When planning your financial future, the one thing you can count on is change. Unexpected life events can make the best-laid plans go awry. Flexibility is critical, and it's the main reason people choose an open-ended home equity line of credit (HELOC).

"Life can change faster than a New York minute," said Don Henley, front man for the Eagles. The singer's statement resonates with many facets of life, particularly finances.

The financial world is in a constant state of flux. Markets are as unpredictable as the weather. These days, job security has gone the way of the dinosaur, and people switch careers as often as they change cell phone plans.

To stay afloat in these rapidly-changing times, you need flexible financial tools. The home equity line of credit (HELOC) provides a degree of nimbleness not found in any other home loan.

Home equity loan: The closed-end option

There are two kinds of second mortgages-the HELOC and the home equity loan. Both of these mortgages are liens on your property. Your equity is used as the collateral to secure the mortgage, and both include tax-deductible interest. The similarities, however, stop there.

A home equity loan is far less flexible than a HELOC, and it works much like a traditional first mortgage. You take out a set loan amount, and you pay a fixed-interest rate on that amount for a set period of time-generally, five, 10, or 20 years. The home equity loan is a great choice for people who are planning a large expenditure, like a home improvement project. It provides the stability of a set loan amount and, because the rate is also fixed, you don't need to worry about market fluctuations.

HELOC-Open-ended for flexibility

Unlike other mortgages, the HELOC functions like a credit card. When you take out a HELOC, you receive a maximum line of credit that you may access whenever you want. When you draw from the line, you pay interest on the balance. The interest rate is calculated on a daily basis, like your credit card, and is variable. These rates are generally tied to the prime rate, which exposes you to market fluctuations.

The HELOC is a good choice for emergency expenditures. If your furnace unexpectedly dies, for example, you can quickly write out a check from your HELOC account, and then pay it off as you see fit. When that balance is cleared, you could take on another small home improvement project, or just keep your line open for unforeseen emergencies.

With an open-ended line of credit, the HELOC provides plenty of flexibility for the modern-day financial world. It's a great option for unexpected financial expenditures that exceed your monthly budget, making it an excellent source of emergency funds. If you want a product that works for life's unanticipated moment, then the HELOC is the flexible financial tool for you.

Published on March 17, 2008