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A modification to your home equity line of credit (HELOC) is a possible solution when you can’t meet your HELOC payments. The goal is to change your borrowing terms in order to make payments more affordable.

It’s important to weigh all of your options when you can’t afford to pay back your HELOC, since this type of financing is secured by your home. Falling behind on your payments can put your house at risk of foreclosure. By facing the challenge and working with your lender, you may be able to lower your stress level and protect your investment in your home.

Understanding HELOC Modifications

A HELOC modification is when a borrower asks their lender for a change in their payment terms. There are many reasons to consider modifying your HELOC, especially if you experience a major life event that impacts your finances. For instance, the death of a spouse, a medical event, or a job loss are common issues that cause a sudden change in financial capabilities.

There are three types of modifications: changing your interest rate, changing your loan term, or converting your HELOC to a fixed-rate home equity loan. Just remember that anytime you extend your loan term, you’ll pay more interest over time, even if your monthly payments are lower.

(Need a refresher on how HELOCs work? Read up on understanding a home equity line of credit.)

Common HELOC Modification Options

Can you modify a HELOC? Yes, and there are a few different ways you can do it.

Interest Rate Adjustments

It’s possible to request a reduction in your interest rate to help lower your overall HELOC payment. If you have a variable rate, you could also request switching to a fixed rate as part of your modification. This keeps your future payments stable, so you know exactly how much of your money is going to both principal and interest each month.

The downside, of course, is that requesting an interest rate adjustment doesn’t mean you’ll get approved. Your lender can deny your request and may prefer the next option for a HELOC modification.

Extending the Draw Period

Another way to modify your HELOC is to extend the draw period. This gives you more time to recover from your financial hardship before you have to start the full repayment period when your HELOC payments are likely to jump even higher. Your lender may be more open to this type of modification because you’ll pay more interest over time.

Converting to a Fixed-Rate Loan

Converting to a fixed-rate loan takes away the volatility of variable interest rates. With a variable rate, your payment can change every month, making it hard to predict how much you need to budget for your HELOC payments.

Recommended: HELOCs and Taxes

Eligibility for HELOC Modification

The eligibility requirements for a HELOC modification vary by lender, but there are a few standard requirements that you’ll likely encounter:

•   Proof of financial hardship.

•   Account has been open for a minimum period of time.

•   You’ve already made some payments.

•   You haven’t exceeded the lender’s modification limits.

Reach out to your lender as soon as possible when you realize you can’t keep up with your HELOC payments, whether you’re in the draw period or the repayment period.

HELOC Modification Process

What happens when you start the HELOC modification process? First, be realistic with your expectations for getting a solution in place. Each lender has its own approval timeline, which can take up to a month.

Before reaching out to your lender, prepare by gathering the following documentation:

•   HELOC loan number

•   Monthly pretax income details

•   Monthly household expenses

•   Details on the reason for your financial hardship

Also note that you may have a trial period before finalizing the HELOC modification. This gives your lender assurance that you can make your new payments. If you pay the new amount on time, then you’ll likely receive a new loan contract after a few months.

Recommended: HECM vs. HELOC

Impact of HELOC Modification on Your Finances

A HELOC modification can hurt your credit score because it will be reported to the credit bureaus. Depending on your credit score, having a loan modification added to your credit report could cause your score to drop. The higher your score, the bigger impact it’s likely to cause.

Another likely drawback is that you won’t be able to tap into your home equity after modifying a HELOC. You also probably won’t have options for increasing your HELOC limit in the future.

Can you increase a HELOC limit while applying for a modification to your existing terms? Again, probably not, since the goal is to make your payments more affordable.

Despite these drawbacks, a loan modification is still a better outcome than going through foreclosure, which causes you to lose possession of your home.

Alternatives to HELOC Modification

There are a few options to think about before modifying your HELOC:

•   Refinance: You could get a lower interest rate or extend your overall payments to a longer time frame by doing a cash-out refinance. If you still have equity in your home, you could get a new mortgage loan at a higher amount, use the cash-out funds to pay off the HELOC, and start making a single mortgage payment with the larger balance.

The downside is that it may be difficult to qualify for a cash-out refinance if you’re already experiencing a period of financial hardship. A home equity loan calculator can help you see how much you might be able to borrow against your home.

•   Convert to a home equity loan: Some lenders allow you to convert your HELOC to a home equity loan, especially when you’re in your draw period and nearing the repayment period.

•   Sell your home: If you calculate your home equity and think the value exceeds your mortgage and your HELOC balances, you could consider selling your home. Check with your HELOC lender and make sure you wouldn’t be required to pay off your balance before listing your home. Also, make sure you have a sound plan in place for your next move.

The Takeaway

Getting a loan modification for your HELOC comes with some drawbacks, but the biggest benefit is helping you stay in your home. If you’ve experienced a major financial hardship and can no longer afford your HELOC payments, talk to your lender as soon as possible.

You can also explore your options with other lenders. A cash-out refinance or a new home equity loan are other possible solutions. Keep making payments on your current HELOC while you consider your options.

SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $350,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.

FAQ

How often can I modify my HELOC?

Each financial institution has its own schedule for how frequently you can request a home equity line of credit (HELOC) modification. Some lenders may require you to wait a certain amount of time before applying for another modification. Your eligibility may also depend on your payment history and current financial situation.

Will modifying my HELOC affect my credit score?

Lenders report home equity line of credit (HELOC) modifications to the credit bureaus. Expect your credit score to drop once the modification is finalized and reported. Your score will recover over time, though any negative information associated with the modification process could remain on your credit report for up to seven years.

Can I modify a HELOC during the repayment period?

Yes. You can modify your home equity line of credit (HELOC) during the repayment period. You may be able to change your rate from a variable to a fixed annual percentage rate (APR) or even convert it to an installment loan.

Photo credit: iStock/nensuria

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHE-Q226-015

The interest you’ll pay on a home equity line of credit (HELOC) is typically calculated by multiplying the daily interest rate by the average daily balance for the billing cycle. (This is called the average daily balance method.) The lower your daily balance, the less interest you’ll pay.

The variable nature of a HELOC interest rate is a big factor in this equation. Many HELOCs allow for interest rate adjustments once a month, so the amount of interest you pay varies from month to month, based on both your balance owed and your rate.

U.S. households had more than $411 billion in outstanding HELOC balances at last count, so plenty of homeowners are looking to minimize the amount of interest they pay. If you’re one of them, here’s a rundown of how interest is calculated on a HELOC so you can take steps to minimize your costs whenever possible.

Basics of HELOC Interest Rates

To understand how HELOC interest works and how much interest you’re being charged, it’s helpful to know the basics of how HELOC interest is calculated. Home equity line of credit interest rates are usually variable, so they can move up or down based on market conditions. Your monthly payment changes as a result. There’s usually an interest rate ceiling and floor on a HELOC, which govern the highest and lowest the interest rate can go on your loan, so there are some controls built into this process.

How are HELOC rates calculated? The interest rate you pay is made up of two parts: the prime rate and the lender’s profit margin.

Your HELOC Interest Rate = Prime Rate + Lender Margin

The lender’s margin stays the same throughout the life of your loan, but the prime rate can fluctuate based on market conditions.

HELOC Interest Calculation Methods

There are a few different ways your lender can calculate interest, though the average daily balance method is the one you’ll most likely see:

•   Average daily balance: An average daily balance calculation involves finding the average daily balance for the month and then multiplying it by the interest rate. This is the most common HELOC interest calculation method.

•   Adjusted balance method: The adjusted balance is where the lender subtracts any payments you made during the period to calculate interest charges from the adjusted balance.

•   Previous balance method: In this method, the lender uses the amount owed at the beginning of the period to calculate interest charges.

Recommended: What Is a HELOC?

Factors Affecting HELOC Interest Calculations

Several factors affect HELOC interest calculations. These include your annual percentage rate (APR), the extent to which you use your credit line, and whether you’re in the HELOC’s draw or repayment period.

APR

As mentioned previously, one of the defining characteristics of a HELOC is the variable APR, which can change over the course of the term. For many HELOC lenders, the interest rate can be adjusted once per month. But you still want to obtain the lowest possible interest rate at the outset of your line of credit.

Your personal qualifications and the attributes of your property and loan are the biggest factors in determining your APR. Some of these include:

•   Credit history: Your credit score and credit history factor into the interest rate your lender will offer you. A better credit score translates into a better interest rate on your loan.

•   Line amount: How large your HELOC is will affect your interest rate.

•   Equity: Generally, the more equity you leave in your home, the better interest rate you’re eligible for.

•   Occupancy: An owner-occupied property typically gets a lower HELOC interest rate than an investment property, although some people do use HELOCs to fund investment properties because they think they can use a HELOC to build wealth.

Of course, it’s recommended to always shop around for a HELOC to ensure you find your best available rate.

Recommended: HELOC vs. Home Equity Loan

Credit Utilization

Lower charges on your HELOC create lower interest charges because with a HELOC, you only pay interest on what you borrow. A HELOC payment calculator can help you estimate what your monthly payment would be on your HELOC based on how much of the credit line you’ve used and your interest rate.

Draw vs Repayment Period

With many HELOCs, there’s a draw period and a repayment period. The draw period is when your minimum payment covers the interest charged on the loan. The repayment period is when you pay principal and interest in installment payments.

When it comes to the interest charges during the draw vs. the repayment period, the calculation is the same, but the interest rate may be different. The main difference is that the principal doesn’t go down if you’re making interest-only payments during the draw period. Some borrowers may also have a fixed interest rate when they enter the repayment period.

Sample HELOC Interest Calculations

It’s helpful to look at the process of calculating HELOC interest rates and see a couple examples to understand how it works. Here’s a complete breakdown of the most common method for calculating HELOC interest, the average daily balance. Yes, it’s a lot of math, but if you have a HELOC, your lender runs the numbers for you and sends you a monthly bill.

Step 1: Find the Average Daily Balance

Add each day’s balance together, then divide by the number of days in the billing cycle.

Average Daily Balance = Total of Daily Balances / Days in the Billing Cycle

Example 1: You have a $10,000 balance for each of the 30 days of the billing cycle:

•   Average daily balance = ($10,000 X 30 days) / 30 days

•   Average daily balance = $10,000

Example 2: You have a $10,000 balance for two days into the billing cycle and then pay it off:

•   Average daily balance = ($10,000 + $10,000) / 30 days

•   Average daily balance = ($20,000) / 30 days

•   Average daily balance = $666.67

Step 2: Find the Daily Periodic Rate of Your HELOC

To find the daily periodic rate of your HELOC, divide the APR on your statement by 365.

Daily Periodic Rate = APR / 365

Example: Your APR is 9.49%:

•   Daily periodic rate = 9.49% / 365

•   Daily periodic rate = 0.026%

Step 3: Find the Daily Interest Charge

You’ll find the daily interest charge by multiplying the average daily balance by the daily periodic rate.

Daily Interest Charge = Average Daily Balance X Daily Periodic Rate

Example 1: $10,000 average daily balance with a 0.026% daily periodic rate:

•   Daily interest charge = $10,000 X 0.026%

•   Daily interest charge = $2.60

Example 2: $666.67 average daily balance with a 0.026% daily periodic rate:

•   Daily interest charge = $666.67 X 0.026%

•   Daily interest charge = $0.17

Step 4: Find the Total Interest Charges for the Billing Cycle

Multiply the daily interest charge by the number of days in the billing cycle. This example uses 30.

Total Interest Charges = Daily Interest Charge X Days in the Billing Cycle

Example 1: $10,000 average daily balance:

•   Total interest charges = $2.60 X 30

•   Total interest charges = $78

Example 2: $666.67 average daily balance:

•   Total interest charges = $0.17 X 30

•   Total interest charges = $5.10

In this side-by-side comparison, the borrower who paid off the balance after two days saved over $70 in interest costs for the month.

Strategies to Minimize HELOC Interest Costs

Paying less interest is a smart move if you can swing it. If you need to use your HELOC to finance a large expense, keep these tips in mind to help you save on interest:

•   Make purchases toward the end of the billing cycle: With the daily balance interest calculation, you want to minimize the number of days you’re paying interest on a purchase. If possible, make purchases with your HELOC toward the end of your billing cycle and make payments shortly thereafter.

•   Pay earlier in the billing cycle: Since the interest is calculated daily based on the money you still owe, paying it earlier in the billing cycle can reduce the amount of interest you’ll pay. And if you can pay down the principal (as in Example 2, above), even better.

•   Make extra payments: Extra payments reduce the principal, which reduces how much interest you’ll pay.

•   Convert to a fixed-rate loan: Converting your HELOC into a fixed-rate loan could lower your interest costs if you can lock in a lower interest rate. And even if you can’t, converting to a fixed rate protects you from further rate increases and ensures you have a predictable payment amount from month to month going forward.

Recommended: How HELOCs Affect Your Taxes

Comparing HELOC Interest to Other Borrowing Options

Here’s how a HELOC stacks up against home equity loans, personal loans, and credit cards. This is especially important to know if you’re a first-time homebuyer and are still learning the different loan types.

Home Equity Loan

This is a different type of home equity loan that offers a fixed interest rate. Like a HELOC, it uses your home’s equity as collateral, but unlike a HELOC, with a home equity loan, you receive your funds in a lump sum upfront and start repaying the principal, plus interest, immediately.

If you’re comparing interest rates on a HELOC vs. a home equity loan, you’ll typically see lower interest rates in HELOCs initially, but over the years, a HELOC can adjust many times, whereas a home equity loan will always have the same interest rate.

Personal Loan

A personal loan usually has a higher interest rate than either HELOCs or home equity loans. However, your home isn’t used as collateral on the loan, which is a big upside. As of February 2026, the average interest rate for personal loans was 11.40%.

Credit Cards

Credit cards have significantly higher interest rates than either HELOCs or personal loans. Average credit card interest rates are 21.00% as of February 2026. They’re very flexible but shouldn’t be relied on as a lending tool because of the high interest rates.

The Takeaway

Paying less interest on your HELOC is a smart move for your finances. If you know how HELOC interest is calculated, you’ll understand how much you’re paying for borrowing money on a HELOC and use smart strategies to pay less. You might also give yourself a head start by paying more than the interest-only payment during the draw period, so by the time you enter the repayment period, you’ve chipped away at your balance and lowered your payment amount.

SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $350,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.

FAQ

How often does a HELOC interest rate change?

Home equity lines of credit (HELOCs) are typically variable-rate loans, and while it’s up to the lender to determine how often they change, the rate can change each month. Some HELOCs offer the option to lock in a certain amount borrowed, and the portion you’ve locked becomes a fixed-rate loan with a repayment schedule.

Can I deduct HELOC interest on my taxes?

There are a few scenarios where you can deduct home equity line of credit interest on your taxes. If you use the funds to buy, build, or improve your residence, the interest is tax-deductible. However, you’d need to itemize your deductions, so consult with a tax advisor.

What’s the difference between simple and compound interest for HELOCs?

The daily balance method used by home equity lines of credit (HELOCs) is considered simple interest. Compound interest is where interest is charged on top of interest, which isn’t a common way of computing interest for HELOCs. All of the specifics about your HELOC — including your interest rate, how often the variable rate may change, and your rate floor and ceiling, among other things — should be spelled out in your HELOC agreement.

Photo credit: iStock/Prostock-Studio

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHE-Q226-011

You may not have heard the term “risk-based pricing” before, but you’ve likely seen it in action if you’ve ever gotten a loan or a credit card.

Risk-based pricing is when lenders decide which interest rate and other loan terms to offer a borrower based on that person’s creditworthiness. If the lender believes you may default or struggle to make payments on a loan, for example, you’ll likely be offered a higher rate — or you could be turned down altogether. On the other hand, if your chances of defaulting are low, you can expect to be offered a more competitive rate and better loan terms.

Read on for a look at how risk-based pricing could affect your loan terms and ways to improve your risk profile in order to secure the most favorable rate possible.

Risk-Based Pricing Explained

If you’ve ever applied for a loan or credit card, you’ve probably noticed that everyone isn’t offered the same interest rate and terms. That’s because financial institutions typically use risk-based pricing to determine how much they’ll charge borrowers for the money they lend.

What Is Risk-Based Pricing?

The idea behind risk-based pricing is fairly straightforward: Different borrowers get different rates depending on the level of risk the lender believes it’s taking. This allows financial institutions to provide options to a wide range of consumers while also making sure they’re being compensated for taking a chance on those who may be less creditworthy.

How Risk-Based Pricing Works

A key part of the loan underwriting process is assessing a borrower’s risk profile. Lenders can’t legally consider factors such as age, race, or gender when they’re deciding whether to approve a loan application. But they can — and do — use risk-based pricing models to help determine if a borrower should get a loan and if that loan should cost more or less based on financial criteria.

Lenders want to be as sure as possible that they’ll be repaid on time and in full. And though there’s no guarantee a borrower with a good financial reputation won’t default on a loan, lenders typically see it as a solid indicator of a favorable outcome.

This means an applicant with an excellent credit score and other positive financial factors can expect to be offered a lower interest rate than a person with average, fair, or poor credit. This is true whether they’re seeking a car loan, personal loan, or a mortgage.

Creditworthiness can also affect loan fees, repayment terms, and the rewards and perks available with certain credit cards.

Factors That Can Influence Risk-Based Pricing

The criteria used to determine loan eligibility and pricing can vary by lender, but here are some of the factors that are typically included in a risk assessment.

Credit Score

A credit score is calculated using information such as payment history, existing debt obligations, and credit utilization from a current credit report. Lenders typically use this three-digit score as an indicator of a person’s overall financial well-being. The higher your credit score, the more likely you are to be approved for a loan and receive better financing terms.

A score of 670-739 is generally considered “good” on the credit rating scale, scores of 740-799 are in the “very good” range, and 800 and above is “excellent.” Individual lenders may set their bar higher or lower when judging credit applicants.

Credit History

To get a more complete look at how you’ve handled credit in the past, lenders may also check one or more of your credit reports for signs of trouble. Potential red flags include past delinquencies, a mortgage foreclosure, bankruptcy, or debts that went to collection.

Income

Your income and employment history can also be a factor in determining risk. Lenders will want to see documentation that shows you earn enough to repay the loan and that you have stable employment.

Debt-to-Income Ratio

Along with your income, lenders will take a look at your debt-to-income (DTI) ratio to ensure you can manage all your debt payments. (You can calculate your DTI by dividing your monthly debt payments by your monthly gross income.) An acceptable DTI may vary by lender and the type of loan you are applying for. But, in general, a DTI ratio below 43% is considered good, though many lenders prefer 36% or below.

Loan Type

Lenders tend to look at different types of debt as carrying varying levels of risk. For example, loans that are secured with some kind of collateral or down payment, such as mortgages, car loans, and home equity loans, usually come with lower interest rates than unsecured loans and credit cards.

Impact on Consumers

It may seem as though risk-based financing is all about protecting lenders: helping them minimize their losses by allowing them to tailor their rates to fit an individual borrower’s risk profile. But because it expands the range of lending options to include those with fair or even poor credit, risk-based lending can also benefit those who otherwise might not qualify for financing.

In addition, it may serve as an incentive to consumers to build their credit reputation to improve their loan terms in the future by refinancing, negotiating for a new and better rate on a current loan, or waiting to apply for financing until their credit is in better shape.

Regulations Governing Risk-Based Pricing

How can you know if you’ve been personally impacted by risk-based pricing? The Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB), and federal banking agencies have all published rules stating that if a lender denies a loan application or offers “materially less-favorable terms” based on a consumer credit report, it must provide the applicant with a notice that explains this decision. If you don’t agree with the terms you’ve been offered — for example, if you’re given a higher-than-expected annual percentage rate (APR) — you aren’t obligated to accept the loan.

Recommended: APR vs Interest Rate: What’s the Difference?

Pros and Cons of Risk-Based Pricing

As with most things related to finances, there are benefits and drawbacks associated with risk-based pricing.

Strategies to Improve Your Risk Profile

If you’re trying to build or rebuild your credit, risk-based lending may seem unfair or even punitive. But if you keep working on your financial health, you can eventually replace the missing or negative information on your credit reports with positive numbers.

Here are some steps that can help you boost your credit profile and show lenders you’re worthy of better loan terms.

Pay Off Debt

Paying down high-interest credit card balances and lingering loan debt can help you build your credit score and lower your DTI. These are two key factors lenders look at when determining a borrower’s risk. If you’re repaying several debts to different lenders, you may want to look into how debt consolidation works and whether it makes sense for you.

Increase Your Income

If a low-paying job is getting in the way of getting a loan, you might consider taking on a side gig, asking for a raise, or looking for an employer that pays more for your work.

Monitor Your Credit Score and Credit Reports

Regularly reviewing your credit reports and promptly disputing dated info or errors can help you ensure your credit profile reflects your current financial standing. You can check your credit score for free through your bank, credit card company, Experian, or a money tracker app. And you’re entitled to a free credit report weekly from each of the three credit bureaus via AnnualCreditReport.com.

Choose Appropriate Loan Products

Think about how you plan to use the money you want to borrow and which lending product might be the ideal choice for that goal. If you plan to make a major purchase, for example, how a personal loan works might make that option better than a credit card because interest rates are typically lower.

Recommended: What Is Risk Tolerance?

Do Some Comparison Shopping

You also may be able to save money by taking the time to shop around for the most competitive rates and terms available for the type of loan or credit card you want. Some lenders and loan types may have less-stringent standards for borrowers than others. And while you’re looking, you can read online reviews of the lenders you’re considering.

The Takeaway

For low-risk borrowers, risk-based pricing could mean a lower interest rate and other favorable terms. For a higher-risk borrower, it can result in a more expensive loan or the loan application being rejected. This is why it’s a good idea to know where your credit stands before you apply for any type of financing. That way, you can be an informed shopper as you look for the most favorable rates and terms based on your current creditworthiness. Or you can work to improve your financial health so lenders regard you as less of a risk.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How does risk-based pricing differ from flat-rate pricing?

With risk-based pricing, the cost of a loan can be adjusted to fit the creditworthiness of the borrower. With flat-rate pricing, everybody who is approved is charged the same rate, whether they have good, bad, or fair credit.

Can I negotiate better terms if I’m offered high rates due to risk-based pricing?

Whether or not you can negotiate better terms may depend on the type of loan you applied for and the lender. If, for example, you’re a long-standing customer, your lender may be willing to work with you even if you present as a high-risk borrower.

How often do lenders reassess risk for existing loans?

Because a borrower’s risk profile can change over time, lenders may periodically review a customer’s credit score, payment history, and other financial factors. How often that happens varies by lender.

Are all types of loans subject to risk-based pricing?

The rates and terms borrowers are charged for most loan types are based on risk-based pricing. However, not all loans follow this approach.

Photo credit: iStock/MicroStockHub

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q226-037

Homeowners with a mortgage typically make monthly payments toward the loan principal and interest. But borrowers can choose to make biweekly mortgage payments instead, resulting in 13 full payments over a one-year period.

Opting for this mortgage payment strategy may come with advantages and drawbacks, including impacts on your savings and reducing the interest you pay over the life of the loan. Here’s what to know about the potential pros and cons of making mortgage payments biweekly.

Understanding Biweekly Mortgage Payments

So how do biweekly mortgage payments work in practice? A biweekly mortgage payment involves a borrower paying half of their monthly payment every two weeks rather than in full each month.

With 52 weeks in a year, these 26 biweekly payments amount to an extra month’s payment every year. Over the course of a 30-year mortgage term, this can help whittle down your mortgage principal — the amount you borrowed to buy your home — and speed up your mortgage repayment by several years.

Before you start making extra or biweekly payments, it’s a good idea to check to make sure you won’t encounter a prepayment penalty for paying off the mortgage before the end of the loan term.

Recommended: Mortgage Repayment Calculator

Pros of Biweekly Mortgage Payments

If you’re looking to pay off your mortgage early, paying the mortgage biweekly could be beneficial. Below are some advantages of paying your mortgage biweekly.

•   Save thousands in interest payments over the life of the loan by reducing the accumulation of interest on your mortgage.

•   Build home equity faster by making additional payments toward the loan principal.

•   Reach 20% equity in your home sooner to cancel private mortgage insurance (PMI), if you have it, and lower your mortgage payment.

•   Pay off your mortgage several years in advance, freeing up finances for other financial goals, such as retirement.

Cons of Biweekly Mortgage Payments

Paying off your mortgage early has a lot of appeal, but it’s important to consider the potential disadvantages of biweekly mortgage payments.

Here are some drawbacks of this mortgage repayment strategy to keep in mind.

•   You may face the risk of prepayment penalties if you pay your mortgage off early, depending on the terms of the loan agreement.

•   Lenders may charge a fee for setting up biweekly mortgage payments to recoup lost interest from paying off the mortgage early.

•   Committing to a biweekly payment plan consumes more of your budget, which can impact your ability to manage the other costs of owning a home and your financial goals.

Recommended: Home Equity Line of Credit

How to Calculate Potential Savings

How much could you save by making mortgage payments biweekly? Here’s an example of how to crunch the numbers and determine how much you could save.

Let’s say you make a 20% down payment on a home and have a $240,000 mortgage principal with a 6.50% interest rate and a 30-year loan term. This amounts to a monthly payment of around $1,516, not accounting for property taxes and home insurance. As a biweekly mortgage payment, you’d pay around $758.

Every year, this means putting an extra $1,516 toward the mortgage principal on top of your monthly mortgage payments. Here’s how a biweekly vs. monthly mortgage payment breaks down in terms of loan term and potential savings, assuming you begin making biweekly payments from the outset of the loan.

With monthly mortgage payments:

•   Monthly payment: $1,516

•   Total annual payment: $18,912

•   Loan term: 30 years

•   Total interest paid: $306,106

With biweekly mortgage payments:

•   Biweekly payment: $758

•   Total annual payment: $19,708

•   Loan term: 24 years

•   Total interest paid: $235,609

By setting up biweekly payments from the start, you’d pay off the mortgage six years early and save $70,497 in interest. Even if you have fewer years left on your mortgage, there’s still potential for significant savings on the mortgage interest. (You can use a mortgage calculator to see how much interest you pay over the life of your mortgage.)

Who Benefits Most from Biweekly Payments?

Getting out of debt and paying off a mortgage sooner could be advantageous for any homeowner, but there are some scenarios when it might make more financial sense.

Borrowers with high interest rates on their mortgages could benefit from making biweekly mortgage payments. Putting an extra monthly payment toward the loan principal each year helps diminish how much interest accrues on the mortgage, adding up to considerable savings.

However, it’s important to take a comprehensive look at your finances to determine where extra payments on debt could be the most effective. If you have a personal loan or credit card debt with a higher interest rate than your mortgage rate, you could save more by tackling these high-interest debts first before setting up biweekly mortgage payments.

Since this approach essentially adds an additional monthly payment each year, it’s worth reevaluating your household budget to ensure you can cover the cost without impacting other financial goals. From a budgeting standpoint, making biweekly mortgage payments could be easier for those who have a steady income and receive a paycheck every two weeks.

Implementing Biweekly Payments

There are some steps to follow and key considerations when setting up biweekly mortgage payments.

First, reach out to your lender to see if it allows biweekly payments and if you’ll be liable for prepayment penalties. Fortunately, prepayment penalties are typically limited to instances where a borrower pays off the mortgage within 3-5 years.

It’s also worth asking how the lender will apply extra payments if you set up biweekly payments. Specifically, confirm that the extra funds are applied to the mortgage principal rather than interest or your escrow. Note that having the half-monthly payment applied right away can lead to more savings than if the lender waits until the second half is received.

Alternatives to Biweekly Mortgage Payments

Biweekly mortgage payments might not work for everyone. If you’re not ready to commit to paying your mortgage biweekly, there are some alternative options that could help save money on mortgage loans.

•   Increase your monthly payment: Round up monthly payments to the nearest hundred-dollar amount (e.g., paying $1,600 instead of $1,516) to put more money toward the mortgage principal.

•   Make a lump-sum payment: Apply a tax refund, extra savings, or bonus as a one-off payment toward the principal when it makes sense for your budget.

•   Refinance your mortgage: Reduce your mortgage term from 30 years to 15 years to save on interest, though this will result in a larger monthly payment.

The Takeaway

Paying off your mortgage early with biweekly payments could save you thousands in interest and shorten your mortgage term by several years. But first, it’s worth paying off other high-interest debt and checking how your lender applies extra payments before committing to this payoff strategy.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Can I switch to biweekly payments on an existing mortgage?

You may be able to switch an existing mortgage to biweekly payments, but you’ll need to check with your lender first. Otherwise, making payments every two weeks may not get applied to the mortgage principal as intended.

Will biweekly payments affect my taxes or escrow?

Biweekly payments don’t affect your taxes. However, it’s a good idea to verify that the appropriate amount from each mortgage payment is going to escrow.

What if I can’t make a biweekly payment occasionally?

Missing a biweekly payment or any mortgage payment could involve late fees and harm your credit score. To avoid these risks, reach out to your lender as soon as possible to discuss options.

Photo credit: iStock/anchiy

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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If the terms of your home equity line of credit (HELOC) no longer feel like a good fit, you may be wondering if you can refinance your HELOC with another bank.

The answer is yes, you can. There are several HELOC refinancing options available. And depending on your reasons for refinancing and the terms other lenders are offering, you might be able to benefit from switching to a different lender.

Read on for a look at what it can take to refinance a HELOC, some pros and cons, and whether it might make sense for you.

HELOC Refinancing Explained

A HELOC is a revolving line of credit that usually comes with a variable interest rate — which can make it seem very much like using a credit card. You can tap into your credit line at any time (up to a preapproved limit). And you can use the money for just about anything you want.

Unlike a credit card, however, a HELOC is secured by the equity in your home, which means the credit limit for a HELOC will likely be higher than a credit card, and the interest rate will likely be lower. But if you default on your payments, you could be putting your home at risk of foreclosure.

Another significant difference between HELOCs and credit cards is that the life of a HELOC is divided into two phases:

•  With a HELOC, you can only use the money from your credit line for a fixed period of time (usually 5 or 10 years) called the draw period. During this time, you can make payments toward your principal and interest, if you like. But typically, HELOC borrowers are only required to make interest payments during the draw period.

•  When the draw period ends, the repayment period begins. During this phase, which generally lasts 10 to 20 years, the focus turns to paying back the principal, along with any interest that’s due.

This is where the option to refinance a HELOC might make sense for some borrowers. Depending on how large the account balance has grown over time, your monthly payments could be substantially higher during the repayment period than they were during the draw period — especially if interest rates have gone up over the years. If you can transfer your HELOC to another bank with more competitive terms (a lower interest rate, for example, or a longer loan length), it could help bring those payments down. You also could refinance to a new HELOC so you can continue borrowing against your equity with another draw period.

Eligibility for HELOC Refinancing

When you refinance a HELOC, you’re basically taking out a whole new line of credit or a new loan to replace your current account. And the eligibility requirements lenders want you to meet may be different from those of your original HELOC. With a refinance, you can expect lenders to look at several factors, including:

•  Home equity: Home equity is the value of your home minus the amount you still owe, and to qualify for a HELOC, you typically must have at least 15% to 20% equity in your home. A home equity loan calculator can help you estimate how much you might be able to borrow.

•  Debt-to-income (DTI) ratio: Lenders look at your DTI ratio (all monthly debt payments / gross monthly income = DTI) to determine how much of your income goes toward paying your monthly debts. Generally, lenders like to see a DTI ratio that’s no higher than 43% to 50% but the lower the better.

•  Loan-to-value (LTV) ratio: The amount you’re allowed to borrow can also be affected by your LTV ratio (your mortgage balance / your home’s current value). Having a lower LTV can improve your chances of meeting refinance requirements. Lenders also like to see a low combined loan-to-value (CLTV) ratio (that’s all the secured loans on your home / the value of your home) to be sure you aren’t taking on too much debt.

•  Credit standing: Having a good credit score and solid credit history can help you qualify for financing and get a better interest rate.

Types of HELOC Refinancing Options

If you’re thinking about refinancing your HELOC, you may have a few different options to consider, including the following.

Replacing Your Current HELOC With a New HELOC

Refinancing to a new HELOC can allow you to reset your draw period (giving you more time to keep borrowing) and postpone your repayment period. You also may qualify for more favorable terms — a fixed and/or lower interest rate, for example, or a longer loan term with lower monthly payments. It’s important to keep in mind, though, that if you refinance and you don’t pay down your principal, you could end up paying more interest over time. And if you sell your home, you’ll likely have to pay off your HELOC as part of that transaction. You can use a HELOC monthly payment calculator to see how different interest rates will affect your monthly payments.

Paying Off Your HELOC With a Home Equity Loan

There are different types of home equity loans. A basic home equity loan is similar to a HELOC in that it’s secured with the equity in your home. But unlike a HELOC, a home equity loan is paid out as a lump sum and usually has a fixed interest rate. This can make payments more predictable and easier to plan for. But again, you could end up paying more interest over time than you would with the original HELOC. And if you sell your home, you may need to pay off the home equity loan. These are all considerations as you weigh a new HELOC vs. a home equity loan.

Using a Cash-Out Refinance

With a cash-out refinance, you would replace your original mortgage with a new, larger mortgage and use the money that’s left over to pay off your HELOC. If you can get a fixed interest rate that’s lower than what you’ve been paying, this strategy might make sense, especially if you can also refinance to a mortgage with a shorter term. And as an extra bonus, you’ll have the convenience of combining two payments into one. But better terms aren’t guaranteed, so it’s a good idea to check out what various lenders are offering.

Modifying Your HELOC With Your Current Lender

If your current lender will work with you to lower your monthly HELOC payments, that may be the most convenient option. If you have a good relationship, you can try asking about extending your repayment term, lowering your interest rate, moving to a fixed rate, or even reducing your principal. Even if you get a positive response, though, you may want to take some time to look at what other lenders are offering and what best suits your needs and goals.

Recommended: HECM vs. HELOC

The HELOC Refinancing Process

The process for refinancing your HELOC is pretty much the same whether you choose a new HELOC, a home equity loan, or some other option. Here are some of the basic steps.

Getting Reacquainted With Your Current HELOC

If it’s been a while since you looked at the terms of your HELOC, take a moment to get reacquainted with the important details — including your current balance, your repayment terms, any fees you might owe, the current interest rate, and what you could end up paying in the future if rates go up.

Comparing Lenders and Offers

Once you’ve reviewed your current HELOC, you can do some comparison shopping to see what other lenders might offer you. Look at interest rates, fees, and other loan terms. And if you can, read reviews to get a feel for what it might be like to work with a particular lender. Keep both your short- and long-term goals in mind as you evaluate various refinancing options.

Applying for Refinancing

Be prepared to provide current mortgage and bank statements, proof of income and employment, a home appraisal, and any other documentation your lender asks for. You can also expect your lender to run a credit check.

Keep in mind that you can only refinance your HELOC if you have adequate equity in your home. If you don’t have at least 15% or 20% in equity, based on the home’s current fair market value, you may not qualify for refinancing.

Costs Associated With HELOC Refinancing

No matter which method you might choose to refinance your HELOC, you can expect to pay closing costs on the new loan. These can include an appraisal fee, a loan origination fee, an application fee, a credit reporting fee, an attorney fee, and more. Closing costs vary depending on the type of loan, the loan amount, and the lender. Though closing costs for some loans can be as high as 2% to 5% of the loan amount, with a HELOC, you may be able to pay as little as 1%.

Pros and Cons of Refinancing Your HELOC With Another Bank

If you’re thinking about refinancing your HELOC with a different lender, there are a few pros and cons you may want to consider.

Recommended: HELOCs and Taxes

The Takeaway

If you think you may be able to qualify for a more affordable monthly payment by refinancing into a new HELOC or home equity loan or by doing a cash-out refinance with your first mortgage, it can make sense to check out the options with other lenders when you are wondering if you can refinance a HELOC with a different bank. It’s easy to hop online and compare what lenders are offering. And that can help you decide if refinancing would help you meet your financial goals.

SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $350,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.

FAQ

How soon can I refinance my HELOC after opening it?

If you’re hoping to avoid high monthly payments or if you want to extend your draw period, it can make sense to refinance your home equity line of credit (HELOC) before you enter the repayment period. But it’s a good idea to review your HELOC agreement to determine if your lender assesses a penalty for closing your HELOC out early.

Will refinancing my HELOC affect my credit score?

Refinancing your home equity line of credit (HELOC) could temporarily affect your credit score. But you can minimize the impact by making your home equity line of credit and other payments on time and by not applying for any other credit accounts for a while.

Can I refinance a HELOC on an investment property?

You may be able to refinance a home equity line of credit (HELOC) on an investment property, but in general, HELOCs are not as common for investment properties as they are for primary residences. Fewer lenders offer them, and the eligibility requirements may be more strict.

Photo credit: iStock/Inside Creative House

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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