What's right for you: A home equity loan or line of credit?

Coins shaped like a house

There are two ways to pull cash out of your home without selling or refinancing -- home equity loans and home equity lines of credit or HELOCs.

What you want the money for will determine which one is right for you.

A home equity loan is another name for a second mortgage. You get a lump-sum check for "X" amount of money, and it comes with a fixed repayment program that spells out the interest rate, the size of the monthly payments, and how long you will have to make them.

As with a fixed-rate mortgage, neither the interest rate nor the monthly payment will change during the life of the loan, and the interest is usually tax deductible.

A HELOC is more flexible but also can be more volatile, since the interest rate is adjustable and can change several times over the life of the loan. You take out money as you need it, and you pay it back as you can. You pay only the interest on the amount that you owe at any one time, and you can take money out and pay it back over and over again.

If you need a large amount of money right now, for a particular purpose, such as a major home remodeling or swimming pool, then this is the type of loan for you.

With interest rates going up, it also makes sense to get a fixed-rate loan if you can. Interest.com's national survey show's the average HELOC is charging just over 8%, up from 5.1% two years ago. Rates on traditional home equity loans have not risen nearly as fast, averaging about 7.8%, or not quite 1 percentage point higher than two years ago.

But a HELOC is still the loan of choice for homeowners who don't have an immediate need for the money, but who want the flexibility to borrow against the value of their home by just writing a check or using a debit card linked to their credit line.

A HELOC also allows you to decide how much of the loan you want to payoff each month. While you must always pay the interest charge -- which is usually tax deductible, just like a traditional home equity loan -- you can choose to pay as much or as little of the principal as you wish.

You usually have to pay an annual fee of $50 to $75 for that convenience and the line of credit is closed, usually after 10 years. At that point your balance -- if you have one -- is converted to a fixed-rate home equity loan at market rates and with a regular monthly payment that requires you to pay down the principal.

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