A home equity line of credit is the cheapest way to borrow money right now -- if you can get one.

That's because the Federal Reserve slashed short-term interest rates to rock-bottom levels in December and has held them there. The prime rate remains at 3.25% -- the lowest it's been since September 1955.

HELOCs are tied to the prime rate, which is what banks charge their best commercial customers for loans, and the prime rate moves with the Fed's short-term interest rate.

Our latest weekly survey, taken Nov. 11, found that the national average for a HELOC fell to 5.59%. Even though this rate has been creeping up since January, it remains the best deal you'll find for any type of consumer loan that's not a promotional rate (such as a 0% car loan).

Our extensive database of the best rates on home equity lines of credit shows that in many parts of the country, lenders are offering HELOCs for less than 5% to homeowners with good credit.

That's why we think HELOCs are the best option for everything from home improvements and college bills to paying down high-cost credit card debt.

Think of the savings you'll pocket by paying off credit cards charging 19% or more with a loan of 5% or less.

Unfortunately, not every homeowner can qualify for a HELOC.

Lenders have pretty much stopped making these loans in places where home values have fallen sharply, particularly in Florida, Arizona, California and Nevada. And due to falling home prices, they've frozen the accounts of more than 600,000 homeowners who already had lines of credit.

Other homeowners are simply tapped out, having already extracted most or all of the equity in their homes with previous loans.

For the first time since the Federal Reserve began keeping records in 1945, homeowners hold less than half of the equity in their homes. That means lenders now own more equity in our homes than we do.

With home prices still falling in many cities, one in three homeowners with mortgages actually owe more than their homes are worth, according to First American CoreLogic.

But if you have good credit and substantial equity in your home, HELOCs have some real advantages over other types of consumer credit.

A line of credit allows you to use as much or as little of the loan as you need, and you can pay it back on your own terms. You only pay interest on the amount that you use, and you can borrow money and pay it back over and over again. If you don't use it, it costs you nothing. Because your house secures the loan, any interest you pay will likely be tax deductible.

To figure out what size HELOC you can get, subtract the balance you owe on your mortgage from what your home is worth. (You may need to get an appraisal.) Your equity is the difference between what your home is worth and how much you owe.

Most lenders require you to leave 20% equity in your home, so if your home is worth $200,000, you would need to leave $40,000 in equity. If you still owed $80,000, you'd be able to borrow $40,000.

But with home prices continuing to drop in many places, we urge you to think twice -- or even three times -- before taking a lot of equity out of your home.

In the hardest-hit states, some home prices have fallen by 20% or 30% over the last 12 months. If you borrowed the maximum allowed and home prices fell 21%, you could find yourself upside-down on your mortgage, meaning you would owe more than the home is worth. You can't sell or refinance in that position without making up the difference in cash.

The average cost of a traditional home equity loan continues to be very high -- 7.90% in our most recent survey.

That's because a growing number of homeowners are defaulting on home equity loans, particularly those used as piggyback loans to buy a house with little or no money down.

Some lenders have stopped making traditional home equity loans altogether. Those that remain in the market are charging higher rates, particularly in high-foreclosure states like California, Florida, Arizona and Nevada.

Home equity loans also are less flexible than lines of credit. You get all of the money up front and adhere to a repayment plan that requires you to make the same payment each month until the debt is retired, much like a mortgage. In fact, home equity loans often are called second mortgages.

With HELOCs so much cheaper, there's no compelling reason to go with a traditional home equity loan right now.

If the time comes when the interest rate on your line of credit is higher than what you would pay for a home equity loan, you could refinance into a fixed-rate second mortgage.

But we don't think that will happen anytime soon. With the economy slowly emerging from a serious recession, the Federal Reserve is unlikely to begin raising rates until well into 2010.

Our advice: Take advantage of the lower HELOC rates while you can -- and if you can.

By Carolyn Siegel

Interest.com Associate Editor