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Home Equity Loans vs. Lines of Credit (HELOC)

Young family sitting in home discussing home equity loans vs. HELOCs as they determine the best option for them

If you have equity in your home and want to take out a loan secured by that equity, home equity loans and home equity lines of credit (HELOCs) are two ways to get money.

You can quickly estimate how much you can borrow with a home equity loan and how much your home equity loan’s monthly payments will be with Discover® Home Loans home equity loan calculators.

To see if a home equity loans or HELOC is right for you, review our comparison and find the right type of loan for you.

Please note that Discover Home Loans offers home equity loans, but does not offer HELOCs.

  Home Equity Loan – Discover Home Loans Home Equity Line of Credit – Typical HELOC Lender
Borrowing amount Up to 90% of available equity Up to 80% of available equity
Interest rates Fixed rate Variable rate
Factors for interest rates
 
  • Income and ability to repay
  • Term Length
  • Borrowing amount (static)
  • Economic conditions at time of loan
  • Income and ability to repay
  • Term length
  • Borrowing amount (fluctuates)
  • Economic conditions over life of loan
Withdrawal period Lump sum when loan is approved Withdrawals as needed up to limit, possibly with transaction fees
Repayment period Consistent monthly payments from start of loan Repayment period begins after withdrawal period closes, payments can fluctuate based on variable rates
Monthly payments Consistent over life of the loan Fluctuate based on variable rate, amount borrowed, and withdrawal/repayment periods
Tax-deductible interest?* Possibly, when the loan is used for home updates or renovations Possibly, when the loan is used for home updates or renovations

*Consult a tax advisor to see if your circumstances qualify.

How home equity loans and HELOCs are similar

Borrowing amount dictated by available equity

If you sold your home today for its estimated resale value, how much money would you have left after you paid off your home mortgage and any other home loans? That number is your available home equity.

Home equity loans and HELOCs both use that available equity to secure a loan. While many lenders will allow you to take out a loan equal to 80% of your available equity, Discover Home Loans may be able to lend up to 90% of your available equity.

Debt repaid over 10, 15, 20, or 30 years

While repayment is structured slightly differently for HELOCs, home equity loans allow you to select a term length ranging from 10 to 30 years.

A shorter term of 10 years will feature lower interest rates but higher monthly payments than the same loan for 30 years would have. With both a HELOC and a home equity loan, you can select the right loan term to fit your budget.

Tax-deductible interest payments when put towards home renovation

Both HELOCs and home equity loans may qualify for tax deductions for the interest you pay on the loan or line of credit, when the funds are put towards updates in your home. Consult a tax advisor to see if your circumstances qualify.

How home equity loans and HELOCs are different

Fixed interest rate vs. variable interest rate

A Discover home equity loan will include a fixed rate over the entire life of the loan. That rate will depend on:

  • How much you borrow,
  • How long your repayment term is,
  • Your current credit and income, and
  • Economic conditions at the time of the loan.

A HELOC, on the other hand, typically features a variable interest rate. While your initial rate will likewise be based on the length of your repayment term and your current credit and income, a HELOC allows you to withdraw funds up to a limit, making the amount you borrow flexible (which can impact the variable rate that applies as you withdraw more).

And a HELOC’s variable rate will also depend on economic conditions throughout the life of the loan, where favorable economic indicators could see a variable rate drop but poor economic conditions can actually drive the HELOC’s rate higher.

Lump sum vs. withdrawals as needed

Once a home equity loan is approved, the lender will deposit the full amount of loan in your preferred account to use as you like.

With a HELOC, you will be granted access to an escrow account, where you can withdraw funds as needed (up to the agreed borrowing limit) during the HELOC’s withdrawal period.

Fixed repayment schedule vs. variable repayments

The benefit of a fixed interest rate and a set borrowing amount with a home equity loan is that your monthly payments will remain consistent over the life of the loan. This can help you align your budget without a sudden increase from a variable rate.

HELOCs not only have a variable rate (that can fluctuate up or down, changing monthly payments), but a HELOC also has two distinct periods that will impact your monthly payments: a withdrawal period and a repayment period.

During the HELOC withdrawal period, you can take out funds as needed and, in many cases, you will only need to repay the interest of the loan each month. When the withdrawal period closes, the repayment period begins, where you will start to pay down the principal of the loan. Because of this structure with a HELOC, monthly payments during a withdrawal period can be very low, and when the repayment period starts, those monthly payments will be significantly higher.

This risk is known as balloon payments: where initial monthly payments are attractive but hide the larger payments that loom towards the back half of the loan.

Couple sitting in home discussing home equity loans vs. HELOCs as consider the pros and cons of each

When you take out a home equity loan with Discover, we pay for any closing costs up front: allowing you to save some money to start.

HELOC withdrawal and transaction fees

Discover home equity loans feature no closing costs and no additional fees when your repayment beings, with the exception of any penalties from late or missed payments.

A HELOC, however, may include transaction fees for any withdrawals and an annual fee during the withdrawal period.

How to decide between a HELOC and home equity loan

If you know you want to tap into your home’s equity but can’t decide between a Discover home equity loan and a HELOC from another lender, it helps to understand which type of financing fits your needs.

If you want consistent monthly payments:

If you want to have the same monthly loan payments over the life of your loan, a home equity loan from Discover features stable monthly payments with a fixed rate.

Use our loan amount calculator to see how much your monthly payments will be with a Discover home equity loan.

If you don’t know how much you’ll need to borrow:

A HELOC may fit a flexible borrowing need a bit better, but a home equity loan can provide a lump sum that you can use in any way you like. It takes a few minutes to see how much you can borrow with a Discover home equity loan.

If you want to borrow as much as your equity can secure:

A home equity loan from Discover offers up to 90% of your available equity for a loan, while most HELOCs are limited to 80% of your equity.

If you want to limit fees and closing costs:

There are $0 in closing costs with a Discover home equity loan and there won’t be any transaction fees or annual fees, unlike a HELOC.

If you want to get the best interest rate on a loan:

A HELOC’s variable rate may seem attractive at first, but it will likely change over the life of the loan. Discover home equity loans feature competitive rates.

Apply for a Discover home equity loan today

You can submit an application for a Discover home equity loan in minutes by providing your personal data, income and employment status, and current debt and assets.

Once you apply, you will be guided through the loan process by our team of loan professionals. As soon as we have all the required information, we will evaluate it and provide you with a decision.

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