your area decline.

• Con: Payments are in addition to your regular mortgage since it is an extra loan

Which is better when?

Before deciding whether to apply for a HELOC or a home equity loan, consider how much money you really need and how you plan to use it. Factor in interest rates, fees, monthly payments and tax advantages as you weigh your options.

Using the equity in your home before selling can be a powerful financial benefit. But remember, you're using your home as collateral. One risk to avoid, whether you choose a home equity line of credit or a loan: Resist funding short-term needs with what may eventually amount to a long-term loan.