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. There are two different types of home equity loans available to California homeowners: home equity loans and home equity lines of credit (known as a HELOCs). 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. 

Fixed Interest Rates

Home equity loans offer fixed interest rates that make it easier for you to budget for your payments. Once you get your 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 is 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 should expect, or you can enter your credit score and estimated home equity in our monthly payment calculator to estimate your monthly payments for a fixed rate 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% and 5% of the entire cost of the total loan. This can often add up to thousands of dollars and is usually added to your loan amount. Examples of fees and closing costs you may be responsible for include:

• Origination and/or Application fees: This is a set fee to apply of rand 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 no fees or costs at the loan’s origination, saving you money over the life of your loan.

HELOCs in California

A home equity line of credit is similar to a credit card: 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. 

While Discover Home Loans does not currently offer HELOCs, Discover does offer a mortgage refinance that can refinance your HELOC into a new home equity loan with a low, fixed rate. See our current rates here.

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

The repayment period ranges 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. 

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 (e.g. prime rate). 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 a more competitive national economy may push interest rates higher, increasing the cost of your HELOC and changing your monthly payments as the line of credit matures.