Home equity loans cost less than credit-card loans.

A friend of mine recently paid his bills during several months of unemployment by drawing on a home equity line of credit. What are the pros and cons of setting up a credit line for an emergency fund?

A: It's not a bad idea, so long as you note the hazards.

A home equity line of credit, or HELOC, is basically a second mortgage on your home, with a floating interest rate that can go up or down each month. If your home was currently worth $300,000 and you owed $200,000 on your first mortgage, you'd have $100,000 in equity that could serve as collateral on a home equity loan.

Of course, that means that if you stop making payments, the lender can foreclose and sell your home to cover the debt, as with a regular mortgage.

To qualify for an equity loan, you generally need proof of sufficient income to make the payments, so if the loan is for an emergency reserve, you should get it while you're employed.

Because equity loans are secured by a property, the lender takes less risk than with unsecured loans such as credit cards. So HELOCs usually have fairly low interest rates - currently 6 percent to 7.5 percent, depending on the borrower's credit rating.

With a line of credit, you are authorized a maximum amount to borrow, and you can take any amount up to that limit any time you want. HELOCs typically provide borrowers with checkbooks and debit cards. Your monthly statement will show the current debt and minimum payment required, just as a credit-card statement would.

A second type of home equity loan, the installment loan, gives the borrower a lump sum when the loan is approved, and the borrower begins making payments right away.

The interest rate is fixed for the life of the loan, as with a traditional mortgage. While that's an advantage, installment loans are not as suitable for an emergency fund because you must begin payments even if you have no immediate use for the money.

With both types of equity loans, interest payments on debts of up to $100,000 are generally deductible on the federal income tax return, which is not the case for credit-card loans. That means the real, after-tax rate on a 7 percent equity loan would be 5.25 percent, assuming a 25 percent tax bracket.

To shop for a HELOC, go to www.bankrate.com.

But first, some warnings:

Many HELOCs have low introductory "teaser" rates. Focus instead on the annual percentage rate or APR, which accounts for fees and the true interest rate after any teaser period ends.

Look for the index that will be used to adjust the interest rate every month after the teaser period.

Know the maximum the loan can charge. I saw one that started with a 3.99 percent teaser but could go as high as 24 percent.

Beware of balloon payments. Some HELOCs offer dirt-cheap minimum payments that cover only interest, so that the whole debt remains due some years down the road.

Having a big line of credit, even if you don't use it, can hurt your ability to get other loans because lenders worry you could go on a spending spree and rack up more debt than you can handle.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.