A home equity loan or a home equity line of credit can help you access cash locked up in the value of your home. These financial tools can help you with debt consolidation or with freeing up money to pay for one of life's necessities like a much needed new car. While "home equity loan" and "home equity line of credit" may sound similar, there are some important differences between them that you should know about.

A Home Equity Loan
A home equity loan uses a home's equity as collateral and is sometimes referred to as a second mortgage. A home equity loan is different from home mortgage refinancing, which involves paying off an existing loan with another loan of the same size that usually has more attractive financial conditions like a lower interest rate. If you decide to take out a home equity loan, you need to decide how much of your equity (the value in your home over and above the amount you owe on the loan) you want to use. You will receive the total home equity loan amount in a lump sum. As soon as you receive that lump sum, you will start incurring interest until you pay off the loan over a predetermined period of time or 'term.'

A Home Equity Line of Credit
A home equity line of credit (HELOC) gives you access to a line of credit, which you can use as and when you need it. You can usually take out as much or as little as you like up to the maximum amount of the line of credit. You pay interest charges only on the amount you draw down. As you pay off your outstanding balance, your available line of credit is replenished. This type of loan may be good if you are not sure exactly how much you are going to need to borrow or when you are going to need it. Interest paid on these loans may be tax-deductible, but you should check with a professional tax advisor to be sure. A home equity line of credit requires you to make interest only payments, but you have the option to make additional principal payments if you are in a position to do so. Remember that if you do not make principal payments, your principal balance will not reduce.

Consider a Home Equity Loan If:

• You want to consolidate your debt from high interest credit cards. A home equity loan can consolidate your costs into a single, fixed payment and may also lower your monthly payment.
• You know the exact amount you want to borrow.
• You want a fixed monthly payment and fixed loan term.

Consider a Home Equity Line of Credit If:

• You are unsure of the loan amount you need and want the flexibility of having funds available for unexpected expenses.
• You want to borrow funds that you plan to pay off within the near term.
• You feel more comfortable with lower, interest-only payments.

The Last Word
Be sure to talk to a number of lenders to get the best deal. The equity in your home can help you out in a pinch or for a new venture requiring more capital than you might otherwise have in the bank.

Sources:
www.investorwords.com