HELOCs are popular, but they can be a financial headache. They're a lot like credit cards: You have a set limit to tap anytime you want, and the interest meter doesn't start running until you actually take the money. So what's the problem? Well, most HELOC rates are adjustable, meaning they can—and will—change every time their benchmark index changes. And that means higher payments for you. The current HELOC rate (assuming you have a really great credit score) is a stiff 9.25 percent. Yes, it's true that interest payments can be tax deductible, but you'll still be paying way too much.
The interest rate on a HEL is fixed, meaning the rate you get at the start is what you pay forever. But the trade-off—and you knew there had to be one—is that your interest meter starts running immediately. If you take out a $25,000 HEL, you'll get $25,000 on day one and owe interest on it pronto. But if you are looking at a big-ticket repair job that you don't expect to be able to pay off within a year or so, a HEL will give you more stability than a HELOC.