A home equity line of credit (HELOC) is a lot like a home equity loan in that it is a loan against the equity of the borrower's home; it represents a lien against the property. Unlike a home loan, however, a HELOC is variable--you don't need to take out one lump sum at a time. Additionally, you are only charged for borrowing the funds you use, not on the full amount of the credit line. Borrowers are rarely charged prepayment fees because of the nature of a HELOC.

HELOC Advantages

Review the main advantages of a HELOC. This helps to understand the best time to lock in a rate for your circumstance. The main advantage for a HELOC is that the money is there for emergencies, like a credit card is, but you only pay interest on the amount borrowed. Additionally, you can often deduct the interest paid on any amount borrowed from your federal taxes.

Rate Flexibility

Depending on your lender and the terms of the HELOC, you may have the option to lock in a rate for a certain part of the loan balance. The best time to lock in a loan rate is when you don't know how long it will take you to repay the debt (for instance, if you use a large amount for home repairs and don't know when you're going to be able to pay it back). You also want to lock in interest rates when rates are at their lowest and/or rising. Read the fine print of your loan contract. You want a loan which gives you the most flexibility in terms of locking in a rate.

Rate Lock Timing

Look at the procedures for modifying your rate before locking it in. Be aware that lenders can lower the line of credit at any moment. For instance, you might arrange for a $100,000 draw down on your line of credit, but your lender may decrease this amount in difficult economic times. That is, you may not have access to the amount when you need it the most or when rates are low. For this reason, use your line of credit as a tool, like a credit card. If you think you will need funds three months out, lock in the rate today and overestimate the amount you need.

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Comparing Home Equity Loans and Lines of Credit