It pays to build up equity on your home since you can take a loan against it at the time of need to take care of purposes like- paying off debts, college tuition or simply to remodel your kitchen. But when it’s a question of taking a second mortgage against your property, you need to be extremely careful with your choice since a wrong decision can damage your financial stability to a great extent.

The second mortgage may come in various forms but the two main types are the home equity loan (HEL) and the home equity line of credit (HELOC).

Home equity loan (HEL)

The home equity loan allows you to borrow a fixed amount against the equity accumulated on your property. Home equity loan works like any other mortgage loan. You would make monthly payments towards it to pay it off.

The advantage with home equity loan however is that the interest rate would remain fixed for the entire loan term.

Home equity line of credit (HELOC)

Home equity line of credit offers a revolving credit line to the homeowner, thereby works just like a credit card. But at the same time you’d continue enjoying the tax advantages on the interest you pay. Again every time you make a payment towards the principal, the limit again rises to its original level. This flexibility is the key feature of HELOC. You can continue borrowing till the amount withdrawn does not exceed the available credit limit.

Which one would suit you?

It’s only you who can decide the best. If you only need a certain amount of fund and would not need tapping your home equity in near future, the fixed rate home equity loan may fit into your requirements more appropriately.

However, the issue with the home equity loan is that it would available in lump sum at the closing of the loan and for once only, i.e. if you feel the need to receive additional funds later some time you would then need to pay off the existing HEL first. It’s not the case with HELOC.

HELOC is more suitable when the need is likely to exist over a period of time, like paying the college fees. But remember that the interest rate usually doesn’t stay constant with an HELOC.

The home equity line of credit may further pose threats to people with bad record of money management. You can run yourself into huge debt by being negligent towards its repayment and since you’d put the home as collateral against the loan you may end up losing it too.

Further, there can be differences in the rate of interest charged by the lenders. In most cases HELOC offers variable rate, i.e. the rate would vary with the market; often lenders offer typically low rates or teasers (to attract the customers) which can later on increase to a high level. But this typically doesn’t happen with a home equity loan.