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Home equity loans and home equity lines of credit (HELOCs) can put cash in your hands to fund home improvements, debt consolidation, or other financial goals. But if you have a HELOC, what happens if you sell your house?

The good news is that you won’t carry the debt with you. Balances owed to HELOCs are paid off using proceeds from the sale. (The same is true of selling a house with a home equity loan.) This is a requirement before the property can change hands.

Understanding HELOCs and Home Sales

Can you sell your house if you have a HELOC? Absolutely, though it’s important to understand how having a HELOC to repay affects the sale process and the amount of profit you get to walk away with.

Here’s a simple HELOC definition: A HELOC is a revolving line of credit secured by your home. When a home is sold, any debts attached to the property, including all mortgages, must be cleared so the new owner can take possession. That applies to your primary mortgage as well as any HELOCs or home equity loans you owe.

HELOCs and home equity loans are junior liens. A lien is a legal claim against a piece of property that protects a lender or creditor’s interest in it. Junior liens are subordinate to senior liens, which, in the case of a home, would be your primary mortgage, assuming you still have one. Liens, whether senior or junior, must be cleared before a piece of property can be sold.

In other words, you can’t take your HELOC with you. Once the HELOC is paid off after you sell, you won’t have access to your line of credit any longer.

Recommended: HELOC Loan Guide

Settlement of HELOC Upon Sale

HELOC debts must be settled when you sell the home. You can’t take your line of credit with you. Settlement means the debt is paid or cleared and is no longer attached to the property. Here’s what happens to a HELOC when you sell your house.

Paying Off the HELOC Balance

Who handles the repayment of a HELOC balance when a home is sold? Typically, that responsibility falls to the title company. Title companies conduct title searches when a home is sold to ensure that there are no outstanding liens on the property. They also offer title insurance to buyers.

HELOC payoff happens during the closing process:

•   The title company requests a payoff amount from the HELOC lender.

•   Funds to buy the home are sent to an escrow account that’s controlled by the title company.

•   The title company uses funds from the escrow account to pay off the HELOC lender, along with your primary home loan.

•   All remaining funds are forwarded to the seller.

Can you pay off a HELOC prior to closing? Certainly, though you’d need to come up with the money to do so out of pocket. If you don’t have cash on hand to settle the debt, you’ll need to use the proceeds from the sale.

Once a HELOC is paid off, you can check state or county property records where you live to make sure the lien was released. A lien release means the debt is cleared from the home.

Closing the HELOC Account

After a HELOC is paid off, you’ll need to make sure the line of credit is closed, since this may not happen automatically. Your lender might require documentation to close your HELOC, including:

•   Closing documents showing proof of sale

•   Payment receipts from the title company showing the HELOC was paid off

•   Authorization from you to close your credit line

In turn, you should get a statement in writing from your lender attesting to the HELOC’s closure. It’s also wise to follow up with a check of your credit reports to make sure your line of credit is listed as closed and paid in full or paid as agreed.

Impact on Sale Proceeds

Selling a house with a home equity loan or HELOC shrinks the amount of profit you get to keep. The share of proceeds you keep depends on how much you owe on the home, including the first mortgage and HELOC, as well as the sale price.

Deduction of HELOC Balance From Sale Proceeds

When a home is sold with a HELOC, it’s usually the title company that handles repayment of the debt. The upside is that you don’t have to worry about calculating how much you’ll need to pay to settle the HELOC or arrange for payment to be sent to the lender.

Instead, the money comes right off the top. For example, say you sell your home for $500,000. You owe $250,000 on your first mortgage and $50,000 to a HELOC. After you deduct $300,000 for the combined mortgage debt, you’d be left with $200,000.

Potential for Remaining Equity

Selling a home with a HELOC assumes that your home’s value has increased since you bought it. If your home value climbed substantially, it’s possible that you could still have a decent amount of equity in the home even if you sell it with a mortgage and a HELOC in place. You may find it helpful to calculate your total equity before making a move to sell a home with a HELOC. You just need to know what you owe on the home in combined mortgage debt and your home’s approximate value.

A home equity calculator can help with this step. You can then decide what you’d like to do with the proceeds from the sale, once your HELOC is paid off. For example, you might apply it as a down payment on the next home you buy.

When you’re ready to buy your next home, you can research what’s required for mortgage preapproval and shop around to find the best mortgage rates. Some options, such as FHA loans, allow for a smaller down payment.

Considerations for Underwater HELOCs

Being underwater in a home means you owe more than it’s worth. So what happens to a HELOC when you sell upside down? And can you sell in that scenario? The answer is yes, but being underwater can add a wrinkle to the process.

Insufficient Sale Proceeds to Cover HELOC

Your first mortgage takes priority for payoff when you sell a home. Any proceeds go to that loan first, before money is directed toward HELOC debt. If the sale proceeds aren’t enough to cover your first mortgage and HELOC, you end up in a negative equity scenario.

That means you’ll need to make up the difference in cash for the sale to go through. You may need to pull money from savings, liquidate some of your investments, or borrow from your retirement account to cover the gap. If you can’t or don’t want to do any of those things, you’ll have to look at other ways to deal with negative equity.

Options for Addressing Shortfalls

There are a few routes you might pursue to deal with a shortfall when selling a home with a HELOC:

•   Delay the sale: You might decide to push the sale back to allow your home’s value to rise or to pay down some of the HELOC balance. Whether that’s feasible for you can depend on your reasons for selling. A HELOC repayment calculator can help you see how you will progress if you start making steady payments to chip away at what you owe.

•   Short sale: A short sale is an agreement between you and the lender to let you sell the house for less than what you owe. If you have a HELOC and a mortgage, both lenders would have to agree to a short sale.

•   Pay off the HELOC with another loan: While not ideal, you might consider getting a personal loan or line of credit to pay off your HELOC. This only moves debt around. It doesn’t reduce what you owe. But it can clear the lien on the home associated with the HELOC so the sale can go through.

Prepayment Penalties and Fees

Before you move to pay off a HELOC, whether to sell your home or for any other reason, read the fine print. Specifically, it’s important to check for prepayment penalties and other fees the lender might impose.

Early Termination Fees

When you get a HELOC, it comes with a set repayment term. For example, you might have 10 years in which to access your credit line and then 20 years after that to pay back what you borrowed.

Lenders may impose an early termination fee or prepayment penalty if you pay a HELOC off early. These fees are designed to help the lender recoup some of the interest they won’t get to collect as a result of you paying off your HELOC ahead of schedule.

If you owe a prepayment penalty, that money will be deducted from the sale proceeds when your HELOC is paid off. Understanding when this fee applies, if your lender charges one, and how much you’ll pay can help you calculate your net profit from the sale.

Reviewing HELOC Terms

Ideally, you scrutinized the terms of your HELOC agreement before you ever signed on the dotted line. But if you didn’t read through it that closely, or you did but now you’ve forgotten what it says, it’s time for a thorough review. Go through your HELOC terms line by line to understand:

•   How long the repayment term lasts

•   If and when a prepayment penalty or early termination fee applies

•   How the fee is calculated, if applicable

•   When the fee is avoidable

•   Any other fees you might pay to close out a HELOC early

If there’s something in your agreement you don’t understand, don’t hesitate to ask the lender for clarification. The home-selling process is hectic enough, and the last thing you need is to be blindsided by surprise fees.

Recommended: What Is a Home Equity Loan?

Steps to Manage Your HELOC Before Selling

If you’re ready to sell your home, it’s important to include HELOC planning on your to-do list. There are two critical steps to tackle before you head to the closing table.

Obtaining a Payoff Statement

A payoff statement offers a detailed breakdown of how much you’ll need to pay to close out a HELOC, including the principal, interest, and fees. You can request a payoff statement from your HELOC lender, though keep in mind the numbers may change slightly as your closing date approaches.

You can use the amount on your payoff statement to estimate how much will be left from the sale proceeds after your first mortgage and HELOC debt are paid. If you have an online account that you use to manage your HELOC, you may be able to log in and request an accurate payoff amount. Otherwise, you’ll need to reach out to the lender directly.

Planning for Closing Costs

Both sellers and buyers have closing costs they’re responsible for paying. The amount you have to pay can depend on the details of the transaction and where you live. Typical seller closing costs can range from 6% to 10% of the home’s sale price.

These costs are most often paid from the sale proceeds. So you’ll need to factor that into your calculations when estimating your profit.

Going back to the previous example of a $500,000 home sale, your closing costs could add up to between $40,000 and $50,000. If you deduct that from your estimated $200,000 in profit, you’d actually walk away with $150,000-$160,000 instead.

The Takeaway

Understanding what happens to a HELOC when you sell your house can help you navigate the process with as few headaches as possible. And if you own a home but haven’t tapped into your equity yet, knowing what to expect can help you understand whether the time is right for a HELOC based on when you might want to sell.

SoFi offers flexible HELOCs. Our HELOC options allow you to access up to 85% of your home’s value, or $350,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi.

FAQ

Will I owe money if my home sells for less than the HELOC balance?

If you’re upside down on your home when you sell with a home equity line of credit (HELOC), you’ll have to make up the difference to pay the line of credit off. If you can’t do that, you may need to delay the sale, arrange a short sale with the lender, or get a personal loan to pay the HELOC in full.

Are there fees associated with closing a HELOC when selling my house?

Lenders may charge early termination fees or prepayment penalties if you pay off your home equity line of credit (HELOC) ahead of schedule. If you owe this fee, it’s deducted from the sale proceeds, along with the amount needed to pay off the HELOC.

How does selling my home affect my credit score if I have a HELOC?

A paid-off home equity line of credit can help your credit score since it shows you can handle debt responsibly. That impact, however, may be counterbalanced by the effects of applying for a new mortgage loan if you’re buying another home.

Can I transfer my HELOC to a new property after selling?

Home equity lines of credit (HELOCs) are secured by your home, so if you’re selling, the line of credit doesn’t transfer with you. If you’re interested in getting another HELOC, you’ll have to apply for a new one once you buy another home.

What happens if I don’t pay off my HELOC before selling my house?

If you don’t pay off your home equity line of credit (HELOC) yourself before selling, then the HELOC balance is deducted from your sale proceeds. The title company handles repayment of HELOC debt for you from your sale proceeds, then passes on the remaining funds from the sale to you at closing.

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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.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
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SOHE-Q226-018

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Looking to get into a home but can’t qualify for a traditional mortgage? You may want to look at owner financing.

Owner-financed homes aren’t very common, but they have some benefits for unique buyer and seller situations. Owner financing bypasses a traditional mortgage when the seller takes on the role of lender, but seller financing comes with some risks.

Read on to discover how owner financing works and when it could make sense.

What Is Owner Financing?

Owner financing, also known as seller financing, is a transaction in which the property owner takes on the role of lender by financing the sale to the buyer. Like the trading of homes, this type of transaction bypasses traditional mortgages (unless the purchase of the home is only partially owner-financed).

The payments for buyers are typically amortized over 30 years for a smaller monthly payment, but there’s often a large balloon payment at the end of a shorter period of time (usually 5-10 years). Owner-financed transactions operate on the belief that the buyer’s finances may improve over time or the property will appreciate to a point where the buyer can get a home loan from a traditional lender.

Note: SoFi does not offer owner financing at this time. However, SoFi does offer conventional mortgage loan options.

How Does Owner Financing Work?

Owner-financed homes work much like traditionally financed homes, but with the seller acting as the lender. The seller may (or may not) require a credit check, a loan application, a down payment, an appraisal of the home, or the right to foreclose should the buyer default. Buyers and sellers will need to agree on an interest rate and the length of the loan.

The buyer and seller sign a promissory note, which contains the loan terms. They also record a mortgage (or deed of trust), and the buyer pays the seller. The buyer should also pay for homeowners insurance, taxes, title insurance, and other loan costs. It’s typical to hire real estate professionals or lawyers to get more into the details of how to use a home contract in owner financing.

Pros and Cons of Owner Financing

For Sellers

Owner financing isn’t nearly as beneficial for sellers as it is for buyers, but there are still some upsides to consider along with the increased debt load and assumed risk.

Pros for Sellers	Cons for Sellers
You attract a larger buyer pool.	You carry more debt.
You save money on selling costs.	You assume more risk because the buyer could default.
You may be able to sidestep inspections, especially if the home needs work or may not pass an inspection for FHA or VA loans.	You aren’t able to cash out for years.
You can earn higher returns by acting as a lender.	You may need to act like a landlord. The buyer may not keep up the property, and the home may lose value.
You may experience faster closing when buyers don’t have to go through the mortgage underwriting process.	If you still have a fairly large mortgage on the property, the lender must agree to the transaction. Many aren’t willing.

For Buyers

There are advantages to buying a house for sale by owner, namely that a buyer can obtain housing sooner under owner financing. A buyer may also be able to lower the down payment needed and pay lower closing costs. But it’s also riskier than borrowing from a traditional mortgage lender. If, for example, buyers are unable to finance the balloon payment, they risk losing all the money they’ve spent during the loan term.

Pros for Homebuyers	Cons for Homebuyers
You can gain equity.	Sellers may ask for a hefty down payment to protect themselves against loss.
You can improve your finances.	You may pay a higher interest rate than the market rate.
You can obtain housing and financing when traditional lenders would issue a denial.	You may pay too much for the home.
Lenders don’t always require a credit check.	Fewer consumer protections are available when a homebuyer purchases from a seller.
There’s no mortgage insurance.	The loan term is short.
There’s no minimum down payment.	Sellers may not follow consumer protection laws.
There are lower closing costs.	Buyers may not be protected by contingencies.

To reduce risk exposure in an owner-financed transaction, buyers may want to hire an attorney.

Example of Owner Financing

Bob and Vila want to purchase a large, forever home for their family. The purchase price of the home is $965,000, but Bob and Vila can only qualify for $815,000. Part of Bob’s income is from recent self-employment, which is not accounted for by the lender but will help the couple be able to afford the house.

For the remaining $150,000, the seller offers owner financing as a junior mortgage. The buyers will pay both a traditional mortgage lender and the seller in this type of owner financing.

Recommended: How Much Home Can I Afford?

Types of Owner Financing

Land contracts, mortgages, and lease-purchase agreements are a few ways to look at owner financing. Here’s how they work and how they’re different from a traditional mortgage.

Land Contracts

Because the title can’t pass to the buyer in owner financing, a land contract creates a shared title for the buyer and seller until the buyer makes the final payment to the seller. The seller maintains the legal title, but the buyer gains an interest in the property.

Mortgages

These are the different ways to structure a mortgage with owner financing:

•   All-inclusive mortgage: The seller carries the promissory note and the balance for the home purchase.

•   Junior mortgage: When a buyer is unable to finance the entire purchase with a lender on one mortgage, the seller carries a junior mortgage (or second mortgage) for the buyer. The seller is put in second position if the buyer defaults, so there’s risk to the seller by doing a second mortgage.

•   Assumable mortgage: Some FHA, VA, and conventional adjustable-rate mortgages are assumable, meaning the buyer is able to take the seller’s place on the mortgage.

A mortgage calculator can help you get an idea of what purchase price you may be able to afford.

Lease Purchase

In a lease-purchase arrangement, both parties agree on a purchase price. The potential buyer leases from the owner for an amount of time, usually 1-3 years, until a set date, when the renter has the option to purchase the property. In addition to paying rent, the tenant pays an additional fee, known as the rent premium.

It’s typical to see options that credit a percentage of the purchase price (often between 1% and 5%), rents, and rent premiums toward the purchase price. If the option to buy isn’t used, the buyer will lose the option fee and rent premiums.

These are also known as rent-to-own, lease-to-own, or lease with an option to purchase. They can be used when an aspiring buyer has a lower credit score and needs some time to qualify for traditional financing.

Steps to Structuring a Seller Financing Deal

If you’re thinking about finding a property with owner financing, consider taking these steps to help get you through the process:

1.    Hire a professional. Because owner financing bypasses traditional lending institutions, there’s a lot more risk involved. Hiring a real estate professional and an attorney can help you structure the deal to protect your interests.

2.    Find a property where the owner offers financing. An owner must be willing and able to offer seller financing to make this type of transaction happen. It’s difficult, which is why owner financing is more common between parties that know each other very well. It’s usually required that the property is owned free and clear of any mortgage. Here are a few other ways to look for seller-financed properties:

◦   Asking your current landlord if they’re open to selling their property to you

◦   Looking for real estate listings with phrases such as “seller financing available”

◦   Contacting the real estate agent about a home you’re interested in, if the home has been on the market a while and the conditions are right

◦   Finding a personal connection who is able to offer owner financing

3.    Agree to terms: Because seller financing terms are so flexible, there are a lot of details that buyers and sellers need to work out, including:

◦   Sales price

◦   Amount of down payment

◦   Length of the loan

◦   Balloon payment amount

◦   Interest rate

◦   Structure of the contract (land contract, mortgage, or lease purchase, as described above)

◦   Any late fees, prepayment penalties, and other costs the buyer is responsible for

4.    Complete due diligence: Buyers and sellers would be wise to do their due diligence as if it were a regular purchase. Sellers may want to examine a buyer’s credit, complete a background check, and confirm that the buyer has obtained homeowners insurance and title insurance to move forward with the transaction. On the buyer’s end, a home inspection and appraisal may be warranted.

5.    Sign and file paperwork: Much like a real estate transaction, the contracts involved in owner financing arrangements can be pretty involved. Depending on how your financing is structured, you may have a promissory note, an owner financing contract and addenda, and title paperwork. You’ll also want to be sure your promissory note and deed of trust are filed with the county recorder’s office. An attorney, if you hired one, should be able to complete this process for you.

Alternatives to Owner Financing

Traditional mortgage financing may work better for your individual situation:

•   FHA loans: FHA loans have a low down payment requirement and low closing costs and may be approved for homebuyers with lower credit scores. They are underwritten by the Federal Housing Administration. Even if you’ve had a bankruptcy, you may be able to get an FHA loan.

•   USDA loans: USDA loans are backed by the U.S. Department of Agriculture. Income must meet certain guidelines (as determined by geographic region), and the home purchased must be in an eligible rural area.

•   VA loans: Loans guaranteed by the Department of Veteran Affairs are geared toward eligible military members, veterans, National Guard and Reserve members, and spouses. The favorable terms include a low down payment (or no down payment), lower closing costs, a low interest rate, and the ability to use the VA for a home loan multiple times.

•   Conventional loans: A conventional loan simply means the financing isn’t insured by the federal government, as it is with FHA, VA, or USDA loans. Fannie Mae and Freddie Mac provide the backing for conforming loans: those that have maximum loan amounts that are set by the government.

It’s advisable to avoid taking interest rates at face value and to compare the annual percentage rates (APRs) instead. The APR represents the interest rate and loan fees, so if an FHA loan looks better than a conventional mortgage based on just the rates, an APR comparison may tell a different story.

For more information, a help center for mortgages can be a great resource for learning more about the mortgage and home-buying process.

Recommended: 18 Mortgage Questions for Your Lender

The Takeaway

With owner financing, the seller is the lender. Both buyers and sellers face upsides and downsides when the transaction involves owner-financed homes.

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.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Why would an owner offer financing?

Owner financing broadens the pool of potential homebuyers, which might appeal to some homeowners. They may also appreciate having the opportunity to earn interest paid by the homebuyer.

What risks does owner financing have for the buyer?

There are fewer consumer protections available to buyers who get owner financing, which is why it’s recommended that buyers seek a lawyer’s help in reviewing any agreement. Buyers also risk paying a higher-than-usual interest rate.

What risks does owner financing have for the seller?

Sellers take on the risk that the buyer may miss payments or default on the loan. They also remain tied to the property until the loan is fully repaid, which could limit their flexibility if they need access to the cash from the sale sooner.

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Photo credit: iStock/KTStock

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.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
This article is not intended to be legal advice. Please consult an attorney for advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOHL-Q126-237

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

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

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

HELOC Refinancing Explained

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

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

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

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

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

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

Eligibility for HELOC Refinancing

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

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

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

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

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

Types of HELOC Refinancing Options

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

Replacing Your Current HELOC With a New HELOC

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

Paying Off Your HELOC With a Home Equity Loan

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

Using a Cash-Out Refinance

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

Modifying Your HELOC With Your Current Lender

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

Recommended: HECM vs. HELOC

The HELOC Refinancing Process

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

Getting Reacquainted With Your Current HELOC

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

Comparing Lenders and Offers

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

Applying for Refinancing

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

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

Costs Associated With HELOC Refinancing

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

Pros and Cons of Refinancing Your HELOC With Another Bank

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

Recommended: HELOCs and Taxes

The Takeaway

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

SoFi offers flexible HELOCs. Our HELOC options allow you to access up to 85% of your home’s value, or $350,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi.

FAQ

How soon can I refinance my HELOC after opening it?

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

Will refinancing my HELOC affect my credit score?

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

Can I refinance a HELOC on an investment property?

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

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Photo credit: iStock/Inside Creative House

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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The U.S. mortgage market is massive, so it’s no surprise that it’s actually composed of a primary and a secondary market.

The primary market serves the home-buying public. The secondary serves investors, but it plays a big role in a borrower’s ability to get a mortgage and how much that home loan costs.

Primary vs. Secondary Mortgage Market

The primary mortgage market links borrowers to home mortgage lenders. The secondary mortgage market allows investors to invest in existing mortgage loans in hopes of earning a return.

What Is the Primary Mortgage Market?

Any time a homebuyer takes out a mortgage loan from a reputable lender, that’s the primary mortgage market in action. Homebuyers and mortgage refinancers can work with a mortgage broker or direct lender to find the right home loan.

Direct lenders include banks, credit unions, and online mortgage companies. They originate loans with their own money or borrowed funding. Many of them originate mortgages only to sell them to investors, though the lenders may retain the servicing rights.

What Is the Secondary Mortgage Market?

With the secondary mortgage market, investors such as pension funds, banks, and insurance companies buy mortgage-backed securities and try to earn a profit on them.

Why would lenders sell some of their home loans? Because they’re able to replenish their supply of mortgage funding and remove the risk they took on by making the loans.

The mortgages that Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.), the country’s biggest residential mortgage buyers, purchase are conforming loans. That means they conform to certain lending guidelines and loan limits. In 2025, the conforming loan limit for a single-family home was $806,500 in most housing markets. In 2026, it’s $832,750.

Then there’s Ginnie Mae (the Government National Mortgage Association), which buys government-backed FHA, VA, and USDA loans and bundles them into securities to be sold on the bond market.

Recommended: Try This Mortgage Calculator

Example of Both Markets in Action

Betty Borrower decides she wants to buy a home and needs help financing the purchase. She shops for a mortgage with an attractive interest rate and low costs. She finds a good fit, applies for the loan, and is approved.

She moves in, and her loan moves on. Then Betty gets a letter from her lender saying that her mortgage has been sold to another financial entity.

The mortgage buyer, which may be an investor or mortgage loan aggregator such as Fannie Mae or Freddie Mac, can repackage home loans as mortgage-backed securities or hold them and collect the interest from Betty.

Any investor who engages with the secondary mortgage market is buying Betty’s mortgage debt and counts on her to pay the debt, with the investor pocketing a percentage of the profit.

Recommended: Guide to Buying, Selling, and Updating a Home

Why Are There Two Mortgage Markets?

The primary and secondary markets work hand in hand. Congress created the secondary mortgage market in the 1930s to give lenders a larger, steadier stream of mortgage funding to stabilize the country’s residential mortgage markets and expand opportunities for homeownership.

Pros and Cons of the Primary Mortgage Market

The primary mortgage market has its upsides and downsides.

Advantages of the Primary Mortgage Market

Mortgage loans are plentiful: Homebuyers can choose from different types of mortgage loans, including banks, credit unions, savings and loans, mortgage brokers, and online financial institutions.

Borrowers have options: The most popular choice is a fixed-term loan of 30 years, but some borrowers may opt for an adjustable-rate mortgage (ARM), in which the introductory rate is fixed for a specified period of time. For example, the 5/1 ARM has a 5-year fixed rate.

Rates are reasonable: The demand for conforming loans helps rein in interest rates for borrowers who meet the lending criteria, which include down payment and credit requirements in addition to conforming loan limits. (Nonconforming loans — loans that Fannie Mae and Freddie Mac cannot buy — include government-backed loans and jumbo loans. The rates may be even lower than conforming loan rates.)

Down payments can be low: For first-time homebuyers, a 3% down payment for a conventional loan may suffice.

Disadvantages of the Primary Mortgage Loan Market

•   Borrowers have to pass a credit check: Mortgage lenders will review a potential borrower’s credit score in order to determine their eligibility for a loan. Applicants with a bad credit score may find it challenging to secure a mortgage other than an FHA loan.

•   Missed mortgage payments can have negative effects: Borrowers who miss payments may face a plummeting credit score or even foreclosure (but mortgage forbearance is an option).

Pros and Cons of the Secondary Mortgage Market

Here are two ways to view the secondary loan market.

Advantages of the Secondary Mortgage Market

•   Replenishes lender funding: The secondary market keeps money flowing through the mortgage system in good economic times and bad.

•   Fuels lower mortgage costs: The secondary market can lead to lower costs for borrowers.

•   May be good for investors: Most mortgage-backed securities are issued or guaranteed by a government agency such as Ginnie Mae or by government-sponsored enterprises such as Fannie Mae and Freddie Mac. The securities carry the guarantee of the issuing organization to pay the interest and principal payments on their mortgage-backed securities.

Disadvantages of the Secondary Mortgage Loan Market

•   Not for the average investor: Common buyers of mortgage-backed securities include deep-pocketed financial organizations, such as insurance companies, banks, and pension funds. Because of the complexity of mortgage-backed securities and the difficulty that can accompany assessing the creditworthiness of an issuer, individual investors should use caution.

•   Investors won’t see the properties attached to the mortgages: Secondary mortgage loan buyers usually won’t physically see and assess the properties attached to the mortgages they’re buying.

The Takeaway

The primary and secondary mortgage markets have a symbiotic relationship. Most mortgage seekers will only be interested in the primary market: getting a home loan that suits their needs.

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.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is the secondary market for mortgages?

When homebuyers take out a mortgage, lenders can bundle similar types of loans and sell shares in this bundle to investors, including banks, pension funds, and mutual funds. Investors are willing to buy these shares because as long as the mortgages are paid off, the investors receive a steady stream of income over the life of the mortgages in the bundle.

What is a second mortgage?

A second mortgage is a loan that uses your home as collateral that you take out while you’re still paying off the primary mortgage on your home. Home equity loans are often second mortgages.

What is mortgage forbearance?

A mortgage forbearance is an agreement between a lender and a borrower that temporarily allows the borrower to pause or reduce their monthly mortgage payments due to financial hardship. It’s an option that can help prevent foreclosure.

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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.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Signing on with a knowledgeable mortgage lender is one of the first steps you’ll take on your journey to homeownership. A good lender could help you make a sound decision about a major commitment.

If you want to know what questions to ask a mortgage lender, this list can help you feel more confident when choosing a lender to navigate the complex home-buying process with you.

1. How Much Can You Borrow?

How much you can borrow is the question most buyers have on their minds when they start dreaming about real estate listings online. You may have come across a mortgage calculator tool that estimates how much a mortgage is going to cost.

But that’s just a starting point. A mortgage lender will evaluate the entire spectrum of a homebuyer’s financial situation and find the true amount they’ll be able to borrow. The lender may also make recommendations for programs or loans for each buyer’s unique situation.

When you get a loan, you’ll receive a mortgage note, a legal contract between the lender and you that provides all the details about the loan, including the amount you were approved to borrow.

2. How Much of a Down Payment Do You Need?

Another key question your lender can help answer for you is how much are down payments? You’ve probably heard about the ideal 20% down, but a lender may be able to help homebuyers get into a home with a much lower down payment, such as 3% or 5%. The lowest down payment option is often available only to first-time homebuyers. But anyone who hasn’t owned a primary residence in the last three years is often considered a first-timer.

A 20% down payment will enable you to forgo mortgage insurance on a conventional loan (one not insured by the federal government). But lower down payment amounts can help homebuyers obtain housing sooner. There are plenty of options to explore with your lender.

3. What Is the Interest Rate and APR?

Your mortgage lender may explain the difference between the interest rate and the annual percentage rate:

•   Interest rate: The interest rate is the cost to borrow money each year. It doesn’t include any fees or mortgage insurance premiums.

•   APR: The APR is a more comprehensive reflection of what you’ll pay for the mortgage, which will include the interest rate, points paid, mortgage lender fees, and other fees needed to acquire the mortgage. It’s usually higher than the interest rate.

The interest rate and APR must be disclosed to you in your Loan Estimate with the other terms and conditions the lender is offering. Pay particular attention to how the APR changes from loan to loan. When you’re looking at APR vs. interest rates for an FHA loan and a conventional mortgage, for instance, you’ll notice that the numbers are very different. Here’s a snapshot of the difference between interest rates and APR for FHA and conventional mortgages in March 2026.

30-Year Term	Interest Rate	APR
FHA	5.84%	6.12%
Conventional	6.58%	6.87%

In this case, both the interest rate and the APR on a 30-year FHA loan are lower than on a conventional loan. However, when accounting for an upfront mortgage premium for the FHA loan and other fees, the APR can sometimes be higher on the FHA loan than on the conventional loan.

4. What Are the Differences Between Fixed- and Adjustable-Rate Mortgages?

The main difference between a fixed-rate mortgage and an ARM is whether or not the monthly payment will change over the life of the loan:

•   Fixed-rate mortgages start with a little higher monthly payment than an ARM, but the rate is secure for the term.

•   An adjustable-rate mortgage will start with a lower interest rate that may increase as the index of interest rates increases. This type of loan may be more appropriate for buyers who know they won’t be keeping the mortgage for long.

Fixed-Rate Mortgages	ARMs
The interest rate is locked in for the term.	The interest rate is variable.
The monthly payment stays the same.	The monthly payment is variable.
These are typically longer-term mortgages, such as 15 or 30 years.	These offer shorter mortgage terms, such as three, five, or seven years.
The interest rate is determined when the rate is locked, before closing the mortgage.	When the index of interest rates goes up, the payment increases.

The key to an ARM is to know how it adjusts. How frequently will your rate adjust? How much could your interest and monthly payments increase with each adjustment? Is there a cap on how high your interest rate could go? A good mortgage lender will help you consider all these variables when selecting a fixed-rate or ARM.

5. How Many Points Does the Rate Include?

What are points on a mortgage? Mortgage points are fees paid to a lender for a lower interest rate. Asking your lender how many points are included in the rate can help you compare loan products accurately.

6. When Can the Interest Rate Be Locked In?

Rate lock policies differ from lender to lender. Check at the top of the first page of your Loan Estimate to see if your rate is locked, and for how long.

You’ll want to ensure that any rate lock agreement gives you enough time to close on your loan. Many lenders have fees for extending a rate lock.

7. How Much Are Estimated Closing Costs?

One of the most important documents you’ll receive from your lender is the Loan Estimate. The Loan Estimate gives a detailed breakdown of the interest rate, monthly payment, fees, and closing costs on the loan you’re applying for. When you ask about closing costs, your lender can provide this document to you.

Common closing costs include:

•   Appraisal fee

•   Loan origination fee

•   Title insurance

•   Prepaid expenses, such as homeowners insurance, property taxes, and interest until your first payment is due

Expect to see 2%-5% of the purchase price in closing costs.

8. Are There Any Other Fees?

Lenders are required to disclose all costs in the Loan Estimate. They’re also required to use the same standard form so you can compare costs and fees among different lenders accurately. Be sure to ask lenders about other fees and watch for them on your Loan Estimate.

9. When Will the Closing Happen?

The time to close on a house will depend on your individual circumstances, but the national average was 42 days as of June 2025.

An experienced lender with a digitized process may be able to close a loan more quickly. The time it takes a lender to approve and process the loan is also a factor to consider.

10. What Could Delay the Closing?

The March 2026 National Association of Realtors Confidence Index survey showed that within a three-month period, 13% of real estate transactions had a delayed settlement. Reasons for a delay may include appraisal issues, financing issues, home inspection or environmental issues, deed or title issues, or contingencies stated in the contract.
An experienced lender may know how to bring a home to the closing table despite the challenges with financing and appraisals. Be sure to ask upfront how these challenges would be addressed.

11. What Will Fees and Payments Be?

The neat part about obtaining a mortgage since 2015 is that the information must be included in the Loan Estimate. The form is used by all lenders and allows borrowers the opportunity to compare costs among lenders quickly and accurately. All fees and payments are required to be clearly outlined in this form.

Recommended: Guide to Mortgage Statements

12. How Good Does Your Credit Need to Be?

You’ll typically need a FICO® credit score of at least 620 to get a conventional mortgage, but lenders consider a credit score to be just one slice of the qualification pie.

With a lower credit score, a lender may steer you in the direction of an FHA loan, which requires a score of 580 or higher to qualify for a 3.5% down payment. Credit scores lower than 580 require a 10% down payment for an FHA loan.

Borrowers with credit scores above 740 may qualify for the best rates and terms a lender can offer.

13. Do You Need an Escrow Account?

Your lender can set up an escrow account to pay for expenses related to the property you’re purchasing. These may include homeowners insurance and taxes. An escrow account can take monthly deposits from the borrower, hold them, and then disburse them to the proper entities when yearly payments are due. In some locations and with certain lenders, escrow accounts are required.

14. Do You Offer Preapproval or Prequalification?

Lenders have different processes for qualifying mortgage applicants, so it’s important to understand prequalification vs. preapproval. Preapproval is a much more in-depth analysis of a buyer’s finances than prequalification.

A preapproval letter provided by the lender specifies how much financing the lender is willing to extend to you and helps to show sellers you’re a qualified buyer. Getting preapproved early in the home-buying process can also help you spot and remedy any potential problems in your credit report.

15. Is There a Prepayment Penalty?

A prepayment penalty is a fee for paying off all or part of your mortgage early. Avoiding prepayment penalties is easy if you choose a mortgage that doesn’t have any. Ask lenders if your desired loan carries a prepayment penalty. It will also be noted in the Loan Estimate.

16. When Is the First Payment Due?

A lender will be able to help you get your first payment in, which is typically on the first day of the month 30 days after you close. For example, if you closed on August 15, the first mortgage payment would be due on the first of the next month following a 30-day period (October 1).

Each mortgage statement sent every billing cycle includes current information about the loan, including the payment breakdown, payment amount due, and principal balance.

17. Do You Need Mortgage Insurance?

Your mortgage lender will guide you through the process of acquiring PMI if you need it. Mortgage insurance is required for most conventional mortgages made with a down payment of less than 20%, as well as for FHA and USDA loans.

It’s not insurance for the buyer. Instead, it protects the lender from risk. A good mortgage lender can also help advise borrowers on dropping PMI as soon as possible. A home loan help center can help you learn more about PMI and other mortgage questions.

Recommended: What Is PMI and How to Avoid It?

18. How Much Is the Lender Making Off of You?

Lenders are required to be clear and accurate when it comes to the costs of the loan. These should be fully disclosed on your Loan Estimate and closing documents. If you want to know how much the lender is charging for its services, you’ll find it under “origination fee.”

The Takeaway

If you’re shopping for a home loan or thinking about it, you might have mortgage questions — about down payments, APR, points, PMI, and more. Don’t worry about asking a lender too many questions, because many buyers need a guide throughout the home-buying journey. Asking questions is a great way to get to the lender and loan terms that make the most sense for your financial situation.

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.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What should you not say to a mortgage lender?

The most important thing to remember when communicating with a prospective lender is that you should be truthful about your circumstances. This is especially important when discussing your finances.

How will I know what fees I will be responsible for in my loan?

You’ll receive an official Loan Estimate when you apply for a mortgage. It will include details such as estimated interest rates, closing costs, insurance rates, and penalties you need to be aware of, among other information.

What questions can a mortgage lender not ask?

Generally speaking, most of the topics that are off limits in a job interview are also off limits in a mortgage negotiation. A lender shouldn’t ask you about race, ethnicity, religion, or sexual orientation, for example. You also shouldn’t be asked about your age (unless you’re applying for an age-based loan), your family status (married vs. divorced, whether you’re planning to have kids, etc.), or your health.

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Photo credit: iStock/Ridofranz

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

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 requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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