Home Equity Loans vs HELOC
As more and more homeowners look to use their home equity as an option for low-interest financing, it can be confusing to know if a Home Equity Loan or a Home Equity Line of Credit (HELOC) is the better option. Both are secured by your home and offer rates that are lower than unsecured loans or credit cards and may offer tax benefits depending on how the loan is used. Both can be good solutions to finance a variety of uses including home improvement, debt consolidation, major expenses (weddings, education, etc.), and refinancing. However, there are differences to understand so you can select the right option for you.
Home equity loans typically carry fixed interest rates. In a changing rate environment, a fixed rate loan can provide a borrower
Home equity loans are disbursed in one lump sum and the borrower is expected to make regular monthly payments of principal and interest for the agreed-upon repayment term. Some lenders may charge a pre-payment fee if the loan is paid in full before the end of the repayment term. With Discover Home Equity Loans, if the loan balance is paid in full within 36 months after your loan closes, you will be required to reimburse some of the closing costs, not to exceed $500.
HELOCs work like a credit card. The borrower can withdraw money as needed during a period of time set by the lender, known as the draw period. If the borrower withdraws money during the draw period, they may be required to make small, interest payments. Once the draw period ends, the borrower can no longer withdraw any more money and is now expected to make full payments of principal and interest for the agreed-upon repayment term. While there is money available to the borrower with a HELOC, the lender can revoke the amount available if the borrower’s financial situation worsens or if their home value changes.
Closing costs and fees vary by lender. Home equity loans act like a mortgage with various fees and closing costs, but it depends on the lender. A HELOC may have upfront costs including an application fee, title search, and appraisal fees. In addition, a HELOC may include fees throughout the life of the loan, including an annual membership fee or a transaction fee. It’s best to shop around and discuss all fees with lenders. Discover Home Equity Loans charges you no application fees, no origination fees, no appraisal fees, and no cash is required at closing. If you’re interested in applying for a Discover Home Equity Loan, you can apply online now and see if you prequalify in minutes.
When considering your options, make sure you evaluate how you plan to use the money and how does this fit within your long-term financial plans. It’s important to not only compare your options but also compare lenders to determine what loan best works for your unique situation.