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If you’re considering a personal loan, you might wonder what kind of impact it may have on your credit. It’s true that the application process can cause your credit score to dip temporarily, but a loan can potentially help it too.

We’ll run through all the ways a personal loan can affect your credit score, as well as when you might consider a personal loan for your financial life.

How Is Your Credit Score Calculated?

To understand how a personal loan can affect your credit, it helps to know the basics of how your credit score is calculated. According to FICO®, a company that generates credit scores, five principal components are used to calculate your FICO Score:

•   Payment History (35%): Your history of making on-time payments to lenders is a key factor, accounting for more than a third of your score.

•   Amounts Owed (30%): The amount of credit you are currently using is the second-most important factor.

•   Length of Credit History (15%): The length of time you’ve had credit accounts open, and in good standing, is also a factor. Opening new lines of credit will bring down the average age of your credit history.

•   New Credit (10%): This component considers the amount of new credit recently taken out.

•   Credit Mix (10%): This final factor takes into account the different types of credit you hold: credit cards, personal loans, mortgages, etc.

How Do Personal Loans Work?

A personal loan is a borrowed sum of money that is paid back in installments, with interest. Loan amounts typically range from $5K to $100K.

Common uses for personal loans include consolidating high-interest credit card debt, and funding large purchases such as home improvements, weddings, unexpected medical expenses, moving expenses, and funerals.

Recommended: Types of Personal Loans

Do Personal Loans Hurt Your Credit?

Any debts you have can impact your credit, so taking out a personal loan might lead to a drop in your credit score over the short term. On the flip side, there are ways for your personal loan to positively affect your credit score.

Here’s how a personal loan can impact your credit score, negatively or positively:

A Personal Loan’s Impact on Credit Score

Pros	Cons
•   Can add to your credit mix •   Could improve your payment history if you pay on time •   May help keep your credit utilization ratio in check •   No collateral required	•   Requires a hard credit inquiry •   May increase amounts owed •   Could negatively impact your payment history if you miss payments •   Fees can drive up the cost of the loan

Con: Requires a hard credit inquiry

Taking out a loan often requires a hard credit inquiry, which can adversely impact your credit score. Hard inquiries remain on your credit report for two years, though their negative effect on your score is minor (typically 5 points or less) and lasts only a year.

Con: May increase amounts owed

The “amounts owed” on your credit score may increase because you are taking on new debt. However, if you’re consolidating credit card debt, you will reduce that debt by paying it down with the personal loan — your amount owed doesn’t change.

Con: Can impact your payment history if you miss a payment

If you miss a payment on your personal loan, that can negatively impact the “payment history” component of your credit score. That factor specifically looks at whether you make your debt payments on time.

Con: Some lenders charge fees

Fees can drive up the cost of a loan, beyond what you’re paying in interest. For example, an origination fee, which lenders charge upfront, is typically a percentage of the principal. And prepayment penalties discourage borrowers from paying off their loan early. (SoFi never charges any fees.)

Pro: Can add to your credit mix

Having a new loan type (and paying it back on-time) can positively impact the “new credit” and “credit mix” components of your score.

Pro: Can improve your payment history if you pay on time

Making on-time payments and showing responsible management of a personal loan is a nice checkmark for the “payment history” part of your credit score.

Pro: May help you keep your credit utilization ratio in check

If you’re using a personal loan to reduce credit card debt, it replaces revolving debt (your credit card debt) with an installment loan. Revolving debt is one you can continue adding to even when paying it down. An installment loan involves borrowing one specific amount and repaying it in — wait for it — installments. Because you won’t be able to add further debt to your installment loan, it may help you keep your credit utilization ratio under control, which can be a good thing for your credit score.

Pro: No collateral required

Loans can be either secured or unsecured. A secured loan is one that requires the borrower to put up collateral, such as a car or home. An unsecured loan requires no collateral.

When To Consider Taking Out a Personal Loan

There’s not a clearcut answer to whether a personal loan can hurt your credit, because everyone’s financial situation is different. But here are some instances when a personal loan may be appropriate:

•   You’re consolidating high-interest debt

•   You have an emergency expense you can’t otherwise afford

•   You’re paying for a home improvement project that will add value to your home

•   It’s your least expensive borrowing option

•   You don’t have any collateral to offer

Before you take on any debt, it’s always important to consider whether it’s really necessary and what other ways you might cover your costs. For instance, it’s often not recommended to take out a personal loan to pay for a vacation when you can scale back on your travel plans or simply wait until you’ve saved up enough money. It’s obviously a very different story if you have to cover the cost of a medical emergency.

Consider whether you can afford to make the payments on time. And make sure you understand the total cost of the loan, with interest and any fees added in. Also think about whether your credit score is high enough to qualify for competitive rates and terms, and whether it can withstand any dips applying for a loan might cause.

Recommended: How To Get Approved for a Personal Loan

The Takeaway

Applying for a personal loan requires a hard credit inquiry, which typically dings your credit score by around 5 points. But overall, as long as you don’t borrow more than you can pay back, and you make all scheduled payments on time, a personal loan can have a positive impact on your credit score over the long term. A personal loan can add to your credit mix, and will improve your available credit if you’re using it to pay off high-interest credit cards.

Shop around for the best personal loan offers for you. SoFi’s personal loan calculator can show you what your monthly payment might be in different scenarios. SoFi can give you a rate quote in minutes.

With SoFi, you can check your rate in 60 seconds, and get your loan funded fast.

FAQ

Is a personal loan bad for your credit?

There’s no clearcut answer because personal loans can have a positive or negative impact on your credit score. The loan itself has less of an impact than how you manage your loan. If you never miss a payment, a personal loan can help your credit score over time. But if you can’t afford to make your monthly payments on time, that can hurt your score.

Will a personal loan affect my credit card application?

It can. If you applied for the loan recently, you may want to wait and see how your credit score is affected before applying for a credit card. A personal loan can have a positive or negative impact on your credit score, depending on your financial situation and how you manage the loan.

Will a personal loan affect my car loan application?

It can. A personal loan affects your “credit utilization,” which impacts your credit score. How much impact it has depends on your financial situation. If the personal loan is your only debt, for instance, your credit utilization might be able to accommodate both loans.

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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.

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 .

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.

SOPL1122003

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In 2020, the average health insurance deductible was $4,364 for individuals, and a staggering $8,439 for families. (Thanks a lot, high-deductible health plans.) That’s a lot to pay upfront before insurance kicks in. What many people don’t know is that the medical bills you receive aren’t always set in stone. You may be able to work with the hospital, doctor, or ambulance service to negotiate a lower price.

We’ll explain how to research your medical bills, dispute overcharges, and negotiate a more fair and affordable price.

Preparing for Medical Bill Negotiation

Save Your Explanation of Benefits

Soon after you’ve received medical care, you should receive an explanation of benefits (EOB) from your insurance company. It may look like a bill, but it isn’t — it’s a breakdown of the following:

•   Medical services you were provided

•   What the doctor or hospital charged

•   What your insurance covered (and didn’t cover)

•   How much your insurance agreed to pay

•   The amount you’re expected to pay

The EOB can help you be sure you’re receiving the full benefits to which you are entitled under your insurance plan. And it can be useful to compare the information your insurance company has to the actual bill(s) you receive. Your EOB may even offer a better description of the services you received than what’s on your medical bills.

If your EOB seems incomplete, it may be because it doesn’t reflect the most recent charges or payments. If you’re confused or suspect an error, call the number listed on the EOB to get help.

Be sure to save your EOB when it comes in the mail, or download it when you receive an email that it’s ready. You may need it when you speak to your insurance company or doctor.

Recommended: Types of Personal Loans

Be Clear About Who’s Billing You

One visit to the emergency room can result in multiple medical tabs. You might be billed by the ambulance, the hospital, and the specialist who saw you.

Adding to the complexity, the invoice you receive may come from a doctor or hospital’s internal billing department, or it might come from a company that’s been hired to handle all invoicing and payments for a hospital, doctor, or group practice.

To avoid mix-ups, carefully track who sent each bill as it arrives, note if the billing was outsourced or done in-house, and mark down who you talked to about errors or making payments. Don’t forget to keep a copy of your EOB with those statements (either paper or digital) so you’re always prepared with the right information.

Don’t Delay Getting Help

As soon as you realize there’s a problem with a bill — either because it’s incorrect or it’s just too high for you to manage — get in touch with the provider who sent it.

As long as your debt remains with the original service provider, medical bills won’t show up on your credit report. But if the bill goes to collections, it can affect your credit score. You may also have fewer options for negotiating once the debt goes to collections.

Ways To Negotiate a Medical Bill

Can you really negotiate medical bills? Absolutely, and there are a few different strategies you can adopt when talking down healthcare costs. If one tactic fails, don’t give up — simply move on to another. The most effective method for negotiating a hospital bill may depend on your situation and the doctor. Here are a few to consider:

Dispute Any Errors

Errors on medical bills are surprisingly common. Look for things like duplicate charges, charges for procedures that didn’t happen, errors in your insurance information, mistakes regarding whether a provider was in-network or out-of-network, and misstated quantities of medications and supplies.

Billing codes for diagnoses and treatments can also be entered wrong, which can confuse the insurance company and slow down or stop payment on a bill. If you suspect your bill was miscoded (and you’re feeling motivated), you can look them up online. There are two different databases:

•   Diagnosis codes, called ICD codes (for International Classification of Diseases) can be found on the Centers for Disease Control website.

•   Treatment and service codes, called CPT codes (for Current Procedural Terminology), are available on the Centers for Medicare and Medicaid website. Just accept the usage waiver, and a spreadsheet of codes will download automatically.

A billing representative can answer almost any questions you have regarding your bill, so don’t hesitate to ask what certain line items are. If you catch any errors that inflate your bill, you may want to file a dispute to get the charges reduced or eliminated.

Offer To Pay a Lump Sum

Many hospitals prefer to get a slightly lower payment at the time of billing than wait for a bill to drag through collections. You can offer to pay the bill immediately — ideally in cash rather than by credit card — if the provider will accept less than the total amount due.

A good rule of thumb is to start high when suggesting a discount, leaving room for the provider to negotiate downward. It’s perfectly reasonable to start by requesting a 50% discount. Even if you don’t pay the entire bill at once, ask whether the provider offers a self-pay discount for those paying out-of-pocket.

Show Evidence of Overcharges

This is where doing your homework comes in handy. If you can show evidence that you were charged more than the average price points in your area, you may have leverage for requesting a discount on your bill. Besides checking online resources and calling competitors, you can also cite the amount Medicare allows for the service. Frame your request as a desire to pay what is “usual, customary, and reasonable”

Negotiate a Payment Plan

Some facilities will agree to a payment plan that replaces the original bill’s due date with a schedule that’s feasible for you. See if you can sign on to a plan with zero interest. If that’s not an option, you can try asking for a lower interest rate. And just because you negotiate a payment plan doesn’t mean you shouldn’t try asking for a discount on the total as well.

Research Hospital and Government Resources

When you’re sick or recovering, online research and phone calls can exhaust your limited energy reserves. But you don’t have to go it alone. There are several resources you may be able to tap for assistance.

Hospital Help

Hospitals often offer discounts or financial relief programs, such as forgiveness, for patients whose income falls below a certain threshold and for uninsured patients. The hospital may refer to this help as “charity care,” “bridge assistance,” or simply “financial assistance.”

Even if you don’t meet income guidelines for government programs, it’s worth checking on what’s available at the hospital level.

Government Financial Assistance

If you weren’t on Medicaid but would have qualified for it when the original medical charges were generated, you may be able to get retroactive help. Depending on the state you live in, Medicaid (a federally authorized, state-administered insurance program for low-income individuals) may cover bills received up to three months before the month you apply for the program. You can check your eligibility on Medicaid.gov

Ask for an Advocate

When you need additional help negotiating with your insurance company or medical provider, consider a patient advocacy organization, such as the Patient Advocate Foundation at PatientAdvocate.org, or state or local consumer protection agency at USA.gov/State-Consumer

Come Prepared To Negotiate

If you’re new to negotiating, here are some basics that can help:

Try to Stay Calm and Polite

Do your best to keep your emotions under control while communicating with billing department representatives. Expressing your requests in a clear and collected way will make it easier for them to understand your situation and can improve the chances that the representatives you deal with will want to help. If you’re angry or despairing, cool off before picking up the phone.

Do Your Homework

You may have a better chance of succeeding if you’ve researched the average costs of the treatments you received — especially if you use data that’s specific to your area. You can find this information with a little online searching or by consulting resources like HealthcareBluebook.com

Don’t Underestimate the Power of Empathy

Explain economic or other hardships you’re facing and why you’re struggling with repayment. Perhaps you’ve recently lost your job, or you just got out of college and you’re on your own for the first time. Calling on the other person’s sense of compassion and humanity may help your cause.

Write Down Everything

Keep clear notes with the dates, names, and affiliations for every phone call you have, as well as reference numbers if applicable. It’s easy to forget what you spoke about and with whom. Keep everything in one place. And ask to receive the final details of any agreement you make in writing.

Don’t Hesitate to Escalate

Start with the contact phone number on your bill. But if the person you’re speaking with seems unwilling or unable to help, don’t be afraid to ask for a supervisor. Be prepared to explain the situation, over and over again, to each person you speak with.

If all else fails, apply a bit of pressure. While remaining courteous, state that you probably won’t use this provider or facility again if they can’t meet you halfway. Mention that you’ll share your negative experience with your network, including on social media.

What Happens If You Don’t Pay Medical Bills?

The worst thing you can do with overwhelming medical bills is ignoring them. If you don’t make a payment by the due date on your bill, what happens next depends on the laws in your state.

After a few months, if you still haven’t paid, the hospital may pass your bill on to a debt collections agency, and that agency may report the past due balance to the credit bureaus that put together your credit reports. From there, individuals with medical debt have about six months to fix insurance or billing problems.

Once that grace period is over, however, an unpaid bill can impact your credit score for years. And if a court issues a judgment in the hospital’s favor, your wages could be garnished. This means money could be taken directly from your paycheck and sent to the creditor, even without your consent.

Borrowing Money To Pay Medical Bills

Even if you use all the strategies described above, negotiation doesn’t always work. If you can’t get your bill reduced or eliminated by negotiating, there are other options, such as taking on debt by using a credit card or taking out an unsecured personal loan.

Recommended: Secured vs. Unsecured Personal Loans

Credit Card

Using a credit card to pay medical bills is not generally recommended because of their typically high-interest rates. However, if you have exhausted all negotiating tactics and are still having trouble paying your outstanding balance after the six months grace period given by credit reporting agencies, it might be better to pay the balance with a credit card than to have your account sent to collections and see your credit score drop.

Recommended: Average Credit Card Interest Rates

Personal Loan

Another option you might consider is taking out an unsecured personal loan to pay your medical bills. Personal loans interest rates can be significantly lower than those of credit cards, particularly if you have a healthy credit score. And since a fixed-rate personal loan is installment debt — in contrast to the revolving debt of credit cards — the balance is paid on a fixed payment schedule.

If you qualify for a personal loan with a manageable interest rate and monthly payment, you can use it to pay off your medical bills immediately and avoid accruing late fees or having the bill move into collections. SoFi’s personal loan calculator can help you run the numbers.

Recommended: How To Get Approved for a Personal Loan

The Takeaway

Medical bills can be stressful, especially when added to the stress of having medical treatment. But it’s best not to ignore them. Armed with the right tactics, you may be able to negotiate the amount due or get assistance to make the expense manageable.

If that doesn’t work, a SoFi personal loan can prevent medical bills from dragging you into a vicious cycle of debt. An unsecured personal loan from SoFi offers competitive, fixed rates; no fees required; and loan terms that can work with a variety of budgets.

Pay for medical costs — without sinking into high-interest debt.

FAQ

Do medical bills affect your credit?

As long as your medical bill remains with the original doctor or facility, it won’t show up on your credit report. But if the bill goes to collections, it can affect your credit score.

Should I pay a medical bill that’s gone to collections?

Yes, paying off medical collections will remove the negative information from your credit report and help you build up your credit again. Under new guidelines, paid medical collections will no longer remain on your report.

How long do I have to pay a medical bill?

Medical bills are typically due 30 days from the date of the bill. Doctors and facilities usually send several rounds of bills before turning the debt over to a collections agency. If you’re struggling to pay your medical bills, call the doctor or facility to negotiate either a lower price or a payment plan that you can afford.

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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.

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

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.

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.

SOPL1122005

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A no-closing-cost refinance sounds divine, but it’s important to understand that you will either roll the closing costs into the new mortgage or exchange them for a slightly higher interest rate.

Because you’ll either fatten your loan principal or pay an increased rate, your monthly payments and total interest paid will likely be higher than if you had paid the closing costs with cash.

Still, a no-closing-cost refinance can help some homeowners make their finances more manageable. Read on to decide if a no-closing-cost refinance is right for you.

No-Closing-Cost Refinance: How Does It Work?

You know how they say that if something sounds too good to be true, it usually is? Well, that’s true in this case, too.

When you refinance a mortgage, you’re taking out a whole new loan, hopefully with a lower rate or shorter term.

The costs to do so are usually 2% to 5% of the total loan amount. For a refinance loan of $300,000, for example, that is $6,000 to $15,000, a big pill to swallow if the costs are to be paid upfront.

A no-closing-cost refinance means you get to take out a new mortgage without paying closing costs out of pocket or you accept a higher rate for the new loan.

Let’s break it down.

Closing Costs? What Closing Costs?

When a borrower signs mortgage documents, a variety of fees and expenses come along for the ride, which you probably remember from signing your mortgage the first time.

Right away or after a set number of months, depending on the kind of mortgage they have, homeowners can attempt to lower their mortgage rate and shorten their loan term or, if they’re sitting on enough home equity, apply for cash-out refinancing.

They may want to transition from an adjustable-rate mortgage to a fixed-rate mortgage — or a fixed-rate mortgage to an ARM.

Some may want to refinance their FHA or USDA loan into a conventional loan to get rid of mortgage insurance; others may be looking to refinance their jumbo loan.

If rates have fallen or if your creditworthiness has significantly improved since you took out your mortgage, those are among the signs it might be time for a mortgage refinance.

But there’s no free lunch when it comes to closing costs, even with a “no-closing-cost refinance.” The mortgage refinancing costs add up.

Here are expenses that might be rolled into the refinanced loan:

Lender fees. Borrowing money costs money! Your lender might assess an application fee, processing fee, credit report fee, and underwriting fee. Most but not all lenders charge an origination fee. Any points on the mortgage, aka discount points, may be rolled in.

Title insurance fees. A title search ensures that no one else can claim ownership of your home.

Other closing costs can’t always be rolled into the new loan. They include:

•   Prepaid property taxes

•   Homeowners insurance

•   Any homeowners association dues

•   Appraisal fee. The home appraiser’s fee is usually charged early in the closing process, so you probably won’t be able to add it to the new loan

If you compare no-cost refinance offers, ensure that each lender is willing to cover the same items.

And be aware that a lender that will cover lender fees, third-party charges, and prepaid items will probably charge a higher rate.

The Cost of a ‘No-Cost Refinance’

Given the heft of closing costs, a no-cost refinance might be sounding better and better. But whether you opt to accept a higher rate or roll in the closing costs, you’re still responsible for paying those costs over time.

And depending on their total expense, as well as the interest rate and mortgage term, closing costs can eclipse the savings you stand to gain by refinancing in the first place.

That’s why it’s important, given your anticipated new loan rate and term, to use a mortgage calculator and scour loan estimates you’ll receive after applying for a mortgage refinance to know the full amount you’ll pay over the life of the loan.

With any mortgage refinance that includes closing costs, it’s a good idea to look at the refinance break-even point: closing costs divided by the expected monthly savings. That will give you the number of months it will take to recoup the costs to refinance.

If a refinance adds $100 a month to your mortgage payment and your lender is covering $4,000 in closing costs, you’ll break even after 40 payments, or three years and four months.

Recommended: Mortgage Recast or Mortgage Refinance?

Pros and Cons of a No-Closing-Cost Refinance

So-called no-closing-cost refinances have upsides and downsides to consider.

Benefits of a No-Closing-Cost Refinance

•   This kind of refinance can help keep homeowners from owing a hefty bill all at once, making it possible to refinance if they don’t have a lot of cash on hand.

•   By rolling costs into a home loan, you can keep cash on hand to use for other purposes that may be more important to you.

•   If you opt for a higher rate, you won’t use up home equity on a no-closing-cost refinance.

Drawbacks of a No-Closing-Cost Refinance

•   The closing costs may be compensated for in the form of a higher interest rate, which can be costly over time.

•   If the closing costs are added to the principal loan balance, borrowers very likely will pay more interest over the life of the loan than they would have if they’d paid closing costs upfront.

•   If your refinance lender won’t let you cross the 80% loan-to-value threshold when closing costs are added, you won’t have enough room to include the closing costs. If the lender will allow a higher than 80% LTV ratio, the new mortgage typically will require private mortgage insurance.

Recommended: Cash-Out Refinance vs HELOC

Is a No-Closing-Cost Refinance Right for You?

If you stand to save money by refinancing your home — and if you’ll be in your home long enough that you’ll break even on the refinance — it might be worth footing the elevated interest rate or higher loan principal of a no-closing-cost mortgage refinance.

For those who don’t have the cash on hand to pay for closing costs upfront, this approach is the only feasible way to achieve a refinance at all.

If, however, you’re able to pay the closing costs upfront, doing so can help keep the loan less expensive over its lifetime.

The Takeaway

With a no-closing-cost refinance, closing costs are either added to the new mortgage or exchanged for a higher interest rate. A no-cost refinance can make refinancing possible for those who can’t pay the closing costs upfront, but it’s important to look at costs over the life of the loan and your plans as a homeowner to ensure that it makes financial sense.

SoFi offers a traditional mortgage refinance and cash-out refinance at competitive interest rates.

And SoFi allows qualifying borrowers to roll closing costs into their mortgage.

When you’re ready to refinance, check out SoFi’s options.

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

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

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For many homeowners who need cash in short order, a second mortgage in the form of a home equity loan or home equity line of credit is a go-to answer.

What’s the point of a second mortgage? It’s a way to fund everything from home improvements to credit card debt payoff, and for some, a HELOC serves as a security blanket.

You can probably think of many things you could use a home equity loan or HELOC for, especially when the rate and terms may be more attractive than those of a cash-out refinance or personal loan.

Just know that you’ll need to have sufficient equity in your home to pull a second mortgage.

What Is a Second Mortgage?

A second mortgage is one typically taken out after your first mortgage. Less commonly, a first and second mortgage may be taken out at the same time in the form of a “piggyback loan.”

Your house serves as collateral.

An “open end” second mortgage is a revolving line of credit that allows you to withdraw money and pay it back as needed, up to an approved limit, over time.

A “closed end” second mortgage is a loan disbursed in a lump sum.

It’s not called a second mortgage just because you probably took it out in that order. The term also refers to the fact that if you can’t make your mortgage payments and your home is sold as a result, the proceeds will go toward paying off your first mortgage and then toward any second mortgage and other liens (if anything is left).

How Does a Second Mortgage Work?

A home equity line of credit (HELOC) and a home equity loan, the two main types of second mortgages, work differently but have a shared purpose: to allow homeowners to borrow against their home equity without having to refinance their first mortgage.

Rates

HELOCs may have lower starting interest rates than home equity loans, although HELOC rates are usually variable — fluctuating over time.

Home equity loans have fixed interest rates.

In general, the choice between a fixed- vs variable-rate loan has no one universal winner.

Costs

Home equity loans and HELOCs come with closing costs and fees of about 2% to 5% of the loan amount, but if you do your research, you may be able to find a lender that will waive some or all of the closing costs.

Some lenders offer a “no-closing-cost HELOC,” but it will usually come with a higher interest rate.

Example of a Second Mortgage

Let’s say you buy a house for $400,000. You make a 20% down payment of $80,000 and borrow $320,000. Over time you whittle the balance to $250,000.

You apply for a second mortgage. A new appraisal puts the value of the home at $525,000.

The current market value of your home, minus anything owed, is your home equity. In this case, it’s $275,000.

So how much home equity can you tap? Often 85%, although some lenders allow more.

Assuming borrowing 85% of your equity, that could give you a home equity loan or credit line of nearly $234,000.

After closing on your loan, the lender will file a lien against your property. This second mortgage will have separate monthly payments.

Types of Second Mortgages

To qualify for a second mortgage, in addition to seeing if you meet a certain home equity threshold, lenders may review your credit score, credit history, employment history, and debt-to-income ratio when determining your rate and loan amount.

Here are details about the two main forms of a second mortgage.

Home Equity Loan

A home equity loan is issued in a lump sum with a fixed interest rate.

Terms may range from five to 30 years.

Recommended: Exploring the Different Types of Home Equity Loans

Home Equity Line of Credit

A HELOC is a revolving line of credit with a maximum borrowing limit.

You can borrow against the credit limit as many times as you want during the draw period, which is often 10 years. The repayment period is usually 20.

Most HELOCs have a variable interest rate. They typically come with yearly and lifetime rate caps.

Second Mortgage vs Refinance: What’s the Difference?

A mortgage refinance involves taking out a home loan that replaces your existing mortgage. Equity-rich homeowners may choose a cash-out refinance, taking out a mortgage for a larger amount than the existing mortgage and receiving the difference in cash.

Taking on a second mortgage leaves your first mortgage intact. It is a separate loan.

To determine your eligibility for refinancing, lenders look at the loan-to-value ratio, in part. Most lenders favor an LTV of 80% or less. (Current loan balance / current appraised value x 100 = LTV)

Even though the rate for a refinance might be lower than that of a home equity loan or HELOC, refinancing means you’re taking out a new loan, so you face mortgage refinancing costs of 2% to 5% of the new loan amount on average.

Homeowners who secured a low mortgage rate will not benefit from a mortgage refinance when the going rate exceeds theirs.

Pros and Cons of a Second Mortgage

Taking out a second mortgage is a big decision, and it can be helpful to know the advantages and potential downsides before diving in.

Pros of a Second Mortgage

Relatively low interest rate. A second mortgage may come with a lower interest rate than debt not secured by collateral, such as credit cards and personal loans. And when rates are on the rise, a cash-out refinance becomes less appetizing.

Access to money for a big expense. People may take out a second mortgage to get the cash needed to pay for a major expense, from home renovations to medical bills.

Mortgage insurance avoidance via piggyback. A homebuyer may take out a first and second mortgage simultaneously to avoid having to pay private mortgage insurance (PMI).

People generally have to pay PMI when they make a down payment on a conventional loan of less than 20% of the home’s value.

A piggyback loan, or second mortgage, can be issued at the same time as the initial home loan and allow a buyer to meet the 20% threshold and avoid paying PMI.

Cons of a Second Mortgage

Potential closing costs and fees. Closing costs come with a home equity loan or HELOC, but some lenders will reduce or waive them if you meet certain conditions. With a HELOC, for example, some lenders will skip closing costs if you keep the credit line open for three years. It’s a good idea to scrutinize lender offers for fees and penalties and compare the APR vs. interest rate.

Rates. Second mortgages may have higher interest rates than first mortgage loans. And the adjustable interest rate of a HELOC means the rate you start out with can increase — or decrease — over time, making payments unpredictable and possibly difficult to afford.

Risk. If your monthly payments become unaffordable, there’s a lot on the line with a second mortgage: You could lose your home.

Must qualify. Taking out a second mortgage isn’t a breeze just because you already have a mortgage. You’ll probably have to jump through similar qualifying hoops in terms of home appraisal and documentation.

Common Reasons to Get a Second Mortgage

Typical uses of second mortgages include the following:

•   Paying off high-interest credit card debt

•   Financing home improvements

•   Making a down payment on a vacation home or investment property

•   As a security measure in uncertain times

•   For a blow-out wedding (or funeral) with a HELOC chunk

•   College costs

Can you use the proceeds for anything? In general, yes, but each lender gets to set its own guidelines. Some lenders, for example, don’t allow second mortgage funds to be used to start a business.

The Takeaway

What’s the point of a second mortgage? A HELOC or home equity loan can provide qualifying homeowners with cash fairly quickly and at a relatively decent rate.

If you’re looking for a way to put some of your home equity to use, see what SoFi has to offer.

In addition to a cash-out refinance, SoFi offers a brokered home equity line of credit, allowing access to 95%, or $500,000, of your home’s equity.

It’s easy to find your rate.

FAQ

Does a second mortgage hurt your credit?

Shopping for a second mortgage can cause a small dip in a credit score, but the score will probably rebound within a year if you make on-time mortgage payments.

How much can you borrow on a second mortgage?

Most lenders will allow you to take about 85% of your home’s equity in a second mortgage. Some allow more.

How long does it take to get a second mortgage?

Applying for and obtaining a HELOC or home equity loan takes an average of two to six weeks.

What are alternatives to getting a second mortgage?

A personal loan is one alternative to a second mortgage. A cash-out refinance is another.

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

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

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Hypothecation may be a word you’ve never heard, but it describes a transaction you’ve probably participated in. Hypothecation is what happens when a piece of collateral, like a house, is offered in order to secure a loan.

Auto loans and mortgages involve hypothecation since the lender can repossess the car or house if the borrower is unable to pay.

There are, though, some more subtle details to understand about hypothecation, particularly if you’re in the market for a home loan. Read on to learn about hypothecation loans.

What Is Hypothecation?

Hypothecation is essentially the fancy word for pledging collateral. If you’re taking out a secured loan — one in which a physical asset can be taken by the lender if you, as the borrower, default — you’re participating in hypothecation. (Hypothecation is also possible in certain investing scenarios, which we’ll talk briefly about later.)

Some of the most common hypothecation loans are auto loans and mortgages. If you’ve ever purchased a car, it’s likely you have (or had) a hypothecation loan, unless you paid the full purchase price in cash.

Importantly, just because the asset is offered as collateral doesn’t mean that the owner loses legal possession or ownership rights of that asset. For instance, with an auto loan, the car is still yours, even though the lender might hold the title until the loan is paid off.

You also maintain your right to the positive parts of ownership, such as income generation and appreciation. This is perhaps most obvious in the case of homeownership. Even if you’re paying a mortgage on your property, you still have the right to lease the place out and collect the rental income.

However, the lender has the right to seize the property if you fail to make your mortgage payments. (Which would be a bad day for both you and the renters alike.)

Why Is Hypothecation Important?

Hypothecation makes it easier to qualify for a loan — particularly a loan for a lot of money — because the collateral means the transaction is less of a risk for the lender.

For instance, hypothecation is the only way that most people are able to qualify for a mortgage. If those loans weren’t secured with collateral, lenders might have very steep eligibility requirements to lend hundreds of thousands of dollars!

There are unsecured loans, however. A personal loan is a good example.

Because unsecured loans are riskier for the lender, they tend to be harder to qualify for and carry higher interest rates than secured loans.

It’s a trade-off: With an unsecured loan, you’re not at risk of having anything repossessed from you, and you can use the money for just about anything you want.

On the other hand, if comparing a car loan and personal loan of equal length, you’re likely to pay more interest over the life of the unsecured loan and be subject to a stricter eligibility screening to get the loan in the first place.

Recommended: Smarter Ways to Get a Car Loan

Hypothecation in Investing

Along with hypothecation in the context of a secured loan for a physical asset, like a house or a car, hypothecation can also occur in investing — though usually not unless you’re taking on advanced investment techniques.

Hypothecation occurs when investors participate in margin lending: borrowing money from a broker in order to purchase a stock market security (like a share of a company).

This technique can help active, short-term investors buy into securities they might not otherwise be able to afford, which can lead to gains if they hedge their bets right.

But here’s the catch: The other securities in the investor’s portfolio are used as collateral and can be sold by the broker if the margin purchase ends up being a loss.

TL;DR: Unless you’re a well-studied day trader, buying on margin probably isn’t for you and you probably don’t have to worry about hypothecation in your investment portfolio. But you should know it can happen in investing, too.

Recommended: What Is Margin Trading?

Hypothecation in Real Estate

A mortgage is a classic example of a hypothecation loan: The lending institution foots the six-digit (or seven-digit) cost of the home upfront but retains the right to seize the property if you’re unable to make your mortgage payments.

Hypothecation also occurs with investment property loans. A lender might require additional collateral to lessen the risk of providing a commercial property loan. Borrowers might hypothecate their primary home, another piece of property, a boat, car, or even stocks to secure the loan.

A promissory note details the terms of the arrangement.

Recommended: 31 Ways to Save for a Home

Is Hypothecation in a Mortgage Worth It?

Given the size of most home loans and the risk of losing the home, you may wonder if taking out a mortgage is worth it at all.

Even though any kind of loan involves going into debt and taking on some level of risk, homeownership is still usually seen as a positive financial move. That’s because much of the money you’re paying into your mortgage each month usually ends up back in your own pocket in some capacity…as opposed to your landlord’s pocket.

When you pay a mortgage, you’re slowly building equity in your home. Most homes have historically tended to increase in value.

More broadly, homeownership can help build generational wealth in your family.

A Note on Rehypothecation

There is such a thing as rehypothecation, which is what happens when the collateral you offer is in turn offered by the lender in its own negotiations.

But this, as anyone who lived through the 2008 housing crisis knows, can have dire consequences. Remember The Big Short? Rehypothecation is part of the reason the housing market became so fragile and eventually fell apart, and thus is practiced much less frequently these days.

The Takeaway

Hypothecation simply means that collateral like a house or car is pledged to secure a loan. Mortgages are a classic example of hypothecation, and hypothecation is the reason most of us are able to qualify for such a large loan.

Are you looking to buy a house or investment property? SoFi offers a range of mortgage loans with competitive rates.

It’s quick and easy to find your rate.

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

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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