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While a home equity loan is a lump sum payment, a home equity line of credit (HELOC) is just that - a line of credit on which the homeowner can withdraw cash when it is needed. One of the principal differences between a home equity loan and a HELOC is that with a HELOC the borrower is making payments only on the sum that he/she has drawn down. With a HELOC, you need only borrow the sum that you feel is necessary.

However on that point, it is worth noting that the number one reason people pursue an equity loan or a HELOC is for the purpose of consolidating short term, high interest debt. Sometimes that debt is the result of job loss or medical difficulties. But more often than not, it is the result of uncontrolled spending with the ever-convenient credit cards. In other words, the HELOC is being used to pay off other debt that is the result of unrestrained spending habits.

Where that is the case, a HELOC can be a dangerous asset. If the undisciplined spending continues, the HELOC will merely pay down credit cards that are once again put to work accumulating further debt. With this sort of pattern repetition, a HELOC holder can find himself/herself in a position where the unmanageable debt now includes a line of credit secured by the home. If the debt becomes unmanageable once again, it can lead to foreclosure.

HELOCs are always provided with an adjustable interest rate. Usually that rate is lower than what is offered for a home equity loan, but will be a couple of percentage points higher than the available interest rate on a primary thirty year mortgage. With an adjustable rate, the cost of these funds can become substantially higher than a standard mortgage. On the other hand, HELOC funds are always cheaper than the cost of an unsecured loan.

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