Dear Rachel,
Land loans are riskier for lenders because the loan's collateral, the property, isn't currently being used. That makes it easier for the owner to walk away and leave the lender with the land. Because of that, down payments and interest rates are higher for land loans than they are for mortgage loans.

What type of loan depends a lot on the property, what you plan on doing with it, and when you plan to have the work completed.

Unimproved land, or raw land, with no plans for improvement is the hardest type of property to secure a loan on because it is in essence a speculative investment. Raw land has no added improvements like sewers, utilities, streets or structures.

A raw land loan will have higher down payment requirements and a higher interest rate than an improved property loan. Some lenders require a 50 percent down payment, but you should be able to find a lender that will only require a 20 percent down payment. A local lender that is familiar with the property will be more willing to work with you on the loan than a lender unfamiliar with the area.

If you're buying raw land and planning to make improvements, make sure that the services you'll need are available. Get a staked survey of the property. Be concerned about easements and access since both will influence the property's value. Access will also influence your ability to get a loan.

When purchasing the property, insist on a warranty deed and title insurance to make sure you'll have clear title to the property.

Improved property, zoned for your intended use, will be easier to get a loan for than unimproved property. Buying land with immediate plans for construction is the easiest type of land loan to secure because the lender will be paid off when you get a mortgage on the structure.

A home equity loan, or refinancing your current mortgage with cash out to purchase the land, may meet your needs better than a land loan. Since your current home secures the home equity loan, there's less risk to the lender. That should mean a lower interest rate.

Land loans typically have 10-15 year maturities just like home equity loans. The interest on your home equity or mortgage loan may generate a tax deduction on your income taxes.

The interest expense on a land loan may be tax deductible if the land is held as an investment. Consult with your tax adviser if you plan to take this interest deduction.

If borrowing against the equity in your home isn't right for you, your credit union is a good place to start shopping for a land loan. You should also interview a few mortgage brokers in your area and talk to them about land loans.

These loans are story loans, meaning the lender has to understand the story behind the property and your plans for the property before they will be willing to lend to you. Using a mortgage broker is a good idea when you look for a land loan.

Dear Jeanne,
If you don't plan to build on the property within the next two years, it will be hard to get a loan secured by the land, like the auto secures an auto loan. Land loans generally require a 20-25 percent down payment and are often limited to 15 years or less. If you have enough equity in your current home, a home equity loan makes more sense than a land loan.

The interest expense on a home equity loan may be tax deductible, reducing your effective interest expense. (Consult your tax advisor.) Refinancing your current mortgage to include cash out for the land purchase is another possibility. Closing costs on a first mortgage are typically higher than on a home equity loan, and with your plan to repay the loan in a short time period, a refinancing may not make economic sense if you already have a low interest rate on your first mortgage. Of these options, I believe that a home equity loan or a refinancing of your first mortgage make the most sense for your situation. IRS Publication 936, Home Mortgage Interest Deduction ,explains why land loans don't qualify for the mortgage interest deduction and how home equity loans can qualify for the deduction.