SoFi

What’s your number? That’s not a pickup line; it’s the digits a mortgage lender will want to know — your credit score for a mortgage application. Credit scores range from 300 to 850, and for most mortgage-seekers, a good credit score to buy a house is at least 620. The lowest interest rates usually go to borrowers with scores of 740 and above whose finances are in good order, while a score as low as 500 may qualify some buyers for a home loan, but this is less common.

Why Does a Credit Score Matter?

Just as you need a résumé listing your work history to interview for a job, lenders want to see your borrowing history, through credit reports, and a snapshot of your habits, expressed as a score on the credit rating scale, to help predict your ability to repay a debt.

A great credit score vs. a bad credit score can translate to money in your pocket: Even a small reduction in a homebuyer’s mortgage rate can save thousands of dollars over time.

Do I Have One Credit Score?

You have many different credit scores based on information collected by Experian, Transunion, and Equifax, the three main credit bureaus, and calculated using scoring models usually designed by FICO® or a competitor, VantageScore®.

To complicate things, there are often multiple versions of each scoring model available from its developer at any given time, but most credit scores fall within the 300 to 850 range.

Mortgage lenders historically have focused on FICO scores. Here are the categories:

•   Exceptional: 800-850

•   Very good: 740-799

•   Good: 670-739

•   Fair: 580-669

•   Poor: 300-579

Here’s how FICO weighs the information:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   New credit: 10%

•   Credit mix: 10%

Mortgage lenders will pull an applicant’s credit score from all three credit bureaus. If the scores differ, they will use the middle number when making a decision.

If you’re buying a home with a non-spouse or a marriage partner, each borrower’s credit scores will be pulled. The lender will home in on the middle score for both and use the lower of the final two scores (except for a Fannie Mae loan, when a lender will average the middle credit scores of the applicants).

Recommended: 8 Reasons Why Good Credit Is So Important

What Is the Minimum Credit Score to Buy a House?

The median FICO score for homebuyers in late 2025 was a very healthy 735, according to Realtor.com® data. Fortunately, not everyone buying a home will need a score this high to qualify for a home loan. After all, the median credit score in the U.S. is 715. (Using the median versus the average credit score necessary to buy a house helps ensure that unusual buyers with extremely high or low scores don’t throw off the calculations.) How low can you go and still buy a house? The answer hinges on your mortgage.

Credit Score Requirements by Loan Type

What credit score do you need to buy a house? The answer will depend on the type of mortgage loan you’re seeking. If you are trying to acquire a conventional mortgage loan (a loan not insured by a government agency) you’ll likely need a credit score of at least 620. The best credit score to buy a house is 740 or better, because that will help you obtain a lower interest rate. But many buyers purchase a home with a lower score.

With an FHA loan (backed by the Federal Housing Administration), 580 is the minimum credit score to qualify for the 3.5% down payment advantage. Applicants with a score as low as 500 will have to put down 10%.

Lenders like to see a minimum credit score of 620 for a VA loan, though some will go lower, to 600.

A score of at least 640 is usually required for a USDA loan, though borrowers with strong compensating factors, such as a healthy savings, might qualify at 620.

A first-time homebuyer with good credit will likely meet FHA loan requirements, but a conventional mortgage will probably save them money over time. One reason is that an FHA loan requires upfront and ongoing mortgage insurance that lasts for the life of the loan if the down payment is less than 10%.

Steps to Improve Your Credit Score Before Buying a House

Working to build credit over time before applying for a home loan could save a borrower a lot of money in interest. A lower rate will keep monthly payments lower or even provide the ability to pay back the loan faster. Here are some ideas to try:

1.    Pay all of your bills on time. “Payment history makes a bigger impact on a person’s credit score than anything else — 35%. So the most important rule of credit is this: Don’t miss payments,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.

2.    Check your credit reports. Be sure that your credit history doesn’t show a missed payment in error or include a debt that’s not yours. You can get free credit reports from the three main reporting agencies. To dispute a credit report, start by contacting the credit bureau whose report shows the error. The bureau has 30 days to investigate and respond.

3.    Pay down debt. Installment loans (student loans and auto loans, for instance) affect your DTI ratio, and revolving debt (think: credit cards and lines of credit) plays a starring role in your credit utilization ratio. Credit utilization falls under FICO’s heavily weighted “amounts owed” category. A general rule of thumb is to keep your credit utilization below 30%.

4.    Ask to increase the credit limit on one or all of your credit cards. This may improve your credit utilization ratio by showing that you have lots of available credit that you don’t use.

5.    Don’t close credit cards once you’ve paid them off. You might want to keep them open by charging a few items to the cards every month (and paying the balance). If you have two credit cards, each has a credit limit of $5,000, and you have a $2,000 balance on each, you currently have a 40% credit utilization ratio. If you were to pay one of the two cards off and keep it open, your credit utilization would drop to 20%.

6.    Add to your credit mix. An additional account may help your credit, especially if it is a kind of credit you don’t currently have. If you have only credit cards, you might consider applying for a personal loan.

How Long It Takes to See Changes in Credit Score

Working on your credit scores may take weeks or longer, but it can be done. Should you find an error in a credit report, you can expect it to take up to a month for your score to change. And if you haven’t been paying bills on time, it could take up to six months of on-time payments to see a significant change.

Other Factors Besides Credit Score That Affect Mortgage Approval

Credit scores aren’t the only factor that lenders consider when reviewing a mortgage application. They will also require information on your employment, income, debts, and bank accounts. Your down payment will be a factor as well. Putting 20% down is desirable since it often means you can avoid paying PMI, private mortgage insurance that covers the lender in case of loan default. But many homebuyers — particularly first-time buyers — put down less than 20% and simply factor PMI into their monthly budget.

Other typical conventional mortgage loan requirements a lender will consider include:

Debt-to-Income Ratio

Your debt-to-income ratio is a percentage: the total of your monthly debts (car payment, student loan payment, alimony, etc) divided by your gross monthly income. Most lenders require a DTI of 43% or lower to qualify for a conforming loan. Jumbo loans may have more strict requirements.

Employment and Income History

A mortgage lender will want to verify your employment and income and may request pay stubs and w-2 statements. Don’t be surprised if the lender also reaches out to your employer to confirm your employment. If you are self-employed, you may be asked for a profit-and-loss statement for your business and for more than a year or two of tax returns. Lenders are looking for borrowers who have a steady income source and can be relied upon to repay a large sum over a long period of time.

Available Savings and Assets

Having cash reserves or investments that you can liquidate in the event that you need to pay your mortgage bill is another factor a prospective lender will consider. So lenders will ask you for information about your accounts, including savings and 401(k) accounts. The lender is also looking to be sure that you have the resources to cover the down payment amount and closing costs related to the home purchase.

A lender facing someone with a lower credit score may increase expectations in other areas like down payment size or income requirements.

If you want to see how all these factors come together in your financial profile to determine what size loan you might be approved for, you can first prequalify for a mortgage with multiple lenders. Ultimately, you may want to seek out mortgage preapproval from at least one lender so you have a very clear picture of your home-buying budget and can move forward swiftly when you find a home you love.

Recommended: 31 Ways to Save for a House

The Takeaway

What credit score is needed to buy a house? The number depends on the lender and type of loan, but most homebuyers will want to aim for a score of 620 or better. A better credit score is not always necessary to buy a house, but it may help in securing a lower interest rate.

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

What credit score is considered good for buying a house?

Generally speaking, you’ll want a credit score of 620 or better if you are looking at a conventional loan or VA loan. A USDA loan would require at least 640 from most borrowers. An FHA loan offers more lenient terms: You could qualify with a score as low as 500, though 580 will allow you to put down a low, 3.5% down payment.

Can I buy a home with a low credit score?

It is possible to get a mortgage and purchase a home with a credit score as low as 500 if you obtain an FHA loan and put down a 10% deposit. If you are looking at a different loan type, then you will likely need at least a 620 score, though if you have a healthy savings and solid income, you may be able to squeak by with a slightly lower credit score.

Do mortgage lenders use FICO or VantageScore?

Mortgage lenders have historically relied on FICO scores but now can use either FICO or VantageScore for loans delivered to Fannie Mae and Freddie Mac, the two entities that buy mortgages from lenders, thereby guaranteeing most of the mortgages in the U.S.

How can I improve my credit score before applying for a mortgage?

The most important thing you can do to help nurture your credit score before applying for a loan is to make your payments in full and on time. Other things, such as requesting credit line increases (but not spending up to the limit) or diversifying your credit mix by adding a personal loan to your credit cards, can help. So can not closing old, unused credit cards. But by far, on-time payments should be your number-one goal.

What other factors do lenders look at besides credit score?

A lender considering a mortgage application will look at your income (both the raw number and how consistent your earnings have been). Your debts, and the ratio of debts to income, will also be important, as will your savings in cash and other assets. Your down payment amount could also factor into a lender’s decision about qualifying you for a loan.

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.

SOHL-Q126-006

Interest rates on savings accounts determine how quickly your money grows while it sits in the bank. If you research the average rate for savings accounts, however, you might be surprised to find that the interest rates across banks can vary significantly.

At the time of publication, the national average savings account rate is 0.39% annual percentage yield (APY). By contrast, the APY for high-yield savings accounts may be close to 3.00% to 4.00% or sometimes higher.

The gap is significant, and can mean earning just a few dollars versus hundreds over the course of a year. Rather than settling for the national average, it can be worth seeking out a savings account that pays a meaningfully higher rate.

What Is the National Average Savings Rate in 2026?

As of December 15, 2025, the APY for a U.S. savings account stood at 0.39%, according to the Federal Deposit Insurance Corporation (FDIC). For comparison, money market accounts averaged 0.58%, while the average six-month certificate of deposit (CD) paid 1.58% APY.

Those headline averages hide a dramatic divide. Large, legacy banks frequently pay very little — some branches still advertise 0.01% APY for basic savings accounts. Meanwhile, many online banks and smaller institutions may offer an APY of 3.00% or higher.

For savers, this means the “average” tells you approximately what many banks may pay, not what’s available if you’re willing to shop around.

How the National Average Savings Rate Is Calculated

The FDIC calculates the national average savings account rate by collecting interest rate data from FDIC-insured banks for savings deposit products.

To avoid skewing the data towards smaller institutions offering niche rates, the FDIC uses a weighted average based on each bank’s share of total deposits. Because many of the biggest banks offer low savings rates, the national average ends up being pulled down — even below what some large banks themselves pay.

Recommended: How to Calculate Interest in a Savings Account

How Do Average Rates at Traditional Banks Compare?

If you keep your savings at a large national bank, you may see very low interest rates on standard savings accounts. As of late 2025, many of the largest banks were still offering near-zero yields.

Here’s a look at the APYs for basic savings accounts as of December 16, 2025 at the five largest banks in the U.S.

This doesn’t mean that big banks never offer competitive products. Some provide promotional or tiered-rate accounts that offer higher yields. But for everyday savings held in standard brick-and-mortar accounts, the numbers tend to remain low.

Why Are Online Savings Account Rates Typically Higher?

Online savings account rates are typically higher because these institutions typically have lower overhead costs compared to traditional banks. Without a vast network of physical branches to maintain, online banks can avoid major expenses such as rent/mortgage, utilities, maintenance, and a large on-site staff. These savings can then be passed on to customers in the form of higher APYs and lower (or no) fees.

For customers, this difference can be substantial. While a traditional savings account might offer an APY of around 0.01%, online high-yield savings accounts often provide rates of 3.00% or more. All FDIC-insured online banks help ensure your money is safe (up to insured limits), just like traditional banks.

How Can You Find the Best Interest Rate for Your Savings?

You don’t have to accept the national average savings interest rate. Here are some of the most effective ways to earn a higher APY:

Focus on High-Yield Savings Accounts (HYSAs)

High-yield savings accounts (HYSAs) typically pay rates many times higher than the national average, allowing your money to grow faster while remaining safe and accessible. HYSAs are often provided by online banks, which can offer better rates due to lower operating expenses. Some credit unions, which operate as not-for-profit institutions, also offer competitive rates, though they may require specific membership criteria.

Compare APY, Not Just the Interest Rate

When looking for a competitive rate for a savings account, it’s important to focus on annual percentage yield (APY), not just the interest rate. The interest rate is the basic rate at which your money earns interest, but the APY offers a more accurate picture of how much your account will grow because it includes the effect of compounding, which is the process of earning interest on both your initial principal and the accumulated interest.

The frequency of compounding can vary between financial institutions (e.g., daily, monthly, quarterly, or annually), so an account with a slightly lower stated interest rate might actually yield more if it compounds more frequently.

By standardizing returns to one year with compounding included, APY allows you to compare savings accounts apples to apples and choose the best return.

Recommended: High-Yield Savings Account Calculator

What to Look for When Comparing Savings Accounts

In addition to APYs, here are several other factors to consider when choosing a savings account:

•   Minimal balance requirements: Some savings accounts require a sizable opening deposit or a minimum ongoing balance to qualify for the highest APY. You’ll want to make sure your balance meets these thresholds so you don’t miss out on the top rate.

•   Bank fees: Monthly maintenance fees can quickly eat into your interest earnings. To avoid them, you can either choose a savings account with no account fees (common with online banks and credit unions) or meet requirements set by banks that charge fees, such as maintaining a certain minimum balance or linking a checking account.

•   Accessibility: Consider how you’ll be able to access and manage your money. Ideally, you want to choose a bank that offers a wide network of free-free ATMs, plus a robust mobile app with features like mobile check deposit, automatic transfers, and account alerts.

How Will the Federal Reserve Affect Savings Rates in 2026?

Savings account interest rates are typically variable, not fixed, and tend to move in response to changes in the Federal Reserve’s benchmark federal funds rate, though the timing and magnitude can vary by bank.

When the Fed raises interest rates, savings account yields generally increase. When the Fed cuts rates, APYs usually fall. In 2025, the Fed lowered the federal funds rate three times. While competitive rates are still available, they have begun trending downward.

Banks also adjust rates based on supply and demand. If a bank needs more deposits to support lending, it may raise savings rates to attract funds. If deposits are plentiful and loan demand is weak, rates may decline. Competition among banks and broader economic conditions further impact this constantly shifting landscape.

The Takeaway

The national average savings interest rate, at approximately 0.39% APY as of late 2025, significantly understates the potential for savings growth. Rates at large traditional banks are often near-zero, but high-yield savings accounts (HYSAs) from online institutions often pay 3.00% APY or more, offering a substantial difference in earnings.

By comparing APYs, looking for accounts with low fees, and prioritizing FDIC-insured HYSAs, you can maximize the return on your savings and ensure your money works harder for you.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is a typical interest rate for a savings account at a large national bank?

Traditional savings accounts, particularly those offered by large, brick-and-mortar banks, generally offer a low interest rate. As of late 2025, the national average annual percentage yield (APY) for a savings account is 0.39%, according to the FDIC. However, some large banks offer rates significantly below this average, sometimes as low as 0.01% APY on their standard savings products.

What is considered a high-interest savings account?

A high-interest savings account, often referred to as a high-yield savings account, is one that offers an annual percentage yield (APY) significantly above the national average. Given that the national average APY for savings accounts is around 0.39% as of late 2025, an account offering an APY of significantly higher than that number may be considered “high-interest.” Some online banks and credit unions offer high-yield accounts that may be upwards of 3.00% to 4.00% APY, making them a popular choice for savers looking to maximize their returns.

How much more interest can you earn with a high-yield savings account?

The amount of extra interest you can earn with a high-yield savings account (HYSA) is often substantial, especially when compared to the national average or the rates offered by large traditional banks. For example, if you have a $10,000 balance and earn 0.01% APY, you would earn $1 in interest over one year. If you move that same $10,000 to a top-tier HYSA offering 3.00% APY, you would earn $300 in interest over one year, a difference of $299. The larger your savings balance and the greater the rate difference, the more pronounced this gap in earnings becomes over time.

How is APY calculated?

The annual percentage yield (APY) is calculated by taking the interest rate and factoring in the effect of compounding over the course of one year. This means it shows you the total return on your savings, including both the base interest earned and the interest earned on that interest. The formula for APY is: APY = [1 + (i / n)]n − 1, where:

•   “i” is the interest rate

•   “r” is the stated annual interest rate (as a decimal)

•   “n” is the number of compounding periods per year.

Are high-yield savings accounts safe?

Yes, high-yield savings accounts (HYSAs) are generally safe, provided they are offered by institutions that are insured by the Federal Deposit Insurance Corporation (FDIC) for banks, or the National Credit Union Administration (NCUA) for credit unions.

FDIC or NCUA insurance protects your deposits up to $250,000 per depositor, per account ownership category (such as single, joint, or trust account), per insured institution, in the event the bank or credit union fails. When choosing an HYSA, always confirm the institution’s insurance status, regardless of whether it is a traditional or an online bank.

Do I have to pay taxes on the interest I earn in a savings account?

You are generally required to pay taxes on the interest you earn from a savings account. The interest is considered ordinary income by the IRS, and it is taxable at your regular federal income tax rate. If you earn $10 or more in interest in a given year, your bank will issue you a Form 1099-INT detailing the amount of interest earned. You must report this amount when filing your annual tax return.

Can a savings account interest rate change?

Yes, a savings account interest rates can change at any time. Banks often adjust rates based on market conditions, such as changes in the federal funds rate or overall economic trends. Unlike fixed-rated products like certificates of deposit (CDs), savings accounts usually have variable interest rates, so your earnings may increase or decrease over time.

Photo credit: iStock/MicroStockHub

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SSOBNK-Q425-037

The average homeowner with a mortgage was sitting on $212,000 in home equity in mid-2025, according to ICE Mortgage Monitor. Obviously, the equity number varies for each individual and depends on factors such as the original down payment, local property values, and the amount of time in the home. But if you have more than 20% equity in your home, using a home equity line of credit (HELOC) to build wealth is a strategy to consider. Let’s explore the basics of how to use home equity to build wealth.

Ways to Build Wealth With a HELOC

A home equity line of credit lets you borrow funds as needed (up to a prearranged limit) through a credit draw. This is different from a home equity loan, in which you would borrow a one-time sum of cash. Drawing on your home equity for certain expenses could help grow your wealth over time, if it financially makes sense. Here are some options to consider.

1. Home Improvements

A HELOC works well for larger home improvement projects and renovations because you can draw funds to pay for materials and contractors as needed. You accrue interest only on the outstanding balance, so it could be cheaper to opt for a HELOC vs. a home equity loan. And if you itemize your taxes, you could deduct HELOC interest payments.

Plus, a renovation project could build wealth by increasing the value of your home. Home improvement experts estimate that a kitchen refresh could deliver a 377% return on investment and refinishing hardwood floors could have a 348% ROI.

2. Debt Consolidation

Paying off debt with a lower interest rate could save you a lot of money over the long run. Let’s look at an example:

Say you have a $10,000 credit card balance with a 22.00% APR. In order to pay off that card in five years, you’d pay $276.19 per month and pay $6,571.35 in interest.

If you qualify for a HELOC with an 8.00% APR, on the other hand, you could make interest-only payments for one year, then spread out the principal and remaining interest over four years, for a total of five years. During the interest-only period, your payment would be $66.67, followed by $244.13 for the remaining four years. On top of that, you’d only pay a total of $2,518.19 in interest for the entire five years.

That’s a potential savings of $4,053.16 in interest payments by consolidating to a lower rate! And here again, HELOC interest is deductible in 2026 for those who itemize. A tax advisor can keep you up to date on deductibility in future years.

3. Real Estate Investments

Using a HELOC to buy investment property can help you start climbing the real estate ladder. Homeowners could use the funds to make a down payment, cover closing costs, and/or make some upgrades before renting out the property.

You’ll still need to qualify for the new property’s monthly mortgage loan payments, particularly if there isn’t a current rental income history for the lender to review. Assuming you’re eligible for the loan, the goal is to use the rental income to pay off the HELOC and make a profit. On top of that, the property itself could increase in value over time, building your overall wealth.

That all sounds simple, but using a HELOC to invest in real estate is something you should only do if you have studied the ins and outs of this business model and factored property management expenses, repair costs, and vacancy rates into your profit and loss calculations.

4. Education and Skills Development

Investing your home equity in your education or skills development could increase your earning power and, consequently, your wealth. Research shows that people with advanced degrees tend to earn more than those without them.

For instance, a study published in Demography revealed that women with bachelor’s degrees earn $630,000 more in a lifetime than those with a high school degree. For men, the increase in lifetime earnings is $900,000. The numbers are even more dramatic with graduate degrees. Women’s lifetime earnings are $1.1 million higher than their high school graduate counterparts, whereas men earn $1.5 million more. Clearly, investing in your professional skills can translate into greater wealth.

5. Start or Expand a Business

The majority of small business owners invest their personal funds in the growth of their companies. Research also shows that upfront funding correlates with greater revenue. So while there’s no way to know that home equity financing you use for your business will guarantee success, it could improve your odds to scale more quickly. It’s important to remember, though, that a HELOC uses your home as collateral. If you use a HELOC to finance a business, it’s a good idea to have a backup plan for how you’ll cover your payments if the business doesn’t get off the ground.

6. Investment Portfolio Growth

Growing a diversified investment portfolio is another option for using a HELOC to build wealth. Obviously, there is risk involved when using a HELOC to invest in the stock market. Focusing on long-term investments could help reduce the risk of short-term market volatility. Remember, though, that for investments made with money from a HELOC to truly pay off, you would have to earn more on the investment than you pay in interest for the HELOC.

7. Emergency Fund or Cash Reserve

Most financial experts recommend having three to six month’s worth of savings on hand in cash in case you lose a job or the ability to earn an income. However, the economic volatility that came during the pandemic has people rethinking that number and even recommending up to a year of expenses in savings. Using a type of home equity loan like a HELOC could give you the peace of mind of having a financial cushion to fall back on, while allowing you to carefully invest that six months of savings instead of keeping it in cash.

Turn your home equity into cash with a HELOC brokered by SoFi.

Access up to 90% or $500k of your home’s equity to finance almost anything.

What to Consider Before Getting a HELOC

There are several factors to consider before you decide on a HELOC instead of some other type of financing, such as a cash-out refinance or unsecured personal line of credit.

•   Your home is used as collateral: As we’ve said already, if you default on your HELOC payments, you could lose your house.

•   You must maintain 10% to 20% equity in your home: You can’t tap into your entire equity amount; lenders require you to keep some in reserve, which means you may not be able to borrow as much as you originally thought.

•   HELOCs have two stages: The first is the draw period, in which you only have to make interest payments. After the draw period, you’ll make payments on both principal and interest. The draw period usually lasts five to 10 years. So it’s critical to be prepared for the bump up in monthly payments when it happens.

Variable Interest Rates and Payment Changes

One of the most important things to understand about a HELOC is that this method of borrowing comes with a variable interest rate. Your rate won’t stay the same throughout the life of the HELOC, and so your monthly payment amount could increase if rates rise. That could mean a bigger balance and bigger payments down the road. Of course, variable rates can also drop — which would be good news. But it’s important to be prepared for the worst, even as you’re hoping for the best where interest rates are concerned.

Impact on Home Equity and Long-Term Value

Another key thing to understand about a HELOC is how it will affect your home equity. A HELOC is technically a second mortgage (assuming you are still paying off your first home loan). This means that as you draw on a HELOC, your home equity could actually decline — until you have repaid what you borrowed. If you’re using a HELOC to make improvements in your home, it’s possible your home value will increase and your equity percentage will hold steady. But using a HELOC for other purposes means your equity level will take a hit, even though, long term, you could be growing your net worth.

How a HELOC Works to Build Wealth Over Time

Many HELOC borrowers feel it’s worth it to take a temporary hit on their home equity level because they are optimistic about building wealth using home equity. To use a HELOC to build wealth, you will first need to qualify for this type of financing. To get a HELOC, you’ll need a credit score of at least 640, though some lenders will require a score of 680 or better. You will also need to have at least 15% (ideally 20%) equity in your home. To compute your equity, subtract what you owe on your mortgage from the home’s market value, then divide the answer by the market value for an equity percentage. In case you are wondering: Yes, you can get a HELOC if you have an FHA loan.

Leveraging Equity Strategically

Being smart about leveraging equity means watching the variable interest rate on this type of financing to make sure that whatever you’re spending the funds on is on track to have a higher rate of return than the interest rate you’re paying to borrow the money. So for example, using a HELOC with a 7.00% interest rate to purchase a 6-month CD that pays 4.00% isn’t the smartest way to leverage your equity. Investing in a postgraduate degree that has the potential to significantly increase your income for the remainder of your career would likely have a better payoff. Weighing costs versus benefits (including the interest you’ll pay on the HELOC) is important no matter how you choose to use the funds.

The Importance of Repayment Planning

The other key aspect of using a HELOC to build wealth is preparing for the time when you exit the draw phase of the HELOC and begin to make monthly principal-plus-interest payments to pay down what you have borrowed. If you’re using a HELOC to buy investment property, for example, you’ll want to make sure that you have a robust rent income stream teed up when the repayment phase comes and that you have made any major repairs to the property.

Your HELOC agreement will specify how often the interest rate can change on the HELOC and by how much. So part of preparing for repayment is computing what payments would be at various interest rates using a HELOC repayment calculator.

Pros and Cons of Taking Equity Out of Your Home

It’s certainly possible to build wealth using a HELOC, but there are advantages and disadvantages to think about.

The Takeaway

Tapping into your home equity using a HELOC is one way to potentially build wealth, especially because rates tend to be low when compared to other forms of borrowing. It’s critical to weigh the pros and cons, since defaulting on payments could result in losing your house. But if you have the financial confidence to move forward, there are several ways that your home equity could help you build wealth.

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

FAQ

Is it smart to use a HELOC for investment property?

Using a HELOC for an investment property could help you fund the transaction sooner than if you used other types of financing. You may be able to make a bigger down payment or even make an all-cash offer. Just be sure that you feel confident in your real estate market research and your ability to make payments even if a worst-case scenario occurs.

What should you not use a HELOC for?

A HELOC should not be used for depreciating assets, especially when your goal is to build wealth. Things like vacations and car purchases aren’t usually recommended since they don’t hold their financial value.

What are the pitfalls of a HELOC?

The biggest pitfall is that your home is used as collateral to secure a HELOC and can go into foreclosure if you miss payments. On top of that, variable interest rates result in the potential for larger-than-expected payments if rates increase over time.

What credit score do you need for a HELOC?

In order to qualify for a HELOC, you’ll likely need a credit score of at least 640. In fact, some lenders like to see a score of 680 or better. And for the best interest rates, you would be wise to try to push your credit score to 700 or better before applying for a HELOC.

Can using a HELOC improve your net worth?

Used strategically, a home equity line of credit can help you grow your net worth in one or more ways. If you use funds from a HELOC to make improvements that increase the value of your home, then your net worth will increase too (after you have repaid what you borrowed). Some borrowers use a HELOC to fund investments in their education that lead to income gains. Investments in a business or even in the stock market are other, riskier ways to use HELOC funds that have the potential to increase net worth.

Photo credit: iStock/nortonrsx

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.

SOHL-Q126-005

If you have federal student loans, you can enroll in an Income-Driven Repayment (IDR) plan, which may make your monthly payments more affordable. That’s because the amount is calculated based on your discretionary income and family size.

Income-Driven Repayment is the umbrella term for several federal repayment programs. (Income-based repayment, on the other hand, refers to one specific IDR plan.) Once you are enrolled in an IDR plan, you will need to recertify annually, by providing updated information about your income and family size — essentially reapplying for the plan. The government uses this information to calculate your payment amount and adjust it if necessary.

You can easily recertify an IDR plan. Read on to find out when to recertify income-driven repayment, how to do it, and upcoming changes to IDR plans you should be aware of.

What Is Income-Driven Repayment?

Income-driven repayment currently encompasses three different repayment plans. These plans are available to federal student loan borrowers to help make their payments more manageable. It’s an option to keep in mind when choosing a loan or if your current federal loan payments are high relative to your income. The program is intended to make the amount you pay on your student loan each month more affordable.

Under the “One Big Beautiful Bill” signed into law by President Trump, the options for income-driven plans will be changing over the next few years. Currently, however, the three income-driven repayment programs offered for federal student loans are:

•   Pay As You Earn (PAYE) Repayment Plan

•   Income-Based Repayment (IBR) Plan

•   Income-Contingent Repayment (ICR) Plan

For all of these plans, your monthly payment amount is based on a percentage of your discretionary income and the size of your family.

An income-driven plan also extends your loan term to 20 or 25 years. On the IBR plan, borrowers are eligible to get any remaining balance on their loan forgiven after that time.

Recommended: Guide to Student Loan Forgiveness

Which Federal Loans Are Eligible for an Income-Driven Repayment Plan?

IDR plans are available for the following types of federal loans:

•   Direct Subsidized Loans

•   Direct Unsubsidized Loans

•   Direct PLUS Loans made to graduate or professional students

•   Direct Consolidation Loans that did not repay any PLUS loans made to parents

•   Subsidized Federal Stafford Loans

•   Unsubsidized Federal Stafford Loans

•   FFEL PLUS Loans made to graduate or professional students

•   FFEL Consolidation Loans that did not repay any PLUS loans made to parents

•   Federal Perkins Loans, if these student loans are consolidated.

Private student loans are not eligible for IDR plans. For borrowers who are struggling to make their monthly payments on private loans, one option they may want to consider is student loan refinancing. With refinancing, you replace your old loans with one new loan. Ideally, the refinanced loan has a lower interest rate, which can lower monthly payments and save a borrower money.

Using a student loan refinancing calculator can be helpful to see how much refinancing might save you.

Take control of your student loans.

Ditch student loan debt for good.

How Monthly Payments Are Calculated Under IDR Plans

On an IDR plan, your monthly payment amount is generally based on a percentage of your discretionary income, which is defined by the Education Department as “the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.”

Below is a look at how monthly payments are calculated under each plan. You can also use the office of Federal Student Aid’s Loan Simulator tool to see what your payments would be for each of the plans.

Also, it’s important to be aware that the PAYE and ICR plans are currently available to borrowers, but they are set to close to new enrollments on or after July 1, 2027. Borrowers already on these plans have until July 1, 2028, to switch to the IBR plan or the new Repayment Assistance Plan (RAP).

The IBR Plan

As noted above, while most of the other IDR plans will close in 2027, IBR will remain open to current borrowers.

On Income-Based Repayment, borrowers pay 10% of their discretionary income each month for a 20-year term if they first borrowed after July 1, 2014. (The monthly percentage is 15% with a 25-year repayment term for those who borrowed before that date.)

Any remaining balance owed at the end of the loan term will be forgiven on IBR. Although the PAYE and ICR plans no longer offer loan forgiveness, a borrower can get credit for their PAYE and ICR payments if they switch to IBR.

The PAYE Plan

To be eligible for PAYE, an individual must be a new borrower as of October 1, 2007, and have received a Direct loan disbursement on or after October 1, 2011. In addition, a borrower’s monthly payment on the plan must be less than what it would be on the Standard 10-year plan.

On PAYE, monthly payments are 10% of a borrower’s discretionary income, and the loan term is 20 years.

PAYE is currently open, but it’s closing down on July 1, 2027. Borrowers already on the plan will have until July 1, 2028 to switch to the IBR plan or the new plan, RAP.

The ICR Plan

The income-contingent repayment plan sets a borrower’s payments at 20% of their discretionary income and has a repayment term of 25 years. This is the only income-driven option for borrowers with Parent PLUS loans — and those loans must be consolidated first.

ICR closes to new enrollees on July 1, 2027, and those currently on the plan have until July 1, 2028 to switch to IBR or RAP. Otherwise, they will automatically be moved to RAP.

Recommended: Student Loan Repayment Calculator

The New RAP Plan

The RAP program is scheduled to launch in the summer of 2026. Here are details on how the plan works.

How RAP Differs From Other IDR Plans

Unlike the existing IDR plans that use discretionary income, RAP will base a borrower’s payments on their adjusted gross income (AGI). Depending on their income, they’ll pay 1% to 10% of their AGI over a term of up to 30 years.

If they still owe money after 30 years, the rest will be forgiven. The federal government will cover unpaid interest and ensure that the loan’s principal goes down by at least $50 each month.

All borrowers are required to pay at least $10 per month on RAP. This plan may offer lower monthly payments than the current IDR options, but borrowers might also pay more interest over the life of the loan due to the longer repayment term.

Eligibility and Enrollment in the RAP Plan

To be eligible for RAP, you must have Federal Direct Loans, Federal Family Education Loans, or Grad PLUS loans (Parent PLUS borrowers are ineligible for RAP). Qualifying loans may be subsidized or unsubsidized.

As of July 1, 2026, new borrowers can enroll in RAP, if they choose. It will be the only income-driven plan available to them. Existing borrowers will be able to choose RAP or IBR.

Borrowers will enroll in RAP through StudentAid.gov. Details about the application process are not yet available; information is likely to be released closer to the July 1, 2026 launch date. Watch for updates from your loan servicer, and check the Student Aid website.

What Is Student Loan Recertification?

Since your current IDR plan is based on your income and the size of your family, you need to reconfirm or recertify these details every year.

When you apply for or recertify an income-driven repayment plan online, the Education Department will ask you for consent to access your tax information. If you give consent, they will automatically recertify your loan every year.

If you choose to recertify manually, you will need to fill out the online form and upload the requested documentation, or print out a PDF and mail it along with the documentation to your loan servicer.

If your financial situation changes ahead of your recertification date — for instance, if you lose your job — you can reach out to your loan servicer and ask them to immediately recalculate your payments.

Why Recertification Matters

Recertification is important because it ensures that your monthly student loan payments are based on your current income and family size, which may help keep your payments manageable. Also, if you fail to recertify, your payments will likely go up — see details about that below.

How to Recertify Income-Driven Repayments

You can apply for income-driven repayments and recertify your status by going online to StudentAid.gov. Filing your application online ensures that it is sent to each of your loan servicers if you have more than one. Alternatively, you may send paper applications to each of your loan servicers.

Steps for Online and Mail Recertification

To file online, go to StudentAid.gov and log in with your FSA ID. Click on “Manage Your Income-Driven Repayment Plan.”

Verify your family size, marital status, income, and spouse’s income, if applicable. If your income has changed since your last tax return, you can upload more recent pay stubs. You can also give consent for the Education Department to access your tax information, allowing automatic recertification in the future.

To recertify by mail, you can download the Income-Driven Repayment Plan Request form on the Student Aid website. Fill out the form and attach the required documents. You’ll send the request to the address provided by your loan servicer.

What Documents Are Required for Recertification

The documents required for recertification are proof of income, such as your most recent tax return or pay stubs. Unless you have chosen automatic recertification, you will need to manually upload these documents for your loan servicer.

When to Recertify Income-Driven Repayment Plans

Your IDR plan recertification deadline is the date one year after you start or renew an IDR plan. Your loan servicer will send you a notification of your upcoming recertification deadline along with the actions (if any) you need to take; you will also receive notices from StudentAid.gov.

If your income has decreased or your family status has changed, you may want to recertify before your annual deadline. You can fill out a recertification form at any time if you’re struggling to make your payments because your financial situation has changed.

What Happens If You Miss the Recertification Deadline?

If you fail to recertify your IBR plan by the annual deadline, you will remain on your current IDR plan, but your monthly payment will switch to the amount you would pay under the 10-year Standard Repayment Plan, which will likely increase your payments.

You’ll be able to make payments based on your income once again when you recertify and update your income information with your loan servicer.

The Takeaway

Income-Driven Repayment plans, which are available to many federal student loan borrowers, can be a way to help make student loan repayments work with a borrower’s budget. Recertification is a critical step borrowers need to take each year to either verify their information or inform the Education Department of changes to their situation that might affect their payment size.

Refinancing is another option some borrowers may want to consider to help manage their student loan debt, especially those with private student loans that don’t qualify for IDR plans or federal benefits and programs.

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

Can you recertify student loans early?

Federal student loan borrowers who are on an income-driven repayment plan can recertify early, which you may want to do if your family has grown or your income has decreased. Otherwise, you need to recertify your loans once a year.

How do I recertify my student loans?

You can recertify your student loans online at the Federal Student Aid website (studentaid.gov), or by downloading and mailing in the Income-Driven Repayment Plan Request form with any supporting documentation. If you mail in the request, you’ll need to send a copy to each of your loan servicers. You can also opt to have your recertification happen automatically every year by giving consent for the Education Department to access your tax information.

When should I recertify my student loans?

Your recertification date is the date one year after you started or renewed your IDR plan. Your loan servicers will send you a notice in advance that it’s time to recertify your loan. The Student Aid website should also send you notices about recertification.

What documents do I need to recertify my IDR plan?

Unless you’ve opted for automatic recertification, you will need to provide proof of income, such as your most recent tax return or pay stubs, when you recertify your IDR plan. You will need to manually upload these documents for your loan servicer.

What if my income has changed since my last recertification?

If your income has changed since your last recertification, you can submit updated information, along with supporting documents such as pay stubs, so that your payments can be recalculated. You can do this at any time through your account on StudentAid.gov or directly to your loan servicer.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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.