Discover Home Equity Loan Review April 2024

Does Discover Offer Home Equity Loans or HELOCs?

Yes, Discover does offer home equity loans. But it does not currently offer home equity lines of credit (HELOCs).

Still, Discover loans appear first class, eliminating as they do some of the irritations and hazards that dog many other lenders’ offerings. Read on for why they might appeal to you.

Given what a famous financial brand Discover is, you might be surprised that it was founded as recently as 1986. It’s best known for its credit cards but offers a comprehensive range of digital banking services, including the Discover home equity loan. 

Indeed, its home equity loan business achieved a milestone in 2019 when its funded dollars for these products reached $1 billion. That represented extraordinary annual growth in its home equity loans over the previous three years of 80% or more.

So, Discover Financial Services is a significant player in the home equity loan space. Indeed, it’s now one of the relatively few big-name banks still to offer home equity loans.

Discover Home Equity Loan

So what are those irritations and hazards that a Discover home equity loan lets you avoid? Well, the danger is future rate hikes. All these Discover loans have fixed rates. And that could be important. Because as of this writing, the Federal Reserve looks set to hike rates significantly for years to come.

And the first irritation you can avoid is high set-up fees (closing costs). A home equity loan is a second mortgage and almost always comes with closing costs that can be quite high.

But Discover promises “Zero application fees, zero appraisal fees, and zero mortgage taxes.” And it goes on to say it “pays all closing costs incurred during the loan process so that you don’t have to bring any cash to your loan closing.”

Of course, closing costs are only one element of a HEL’s overall attractiveness. And you need to get quotes from multiple lenders so you can see which gives the best overall deal, including interest rates, costs, and terms.

Another irritation you can avoid is low borrowing potential. A Discover home equity loan lets you borrow a larger proportion of your home’s value than many other lenders allow. So the balance on your existing mortgage plus your new home equity loan can add up to 90% of your home’s appraised value. Many lenders cap that at 80% or 85%. This is called your combined loan-to-value ratio or CLTV.

Key characteristics of Discover home equity loans

So let’s sum up the information you need to know about these loans:

• Maximum combined loan-to-value ratio (CLTV) of 90% – The balance on your existing mortgage plus your new HEL can be up to 90% of the appraised value of your home.
• Interest rates ranging from 3.49% - 11.99% APR (February 2022) – What you will pay will depend on factors such as your credit score, LTV, and existing debt burden. If you have an existing mortgage, the lowest APR is 4.15%.
• The minimum credit score is 620 – But the higher your score, the lower the rate you’re likely to pay.
• Loan amounts range from a $35,000 minimum to a $300,000 maximum.
• You can choose from loan terms of 10, 15, 20, or 30 years – The longer the term, the lower your monthly payments. However, you’ll pay more interest over the lifetime of your loan.
• Closing costs are zero.
• Interest rates are fixed.

There’s one other thing you need to know. There is a prepayment penalty if you pay down your loan in full within three years of its start. This is so Discover can recover some of the closing costs it paid on your behalf. But the most it can charge you for this is $500.

Discover HELOC

Discover does NOT currently offer HELOCs. It’s one of several big-name banks that have discontinued them in recent years, often in response to the pandemic. 

But, in case it changes its mind and reintroduces them, we can tell you a little about how it still describes HELOCs. Might that give you some clues about future Discover HELOCs? Let’s hope so.  See the bullet points for home equity loans (above) for fuller explanations of loan terms.

• Maximum combined loan-to-value of 80-85%
• Mostly variable rates
• Credit score of 700 or higher is “preferred”
• Draw period of 5, 7, or 10 years – followed by a repayment period during which you can’t borrow more but must pay down the loan within an agreed time
• Possibility of later converting a variable-rate HELOC into a fixed-rate home equity loan

The bank is describing its idea of a typical HELOC. We’ll tell you how to find real-life ones later in this article.

Alternatives to HELOCs

As an alternative, Discover does offer personal loans, and those are pretty good. Meanwhile, other lenders may provide personal lines of credit, which are similar to HELOCs in many respects.

However, both personal loans and personal lines of credit are “unsecured” loans. That’s good in that it means you’re not putting your home on the line if things go wrong. But the disadvantage is that interest rates tend to be higher because the loans are riskier for lenders.

How to Apply for Discover Home Equity Loans

Discover doesn’t have a physical branch network. So you need to apply for your loan online or over the telephone. 

We explored the online application service, and it appeared straightforward and functional. And you should be in line for a similarly easy experience if you use Discover’s call center.

But, of course, you’re applying for a second mortgage. So you should expect to have to submit multiple documents confirming your identity and your employment and financial status early in the process. 

If you’re in a hurry, it’s worth scanning or copying those in advance so that you’re ready to upload, email, or mail them quickly. Take a look at Discover’s document checklist on its website so you’ll know what to prepare.

You may get a swift decision from Discover. But all lenders take a while to process a second mortgage; it often depends on how long it takes to get a home appraisal, which can be weeks when appraisers are busy.

Discover Expert and Consumer Ratings

We scoured the web for consumer and expert reviews of Discover Financial Services. Answer averaged consumer and professional ratings; Discover’s average is 3.15 stars out of five.

But, as is common with all large financial institutions, that is only part of the story. Star ratings on consumer websites were much lower than those on expert ones. 

And you can guess why. People are much more likely to go onto such a site to vent their wrath rather than lavish praise. And every company with millions of customers manages to upset some of them. So consumer reviews are invariably skewed.

Expert reviewers shouldn’t have skin in the game. They cooly look at each product and provider and compare them to others.

And Discover does well with those, scoring above 4 out of five with them all. And 5 out of 5 with one. Meanwhile, the Better Business Bureau awards Discover its highest rating of A+.

Discover Pros

Reading other online reviews of the Discover home equity loan product, we find many agree with us. They identify the main benefits of one of these as:

1. No closing costs
2. Competitive interest rates
3. Good borrowing potential – The 90% CLTV is higher than most competitors allow

Those are powerful pros.

Discover Cons

The cons for these loans are fewer and may well not bother most borrowers:

1. No branch network – Apply over the phone or online
2. No HELOC
3. A higher minimum borrowing amount than some others: $35,000

Do those give you cause for concern?

Discover Alternatives

Don’t see what you want here? Other lenders offer home equity products that might be better for you. 

Remember to compare programs and pricing to get a good deal. And don’t worry about your credit score. With this sort of loan, applying to multiple lenders has the same effect on your score as applying to one – providing you make all your applications within a focused period. Two weeks should be safe.