How to use your home's equity for a loan or line of credit in California

For homeowners in California, a home equity loan (sometimes known as a second mortgage) can be a great way to use a home’s equity to meet your financial needs.

You can use a home equity loan for many different expenses including debt consolidation, home improvements, college tuition, medical bills, or even a vacation. Two different types of home equity loans available to California homeowners include home equity loans and home equity lines of credit (known as a HELOC). Let’s take a closer look at each of them.

Home equity loans in California

With a home equity loan, you get one lump sum of money that you pay back via fixed monthly payments over an agreed term. If you know exactly how much money you need to borrow or prefer to get your loan funds at once, a home equity loan may be a better option than a home equity line of credit.

A home equity loan can also be effective in consolidating your debts, where you can often convert your current debt into a stable monthly loan payment, often at a lower interest rate.

READ MORE: What is a home equity loan? How does it work?

Fixed interest rate home equity loan

Home equity loans typically offer fixed interest rates that may make it easier for you to budget for your payments. Once you get your fixed interest rate and the disbursement of the loan is received, the interest rate will not change, even when there are major interest rate fluctuations in the market. This may be considered an advantage of the home equity loan over the home equity line of credit, which often uses variable rates.

You can view current home equity loan rates from Discover® Home Loans to better understand what rates you could expect, or you can enter your credit score and estimated home equity in our monthly payment calculator to see what your monthly payments might look like for a fixed rate home equity loan.

Home equity loan closing costs and other fees

Although closing costs vary by lender, you can often expect to pay them when you take out a home equity loan. In most cases, closing costs are between 2% - 5% of the entire cost of the total loan. This may add up to thousands of dollars and can be added to your total loan amount. Examples of fees and closing costs you may be responsible for paying include:

• Origination and/or Application fees: This is a set fee to apply for and originate your loan.
• Appraisal fee: Your lender may use an appraisal to determine your combined loan-to-value ratio. This is calculated by adding your new loan to any other loans or your home, then dividing the balance by your property value.
• Title search fee: A title search fee will allow your lender to confirm that you’re the owner of the property.

Discover Home Loans offers home equity loans with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.

HELOCs in California

A home equity line of credit is like a credit card attached to your home equity — you have a set credit limit that allows you to borrow as much or as little as you’d like up to that credit limit. HELOCs are a good option when you would like the flexibility of being able to borrow money as you need it. 

If you take out a HELOC, you should be aware of two timeframes: the draw period and the repayment period. During the draw period (which could range from 5 to 10 years), you can withdraw whatever amount you need up to your limit. You will only pay interest on what you borrow. Once the draw period is over, the repayment period will begin.

The repayment period may range from 10 to 20 years and requires you to pay back the principal and any interest on your borrowed amount. You can no longer borrow money from your HELOC during the repayment period. Some lenders may require payment in full or for a large portion of the loan balance at the end of the HELOC draw period (also known as a “balloon payment”), so make sure to understand your lender’s specific requirements before you apply for a loan.

READ MORE: Home Equity Line of Credit Handbook

HELOC: Variable interest rates

While some do not, many HELOCs come with a variable interest rate that can fluctuate based on the market index used for the loan. If the market’s prime rate goes up, you can expect your HELOC rate to increase as well.

Your credit score and debt-to-income ratio (your debt payments divided by your gross monthly income) are often considered when determining the initial interest rate you’re offered. Generally, the higher your credit score is and the lower your debt-to-income ratio is, the better initial rate you will receive on a HELOC.

Over the lifetime of the loan, this variable interest rate can move up or down, meaning you will pay more or less in interest as the index moves. This can work in your favor when the economy features low interest rates, but economic conditions may push interest rates higher, increasing the cost of your HELOC and changing your monthly payments as time goes on.