When it comes to tapping into the equity you have built up in your home, there are two main options: The home equity loan and the home equity line of credit. Both of these loans are secured by your home, and there is also the possibility that the interest you pay on each of these types of loans is tax deductible.

Even though each of these options is a type of loan, and they have similar features, they are used in different ways. Before you borrow against the equity in your home, make sure you understand which type of loan is best for you.

Home Equity Loan

A home equity loan is an installment loan. This means that you are usually provided with a lump sum. Then you repay the loan over time, in a set amount. You have a set term, and you can usually lock in a fixed interest rate. Many home equity loans have term lengths of 30 years.

Getting a home equity loan is ideal if you know your fixed costs, and you need the money for a one-time expenditure. Home equity loans are popular for such items as debt consolidation, paying for weddings, and even paying for college.

Home Equity Line of Credit

With a home equity installment loan, you get a lump sum, and if you want more money, you have to reapply. A home equity line of credit works differently. A home equity line of credit is a revolving credit line, which means that you pay it down as you go. It works a lot like a credit card, only the loan is secured by your home.

The biggest convenience of the home equity line of credit is that you don’t have to reapply if you want more money. Instead, you just pull from your available balance. This feature makes the home equity line of credit ideal for home improvement situations. If you don’t know how much money you will need exactly, a home equity line of credit can ensure that you are able to cover the costs.

Remember: These Loans are Secured By Your Home

It’s vital that you remember that both of these loans are secured by your home. This means that if you default on the loan, your home could be foreclosed upon. And, of course, since these are major loans, you will need good credit to get the best rates and terms, and you will need to fill out a great deal of paperwork.

A home equity loan or line of credit is not something to enter into lightly. Know what you’re getting into before you sign.