A home equity loan (HEL) is very similar to a regular residential mortgage except that it typically has a shorter term and is in a second (or junior) position behind first mortgage on property - if there is a first mortgage. With a HEL, you receive a lump sum of money at closing and agree to repay it according to a fixed amortization schedule (usually 5, 10 or 15 years). Much like a regular mortgage, typical HEL has a fixed interest rate that is set at closing for life of loan.

In contrast, a home equity line of credit (HELOC) in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you can borrow up to - not a check. HELOC funds are borrowed "on demand" and you pay back only what you use plus interest. Depending on how much you use HELOC, you will have a minimum monthly payment requirement (often "interest only"); beyond minimum, it is up to you how much to pay and when to pay. One more important difference: interest rate on a HELOC is adjustable meaning that it can - and almost certainly will - change over time.

So, once you've decided that tapping your home's equity is a smart move, how do you decide which route to go? If you take time to honestly assess your situation using following three criteria, you will be able to make a sound and reasoned decision.

1. Certainty or Flexibility: Which do you value most?! For many borrowers, this is most important factor to consider. Your home is collateral for either type of home equity borrowing and, in a worst case scenario, it could be seized and sold to satisfy an outstanding unpaid loan balance. People do remember double-digit interest rates of early 1980's and, for many, mere prospect of interest costs on a variable-rate home equity line of credit rising rapidly beyond their means is reason enough for them to opt for certainty of a fixed rate HEL.

From borrower's perspective, "certainty" is main virtue of a fixed-rate home equity loan. You borrow a specific amount of money for a specific period of time at a specific rate of interest. You repay loan in precise monthly installments for a precise number of months. For many, knowing exactly what their future obligations will be is only way they can borrow against equity in their home and still sleep at night.

A home equity line of credit, in contrast, is short on certainty but long on virtue of flexibility. With a HELOC you borrow funds on an irregular schedule that meets your needs at adjustable interest rates that can change quickly. Loan repayment is also flexible: you typically are required to make only relatively small "interest-only" monthly payments on a HELOC. However, you have flexibility to make any size payment above interest-only minimum or payoff loan at your will.

1. No application fee (or fee should be refunded at closing) - The HELOC market is very competitive. Some lenders may charge a fee to help cover their costs of processing your HELOC application and to ensure applications are received only from seriously interested homeowners. If your lender assesses an application fee, be certain that it is refundable at closing. Otherwise, look elsewhere for your HELOC.

2. No appraisal or closing costs - The market value of your property is key to determining amount of your credit line. Some lenders are willing to use publicly available tax assessment data in lieu of formal appraisals. Others may absorb appraisal costs to attract customers. Either way, there are enough no-cost options available that you should not have to settle for HELOC lender that charges appraisal costs or any other closing costs.

3. No account maintenance or check-writing fees - Lenders obviously make their money when you write checks (borrow) on home equity credit line. Most lenders make it as hassle-free as possible with free checks and, sometimes, even debit cards. If your lender charges fees for privilege of having a HELOC checking account, look elsewhere

4. No "non-usage" fees - The market value of your property is key to determining amount of your credit line. Some lenders are willing to use publicly available tax assessment data in lieu of formal appraisals. Others may absorb appraisal costs to attract customers. Either way, there are enough no-cost options available that you should not have to settle for HELOC lender that charges appraisal costs or any other closing costs.

5. Variable APR equal to or near prime rate (adjusted quarterly) - The only cost involved with a good home equity credit line should be interest charged (APR) on balance borrowed. As with any loan, borrower's goal is to get lowest possible APR. Most lenders use "prime rate" as published in Wall Street Journal (or other publication) as a base index and charge you an APR equal to prime plus or minus a marginal percentage (e.g. 0.25%). Search for best rate available, but be aware of low "teaser" rates that may suddenly change after a brief introductory period or be accompanied by special fees. Also, keep in mind that periodic and lifetime caps on rate changes are as important as initial rate (see below).