Home equity: loan or line of credit?  
That is the question.

With most lenders, you can borrow up to 85% of the current appraised value of your primary residence minus the balance of your mortgage.

So, if your home was appraised at $400,000, and you owe $220,000 on your mortgage, then:

$340,000 [85% of your home's appraised value] - $220,000 [your mortgage balance] = $120,000 [the amount you may be able to borrow]

A home equity loan works like your mortgage or other loans. You borrow a specific amount, then make regular monthly payments with a fixed interest rate during a predetermined repayment period.

A home equity line of credit works more like a credit card. You have a credit limit that you can access during the borrowing period, which is typically 10 years. Like a credit card, when you pay back some or all of what you borrowed, you replenish the credit limit you can borrow from.You only pay interest on the money you borrow, not the entire limit, and only pay interest once you access that money.

For both HELOANs and HELOCs, the interest rate is often lower than other types of loan rates because the rate is based on collateral (your home) instead of your income and credit rating.

For both, if you use the money you borrow for home improvements, the interest may be tax-deductible.^Footnote1

For both, you may be able to borrow up to 85% of your home's appraised value minus your mortgage balance.

With a HELOAN, you receive the entire amount you borrow in a lump sum. With a HELOC, you have a credit limit and can borrow as much (or as little) of that as you need over the course of the borrowing term.

Most HELOANs have fixed interest rates, and most HELOCs have variable interest rates. Some HELOCs (including those offered by Bank of America) give you the option of converting a portion of the credit line to a fixed rate.^Footnote2

With HELOANs, you pay interest on the entire amount borrowed. With HELOCs, you only pay interest on the amount of your limit that you use.

You can use HELOANs and HELOCs to finance home improvement projects-and if you do, the interest may be tax-deductible.^Footnote1

They can also be used for debt consolidation,^Footnote3 emergency costs including medical bills and other unforeseen expenses, and education tuition and fees.

The major deciding factors in the choice between HELOAN and HELOC are 1) how immediately you'll spend the funds, and 2) how certain you are about the amount you'll spend.

For instance, if you're putting in an in-ground pool, a HELOAN is probably the better choice because you'll need the lump sum of money to pay for that project, and because you know the total cost of the project ahead of time.

If you've decided to do a series of home improvements over the next few years, a HELOC works best because it gives you the flexibility to only spend what you need when you need it. Plus, you don't pay interest on the money until you actually access it.