First, the differences between them. A standard home equity loan is a loan for a specific amount of money, usually with a fixed interest rate. You receive the entire amount of money at loan closing, you pay a fixed interest rate, and you make fixed monthly payments. A HELOC, on the other hand, gives you a line of credit almost like a maximum limit on a credit card. For example, a $30,000 credit line means that you have a limit of $30,000 that you can borrow at any time without any further approval from the bank. But, you may borrow nothing if you don't need the money.

What's the right answer for you? If you have a fixed purchase in mind, like a new boat or college tuition that you want to pay off over a fixed amount of time, then a traditional home equity loan is probably the right choice. You'll know the interest rate and monthly payment and you can work that into your monthly budget. On the other hand, if you are trying to deal with uncertainty in your income or your expenses, a HELOC may be best. You probably pay a higher rate during the times when you have drawn against the line, but you are not paying interest on the loan when you don't need it. In that way a line of credit can be a very inexpensive insurance policy, allowing you to establish the line when your credit and income are good, but draw against it when you have an unexpected expense (such a hospital stay) or lose income (such as a tough year for your small business). As the saying goes, it's a lot easier to borrow money when you don't need it.