HELOC comparisons

Please note: Discover® Home Loans offers home equity loans and mortgage refinance opportunities but does not offer HELOCs.

Home equity financing may help you plan for your financial future. However, you’ll want to pick the right type of loan that meets your specific needs.

When comparing HELOCs to other types of loans, be sure to check interest rates, closing costs, repayment terms, and other factors to make an informed decision.

Type of loan	Collateral	Type of credit	Common purchases may be used for
HELOC	Home	Revolving	Large purchases Debt consolidation Home improvement projects
Home equity loan	Home	Installment	Large purchases Debt consolidation Home improvement projects
Cash out refinance	Home	Installment	Refinancing a mortgage Large purchases Debt consolidation Home improvement projects
Credit cards	None (on an unsecured credit card); cash deposit (on a secured credit card); asset like a home or car (on an asset-secured credit card)	Revolving	Day-to-day purchases
Personal loans	None (on an unsecured personal loan); asset like a home or car (on a secured personal loan)	Installment	Large purchases Debt consolidation

 

What is a HELOC?

A home equity line of credit (HELOC) is a revolving line of credit that lets you borrow against the equity in your home. Equity is the difference between the current appraised value of your home and the total amount you owe. 

Like a credit card, a HELOC will allow you to access funds up to a predetermined amount set by your lender during a “draw period.” During this time, you may have the option to only pay interest on the amount you borrow or pay both interest and the loan’s principal. 

Once the draw period ends, you enter a repayment period, where you usually pay both interest and principal. This may mean your monthly payments during the draw and repayment periods are different.

A HELOC typically has a variable interest rate, so your monthly payments may go up or down based on factors such as market conditions and the economy.

How to calculate your home equity

To calculate your home equity, add up the outstanding mortgage debt on your home, including any second mortgages, and the balance of any loans on your property. Then, subtract what you owe from your home’s current value. You can look online to estimate the current value of your home or hire a professional appraiser.

For example, if you currently owe $150,000 and your home's value is $300,000, you have $150,000 of equity in your home, which is 50%.

Pros and cons of HELOCs

Instead of borrowing a large lump sum at once, a HELOC lets you withdraw funds up to a pre-approved limit over time during the draw period. You may have an option to only pay interest on what you borrow until the repayment period begins.

A HELOC usually has a variable interest rate, meaning your monthly payments may fluctuate. Also, be aware that interest-only monthly payments during the draw period may increase to higher monthly payments during the repayment period. This is because you’ll need to pay the loan’s principal as well as interest.

Like other loan types that use your home as collateral, not making payments on your HELOC may lead to foreclosure.

Comparing HELOCs with other borrowing options

When considering a HELOC, compare it with other borrowing options on the market. This may help you find the right product for your circumstances.

HELOC vs. home equity loan

HELOCs and home equity loans both let you borrow against your home equity.

Rates

As HELOC interest rates are usually variable, they may rise or fall over time. This is because they are tied to a benchmark rate, like the prime rate, which is influenced by economic changes and other factors. 

Home equity loans, on the other hand, typically offer fixed interest rates that stay consistent throughout the life of the loan.

Borrowing amounts

A home equity loan offers a fixed borrowing amount, which is available as a lump sum. A HELOC gives you a revolving line of credit that you can tap into whenever you like during its draw period.

Repayment

Some HELOCs allow you to make interest-only payments during the draw period, while others require you to pay both interest and the loan principal. With interest-only draw periods, after a set time, you enter the repayment period, where payments of interest and principal may be higher if you’ve previously only paid interest.

Unlike interest-only HELOCs, home equity loans normally require you to make regular payments of interest and principal after you take out the loan. Those with a fixed interest rate offer consistent monthly payments until the loan is paid off.

Available terms

Term lengths for home equity loans can vary by lender. A home equity loan from Discover can come with flexible terms of 10, 15, 20, or 30 years in amounts between $35,000 and $300,000 (2nd Lien). For example, if you borrowed $60,000 for a 20-year term at 8.86% APR, your fixed monthly payments would be $534.45.

HELOC term lengths can also vary by lender. A separate draw and repayment period make up the total loan term.

HELOC vs. cash out refinance

HELOCs and cash out refinances may be used for similar purposes, such as debt consolidation and large expenses, but are different products. A HELOC is a second mortgage, meaning you typically will make two monthly payments — one for your existing mortgage and one for the HELOC. A cash out refinance replaces your existing mortgage with a larger one, and you receive the difference between these two amounts in cash.

Rates

Cash out refinances typically have fixed interest rates, while HELOCs typically have variable rates. A fixed rate may help to make monthly payments more predictable as the interest rate stays consistent throughout the loan term.

Borrowing amounts

The amount you can borrow with a HELOC or a cash out refinance may depend on various factors, such as your income, credit score, and combined loan-to-value (CLTV) ratio.

Repayment

A HELOC has two separate repayment phases: the draw period (which may feature interest-only or interest and principal payments) and the repayment period (typically with interest and principal payments).

A cash out refinance will have one repayment phase where you pay interest and principal for the life of the loan.

Available terms

Depending on the lender, a HELOC or a cash out refinance may offer repayment terms that suit your unique financial situation.

HELOC vs. personal loans

While a HELOC provides a revolving line of credit, a personal loan offers a lump sum of cash.

Rates

Personal loans typically have a fixed interest rate, while HELOCs typically have a variable interest rate. Rates for both loans depend on your income, credit score, debt-to-income (DTI) ratio, and other factors.

Borrowing amounts

One of the factors that determines how much you may be able to borrow with a HELOC is the amount of available equity in your home. An unsecured personal loan doesn’t take home equity into account.

Repayment

Personal loans have one repayment phase, whereas HELOCs have two repayment phases: the draw and repayment periods.

Because a HELOC usually has a variable rate, monthly payments may go up or down depending on various factors.

Available terms

Personal loans often have repayment terms that last for several years. HELOCs have separate terms for the draw period and the repayment period.

HELOC vs. credit cards

HELOCs and credit cards are types of revolving credit. The key difference between the two is that a HELOC uses your home as collateral for the loan, whereas a credit card is usually unsecured and doesn’t require any collateral.

Rates

Both HELOCs and credit cards typically come with variable interest rates. Many credit cards offer an introductory interest rate as an incentive.

Borrowing amounts

Borrowing limits for HELOCs and credit cards may be determined by your income, credit score, and other factors. HELOCs also consider how much equity you have in your home.

Repayment

Because HELOCs and credit cards usually have variable interest rates, monthly payments for both options may fluctuate from month to month. 

A HELOC may provide the option to make interest-only payments during its draw period. This is followed by the repayment period, where you usually pay interest and principal. A credit card requires, at the least, a minimum monthly payment that goes toward interest and principal. 

Available terms

A credit card doesn’t have a specified term length, with your credit limit potentially staying active as long as your account is in good standing and kept open by the issuer.

HELOCs include separate withdrawal and repayment periods.