Homeowners can use their equity to access cash for projects like a remodel, consolidating debt or major expenses. They may choose to take out a home equity loan or a Home Equity Line of Credit (HELOC).

Which option is best depends on why you want to borrow. Consider factors like draw and repayment periods, interest rate and fees.

What is a HELOC?

A HELOC is a line of credit based on the equity in your home. You can use it to borrow money whenever you need it, and you only pay interest on what you use. It can be used for bigger expenses like a roof replacement or to finance an expensive wedding, or smaller expenses such as a vacation.

A lender can only give you a HELOC if you have enough equity and meet other requirements, such as a minimum 620 credit score and debt-to-income (DTI) ratio under 43%. Before you decide to apply, shop around. Compare rates and fees between lenders, and read the disclosure documents carefully.

Remember, your house is on the line if you fail to repay the debt, so make sure you only use it for necessities. It may be helpful to create a budget and plan spending. You should also consider talking to a tax professional, as the interest you pay on your HELOC is often tax-deductible.

How does a HELOC work?

A HELOC has two phases: the “draw period” and the “repayment period.” During the draw period, you can borrow up to your limit and make payments only on interest. This period can last 10 years or more.

During the repayment period, you can no longer borrow funds and have to start paying back both principal and interest. These payments can be steep compared with those during the draw period.

HELOCs typically have variable interest rates, which can rise and fall as well as your home’s market value and mortgage loan terms. It’s important to review your plan carefully and compare your options before deciding on the best option.

You can shop around for the best HELOC rates by applying with several lenders. It doesn’t affect your credit to apply with multiple lenders, and it’s a good idea to compare rates, fees and minimums/maximums. Also consider whether the loan is tax-deductible. Some lenders don’t offer this benefit.

What are the advantages of a HELOC?

Homeowners can use their HELOC for a variety of purposes including renovating their home, paying off higher-interest debt or funding college expenses. They can also benefit from lower interest rates than credit cards.

Most lenders require a stable income, and they look at the borrower’s debt-to-income ratio to make sure that the added loan payment won’t cause financial distress. They will also typically require a home appraisal and may charge an annual fee to maintain the line of credit.

Unlike mortgages, which usually have fixed rates, HELOCs tend to have variable interest rates. This can lead to fluctuating monthly payments and can make it harder for homeowners to budget. In addition, the IRS sets limits on how much of a homeowner’s HELOC interest is tax-deductible each year. Consult a tax advisor for more details.

What are the disadvantages of a HELOC?

Although a HELOC may offer many benefits, there are also some drawbacks. You’re tapping into your home equity and using it as collateral, which puts your home at risk if you can’t repay the debt. Moreover, some lenders assess an early repayment penalty if you close your account before or soon after the end of the draw period.

During the draw period, you can borrow as much or as little as you want and pay only interest for up to 10 years. This can be an attractive feature for certain expenses that occur sporadically, such as multi-phase home renovations or ongoing medical treatments.

However, it’s not the best option for a one-time large expense or for accumulating high-interest debt that requires a regular monthly payment. And since HELOCs have variable interest rates, when rates go up, your payments will likely increase as well. Your lender may send you electronic alerts if the credit limit on your HELOC declines.