Credit Basics

"They are one of the best things the banks have come up with," Bour says. "It gives you ready access to cash and you don't pay anything unless you use it. And the interest rates are much lower than you'd usually pay on a car loan or on your credit card debt."

But, be careful, cautions Herman. "If you don't pay the credit card bill, there's nothing they can take away from you; but if you do it as equity you can lose your home. Be absolutely positive you can make those payments to completion."

Who is it for?: People who are unsure how much money they may need for longer-term home improvement projects. Cars, credit card purchases, even college tuition payments are often financed this way, too, because interest rates are lower than with traditional car loans, and so on.

HELOCs also work well for people who want a sort of "insurance policy" for unforeseen medical expenses or if they lose their job, because then it's too late to get approved for a loan.

How the interest rate works: Typically variable and tied to the floating rate index, or the prime lending rate set by the Federal Reserve. While the HELOC rate (currently between 4 and 4.25 percent) is typically lower than other home equity loans, the rate can fluctuate and will likely increase through the rest of the year as the Federal Reserve increases short-term rates to keep potential inflation in check.

You can make interest-only payments during that initial, five-to-10-year draw period. Typically, interest is tax-deductible.

Home equity loan

What is it?: One lump sum of money. Like a standard car loan, you borrow the cash once and have monthly installments to pay it back. Also known as a second mortgage.

Who is it for?: People who know exactly how much their project costs, or how much they're going to need. Also works well for people who want to know the exact amount of their monthly payments.

How the interest rate works: Carries a fixed rate over the term of the loan. Currently the national average rate on a home equity loan is around 6 to 6.5 percent. Payments are principal and interest combined, and interest is typically tax-deductible.

General purpose loan

What is it?: Anyone can apply, homeowner or not. This is used least frequently because of the higher interest rate. Also, since many people have some equity in their homes, they opt for one of the above.

Who is it for?: People who have no equity in their homes but have solid credit and job security.

How the interest rate works: Typically carries a higher interest rate (8 to 12.5 percent) because borrowers are considered higher risk.