Market Insights

Home Equity Line of Credit (HELOC) Interest Rates

Couple drinking coffee while discussing HELOC rates that are available

If you're trying to decide on a home equity line of credit (HELOC) or other home equity loan product, it's important to understand how home equity line of credit interest rates are applied and how much they can cost you over the life of your loan or line of credit.

Learning more about how home equity line of credit rates get calculated and which factors go into determining the rate you are offered can help you make a better decision about which HELOC or other home equity loan product is best for your financial needs. While Discover® Home Loans does not offer HELOCs, Discover® does offer home equity loans for amounts between $35,000 and $200,000 with no application, origination, or appraisal fees, and no cash is required at closing.

How are HELOC interest rates different from home equity loan interest rates?

Unlike the fixed interest rates associated with home equity loans, HELOCs typically use variable interest rates that are pegged to the national prime rate. With variable interest rates, your rate could go up or down for as long as your HELOC account is open. In contrast, most home equity loans offer fixed rates, which means you know upfront how much interest you will pay on the money you borrow.

As the prime rate moves up or down (often depending on factors of the national economy), your HELOC’s variable rate moves up or down as well. Banks charge variable interest based on the prime rate plus a margin, for example, prime rate plus 2%. This margin will vary by the lender, depending on how competitive they want their loans to be, and based on what rates they can offer to borrowers with different credit ratings and qualifications. However, even as the prime rate moves up or down, the margin your lender charges on top of that rate will remain constant over the life of the loan.

Factors Affecting HELOC Interest Rates

While a HELOC with a variable rate is based on the prime rate, the marginal rate that lenders add on top of that prime rate is dependent on a few basic elements of your home equity line of credit:

  • Your credit score and credit history: A homeowner who has good credit will be more likely to qualify for lower interest rates on their home equity loan or HELOC than borrowers with lower credit scores. For example, Discover has home equity loan requirements that include a minimum credit score of 620.
  • Your available home equity: The difference between your home’s current value and the amount remaining on any home loan(s) represents your available home equity. Your amount of home equity allows lenders to calculate the maximum home equity loan amount that you are eligible for, where greater equity compared with the amount you are borrowing can lower the interest rates offered to you.
  • Length of HELOC repayment period: When you sign up for a HELOC, you are not getting a fixed term with a set schedule of monthly repayments like you would with a typical home equity loan. Instead, your HELOC will include a “draw period" (how long you will have access to withdraw money from your HELOC account) and a “repayment period" (how long before you are expected to repay any money borrowed from your HELOC). The length of your repayment period can affect your interest rate. For example, some HELOCs have repayment periods of as few as 5 years or as many as 30 years. The longer the repayment period, the more interest you could pay over the life of the home equity loan or line of credit.
  • How much you withdraw from your HELOC: Interest charges from a variable-rate HELOC can also change based on the amount withdrawn, as the outstanding amount you borrow is used to calculate the interest you owe. So if you withdraw less than your maximum borrowing limit from a HELOC, you may reduce the interest charges of the loan.

How to Refinance a Variable-rate HELOC to a Fixed Rate

If you are concerned about the financial risks  that the prime interest rate may rise, you can refinance your variable rate HELOC to a fixed-rate home equity loan from Discover®. Fixed-rate home equity loans can provide budget-conscious consumers a way to access the equity in their homes, without worrying about fluctuations in monthly payments caused when interest rates rise or fall.

If you want to refinance your HELOC to a fixed rate, there are a few possible costs and complications to keep in mind:

  • Extra fees: Converting to a fixed rate home equity loan will usually require you to pay additional fees, depending on the lender. Discover Home Loans, does not charge origination fees or costs at closing, even when you refinance a HELOC.
  • Minimum borrowing amount: If you're converting to fixed rate, your lender might require you to borrow a minimum amount with your HELOC to qualify for the fixed rate. This can reduce the flexibility that can make a line of credit more appealing than a traditional home equity loan. 
Couple in their dining room reviewing HELOC rates and comparing HELOC lenders

Your HELOC interest rate is important, but it's not the only thing to consider when choosing a lender

Questions to ask lenders to get the best home equity line of credit interest rates

If you want to get a HELOC, it pays to shop around. Different lenders can offer better deals, better interest rates, better loan features, and otherwise give you a better home equity loan product to suit your financial needs. Some lenders might offer a special low introductory APR (annual percentage rate) that can help you save money. Other lenders might offer a longer draw period for your HELOC so you can borrow money (with the approved terms and variable interest rate) for a longer timeframe than other lenders offer.

Your HELOC interest rate is important, but it's not the only thing to consider when choosing a lender. Ask these questions to get the best HELOC rates and to find the best overall loan option for you:

How long does the initial introductory rate last, and what happens next?

Some lenders offer a super-low introductory APR, but this rate might only be applicable to the first 12 months (or less) that your account is open – then the interest rate goes up. Make sure you understand how long the special intro offer will last, and read the details on what your interest rate will be from then on.

What is the HELOC rate index and margin/mark-up?

Find out how the HELOC rate is calculated. Many lenders will spell this out in the fine print on your loan application, such as “prime rate + 2%-13.99%." The range of interest rate margin available to you will depend on your credit score and other qualifying factors.

What is the increase in HELOC margin, and what are the HELOC rate caps?

If you are getting a variable-rate HELOC, you'll want to find out just how high that interest rate can go. Is the lender offering any details on what happens if interest rates go up? Will the lender's margin also go up, or are they committing to a fixed margin? And what is the maximum rate that they will charge on this loan? These details should be available in the terms and conditions of the HELOC, which you can review prior to signing up for the HELOC account. Find out if your lender offers a cap on the rate to put a limit on the maximum interest rate that you can be charged to protect yourself from high prime rates.

How long is your HELOC draw period?

Find out how long you'll be able to withdraw money from your HELOC. After this draw period is up, you would have to get your lender to approve an additional draw period, or refinance your HELOC, if you want to continue borrowing.

Are there options for HELOC balloon payments?

Many borrowers repay their HELOC on an ongoing basis, but some people want the option to pay off very little of their HELOC borrowings during the draw period, and then leave the largest amount to repay at the end – this is known as a “balloon payment." This type of repayment plan can be beneficial if you are investing the funds in a major home improvement and are planning to sell your home when the project is finished.  

Are there any additional fees with a HELOC?

Some HELOC lenders include fees like early withdrawal fees, inactivity fees, annual account fees, prepayment penalties, and more. Make sure you have a clear understanding of the total fees for your HELOC, not just your interest rate, before you sign.

Find a HELOC rate that fits your budget

A variable-rate HELOC can be a good tool for some people's financial needs, especially if you have a one-time home improvement project or are considering funding a series of home repairs or remodels over the next few years. For example, if you know you want to build a new garage, remodel your kitchen, and put in new flooring in your upstairs bedroom, but you don't want to finance all of these projects at once, having access to a HELOC while you work through your to-do list during the next few years could be a flexible option to match your flexible needs.

But don't assume that a HELOC is “free money." Variable interest rates can go up, making it much more expensive to repay the money borrowed from your home equity and altering your loan payments each month.

If you have predictable costs, regular monthly payments, and fixed interest rates, a home equity loan might be a better solution for your financial needs. Unlike a HELOC, a home equity loan lets you set all the details in place upfront, before you get your loan funds, so you can commit to a fixed interest rate and a predictable monthly payment that fits your budget. Use this home equity loan calculator from Discover to figure out what your estimated monthly payment might be.

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