For most of us, our home is our biggest investment, and the equity in our homes often represents a significant portion of our total net worth. Those who are on the path to retirement or already retired often find that they are "house poor," with so much wealth tied up in their homes that little remains to pay bills and provide a reasonable standard of living.

Those in this uncomfortable situation have a number of options at their disposal, including:

• Selling the home and moving to a smaller home or apartment
• Taking out a reverse mortgage
• Taking out a home equity loan or second mortgage
• Using a home equity line of credit

While all of these options can be good choices in different circumstances, those who wish to pass their homes on to their heirs may wish to look more closely at the home equity loan or home equity line of credit options. Those homeowners will need to understand the difference between these two options in order to make the best choice.

A home equity loan is also referred to as a second mortgage, and it is basically a loan secured by the value of the home. The home is used as collateral for the loan, and this generally allows for lower interest rates than other types of loans. It is absolutely vital for borrowers to understand that the home is at risk if the loan is not paid back on a timely basis.

A home equity loan can be taken out for any number of reasons. Some parents use this type of loan to pay for their children's college costs or other expenses. Home equity loans can also be used to pay for home improvements and other costs.

In contrast, a home equity line of credit is meant to provide funds as they are needed. This type of loan is often used to provide funds for home improvement projects, especially projects where the cost is not known up front. This provides homeowners will the flexibility to take out exactly the funds they need, avoiding unnecessary expenditures while still getting the money they need.

Since these two types of loans are so different, the payments will be different as well. With a traditional home equity loan the payments are generally the same each month. Each payment pays back a portion of the principal borrowed, along with interest, until the loan has been paid back in full.

A home equity line of credit works a bit differently, since the amount borrowed can change over time. These payments will vary from month to month as the amount of principal and interest changes.

It is important for those considering a home equity line of credit to understand this variability and to ensure that there will be sufficient cash flow to make the payments as they come due.

Which option – home equity loan or home equity line of credit – is the right choice depends on many different factors. All things considered, home equity lines of credit offer more flexibility to the borrower, but with that flexibility come more unstable repayment terms.