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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

Credit card debt can go from zero to thousands with one quick swipe. Or it can build slowly like rising water — a nice dinner here, some retail therapy there. Before you know it, your balance is uncomfortably high. You’re not alone. According to the Federal Reserve Bank of New York’s Survey of Consumer Expectations, about 46% of U.S. households carry credit card debt. Of those consumers, the average balance is $6,768, according to recent Experian® data.

If you’ve vowed to pay off your credit card balance, you’re making a smart financial move. Doing so can save you money on interest, build your credit history, and help you achieve other financial goals. Here, learn the top tips and strategies for getting it done, from the snowball strategy to hardship plans and the boring but effective debt-focused budget.

What Is a Realistic Payoff Schedule?

If you’ve been carrying a balance on one or more cards, it may take longer than you’d like to pay off the debt. Determine how long you need to become debt-free while still covering your monthly bills comfortably.

You’ll want to consider these facts:

•   A longer payoff term can allow you to continue to save and invest while paying down debt.

•   A shorter payoff term can save you a considerable amount in interest.

Worth noting before moving on to tactics: If there’s no scenario in which you can cover your living expenses and pay off your credit card debt in five years, the standard payoff strategies may not be enough. It may be time to consider applying for credit card debt forgiveness.

7 Credit Card Payoff Strategies and Tips

There are numerous ways to tackle debt and pay off credit cards. The approaches below may work optimally when you mix and match several to create your own custom debt payoff plan.

1. Create a Debt-Focused Budget

Achieving financial goals usually starts with a budget. Making a budget is designed to help you discover extra cash you can put toward your credit card bill.

•   First, make a list of your monthly bills that reflect the “musts” in your life. Along with your rent or mortgage, phone, gas, food, and other required living expenses, include your credit card payment and other minimum debt expenditures. You can leave the amount blank for now. This is your “Needs” column.

•   Next, look at your “wants.” These are things that you can survive without — restaurant meals, new clothes, gym membership, travel — but often make life better. Which items can you do without temporarily so that you can put their cost toward your credit card bill? The idea is to trim spending so you can pay down your debt.

It’s OK if your budget isn’t the same from month to month — flexibility is good. While you’re at it, build the following into your budget:

•   Look ahead for unavoidable big purchases (that upcoming destination wedding) and occasional bills (annual home insurance premiums, for instance, or holiday gift shopping).

•   Leave some wiggle room for unexpected expenses. You might need to dip into your emergency savings for this kind of cost, but it’s good to have a cushion in your budget (say, for a rent increase).

•   Recognize that your credit card payment may be lower in some months to accommodate the fluctuating costs noted above. Just always pay at least the minimum payment.

Your new budget should prioritize your credit card payment on par with other bills and above nonessential treats. One way to simplify budgeting is to download a financial insights app, which pulls all of your financial information into one place.

2. Zero-Interest Credit Card

The frustrating thing about credit cards is how interest can take up more and more of your balance. Zero-interest credit cards, also known as 0% APR cards, allow cardholders to make payments with no interest on transfers and purchases for a set period of time. The promotional period on a new credit card can usually last from 12-21 billing cycles, long enough to make a large dent in the card’s principal balance.

Consolidating your credit card debt on one zero-interest card serves to simplify your monthly bills while also saving you money on interest payments. The key here, of course, is to avoid racking up even more credit card debt.

One drawback to these cards is that you often need a FICO® Score of 670 or above to qualify. And once the promo period expires, the interest rate can climb to 28.99% or higher. In an ideal world, you’ll want to achieve your payoff goal before the rate rises.

A credit card interest calculator can give you an idea of how much your current interest rate affects your total balance.

3. Consider the Snowball, the Avalanche, and the Snowflake Strategies

The snowball and avalanche debt repayment strategies take slightly different approaches to paying down debt. Both involve maintaining the minimum payment on all but one card.

•   The debt snowball method focuses on the debt with the lowest balance first, regardless of interest rate, putting extra toward that payment each month until it’s paid off.

Then, that entire monthly payment is added to the next payment — on top of the minimum you were already paying. Rinse and repeat with the next card. It’s clear to see how this method can quickly get the snowball rolling.

•   The debt avalanche method is based on the same philosophy but targets the highest-interest payment first. Getting out from under the highest debt can save a lot of money in the long run. Just like the snowball method, applying that entire payment to the next highest interest debt can lead to quick results.

•   The debt snowflake method, the third snow-related strategy, emphasizes putting every extra scrap of cash toward debt repayment. If you have extra money to throw at your debt, even $20, it can still make a difference in your overall amount owed. So this method encourages you to chip away at debt with any small amounts available.

4. Make More Money

Sure, increasing your income is easier said than done. But if you have the time to spare, it can make paying down debt a lot more manageable. Here are the top ways that people can bring in more cash:

•   Start a side hustle (or monetize an existing hobby).

•   Get a part-time job (on top of your current job). Two shifts a week can help you bring in another $500 to $1,000 per month.

•   Sell your stuff. Reselling clothes, books, old electronics, and jewelry can help bring in cash.

•   Negotiate a raise. In some cases, labor shortages may give workers extra leverage to ask for more.

5. Negotiate With Your Credit Card Company

If your large credit card balance is the result of unemployment, medical bills (yours or a loved one’s), or another financial setback, inform your credit card company. You may be able to negotiate a lower interest rate, lower fees and penalties, or a fixed payment schedule.

Hardship plans have no direct effect on your credit rating. However, the credit card company may send a note to the credit bureaus informing them that you’re participating in the program.

One point to be aware of: Your credit card issuer may also close or suspend your credit card while you’re paying off the balance. This can leave you without a means to pay for purchases and could also ding your credit score.

6. Change Your Spending Habits

Changing how you spend your money is key to paying down debt — and to avoiding racking up more in the future. You can approach this in two ways: as a temporary measure while you pay off your cards or a permanent downsizing of your lifestyle.

•   The advantage of the temporary approach is that people are generally more willing to give things up when it’s for a limited time. For instance, can you suspend your gym membership during the warmer months when you can work out outdoors? Perhaps you can challenge yourself to cook at home for 30 days to save on restaurants. Or you might go without paid streaming services for six months.

String enough of those small sacrifices together to cover a year or two, and see how quickly you might be able to increase your credit card payments. That, in turn, can make your payoff term shrink.

•   Downsizing your lifestyle for the long term has its own appeal, even for people who aren’t paying down debt. Living below your means is key to accumulating wealth. How exactly you accomplish that isn’t important. For instance, you can frequent cheaper restaurants, reduce the number of times you go out each month, or merely avoid ordering alcohol and dessert. The bottom line is to save money, avoid debt, and enjoy the financial freedom that results.

7. Take Out a Personal Loan

Similar to a zero-interest credit card, a personal loan is a form of debt consolidation. Personal loans tend to have lower interest rates than credit cards, saving you money. And if you’re carrying a balance on multiple credit cards, a personal loan can allow you to simplify your debt with one fixed monthly payment.

Personal loans can be a great option for people with good to excellent credit. That’s because your interest rate is determined largely by your credit score and history. You can typically borrow between $1,000 and $100,000, and use the money for just about any purpose, from paying off debt to funding travel or a home renovation.

You’ll usually find fixed-rate personal loans, though some variable-rate ones are available as well. Terms usually run from one to seven years for personal loans.

The Takeaway

Credit card debt can sneak up on you. If you’re carrying a balance on one or more cards, there are numerous ways to approach paying down your debt. You might start with a new budget that prioritizes your credit card payment along with your other monthly bills, and trim your spending accordingly. You could then combine a broad payoff strategy (the snowball, the avalanche) with other tips and tactics (zero-interest credit cards) to minimize your interest payments and shorten your payoff term. And remember: You’re not alone, and you can do this!

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 to pay off a huge credit card bill?

There are a variety of ways to pay off a large credit card bill. These include making (and sticking to) a budget, trying the debt avalanche or snowball methods, applying for a zero-interest balance transfer card, or taking out a personal loan.

How to get rid of $30,000 credit card debt?

To pay off a $30,000 credit card debt, it’s wise to create a smart budget, look into cutting your expenses, develop a repayment plan, and see about consolidating your debt. If these don’t seem likely to lead to getting rid of your debt, you might talk to a certified credit counselor and/or consider a debt management plan.

What is the best tip to pay off credit cards?

The top tip for paying off credit card debt will depend on a variety of factors, such as how much debt you have vs. your available funds. For some people, the debt avalanche method of putting as much available cash toward the highest interest debt can be a smart move. For others, consolidating debt with a personal loan may be a good option.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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-Q226-020

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

Did you know you can use a home loan for renovations? Renovation home loans cover the cost of purchasing and renovating a home. If you’re familiar with construction loans, renovation loans are similar. Also called “one-close” loans or renovation mortgages, renovation loans can offer buyers simplified financing for transforming a fixer-upper into an attractive, modernized home.

Read on to learn how to add renovation costs to your home loan and fund your home project, including ways to use your existing home equity to help you pay for renovations.

What Is a Renovation Home Loan?

A renovation home loan combines the cost of a home purchase and money for renovations in one mortgage. There’s only one closing and one loan when buying a new home or refinancing an existing home. The lender has oversight of the renovation funds, including the budget, vetting of the contractor, and disbursement of funds for renovation work as it’s completed.

The borrower, their property, and their lender must all meet criteria set out by the remodel home loan program to qualify, which can present a challenge. Qualifying lenders, in particular, can be hard to find. That’s because most lenders must maintain a custodial account for the renovations over the course of an entire year, which requires extra work and resources. However, if you can find a lender that can handle the process, renovation loans can be a convenient way to improve a promising fixer-upper.

Types of Home Loans That Can Include Renovations

Most mortgages don’t include renovations in the loan amount. Renovation mortgages are niche products serviced by a fraction of lenders. Buyers and properties must also meet certain requirements, which are outlined below.

There are several different types of home loans you can apply for that are eligible for adding renovation costs to the mortgage.

1. FHA 203K

An FHA 203(k) is a mortgage serviced by the Federal Housing Authority (FHA) in which the cost of repairs is combined with the mortgage amount. It’s different from a traditional FHA loan, which doesn’t include improvement expenses, but qualifications (credit score, down payment, etc.) are very similar.

Interest rates and terms are also similar to what you see in a standard FHA loan. However, you can expect additional lender fees to cover the extra oversight needed on a renovation loan.

The amount you can borrow is equal to either the value of the property plus the cost of renovations or 110% of the projected value of the property after rehabilitation. Borrowers must use an FHA-approved lender for this type of mortgage.

Eligible properties must be 1-4 units. Repairs can include those that enhance the property’s appearance and function, the elimination of health and safety hazards, landscape work, roofing, accessibility improvements, energy conservation, and more. A limited 203(k) is also available for repairs costing $75,000 or less.

2. Fannie Mae HomeStyle

The HomeStyle Renovation loan from Fannie Mae takes into account the value of the property after renovations are complete. The amount of allowable renovation money can equal 75% of the value of the property after renovations are complete.

In the world of home loans, the LTV is the percentage of your home’s value that is borrowed. Many lenders limit your LTV to 80%-85%.

A HomeStyle loan allows an LTV of up to 97%. This means it’s possible to put as little as 3% down. Some investment properties are also eligible for this type of loan. Renovations are eligible as long as they are permanently affixed to the property. Work must be completed within 15 months from the closing date of the loan.

3. Freddie Mac CHOICERenovation

The Freddie Mac CHOICERenovation program is virtually identical to the Fannie Mae HomeStyle program. This renovation loan is for buyers who want a loan with more flexibility than an FHA renovation loan.

Like HomeStyle, renovations that are permanently affixed to the property are eligible in 1-4-unit residences, 1-unit investment properties, second homes, and manufactured homes. The maximum allowable renovation amount is 75% of the “as-completed” appraised value of the home. This is the appraised value of the home before renovations that still accounts for all planned changes. The maximum LTV ratio is 95% (97% for HomePossible or HomeOne loans).

The Freddie Mac CHOICEReno eXPress Mortgage is an extension of the CHOICERenovation mortgage. The CHOICEReno eXPress mortgage is a streamlined mortgage for smaller-scale home renovations. Renovation amounts are limited to 10%-15% of the “as-completed” appraised value of the home. Borrowers need to work with an approved lender to apply for one of these programs.

4. USDA Purchase With Rehabilitation and Repair Loan

A USDA Purchase with Rehabilitation and Repair Loan assists moderate- to very-low-income households in rural areas with repairs and improvements to their homes. Buyers can secure 100% financing with this loan.

For very low-income borrowers, there’s a separate loan you can qualify for with a subsidized, fixed interest rate set at 1.00% with a 20-year term. This makes borrowing incredibly affordable.

To apply, you must have a household income that qualifies as low to moderate in your county per USDA standards. The property must be your primary residence (no investments), and rehab funds cannot be used for luxury items, such as outdoor kitchens and fireplaces, swimming pools and hot tubs, and income-producing features. Manufactured homes, condos, and homes built within the last year aren’t eligible.

5. VA Alteration and Repair Loan

The VA allows qualified service members to bundle repairs and alterations with the purchase of a home. As with all VA loans, 100% financing is available on these low-interest loans.

Alterations must be those ordinarily found in comparable homes. Renovations are also required to bring the property up to the VA’s minimum property standards.

The loan amount can include the “as completed” value of the home as determined by a VA appraiser. Leftover money from the home loan after renovations are complete is applied to the principal.

Note: SoFi does not offer the five types of home renovation loans on this list, although it does offer other types of FHA loans and VA add loans.

Home Style Quiz

Other Options for Financing Home Renovations

While a renovation home loan is a great way to finance a renovation, it’s not your only option for borrowing money for home improvements, nor is it the most flexible. Alternative loans, such as cash-out refis, home renovation personal loans, and home equity loans, may provide more flexibility.

Cash-Out Refinance

A cash-out refinance is useful for those who already own their home. You replace your old mortgage with a new mortgage, and the equity (here, the “cash”) is refunded to you. You’ll have closing costs with a refinance, but you won’t have separate financing costs for the money you’re using for renovations.

Personal Loan

Personal loans are often used for a home remodel or renovation. Because the funds are not secured by your property, you’ll likely have to pay a higher interest rate. The bright side of funding this way means you won’t lose your home if you have a financial setback and need to stop paying back the loan.

This type of loan comes with a shorter repayment period, higher monthly payment, and lower loan amount. You can find these loans through banks, credit unions, and online lenders.

Home Equity Loan

A home equity loan is a secured loan that uses your home as collateral. That means the lender can foreclose on the home if you stop paying the loan, so interest rates are typically lower. A home equity loan also comes with a longer repayment period than a personal loan.

Home Equity Line of Credit (HELOC)

A HELOC is a line of credit that lets homeowners borrow money as needed, up to a predetermined limit. As the balance is paid back, homeowners can then borrow up to the limit again through the draw period, typically 10 years. The interest rate is usually variable, and the borrower pays interest only on the amount of credit they actually use.

After the draw period ends, borrowers can continue to repay the balance, typically over 10 or 20 years, or refinance to a new loan.

Recommended: A Personal Line of Credit vs. a HELOC

Private Loan

A private loan is a loan made without a financial institution. Loans made from a family member, friend, or peer-to-peer source are considered private loans. Qualification requirements will depend on the individual or group lending the money. There are some serious drawbacks to obtaining funding from a private source, but these loans can help some borrowers in buying a home.

Government or Nonprofit Program

It’s possible to finance the cost of remodeling with the help of government programs. Federal programs such as the U.S. Department of Housing and Urban Development (HUD) have financing options for renovations, as do some state and local government agencies.

Recommended: What Is HUD?

The Takeaway

Homeowners have a lot of options for financing renovations, especially in an era when home equity is higher than ever before. Renovation home loans allow borrowers to purchase and renovate a property with one loan, but that’s not the only way you can remodel a fixer-upper. Some alternatives to renovation home loans include home equity loans, HELOCs, and personal loans.

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 do renovation mortgages work?

Home renovation loans are known for combining the cost of financing a renovation or remodel with the cost of purchasing the home into a single-closing transaction. Lenders calculate the amount to be borrowed based on the value of the home after renovations are complete.

Can you include renovation costs in a mortgage?

A home loan can include renovations. However, you must work with your lender to be approved for specific renovation loan programs.

Can you add renovation costs to your mortgage?

You can’t add renovation costs to an existing mortgage, but you can refinance your mortgage with a cash-out refinance that provides you with funds you can use however you wish. You can also take out a home equity loan or open a home equity line of credit (HELOC), which would provide you with renovation money and would, technically, be a second mortgage.

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SOHL-Q226-021

Americans owe more than $1.6 trillion in federal student debt, and the average federal student loan debt balance is $39,547. Fortunately, your state may be able to help. There are a number of states that pay off federal or private student loans through student Loan Repayment Assistance Programs (LRAPs). Some of these plans are meant to entice people to move to the state, while others are available to residents who work in certain professions. If you can qualify for one of these programs, you could get a major chunk of your federal or private student loan debt repaid for you.

Overview of State Loan Repayment Programs

State loan repayment programs, or LRAPs, offer student loan assistance to eligible borrowers who are paying back student loans. Some programs act as an incentive to encourage people to move to certain areas or become homeowners in the state. Others are available to residents who work in a certain field, such as health care or law.

Unlike federal loan forgiveness programs, which only forgive federal student loans, some states that pay off student loans through LRAPs can help you repay both private and federal student loan debt. However, like most other student loan repayment options, there are stipulations. For instance, you may have to commit several years to living or working in an area in order to receive the maximum benefits.

State-By-State Loan Repayment Assistance

Here are some of the states offering repayment assistance to qualifying federal and private student loan borrowers, which could help you pay off student loans early. This list isn’t exhaustive, so check with your state to find out if it offers LRAP opportunities.

California

The California State Loan Repayment Program offers assistance to primary care physicians, dentists, dental hygienists, physician assistants, nurse practitioners, certified nurse midwives, pharmacists, and mental/behavioral health providers who practice in designated California Health Professional Shortage Areas. Award amounts can be up to £50,000 for a 2- or 4-year service commitment if you have a federal or private student loan.

Kansas

Kansas offers up to $15,000 in federal and private student loan assistance over five years to new residents who move to one of its Rural Opportunity Zones (ROZs). You must have a newly established permanent residence in an eligible ROZ and live there for the five years of repayment to qualify for the full amount.

Maine

Maine offers several perks for federal and private student loan borrowers, including LRAPs and a tax credit:

•   Maine Dental Education Loan Repayment Program: This program offers repayment assistance up to $100,000 to dentists and dental health professionals working in underserved areas.

•   Maine Health Care Provider Loan Repayment Pilot Program: Designated for health care providers who live and work in Maine for at least three years, this program offers up to $75,000.

•   Nursing Education Loan Repayment Program: Established and new Maine residents who work as registered nurses or nurse educators for at least three years are eligible to receive up to $40,000 through this program.

•   Student Loan Repayment Tax Credit: Student loan borrowers who earned at least $13,712 in Maine could claim a student loan tax credit up to $2,500 annually with a lifetime limit of $25,000.

Recommended: How to Get the Student Loan Interest Deduction

Maryland

Maryland has a SmartBuy 3.0 program to help federal and private student loan borrowers become homeowners. To qualify for this program, you must owe at least $1,000 in student loans, purchase a home that meets the Maryland Mortgage Program guidelines, and borrow a mortgage from an approved Maryland SmartBuy lender. The program can provide up to 15% of the home purchase price (for a maximum of $20,000) for you to use to pay off your student loans.

Massachusetts

The Massachusetts Loan Repayment Program for Health Professionals provides up to $50,000 in federal and private student loan repayment to health care professionals in exchange for working two years in an underserved community. You’ll need to be licensed to work as a primary care physician, dentist, physician assistant, clinical social worker, marriage and family therapist, or other qualifying health care profession.

Michigan

Michigan’s State Loan Repayment Program offers up to $300,000 in federal and private student loan assistance to health care providers who work in a designated shortage area. You must commit to a service term of at least two years to qualify for this program.

Ohio

The city of Hamilton in Ohio has a program to incentivize new residents to move to the area. The Hamilton Talent Attraction Program Scholarship offers up to $15,000 to borrowers who move to an area in the Hamilton city limits. It prefers graduates with a degree in science, technology, engineering, the arts, or mathematics.

Texas

The Texas Student Loan Repayment Assistance Program offers up to $6,000 per year to attorneys paying back federal and private student loans who work for a Texas legal aid program that’s receiving a grant from the Texas Access to Justice Foundation (TAJF). You also must have been licensed to practice law for fewer than 10 years and make no more than $80,000 per year.

Requirements and Eligibility

The requirements for state-provided LRAPs vary by program. Some are open to current residents, while others offer benefits to new residents who move to or buy a home in a certain area.

Programs that are designated for specific professionals often require you to work in a designated shortage area or with an underserved community. You’ll also generally need to commit to a certain service term, such as two or three years. Read over the fine print of a program’s requirements to see if it could be a good match for you.

If you can’t find a program that fits your specific situation, there are other ways to make it easier to repay your federal or private student loans. For instance, you might consolidate all your loans into one loan or refinance your student loans, ideally for a lower interest rate or better loan terms if you qualify. (Just be aware that refinancing federal student loans makes them ineligible for federal programs and protections such as income-driven repayment.)

Application Process and Deadlines

The application process and deadlines also vary by loan repayment assistance program, and you can usually find this information on the official state or program website. You may need to fill out an application with details about your educational background and student loan debt. Often, a program requires you to commit to working half-time or full-time for a certain number of years.

These programs can be competitive, so make sure to get your application in well ahead of the stated deadline. Some programs also pay out a certain amount per month or year, so find out whether you need to submit additional applications to maintain your eligibility.

Loan Repayment vs Loan Forgiveness

Both loan repayment assistance programs and student loan forgiveness programs can help you pay off your education debt. However, loan repayment programs may offer assistance sooner, as some of these programs only require two or three years of service.

By contrast, the Teacher Loan Forgiveness Program requires five complete and consecutive years of service, while Public Service Loan Forgiveness requires 10. And income-based student loan repayment forgiveness requires 20 or 25 years of payments until your balance may be forgiven.

Loan repayment programs might also help you pay off both private and federal student loans, whereas only federal student loans are eligible for loan forgiveness programs.

Finally, loan repayment and loan forgiveness programs may have different tax implications. The loan forgiveness you get from PSLF isn’t taxable, for instance, whereas assistance you get from an LRAP could be treated as taxable income.

The Takeaway

When it comes to paying back your federal or private student loans, your state may be able to help. Several states offer loan repayment assistance programs to eligible borrowers who move to a certain area or work in a qualifying profession. By taking advantage of one of these programs, you may be able to get a major portion of your federal or private student loans paid off.

Even if your state doesn’t offer an LRAP, there are other ways to potentially make your payments easier, including student loan forgiveness, loan consolidation, and student loan refinancing for more favorable rates and terms for those who qualify. Carefully consider all your options for repaying federal or private student loan debt.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

What types of loans qualify for state repayment assistance?

State repayment assistance programs generally pay off federal student loans, and some will pay off private student loans as well. Check with each individual program to find out what types of loans qualify for repayment assistance.

Can you receive assistance from multiple state programs?

You may be able to receive assistance from multiple state programs — if, for instance, you live in one state and get assistance and then move to another state and get assistance there — but you likely can’t do this simultaneously. Most programs require you to live and work in-state to be eligible for student loan repayment benefits.

How much student loan debt can state programs cover?

State programs can cover a significant portion of your student loan debt. The Loan Repayment Assistance Program (LRAP) for health care workers in Massachusetts offers up to $50,000, while Michigan’s health care worker LRAP can provide up to $300,000. However, the amount will depend on the program and the field you work in.

Photo credit: iStock/zimmytws

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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.