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Your income is one of your biggest assets, and losing it can quickly take a toll on your financial wellbeing. Disability insurance can offer an important safety net because it pays you a percentage of your salary if an illness or injury ever prevents you from working.

There are two main types of disability insurance: short-term disability insurance, often offered through employers, and long-term disability insurance, which may be purchased separately. As their names imply, short-term disability insurance lasts for a shorter period of time than long-term disability insurance.

But there are other key differences between short-term and long-term disability, including how quickly coverage kicks in and cost.

Here, we’ll take a close look at both types of disability insurance.

What Is Short Term Disability Insurance?

Short-term disability insurance (also called short-term disability income insurance, or STDI) is a type of insurance that will provide supplemental income in the event of an injury or illness that keeps you from working. The length of time you can receive benefits (or supplemental income), is known as the benefit period.

Short term disability policies typically have a benefit period of three to six months, though some may last up to a year. The shorter the benefit period, the less you or your employer will pay in premiums for coverage.

Benefits vary by plan, but these policies typically pay anywhere between 50% to 70% of your pre-disability salary during that time.

Disability policies also have specific start dates when your payments begin. The waiting period is typically referred to as the elimination period.

Short-term disability policies often have an elimination period of 14 days, though it can range from 7 to 30 days. That means payments would start 14 days after your disability occurs, or from the last day you were able to work.

Some employers have policies that require employees to take all of their sick days or, if the injury happened on the job, workers’ compensation benefits, before short-term disability is paid. Employers may also require you to show proof from a doctor that you have undergone an illness or injury that prohibits you from working.

They also may require you to see an approved healthcare provider for regular updates on your condition while you are out of work. Many of the rules for short-term disability coverage are determined by your state.

Recommended: Own Occupation vs Any Occupation Disability Insurance, Explained

How Do I Purchase Short Term Disability Insurance?

Most commonly, people get disability insurance through their employer. Companies often offer this benefit for no or very low cost.

In some states it’s mandatory for employers to offer this. Employees may pay a small fee from payroll deductions. Your employer is generally the easiest and most cost-efficient way to get short-term disability insurance.

If you are self-employed, or your employer doesn’t offer this benefit, you may be able to purchase short-term disability insurance from a private insurer. The hitch is that few carriers offer private short-term insurance and, if they do, it tends to be costly.

You could pay anywhere from 1% to 3% of your annual salary for a benefit that may only last a few weeks or months. You may find it makes more sense to invest in long-term disability insurance.

What Is Long Term Disability Insurance?

Long-term disability insurance — also known as long-term disability income insurance or LTDI — is an insurance policy that protects employees from loss of income in the event that they are unable to work due to an illness, injury, or accident for a long period of time.

The benefit period, or the amount of time you’ll receive benefits, for long-term disability insurance is often a choice of 5, 10, or 20 years, or even until you reach retirement age, depending on the plan. In general, the longer the benefit period, the more you’ll pay in premiums.

Long-term disability insurance typically pays about 50% to 70% of your pre-disability salary, depending on the policy. In most cases, the higher that number, the higher the premium. Some policies will also make up the gap in your income if you must return to work at a lower-wage job because of an illness or injury. That coverage may also come with a higher premium.

The elimination period (the amount of time you must wait until benefits begin) for long-term disability insurance usually includes several options, including 30, 60, 90, 180 days, or a full year. In general, the longer the elimination period, the less you will pay in premiums. The most common elimination period is 90 days. But if you can’t afford a policy with that elimination period, you may be able to reduce your premium costs by electing a longer period of time until benefits start.

You may want to keep in mind, however, that a longer elimination period means that you would have to go without income for a longer period of time, and might need to have savings or other resources to cover living expenses.

Each long-term disability insurance policy has different conditions for payout, diseases or pre-existing conditions that may be excluded, and various other conditions that make the policy more or less useful to an employee. Some policies, for example, will pay disability benefits if the employee is unable to work in his or her current profession. Others expect that the employee will take any job that the employee is capable of doing — that’s a big difference and could be consequential to the employee.

Recommended: Everything You Need To Know About Getting a Loan While on Disability

How Do I Purchase Long Term Disability Insurance?

Some employers offer subsidized long-term disability insurance policies to employees at discounted group rates. If your employer doesn’t offer this, you may be able to purchase long-term disability insurance from a private insurer. Unlike short term disability insurance, these policies are widely available. Also, unlike short-term disability insurance, private insurers typically offer individuals a range of long-term disability policies to choose from.

Long-term disability insurance is also sometimes available for purchase through professional associations, potentially at discounted group rates. The cost of long-term disability insurance can vary depending on the benefit period, the elimination period, your age, health, occupation, along with other factors. In general, these policies tend to run between 1% and 3% of your annual salary. This is about the same as if you purchased a short-term disability policy outside of your employer.

If you were to use the insurance, however, you would benefit for years, not months, making long-term disability insurance more cost-efficient than short-term disability insurance.

Do I Need Short Term Disability if I Have Long Term Disability?

When possible, it can be beneficial to pair short term and long term disability insurance together.

Short-term disability is intended to cover you immediately following a serious illness or injury, and long-term disability insurance is intended to maintain supplemental income if your condition keeps you out of work past the end of your short-term disability benefit period, even to retirement, depending on your plan.

If you have both short-term and long-term disability policies in place, short-term disability can pay you benefits during the elimination or waiting period before your long-term disability coverage begins, at which point you would transition from one policy to the next to receive benefits.

The combination can help you achieve the smallest possible income gap should you need to use disability insurance.

The best combination for you will depend on what options your employer offers, how much money you have saved in an emergency fund, and what you may be able to afford to purchase on your own.

The Takeaway

Disability income insurance offers an important way to protect your livelihood should you find you can no longer work at the same capacity you were expecting. The primary distinction between short- and long-term disability insurance is the coverage period.

Short term policies generally cover just the first few months you’re unable to work. Long-term policies, on the other hand, can last for years — decades even — after you’re unable to work and may see you through retirement. Because long term disability insurance benefits don’t start right away, it can be beneficial to pair long term disability benefits with short term disability insurance.

When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.

Find affordable auto, life, homeowners, and renters insurance with SoFi Protect.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you own a home, you may be interested in tapping into your available home equity. One popular way to do that is with a home equity line of credit (HELOC). What is a HELOC? Well, for starters, it’s different from a home equity loan. But like a home equity loan, it can help you finance a major renovation or cover other expenses.

Homeowners sitting on at least 20% equity — the home’s market value minus what is owed — may be able to secure a HELOC. Let’s take a look at how a HELOC works, the pros and cons, and what alternatives to HELOC might be.

How Does a HELOC Work?

The purpose of a HELOC is to tap your home equity to get some cash to use on a variety of expenses. Home equity lines of credit offer what’s known as a revolving line of credit, similar to a credit card, and usually have low or no closing costs. The interest rate is likely to be variable (more on that in a minute), and the amount available is typically up to 90% of your home’s value, minus whatever you may still owe on your mortgage. (You can roughly calculate home equity before you apply for a HELOC by using online property estimates; ultimately your lender will likely do an appraisal.)

Once you secure a HELOC with a lender, you can draw against your approved credit line as needed until your draw period ends, which is usually 10 years. You then repay the balance over another 10 or 20 years, or refinance to a new loan. Worth noting: Payments may be low during the draw period; you might be paying interest only. You would then face steeper monthly payments during the repayment phase. Carefully review the details when applying.

Here’s a look at what is a HELOC good for:

•   HELOCs can be used for anything but are commonly used to cover big home expenses, like a home remodeling costs or building an addition. The average cost of a bathroom remodel topped $12,000 in 2025 according to Angi, while a kitchen remodel was, on average, almost $27,000.

•   Personal spending: If, for example, you are laid off, you could tap your HELOC for cash to pay bills. Or you might dip into the line of credit to pay for a wedding (you only pay interest on the funds you are using, not the approved limit).

•   A HELOC can also be used to consolidate high-interest debt. Whatever homeowners use a home equity credit line for — investing in a new business, taking a dream vacation, funding a college education — they need to remember that they are using their home as collateral. That means if they can’t keep up with payments, the lender may force the sale of the home to satisfy the debt.

HELOC Options

Most HELOCs offer a variable interest rate, but you may have a choice. Here are the two main options:

•   Fixed Rate: With a fixed-rate home equity line of credit, the interest rate is set and does not change. That means your monthly payments won’t vary either. You can use a HELOC interest calculator to see what your payments would look like based on your interest rate, how much of the credit line you use, and the repayment term.

•   Variable Rate: Most HELOCs have a variable rate, which is frequently tied to the prime rate, a benchmark index that closely follows the economy. Even if your rate starts out low, it could go up (or down). A margin is added to the index to determine the interest you are charged. In some cases, you may be able to lock a variable-rate HELOC into a fixed rate.

•   Hybrid fixed-rate HELOCs are not the norm but have gained attention. They allow a borrower to withdraw money from the credit line and convert it to a fixed rate.

Note: SoFi does not offer hybrid fixed-rate HELOCs at this time.

HELOC Requirements

Now that you know what a HELOC is, and the basics of how does a HELOC work, think about what is involved in getting one. If you do decide to apply for a home equity line of credit, you will likely be evaluated on the basis of these criteria:

•   Home equity percentage: Lenders typically look for at least 15% or more commonly 20%.

•   A good credit score: Usually, a score of 680 will help you qualify, though many lenders prefer 700+. If you have a credit score between 621 and 679, you may be approved by some lenders.

•   Low debt-to-income (DTI) ratio: Here, a lender will see how your total housing costs and other debt (say, student loans) compare to your income. The lower your DTI percentage, the better you look to a lender. Your DTI will be calculated by your total debt divided by your monthly gross income. A lender might look for a figure in which debt accounts for anywhere between 36% to 50% of your total monthly income.

Other angles that lenders may look for is a specific income level that makes them feel comfortable that you can repay the debt, as well as a solid, dependable payment history. These are aspects of the factors mentioned above, but some lenders look more closely at these as independent factors.

Example of a HELOC

Here’s an example of how a HELOC might work. Let’s say your home is worth $300,000, and you currently have a mortgage of $200,000. If you seek a HELOC, the lender might allow you to borrow up to 80% of your home’s value:

   $300,000 x 0.8 = $240,000

Next, you would subtract the amount you owe on your mortgage ($200,000) from the qualifying amount noted above ($240,000) to find how big a HELOC you qualify for:

   $240,000 – $200,000 = $40,000.

One other aspect to note is a HELOC will be repaid in two distinct phases:

•   The first part is the draw period, which typically lasts 10 years. At this time, you can borrow money from your line of credit. Your minimum payment may be interest-only, though you can pay down the principal as well, if you like.

•   The next part of the HELOC is known as the repayment period, which is often also 10 years, but may vary. At this point, you will no longer be able to draw funds from the line of credit, and you will likely have monthly payments due that include both principal and interest. For this reason, the amount you pay is likely to rise considerably.

Recommended: What Are the Different Types of Home Equity Loans?

How to Get a Home Equity Line of Credit

If you’re ready to apply for a home equity line of credit, follow these steps:

•   First, it’s wise to shop around with different lenders to reveal minimum credit score ranges required for HELOC approval. You can also check and compare terms, such as periodic and lifetime rate caps. You might also look into which index is used to determine rates, and how often and by how much it can change.

•   Then, you can get specific offers from a few lenders to see the best option for you. Banks (online and traditional) as well as credit unions often offer HELOCs.

•   When you’ve selected the offer you want to go with, you can submit your application. This usually is similar to a mortgage application. It will involve gathering documentation that reflects your home’s value, your income, your assets, and your credit score. You may or may not need a home appraisal.

•   Lastly, you’ll hopefully hear that you are approved from your lender. After that, it can take approximately 30 to 60 days for the funds to become available. Usually, the money will be accessible via a credit card or a checkbook.

How Much Can You Borrow With a HELOC?

Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 90% of the value of your home (or, in some cases, even more), less the amount owed on your first mortgage.

Thought of another way, most lenders require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity line of credit.

Here’s an example. Say your home is worth $500,000, you owe $300,000 on your mortgage, and you hope to tap $120,000 of home equity.

Combined loan balance (mortgage plus HELOC, $420,000) ÷ current appraised value ($500,000) = CLTV (0.84)

Convert this to a percentage, and you arrive at 84%, just under many lenders’ CLTV threshold for approval.

In this example, the liens on your home would be a first mortgage with its existing terms at $300,000, and a second mortgage (the HELOC) with its own terms at $120,000.

How Do Payments On a HELOC Work?

A HELOC is distinguished from other types of loans by its two-phase payment structure. During the first stage of your HELOC (the draw period), you can borrow against your credit line, up to the approved ceiling, but you may be required to make only minimum payments. These are often interest-only payments. (Of course, if you choose to repay all that you owe, you can then borrow against the entire credit line again, and again, up to the end of the draw period.)

Once the draw period ends, your regular HELOC repayment period begins, when payments must be made toward both the interest and the principal.

Interest-Only vs. Principal and Interest Payments

After the draw period ends and the repayment period begins, you’ll begin making monthly payments that, similar to a home mortgage loan, include both principal and interest. For some borrowers, the end of the interest-only period can be a bit of a shock to the budget, so make sure you are prepared and know when the draw period is ending (often at the 10-year mark). A HELOC repayment calculator can help you understand what your payments might be based on how much you borrow.

Remember that if you have a variable-rate HELOC, your monthly payment will fluctuate over time. And it’s important to check the terms so you know whether you’ll be expected to make one final balloon payment at the end of the repayment period.

Pros of Taking Out a HELOC

Here are some of the benefits of a HELOC:

1. Initial Interest Rate and Acquisition Cost

A HELOC, secured by your home, may have a lower interest rate than unsecured loans and lines of credit. What is the interest rate on a HELOC? The average rate for a $100,000 HELOC in March 2025 was 7.61%.

Lenders often offer a low introductory rate, or teaser rate. After that period ends, your rate (and payments) increase to the true market level (the index plus the margin). Lenders normally place periodic and lifetime rate caps on HELOCs.

The closing costs may be lower than those of a home equity loan. Some lenders waive HELOC closing costs entirely if you meet a minimum credit line and keep the line open for a few years.

2. Taking Out Money as You Need It

Instead of receiving a lump-sum loan, a HELOC gives you the option to draw on the money over time as needed. That way, you don’t borrow more than you actually use, and you don’t have to go back to the lender to apply for more loans if you end up requiring additional money.

3. Only Paying Interest on the Amount You’ve Withdrawn

Paying interest only on the amount plucked from the credit line is beneficial when you are not sure how much will be needed for a project or if you need to pay in intervals.

Also, you can pay the line off and let it sit open at a zero balance during the draw period in case you need to pull from it again later.

Cons of Taking Out a HELOC

Now, here are some downsides of HELOCs to consider:

1. Variable Interest Rate

Even though your initial interest rate may be low, if it’s variable and tied to the prime rate, it will likely go up and down with the federal funds rate. This means that over time, your monthly payment may fluctuate and become less affordable (or more!).

Variable-rate HELOCs come with annual and lifetime rate caps, so check the details to know just how high your interest rate might go.

2. Potential Cost

Taking out a HELOC is placing a second mortgage lien on your home. You may have to deal with closing costs on the loan amount, though some HELOCs come with low or zero fees. Sometimes loans with no or low fees have an early closure fee.

3. Your Home Is on the Line

If you aren’t able to make payments and go into loan default, the lender could foreclose on your home. And if the HELOC is in second lien position, the lender could work with the first lienholder on your property to recover the borrowed money.

Adjustable-rate loans like HELOCs can be riskier than others because fluctuating rates can change your expected repayment amount.

4. It Could Affect Your Ability to Take On Other Debt

Just like other liabilities, adding on to your debt with a HELOC could affect your ability to take out other loans in the future. That’s because lenders consider your existing debt load before agreeing to offer you more.

Lenders will qualify borrowers based on the full line of credit draw even if the line has a zero balance. This may be something to consider if you expect to take on another home mortgage loan, a car loan, or other debts in the near future.

Alternatives to HELOCs

If you’re looking to access cash, here are HELOC alternatives.

1. Cash-Out Refi

With a cash-out refinance, you replace your existing mortgage with a new mortgage based on your home’s current value, with a goal of a lower interest rate, and cash out some of the equity that you have in the home. So if your current mortgage is $150,000 on a $250,000 value home, you might aim for a cash-out refinance that is $175,000 and use the $25,000 additional funds as needed.

Lenders typically require you to maintain at least 20% equity in your home (although there are exceptions). Be prepared to pay closing costs.

Generally, cash-out refinance guidelines may require more equity in the home vs. a HELOC.

Recommended: Cash Out Refi vs. Home Equity Line of Credit: Key Differences to Know

2. Home Equity Loan

HELOCs and home equity loans are often confused. Both are second mortgages (assuming you still have your first mortgage) that allow you to borrow against your home equity. The key difference in the HELOC vs. home equity loan comparison: With a home equity loan, you get a lump sum all at once and begin repaying what you owe (principal plus interest) immediately. A HELOC, as noted above, works more like a credit card. You borrow what you need in increments before you reach your repayment term.

Another difference: Home equity loans almost always come with a fixed interest rate, which allows for consistent monthly payments. HELOCs typically have a variable rate.

3. Personal Loan

If you’re looking to finance a big-but-not-that-big project for personal reasons, and you have a good estimate of how much money you’ll need, a low-rate personal loan that is not secured by your home could be a better fit.

With possibly few to zero upfront costs and minimal paperwork, a fixed-rate personal loan could be a quick way to access the money you need. Just know that an unsecured loan usually has a higher interest rate than a secured loan.

A personal loan might also be a better alternative to a HELOC if you bought your home recently and don’t have much equity built up yet.

4. Reverse Mortgage

If you are 62 or older, a reverse mortgage could allow you to turn part of your home equity into cash. Funds can be paid out as a lump sum, a monthly payment, or available as a line of credit, and are repaid when the home is sold. Borrowers who want a reverse mortgage usually turn to a home equity conversion mortgage, or HECM, which has fairly rigid standards. All owners must be at least age 62, and the home must be paid off or largely paid for.

Note: SoFi does not offer home equity conversion mortgages (HECMs) at this time.

5. Bridge Loan

A short-term bridge loan lets owners use the equity in their existing home to help pay for a home they’re ready to purchase. A bridge loan is secured by the first home and typically issued by a lender who will be the lender on their new mortgage. If you’re buying and selling a home at the same time, a bridge loan might be an appropriate way to help cover costs in the transitional period, such as when closing dates on the two properties don’t align.

Note: SoFi does not currently offer bridge loans for home financing.

The Takeaway

If you are looking to tap the equity of your home, a HELOC can give you money as needed, up to an approved limit, during a typical 10-year draw period. The interest rate is usually variable. Sometimes closing costs are waived. It can be an affordable way to get cash to use on anything from a home renovation to college costs.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

What can you use a HELOC for?

It’s up to you what you want to use the cash from a HELOC for. You could use it for a home renovation or addition, or for other expenses, such as college costs or a wedding.

How can you find out how much you can borrow?

Lenders typically require 20% equity in your home and then offer up to 90% or even more of your home’s value, minus the amount owed on your mortgage. There are online tools you can use to determine the exact amount, or contact your bank or credit union.

How long do you have to pay back a HELOC?

Typically, home equity lines of credit have 20-year terms. The first 10 years are considered the draw period, and the second 10 years are the repayment phase.

How much does a HELOC cost?

When evaluating HELOC offers, check interest rates, the interest-rate cap, closing costs (which may or may not be billed), and other fees to see just how much you would be paying.

Can you sell your house if you have a HELOC?

Yes, you can sell a house if you have a HELOC. The home equity line of credit balance will typically be repaid from the proceeds of the sales when you close, after any mortgage principal is paid off.

Does a HELOC hurt your credit?

A HELOC can hurt your credit score for a short period of time. Applying for a home equity line can temporarily lower your credit score because a hard credit pull is part of the process when you seek funding. This typically takes your score down a bit.

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You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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