Dear EchoBay Expert:

Dear Loyal Reader: The first thing that you need to ask yourself is do you really want to put your home up as collateral for the purchase of a boat? If you're absolutely positive that you'll be able to make the monthly payments each and every month and you absolutely just can't live without a boat, then the answer to your question will largely be determined by current interest rates.

If interest rates are higher than when you originally financed your home, you're going to want to go with a home equity loan or a home equity line of credit lest you wind up refinancing your entire mortgage balance at a higher interest rate, which could equate to throwing away thousands of dollars.

However, if interest rates are lower than when you first financed your home, you can kill two birds with one stone (hypothetically of course) with a cash-out refinance. You'll be able to lower your current interest rate, saving you potentially thousands of dollars over the term of your loan, and get the cash you need to finance your boat purchase.

Dear EchoBay Expert:

Dear Loyal Reader: In the beginning of your loan term, the lower rate will be offered on the home equity line of credit. This is because a home equity line of credit features a variable rate. The rate will start off low and will generally increase over time. This rate is usually stated as WSJP (Wall Street Journal Prime) plus a certain number of percentage points.

As WSJP changes, so will your loan rate. While the interest rate can be very attractive in the beginning, if rates begin to rise you could see a significant increase in the amount of interest you will end up paying on the money you borrow from your line. Home equity loan rates are fixed along with the payment amount. This equates to a higher interest rate, although home equity loan rates are generally very low and comparable to mortgage rates.

Of course with a home equity loan, you will get a lump sum upfront whereas the line of credit allows you the flexibility to draw the money when you need it. Deciding between a home equity line of credit and a home equity loan depends largely on how you plan to use the money. If it is a one-time purchase, a home equity loan can be the best way to go even though home equity loan rates are higher.

This of course assumes that you will be taking years to pay off the loan amount. If you want the flexibility to use the money as needed over the next 10-15 years, a home equity line can be your best choice.