Market Insights

Home Equity Line of Credit Rates

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

Home equity lines of credit (HELOCs) are loans that let you borrow cash on an as-needed basis. They’re a way to use your home’s equity to pay for renovations or finance big expenses, like a wedding or college tuition. HELOCs work somewhat like credit cards: you can pull funds up to a certain credit limit during the draw period. When the draw period is over, you repay the loan plus interest over time.

The main drawback to HELOCs is their variable interest rates, which mean HELOC monthly payments can be inconsistent and change with general interest rates. This is different from home equity loans, which usually carry a fixed interest rate. Discover® offers home equity loans with low, fixed rates. See today's home equity loan rates

Wondering if a HELOC is right for you? Let’s look at how their interest rates work:

How to find current HELOC rates

Several factors affect HELOC rates, including the Federal Reserve federal funds rate, the interest rate at which banks lend money to each other. In March 2022, the Federal Reserve raised interest rates for the first time since 2018 and announced that it would raise the target federal funds rate incrementally over 2022.

Average HELOC rates are also based partially on the prime rate reported by The Wall Street Journal. The prime rate is the rate at which the 30 largest banks lend money to their most creditworthy customers.

The easiest way to find current HELOC rates is to look into specific lenders. Their websites will usually offer a range. But, remember, if this is a variable interest rate, it can change over time.

While these official benchmarks offer guidance, HELOC rates also depend on personal factors like home equity, income, and credit score.

What is a good rate for a home equity line of credit?

Because HELOC interest rates vary, the numeric answer to this question will also vary. But, generally, any rate below the average HELOC rate is considered good. Homeowners can earn lower HELOC rates by increasing their home equity, reducing their debt-to-income ratio, and improving their credit score by making on-time payments.

How are rates set for home equity lines of credit?

Lenders calculate HELOC rates differently, but they generally look at the same few categories. Factors that impact home equity line of credit rates include:

Economic indicators

Economic indicators include the current prime rate and federal funds rate, both of which affect HELOC rates. Indicators like inflation, as well as market supply and demand can also impact rates.

Borrowing amount and available home equity

Your HELOC’s credit limit is based on your home equity. HELOCs often have a borrowing limit of 80-90% of your home equity. So, if you have $50,000 in equity, you might be able to obtain a credit limit of between $40,000 and $45,000. The amount you borrow may also impact the interest rates you qualify for.

Credit health and debt

The higher your credit score, the less risky you are to lenders. Higher credit scores can lead to lower rates for HELOC loans, while a lower credit score can lead to higher interest rates.

Debt-to-income ratio, or DTI, is how much of your monthly gross income (before taxes) goes toward paying down debts. A low DTI indicates to lenders that you can responsibly manage your finances and pay off debts and can help you get a lower HELOC interest rate.

Income and ability to repay

Proof of stable income can lead to a lower interest rate. Knowing that you have a steady income lets banks know you will have a way to repay the HELOC loan, making you a less risky customer.

HELOC term length

The full length of the HELOC (draw period and repayment period) also affects interest rates. Longer-term HELOCs, such as 30 years, often come with a lower interest rate, while shorter-term HELOCs, such as 15 years, often come with a higher interest rate.

How do variable rates for a home equity line of credit work?

Most HELOCs come with variable interest rates. The interest rate can change over the life of the loan, though banks must disclose a lifetime cap (maximum interest rate) at signing.

Even if you open your HELOC with a low interest rate, you can still end up with a high interest rate later in the loan term. This makes it hard to predict your monthly payments, which fluctuate with changing rates.

Home equity loans come with low, fixed rates, so you know what your monthly payments will be over the lifetime of your loan. They won’t increase with federal interest rates or inflation. Use the monthly payment calculator from Discover to find a fixed rate and monthly payment that fits your budget.

How much does a home equity line of credit cost?

Unlike other loan options, a HELOC is considered a second mortgage, with its own interest rates, terms, and monthly payments. HELOC borrowers will have to go through an application and closing process, just as with their original mortgage. These may come with added fees, including annual fees, closing costs, origination fees, and underwriting fees. By contrast, home equity loan from Discover come with $0 in closing costs and no additional fees.

Is a home equity line of credit right for you?

HELOCs can help homeowners tap into their equity and fund home renovations or consolidate debt, but their variable interest rates mean they might not be the right option for borrowers looking for stable monthly payments.

Unlike HELOCs, Discover Home Equity Loans come with $0 in closing costs and no additional fees, so borrowers don’t have to bring any cash to their closing. To see if a home equity loan from Discover is right for you, use our monthly payment calculator. If the numbers make sense, apply online and get your loan options in minutes.

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