The appeal of both of these types of loans is in their interest rates. They are almost always lower than those of credit cards or conventional bank loans, because they are secured against the equity value in your home. In addition, the interest you pay on a home equity loan or line of credit, is often tax deductible (consult a tax advisor about your particular situation). Unfortunately, both HELOCs and HELs usually carry a higher interest rate than that of a first mortgage. With a HEL, you may choose either an adjustable rate that fluctuates according to variations in the prime rate, or you may choose a fixed rate. A fixed rate enables you to budget a set monthly payment without worrying about increasing costs should interest rates rise.

 

With a HEL, there are also closing costs that you need to take into account. This refers to the money paid at closing to the lender. It may include one or more of the following fees: a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement.

 

A HELOC will usually carry a lower initial interest rate than a HEL, but its rate fluctuates according to the prime rate, so there is always more of an interest rate risk. Unlike a HEL, where your monthly payment is a set amount, a HELOC enables you to borrow funds as needed and repay as little as interest only each month. Also unlike the HEL, there are generally no closing costs when you open a HELOC.

 

One important fact to keep in mind is your home is the collateral for both a HELOC and a HEL. If a HELOC's easy access to cash tempts you to run up more debt than you can repay, or if you fail to make your monthly payments on you HEL, you risk losing your house.