Dear EchoBay Expert:

Dear Loyal Reader: In the simplest terms, think of a credit card and think of a car loan. One you pay off in equal monthly installments and one is a revolving line of credit where the amount of cash available to you increases each time you pay down your balance.

A home equity line of credit works like a low-interest credit card. You borrow from the line of credit when you need to access the funds, and as you pay the money back, your line of available credit increases again. A home equity loan is like a car loan, but generally with a much lower interest rate.

You borrow a set amount of money, which is paid to you in one lump sum, and then you pay the money back in set monthly installments over a set period of time according to the terms of the loan. A home equity loan is great if you know exactly how much money you need and you want to pay it back over a set period of time.

If you're not sure how much cash you're going to need for a project or an expense and you'd like the flexibility of accessing funds only as you need them, a home equity line of credit is probably your best bet.

Dear EchoBay Expert:

Dear Loyal Reader: Understanding the terms of your home equity line of credit is extremely important considering that your home is on the line here. To many people, reading through the terms of their credit agreement is like reading through a book written in Latin. Unless you're familiar with the lingo, it can be quite confusing.

There are a few essential terms that are important for you to understand. Your terms should refer to an initial interest rate. This is the rate that you will be paying at the beginning of the loan. The terms for your home equity credit line will then discuss interest rate changes. Things that you need to pay attention to are how your interest rate will change (what index and margin will your lender use), how often it can change (your adjustment periods), and how much your rate can change at any given period (periodic rate cap) and over the life of the loan (lifetime cap).

You'll also want to see if there is a condition that will allow you to convert your adjustable rate to a fixed-rate loan in case interest rates begin to skyrocket. In addition, check to see if there is a clause within your agreement that will allow your lender to freeze your borrowing privileges in certain situations. You don't want your borrowing ability frozen when you need funds the most.