Mortgage Products

HELOC: Options & Alternatives

If you’re a homeowner, a home equity line of credit (HELOC) can seem like an easy way to withdraw funds when you want. HELOCs, however, may have specific withdrawal and repayment periods and often feature fluctuating variable interest rates. 

On top of that, securing a HELOC isn’t the only way to use the equity you own in your home to your advantage. A home equity loan or cash-out refinance are home equity lending alternatives that can give you access to funds with relative ease.

If you’re deciding whether to apply for a HELOC and want to know what kind of options you have, learn how HELOCs work and how home equity alternatives can offer similar financing with their own appealing options.

Fixed vs. variable HELOC rates

Most lenders offer variable-rate HELOCs, which sometimes promote a 0% introductory APR. While variable rates may start at lower rates than a comparable home equity loan, an increase in rates can mean paying more in interest charges over time.

Some lenders do offer fixed-rate HELOCs though, experiencing many of the same benefits as fixed-rate home equity loans. For example, a fixed-rate HELOC’s interest rate won't change — even if you lose your job or the federal interest rate increases.

HELOC withdrawal & repayment options

A HELOC is usually structured by two distinct terms: a withdrawal period (or draw period) and a repayment period.

During the draw period, you can make any number of withdrawals, up to the approved line of credit. Many HELOCs will allow you to pay only interest charges (not repaying the principal balance) on the balance of the withdrawals you made during the draw period.

But the lower monthly payments of a HELOC’s draw period are followed by the repayment period.

During the repayment period, you will have to pay both interest and start repaying the loan balance. This will push your monthly payments in the repayment period higher than they were during the interest-only draw period.

Refinancing HELOCs

HELOCs, in most cases, can be refinanced for debt consolidation, but this can have drawbacks. Specifically,  the closing costs and potential additional fees for each loan may increase the loan amounts.

And. if your variable-rate HELOC is too difficult to budget for, refinancing with a fixed-rate home equity loan can switch the fluctuating monthly payments of your HELOC to the fixed monthly payments of a home equity loan.

Alternative borrowing options to HELOCs

HELOCs aren’t the only way to leverage the ownership you have in your home, either.

Home equity loans

Home equity loans offer similar borrowing limits and interest rates as HELOCs, but typically include fixed rates that help to build a consistent payment schedule for the life of the loan. A home equity loan form Discover® also features $0 in costs at closing to keep the loan’s cost down.

Cash-out refinancing

Cash-out refinancing is another way to use your home's equity to access funds. Refinancing your existing mortgage may improve your rate, which can lower your monthly payments. Getting cash-out refinancing from Discover may allow you to improve on your existing mortgage, while borrowing additional funds to use for almost any purpose.

Find the best option for your home equity lending

HELOCs, home equity loans, and cash-out refinancing all provide:

  • competitive borrowing rates,
  • higher borrowing limits than credit cards or personal loans,
  • flexibility to use the funds for almost any purpose,
  • and flexible repayment terms ranging from 5 to 30 years.

When deciding on the right home equity borrowing for you, be sure to understand the full costs of the loan, which can include processing fees and closing costs.

And while HELOCs may be a fit if you are unsure of your borrowing need, home equity loans and cash-out refinancing feature stable monthly payments so you can build a budget to match.

If you’re still unsure which home equity lending option suits you best, reach out to a specialist at Discover or learn about how much you can borrow with your home equity by using one of our calculators.

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