Adding a HELOC to your mortgage

Please note: Discover Home Loans offers a home equity loan product, but does not offer HELOCs.

A home equity line of credit (HELOC) can help you access money for renovation projects, debt consolidation, or major purchases.

Unlike cash-out refinancing, a HELOC acts like a second mortgage. This means you’ll have monthly bills for both your original mortgage and your new mortgage line of credit. For this reason, adding a HELOC to your mortgage comes with unique risks and rewards.

Discover® does not provide HELOCs but features home equity financing through home equity loans and cash-out refinancing. But, to see if a HELOC fits your financial needs, let’s look at how HELOCs work, alternatives to HELOCs, and how to find the right loan option for you.

How a HELOC works with your existing mortgage

As a mortgage line of credit, a HELOC acts as a second home loan, complete with its own interest rate and terms. It allows you to open a credit account and set a limit based on the equity you’ve built in your home. Like a credit card, you can access this line of credit as needed.

HELOCs come with a draw period, typically five to ten years, followed by a repayment period, typically ten to twenty years, during which you pay back the loan plus interest.

Understanding first lien and second lien mortgage positions

A mortgage lien is a property claim that serves as collateral. It ensures that if you default on your mortgage, the lender can take possession of your property and sell it to earn back their investment.

Your original mortgage is in first lien position. This means if you default, and the bank forecloses on your home, that mortgage will be paid off first. As a second mortgage, a HELOC is in second lien position, and therefore riskier for lenders. For this reason, HELOCs often incur higher interest rates.

However, if you’ve already paid off your original mortgage a HELOC will be in first lien position, allowing you to borrow at a lower rate.

Borrowing alternatives to a HELOC

A HELOC allows for flexible borrowing, letting you tap into your line of credit as needed and only pay back what you use. It also comes with a variable interest that changes over time, and, because it acts as a second mortgage, you’ll need to keep track of two monthly mortgage payments and interest rates.

For more favorable loan options, you might consider these alternatives to HELOCs:

Home equity loan

A home equity loan gives you a lump sum of money up front. Home equity loans are paid back in monthly installments over a set repayment period, such as thirty years.

Unlike HELOCs, home equity loans often have fixed interest rates, so monthly payments won’t fluctuate over time. Discover Home Equity Loans come with low fixed rates and zero application and origination fees, helping you save money on fees and interest.

Use loan amount calculator from Discover to see how much money you might be able to borrow.

Cash-out refinance

Cash-out refinancing involves replacing your original mortgage with a new one that offers more favorable terms. Unlike with a HELOC, you won’t have to juggle two mortgages. Cash-out refinancing also lets you access a lump sum of money that you can use to fund home improvement projects or consolidate debt.

With cash-out refinancing, you can get a lower, fixed interest rate, saving money and ensuring stable monthly payments. By cash-out refinancing with Discover, you can keep your existing mortgage — but on better terms — and get the cash you need.

Use cash-out refinance calculator from Discover to see how much cash you can get out of your home equity.

Benefits & risks of adding a HELOC to your mortgage

It’s important for homeowners to understand the benefits and risks of HELOCs so they can make the best decisions for their loan needs.

The biggest advantages of HELOCs include:

• Flexibility. Because you’re opening a mortgage line of credit, you can pull cash as needed, and you only pay interest on what you borrow.
• Low closing costs. HELOCs often come with extra fees such as origination and application fees, but they usually don’t come with closing costs.

The most notable drawbacks of HELOCs include:

• Variable interest rates. HELOC interest rates can fluctuate, leaving homeowners with unpredictable and high monthly payments. Discover Home Loans, however, come with low, fixed interest rates that offer more financial stability.
• Added fees. HELOC borrowers often pay additional fees, like annual fees, origination fees, and underwriting fees. Discover Home Loans, on the other hand, have zero fees and no cash due at closing.