 TITLE: How Does a Home Equity Loan Work? CONTENT: How Is a Home Equity Loan Different From a Home Equity Line of Credit?\n----------------------------------------------------------------------\nAn alternative to taking out a lump sum is to borrow from your home equity as you need funds. Home equity lines of credit (HELOCs) provide a revolving credit line, similar to a credit card, with a credit limit based on your accumulated equity. You can tap into it for a specific number of years, called the draw period.\nThere are some notable differences between a HELOC and a home equity loan. With a HELOC:\n*   Interest is only applied to the amount you borrow, and not to the unused portion of the credit line.\n*   Interest rates are variable, and are based on the prime rate (or other index) plus a fixed margin. If the index your rate is based on goes up or down, so, too, will the interest rate.\n*   Payments fluctuate according to the amount you owe and the interest rate.\n*   If a balance remains after the draw period, a fixed repayment period begins, which is generally 20 years.\nThe downsides to HELOCs are similar to those you'd experience with home equity loans: The debt depletes your home's equity, and you could lose your home if you miss too many payments. What makes HELOCs unique, however, is the ability to use your credit line like that of a credit card, which could result in overuse. In addition, if the interest rate rises, the debt will be more expensive than you expected. If you make only minimum payments, you may end up with a large bill at the end of the draw period, and the new payments could be uncomfortably high.\nConsequently, HELOCs are best for the things you can afford to repay quickly rather than extend out for a number of years. END