When you close on a HELOC, on other hand, you will be given a checkbook (or debit card) that you use only as needed. So, for instance, if you're embarking on a multiyear home improvement project for which you'll be writing checks at varying times, a HELOC might be best. Similarly, a credit line is probably best for paying sporadic college expenses. Interest on a HELOC is only charged from time that your HELOC checks clear bank and only on amounts actually disbursed…not value of entire credit line.

3. Do you possess sufficient financial self-discipline for a HELOC? Financially-disciplined borrowers can have best of both worlds…almost. By taking out a HELOC but paying it back according to a self-imposed fixed amortization schedule they can enjoy both flexibility of borrowing cash only as needed and certainty of a fixed repayment schedule. HELOCs are typically more efficient in terms of lower closing costs and a lower initial interest rate. Also, a HELOC may be somewhat easier for borrowers to qualify for since low, flexible monthly payments mean debt to income ratios that loan officers look at are more favorable for borrower.

The one big factor not within HELOC borrower's control is interest rate (see #1 above). Interest rates will almost certainly change over life of a HELOC. This means that a self-imposed "fixed" amortization schedule may need to be periodically refigured. Numerous internet sites provide free, powerful mortgage calculators that can assist you in preparing updated amortization schedules whenever needed. Some lenders are also meeting borrowers' demand for greater certainty by providing HELOC products that can be converted (for a fee) into a fixed rate loan when borrower elects.

As mentioned earlier, HELOCs are much like credit cards and similarity extends to spending temptation. If you are a person who has trouble keeping credit card debt under control and you haven't taken steps to change habits, then a HELOC probably isn't a smart choice.

You might be wondering which home equity product most people actually choose. According to Consumer Bankers Association 2002 Home Equity Study, home equity lines of credit account for 28% of consumer credit accounts followed by personal loans (23%) and regular home equity loans (16%). In terms of dollar value, home equity credit accounts (HELs and HELOCs together) represent a full 75% of consumer credit portfolios with HELOCs having a 45% share of market and HELs a 30% share. Of course, popularity of HELOCs may subside if interest rates continue to rise.

Whichever home equity product you decide on be certain to shop for best deal possible. The market is extremely competitive and there are many non-traditional options, including on-line lenders and credit unions, which should be considered in addition to your local bank.

7. Lifetime cap on rate increases (the amount that rate can be adjusted over loan's life) - A good HELOC is something you'll want to keep for awhile. Although interest rates have been at relatively low levels for a number of years, it wasn't too long ago that a 10% loan was regarded as a bargain! The point is that interest rates over time can rise dramatically. You'll want to find a HELOC with a lifetime rate cap that you can live with. Ask your loan officer to clearly spell out "worst case" scenario for rate increases for HELOC you are applying for.

8. Ability to convert to a fixed rate loan - When rates do rise, people often get skittish about their variable-rate debt. A useful feature to look for in a HELOC is ability to convert line of credit to a standard fixed-rate, fixed-term home equity loan (HEL). You likely won't get an APR as favorable as a newly issued HEL, but you also won't have appraisal or closing costs to pay if you convert. However, note that many lenders charge a fee for converting to a fixed rate loan.

9. Interest-only payments allowed - It is usually best to make regular principal payments on your HELOC balance. Yet a job loss or other emergency can make it a challenge to keep payments current. In these situations it is nice to have flexibility to lower your HELOC payment as much as possible without increasing your loan balance or raising red flags at credit rating agencies.

10. Unrestricted ability to repay principal without penalty - On other hand, you also want flexibility to pay down principal on loan when you choose. You may get a bonus from your job that you want to apply to loan or you may find a 0% balance transfer offer that is worth taking advantage of. In any case, a key component of a good HELOC is unfettered ability to repay principal.

Shop around and you will be able to find a home equity line of credit with many (if not all) of these features. Keep in mind that your bank is not only game in town. Credit card companies, mortgage bankers and brokerage firms have all entered market and offer competing products. Credit unions typically offer excellent terms and should not be overlooked. Also, there are many reputable on-line sources that have lower overhead costs and may be able to offer better terms than local bank.