The two most common methods of financing home improvements are cashing out the equity in your home by refinancing and taking out a second mortgage or home equity line of credit. Home equity loans, a type of second mortgage, have a fixed term, usually between five and fifteen years, at a fixed interest rate. You borrow one lump sum of money and make regular monthly payments over the life of the loan.

Home equity lines of credit are a type of revolving credit, like a credit card. You're allowed to borrow a certain amount over the life of the loan, and you don't have to borrow it all in a lump sum. Some lenders give you special checks; others provide a type of credit card that you use to access the money. As you pay off the principal, you can borrow more. For example, let's say you have a line of credit of $15,000. You borrow $6,000, leaving $9,000 of available credit. You pay off $3,000, making your available credit $12,000 ($15,000 – $6,000 + $3,000 = $12,000). The interest rate is variable so your payments change depending on the current rate and your outstanding balance. At the end of the loan term, any unpaid balance is due. If you sell your house, the balance is due at the time of sale.

Which Type of Loan Is Best for You?

Home equity loans are best suited for times when you need a lump sum amount. Lines of credit are best if you need the money at intervals, so you borrow only the amount you need, when you need it. Lines of credit can be dangerous if you have trouble controlling credit card debt because they work in much the same way as credit cards. But there's one very important difference: With a home equity line of credit your home is at stake. If you get in over your head, you could lose your home.

Home equity loans are attractive for a number of reasons. Their rates are higher than interest rates on first mortgages but much lower than credit card interest rates. Interest on home equity loans may also be tax-deductible, another attractive feature. Closing costs for home equity loans are similar to those for first mortgages. Expect to pay 2 to 5 percent of the loan amount — but keep your eyes open for specials and promotions.

You can't use the APR to compare home equity lines of credit and home equity loans. The APR for a line of credit doesn't include points and fees, so it will be misleadingly low if you try to compare it to the APR for a home equity loan.

Should You Get Your Loan Online?

Even if you're not comfortable with the idea of handling the entire mortgage process online, don't hesitate to use the Internet to research rates and fees being offered by various lenders. Lenders who offer the most competitive rates tend to be online, so you can find the best rates much more quickly than you could by calling or visiting local lenders.

You may not want to complete the lengthy loan application form online, but you can call the lender and give the information over the telephone. You may be able to track the progress of your loan online. At the very least, you can use the Internet to educate yourself quickly and painlessly about various mortgage products and current rates.