Loans have become an integral part of American financial life. We need a mortgage to buy our first home, and an auto loan to purchase a car. More recently, people are turning to personal loans to cover surprise bills and avoid high-interest credit card debt. But just because you need a loan doesn’t mean a lender is going to give you the loan — and interest rate — you want.
If you’re struggling to qualify for a loan, a friend or family member may be able to help by becoming a co-borrower. By leveraging their income, credit score, and financial history, you may qualify for better loan terms. Let’s dive into the details.
What is a Co-borrower?
A loan co-borrower basically takes on the loan with you, and their name will be on the loan with yours. They will be equally responsible for paying the loan back and will have part ownership of whatever the loan buys. When you take out a mortgage with someone, the co-borrower will own half the home.
When applying for a loan, your partner is called a “co-applicant.” Once the loan is approved, the co-applicant becomes the co-borrower.
Spouses often co-borrow when buying property, and when taking out a home improvement loan for a remodel. In other circumstances, two parties become co-borrowers in order to qualify for a larger loan or better loan terms than if they were to take out a loan solo.
A cosigner plays a slightly different role than a co-borrower. A cosigner’s income and financial history are still factored into the loan decision, and their positive credit standing benefits the primary applicant’s loan application. But a cosigner does not share ownership of any property the loan is used to purchase. And a cosigner will help make loan payments only if the primary borrower is unable to make them.
Cosigning helps assure lenders that someone will pay back the loan. Typically, a cosigner has a stronger financial history than the primary borrower. This can help someone get approved for a loan they might not qualify for on their own, or secure better terms.
For example, a parent with a strong credit history might cosign their child’s mortgage. The parent’s income likely lowers the child’s debt-to-income ratio. This, along with the parent’s longer credit history and typically higher credit score, allows the child to get a lower interest rate on their home loan. The parent doesn’t co-own the home, but they do have to make mortgage payments if their child can’t.
Having a co-borrower can help two people who both want to achieve a financial goal — like first-time homeownership or buying a new car — put in a stronger application than they might have on their own. The lender will have double the financial history to consider, and two borrowers to rely on when it comes to repayment. Therefore, the loan is a less risky prospect, which translates to more favorable terms.
Having a co-borrower has the potential to improve the borrowing power for both partners. Having a cosigner, on the other hand, is generally more beneficial to the primary applicant than it is for the cosigner.
Risks of a Co-borrower
By essentially taking on a financial partner, co-borrowers take on significant risk. Both parties are responsible for the loan from the beginning. And any bad financial decisions made by one borrower (like getting mixed up in short-term loans) can affect the other if it means the struggling borrower can’t make their payments.
Then there is the personal risk to the relationship. Money conflicts can sour a bond and even lead to the partnership being dissolved. Before taking on a co-borrower or agreeing to become one, it’s important to have an honest discussion. Both parties must be open about their credit history, financial habits, and goals.
Consider drawing up a contract — separate from the loan agreement — that outlines how responsibility will be divided and what happens in worst-case scenarios. While it may feel awkward, it can save you both a more heated argument later on.
When Does Having a Co-borrower Make Sense?
Applying with a co-borrower makes the most sense when you’re working as a team toward the same financial objective. Spouses buying a house together is a common example, but a joint personal loan with a partner might also be considered.
Personal loans are often used to fund home improvements or used for debt consolidation. Business partners may also co-borrow loans to help get their ventures up and running.
Many companies, including SoFi, now allow qualified individuals to co-borrow on personal loans. That means you and your co-borrower (whether a spouse, friend, or family member) may be able to qualify for a better personal loan interest rate and fund your financial goals much more easily.
Awarded Best Personal Loan of 2023 by NerdWallet.
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The Takeaway
Taking out a loan is a big decision, and doing so with a co-borrower carries additional risks. A co-borrower is a partner in the loan and any property the loan is used to purchase. If one borrower cannot make their payments, the co-borrower will be on the hook for the full amount. But if both parties can come to an agreement about how they’ll handle any financial hardships, co-borrowing can have major benefits. By pooling their income and debt, they may lower their debt-to-income ratio and qualify for a mortgage or personal loan with a lower interest rate and better terms.
Thinking about co-borrowing on a personal loan? Check out your rate on a SoFi Personal Loan in 1 minute.
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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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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.
Has this happened to you? You’re thinking about getting a personal loan but haven’t yet applied. Then you get a letter in the mail: “You’re preapproved or prequalified for a personal loan!” What does that mean?
Some lenders use “prequalified” interchangeably with “preapproved,” but they are different. Here, we’ll discuss the distinction, and how to know if you’re a good candidate for a personal loan.
What Does Being Prequalified for a Loan Mean?
Prequalification is sometimes considered the first step in the loan approval process. You can think of it as a less comprehensive version of a preapproval. Prequalification simply means that you fit the general description of a customer typically qualified for a loan.
Based on your general profile, the lender can give you an idea of the size of loan you can qualify for. While prequalification can be done fairly quickly, it does not involve a full analysis of your credit report or verification of the financial information you provide. Because of that, there’s no guarantee that your loan will be approved.
Preapproval is a more in-depth stage of the personal loan approval process. A lender will have accessed your financial history to assess you as a potential customer. Being preapproved means that, based on the information accessed, you most likely will be approved for a loan.
Preapproval allows the lender to show you the size of the loan you might qualify for, and the interest rate and loan terms they’re willing to offer. It’s a step closer to final approval of your loan application. However, this doesn’t automatically translate to being fully approved. For example, a hard credit inquiry can pull in information previously unseen by the lender that was not considered at the preapproval stage.
Does Prequalification or Preapproval Affect Your Credit Score?
Lenders typically prequalify you on the basis of financial information that you provide and perhaps a soft inquiry into your credit history. Soft inquiries don’t affect your credit score, so it’s unlikely that prequalification will either.
Because the prequalification process varies by lender, however, it’s impossible to say for sure that prequalification won’t impact your credit. If it does, the impact will be small and temporary.
Preapprovals are more rigorous than prequalifications, and closer to what you’ll experience when you actually apply for a loan. Preapprovals often involve a hard credit inquiry, which does impact your credit. Again, any effect will be minor.
How Do I Know If I’m a Good Candidate for a Personal Loan?
A personal loan application considers your existing debt and your ability to repay the loan. Your current employment will factor into how well-suited you are to repay the loan, as will your credit score. In most cases, this means you need a good credit score to qualify for an unsecured personal loan at a low interest rate.
If you can’t otherwise qualify because of a poor credit score, consider asking a close friend or family member to cosign your personal loan. Adding a cosigner with a good credit score to your application can help you get a lower interest rate on your loan.
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Will You Prequalify for a SoFi Personal Loan?
Some nontraditional lenders, like SoFi, look at other parts of a financial package when evaluating a candidate’s personal loan application.
SoFi considers additional factors such as your earning potential and cash flow after expenses. This means that even if you have a shorter credit history (because you just graduated college, for example) you may still qualify for a personal loan based on your education and career.
To find out if you qualify for a SoFi personal loan, first go through the online prequalification process. This requires you to create an account, and input your basic personal information, education, and employment history. It takes only a few minutes, after which SoFi will immediately show you which loan options you prequalify for.
After selecting a preliminary personal loan option, you’ll have to finalize your application by uploading documentation to verify your personal information. This may include pay stubs and bank statements. Once you’re approved, the loan is typically disbursed within a week.
If you’re ready to apply for a personal loan, check out SoFi personal loans today.
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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.
Maybe you’ve spent a serious amount of time watching HGTV and now have visions of turning your kitchen into a chef’s paradise. Or perhaps you have an entire Pinterest board full of super-deep soaking tubs that you’re dreaming about.
Either way, the home improvement bug has bitten you, and you’re hardly alone. In the U.S. $538 billion was spent on home improvement in 2021, and that number is expected to hit $625 billion by 2025. For a bit more context, consider that the average American spent almost $8,500 on home improvement projects in 2022. That’s a lot more than just buying a new bathroom sink.
While your home might be begging for some updates and improvements, not all of us have close to $10,000 stashed away in a savings account. For many people, realizing their home improvement goals means borrowing money. But how exactly?
Read on to learn about some of your options. This guide will cover:
• What’s the difference between home equity loans, HELOCs, and home improvement loans?
• In which situations do home equity loans, HELOCs, and home improvement loans work best?
• Which home improvement loan option is right for you?
What’s the Difference Between Home Equity Loans, HELOCs, and Home Improvement Loans?
If you’ve figured out how much a home renovation will cost and now need to fund the project, the options can sound a bit confusing because they all involve the word “home.”
What’s more, you may hear the term “home equity loan” loosely applied to any funds borrowed to do home improvement work. However, there are actually different kinds of home equity loans to know about, plus one that doesn’t involve home equity at all.
So, before digging into home improvement loans vs. home improvement loans vs. HELOCs, consider the basics for each:
• A home equity loan is a lump-sum payment that a lender gives you using the equity in your home to secure the loan. These loans often have a higher limit, lower interest rate, and longer repayment term than a home improvement loan.
• A home equity line of credit, or HELOC, is a revolving line of credit that is backed by your equity in your home. It operates similarly to a credit card in that the amount you access is not set, though you will have a limit on how much you can access.
• A home improvement loan is a kind of lump-sum personal loan, and it is not backed by the equity you have in your home. It may have a higher interest rate and shorter repayment terms than a home equity loan. What’s more, it may have a lower limit, making it well suited for smaller projects.
Worth noting: If you use your home as collateral to borrow funds, you could lose your property if you don’t make payments on time. That’s a significant risk to your financial security and one to take seriously.
Next, here’s a look at how key loan features line up for these options.
How Much Can I Borrow?
The sky isn’t the limit when borrowing funds. This is how much you will likely be able to access:
• For a home equity loan, you can typically borrow between 80% and 85% of your home’s value, minus what’s owed on your mortgage. So if your home’s value is $300,000, 80% of that is $240,000. If you have a mortgage for $200,000, then $240,000 minus $200,000 leaves you with a potential loan of $40,000.
• For a HELOC, you can typically access up to 80% of the equity you have in your home, though some lenders may go even higher. In that case, you are likely to pay a higher interest rate. In the scenario above, with a home valued at $300,000 and a mortgage of $200,000, that means you have $100,000 equity in your home. A loan for 80% of $100,000 would be $80,000. As with other lines of credit, your credit score and employment history will likely factor into the approval decision.
• For a home improvement loan, the amount you can borrow will depend on a variety of factors, including your credit score, but the typical range is between $3,000 and $50,000 or sometimes even more.
What Can the Funds Be Used for?
Interestingly, some of these funds can be used for purposes other than home improvement costs. Here’s how they stack up:
• For a home equity loan, you can certainly use the funds for an amazing new kitchen with a professional-grade range, but you can also use the money for, say, debt consolidation or college tuition.
• For a HELOC, as with a home equity loan, you can use the money as you see fit. Redoing your patio? Sure. But you can also apply the cash to open a business, pay for grad school, or knock out credit card debt.
• For a home improvement loan, there is often the requirement that you use the funds for, as the name suggests, a home improvement project, such as adding a hot tub to your property. In some cases, you may be able to use the funds for non-home purposes. Your lender can tell you more.
How Will I Receive the Funds? How Long Will It Take to Get the Money?
Consider the different ways and timing you may encounter when getting money from these loan options:
• With a home equity loan, you receive a lump sum payment of the funds borrowed. The timeline for getting your funds can take anywhere from two weeks to two months, depending on a variety of factors, including the lender’s pace.
• With a HELOC, you open a line of credit, similar to a credit card. For what is known as the draw period (typically 10 years), you can withdraw funds via a special credit card or checkbook up to your limit. It typically takes between two and six weeks to get funds, but some lenders may be faster.
• With a home improvement personal loan, you receive a lump sum of cash. These tend to be the quickest way to get cash: It may only take a day or so after approval to have the funds available.
How Much Interest Will I Pay?
How much you pay to access funds for your project will vary. Take a closer look:
• For a home equity loan, you typically get a lower interest rate than some other loan types, since you are using your home equity as collateral. These are typically fixed-rate loans, so you’ll know how much you are paying every month. At the start of 2023, the average rate of a fixed, 15-year home equity loan was 5.82%.
• For a HELOC, the line of credit will typically have a rate that varies with the prime rate, though some lenders offer fixed-rate options. HELOCs may have lower interest rates than personal and home equity loans, but you will need a high credit score to snag the lowest possible rate.
• For home improvement loans, which are a kind of personal loan, rates vary widely. Currently, you might find anything from 6% to 36% depending on the lender and your qualifications, such as your credit score. These loans are typically fixed rate.
How Long Will I Have to Repay the Funds?
Repayment terms differ among these three options:
• For home equity loans, you will agree to a term with your lender. Terms typically range from five to 20 years, but 30 years may be available as well.
• With a HELOC, you usually have a draw period of 10 years, during which you may pay interest only. Then, you may no longer withdraw funds, and move into the principal-plus-interest repayment period, which is often 20 years.
• With a home improvement personal loan, your repayment terms are typically shorter than with the other options and will vary with the lender. You may find terms of anywhere from one to seven years or possibly longer.
Here’s how these features compare in chart form:
Feature
Home Equity Loan
HELOC
Home Improvement Personal Loan
Type of collateral
Secured via your home
Secured via your home
Unsecured
Borrowing Limit
Typically up to 80% – 85% of home value, minus mortgage
Typically up to 80% or more of your home equity
Typically from $3,000 up to $50,000 or more
How funds can be used
For a variety of purposes
For a variety of purposes
Often strictly for home improvement
How funds are dispersed
Lump sum
Line of credit
Lump sum
How long to receive funds
Typically two weeks to two months
Typically two to six weeks
Often within days
Type of interest rate
Typically fixed rate and may be lower than other loans
Typically variable but some lenders offer fixed rate; rates vary
Typically fixed rate; rates vary widely
Repayment term
Typically 20 to 30 years
Typically 20 years after the 10-year draw period
Typically 1 to 7 years
Which Home Improvement Loan Option Is Better?
Now that you’ve learned about the features of these loan options, here’s some guidance on which one is likely to be best for your needs.
When Home Equity Loans Make Sense
Here are some scenarios in which a home equity loan may be a good choice:
• If you have significant home equity and are looking to borrow a large amount, a home equity loan could be the right move to access a lump sum of cash.
• If you want to have a long repayment period, the possibility of a 30-year term could be a good fit.
• When you are seeking to keep costs as low as possible. These loans may offer lower interest rates.
• A home equity loan can be a wise move when you need cash for other purposes, such as debt consolidation or educational expenses.
• Some interest payments may be tax-deductible, depending on how you use the funds, which could be a benefit of this kind of loan.
When HELOCs Make Sense
A HELOC may be your best bet in the following situations:
• You aren’t sure how much money you need and like the flexibility of a line of credit.
• You want to keep your payments as low as possible in the near future. HELOCs can usually be an interest-only loan during the first 10-year draw period of the arrangement.
• A HELOC can be a good fit for people who are doing a renovation in stages, and want to draw funds as needed versus all upfront.
• You need cash for something other than just home renovation, such as to pay down credit card debt or fund tuition.
• Depending on what you put the money towards, interest payments may be tax-deductible to a degree.
When Home Improvement Personal Loans Make Sense
Consider these upsides:
• These personal loans tend to have a straightforward, fast application process, and often have fewer fees, such as no origination fees.
• Home improvement loans are usually approved more quickly than other kinds of home loans.
• These loans can be a good way to borrow a small sum, such as $3,000 or $5,000 for a project you need to complete quickly (say, a bathroom without a functional shower).
• Home improvement loans can be a good option for new homeowners, who haven’t yet built up much equity in their home but need funds for renovation.
• For those who are uncomfortable using their home as collateral, this kind of loan can be a smart move.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
The Takeaway
Home improvement is a popular pursuit and can not only make daily life more enjoyable, it can boost the value of what is likely your biggest asset. If you are ready to take on a renovation, you’ll have options in terms of how to access funds; depending on your needs and personal situation, you might prefer a home equity loan, a home equity line of credit (HELOC), or a home improvement personal loan.
SoFi can help with two of these: If you’ve decided that a personal loan could be the right move for you, SoFi’s home improvement loans are fee-free, range from $5K to $100K, and you may be able to get same-day funding.
SoFi also offers a home equity line of credit or HELOC with low interest rates, the flexibility to use the amount you need, and you can borrow up to 95% or $500K of your home’s equity.
Let SoFi help you transform your home into your palace with a flexible and convenient HELOC.
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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Graduate school can be expensive and students who graduate with a master’s degree carry an average debt of $71,287, according to the Education Data Initiative. There are numerous ways to finance your advanced degree (even ways without taking out loans), and investing in graduate education is frequently worth it; the right degree has the potential for a massive return on investment.
The complicated part is determining what options are available to you and figuring out how to hack your way through grad school with the smallest bill. If you’re considering going to grad school, we’ve laid out some key financing options. Read on to learn how to formulate a plan to pay for your graduate education.
Ways to Pay for Grad School Without Taking on Debt
Things like filling out the FAFSA, applying for scholarships and grants, or working for an employer who offers tuition reimbursement while you are going to school can all help you lower your tuition bill during grad school. Continue reading for even more strategies to pay for grad school without taking on debt.
Fill Out The FAFSA
If you received financial aid or federal student loans during undergrad, you’re probably familiar with the Free Application for Federal Student Aid, usually called by its friendlier name: the FAFSA®. The FAFSA is an application to determine what types of federal financial assistance you might qualify for.
Many students who are applying for grad school are considered “independent,” for FAFSA purposes. This means that even if your mom is supplementing your monthly groceries with weekly homemade lasagnas and you’re still using your parents’ password to binge watch Netflix, you may not need to include their financial information on your FAFSA application.
Your FAFSA will determine your eligibility for federal student loans, federal work-study, and federal grants. In addition, your college may use your FAFSA to determine your eligibility for aid from the school itself. Here’s a closer look at the federal options, excluding federal student loans which will be discussed in detail in a later section.
Federal Grants
Unlike student loans, federal grants do not need to be repaid. It may be possible to receive some grant funding to help you pay for graduate school. Filling out the FAFSA is the first step to determine whether you’re eligible. Federal grant programs include the Pell Grant, which is generally only available to undergraduate students who demonstrate exceptional financial need.
Another federal grant that may be available to graduate students is the TEACH grant, or Teacher Education Assistance for College and Higher Education grant. This grant has relatively stringent requirements and is available for students pursuing a teaching career who are willing to fulfill a service obligation after graduating.
Federal Work-Study Program
Just like undergrad, you might be eligible for work-study jobs during grad school. Eligibility for work-study jobs is also based on your FAFSA. These jobs often pay you to work at your university for a set number of hours.
They can oftentimes be doubly beneficial because in addition to earning money, you can sometimes secure a work-study position that is relevant to your field of study. You usually have to go through an application process in order to secure a work-study job.
Work-study is a type of financial aid available to students who qualify based on their financial need. You can apply for the program when you fill out your FAFSA. If you qualify for work-study it will be part of your federal financial aid award.
Even if you receive your work-study award you may still have to find a job that qualifies. Many schools have online databases where you can look for and apply to jobs.
Typically, financial aid is awarded on a first-come, first served basis, so the earlier you file your FAFSA the better chance you’ll likely have of securing work-study as a part of your financial aid award.
Figuring out What Your University Can Offer You
After narrowing down your federal options, make sure to consider what university-specific funding might be available. Many schools offer their own grants, scholarships, and fellowships. Your school’s financial aid office likely has a specific program or contact person for graduate students who are applying for institutional assistance.
Many schools will use the FAFSA to determine what, if anything, the school can offer you, but some schools use their own applications.
Although another deadline is the last thing you need, seeking out and applying for school-specific aid can be one of the most successful ways to pay for grad school: Awards can range from a small grant to full tuition remission.
Employer Tuition Reimbursement
It might sound too good to be true, but some employers are happy to reimburse employees for a portion of their grad school costs. Employers that have tuition reimbursement plans set their own requirements and application process.
Make sure to consider any constraints your employer puts on their tuition reimbursement program, including things like staying at the company for a certain number of years after graduation or only funding certain types of degree programs.
If your employer doesn’t already have a program in place, don’t despair. It is almost always worth asking your company if they offer any benefits to employees pursuing a higher degree.
Some employers might offer professional development funding that can be used to help you pay for school or let you keep a more flexible work schedule to accommodate your classes.
Becoming an In-State Resident
If you’re applying for graduate school after taking a few years off to work, you might be surprised to find how costs have changed since your undergraduate days. Graduate students interested in a public university can save tens of thousands of dollars by considering a university in the state they already live in.
Each state has different requirements for determining residency, so if you are planning on relocating to attend grad school be sure to look into the requirements for the state the school you are planning to attend.
Certain states require only one year of full-time residency before you can qualify for in-state tuition, while others require three years. During that time, you could work as much as possible to save money for graduate school. More savings could mean fewer loans.
Becoming an Resident Advisor (RA)
You probably remember your undergrad Resident Advisor (RA). They were the ones who helped you get settled into your dorm room, showed you how to get to the nearest dining hall and yelled at you for breaking quiet hours.
RAs may be under-appreciated, but they’re often compensated handsomely for their duties. Students are typically compensated for a portion or all of their room and board. Some schools even include a meal plan and sometimes even reduced tuition or a stipend. The compensation you receive will depend on the school you are attending, so check with your residential life office to see what the current RA salary is at your school.
While there are plenty of perks to being an RA, don’t underestimate the responsibility that comes with the position. It can be a time-intensive position, requiring round-the-clock supervision.
Still, the perks of being an RA may be measured in saving money each year. By having a free place to live and a free meal plan, you could save more and eat a diet that doesn’t just consist of ramen and stale pizza. RAs rarely have to share a room, so you’ll also have more privacy than you would in an apartment with roommates.
Because RAs receive so many benefits, competition for the job can be fierce and selective. Polish your resume and hone your interview skills before applying. The difference between working as an RA and having to take out loans for rent could affect your life for years to come.
Serious savings. Save thousands of dollars
thanks to flexible terms and low fixed or variable rates.
Finding a Teaching Assistant Position
If you’re a graduate student, you can often find a position as a Teaching Assistant (TA) or Research Assistant (RA) for a professor. The position will be related to your undergrad or graduate studies and often requires grading papers, conducting research, organizing labs, or prepping for class. You probably had several TAs during your undergraduate classes and didn’t even realize they were students too.
TAs can be paid with a stipend or through reduced tuition depending on which school you attend. Not only can the job help you to potentially avoid student loans, but it also gives you networking experience with people in your field.
The professor you work with can recommend you for a job, bring you to conferences, and serve as a reference.
Being a TA may help boost your resume, especially if you apply for a Ph.D. program or want to be a professor someday. According to PayScale.com, the average TA earns around $13 an hour, as of September 2022.
Similarly to a job as an RA, securing a TA position can be competitive. Apply early and get to know the professors who will make the decisions.
Applying for Grants and Scholarships
Do you remember all those random essay contests and company scholarship applications your classmates fired off senior year of high school? Well, grad school is no different. There are private scholarships out there, you just need to find them.
Scholarship for the unusually tall? Check. Essay contest on automatic sprinkler systems? You betcha. In addition to the weird and wonderful one-off scholarships, there are industry-specific scholarships that are intended to help graduate students pursuing your specific field of study.
An easy way to search for scholarships is through one of the many websites that gather and tag scholarships by criteria. Keeping all your grad school and FAFSA materials handy means that you’ll have easy access to the information you’ll need for scholarship applications.
As we mentioned at the top of this post, grad students have to submit the Free Application for Federal Student Aid (FAFSA®) in order to potentially qualify for federal grants — just as undergrads do. Grants and scholarships are a great source of financing for graduate school because they don’t need to be repaid.
Grants are available from both the federal and state governments, as well as from the university itself (again, many universities use the FAFSA to determine their own institutional aid, so filling it out is essential). Some companies provide their own grants or scholarships, and many private organizations sponsor grants.
It never hurts to apply for a grant or scholarship, no matter how small it might seem. Think of it this way — every dollar received is one less dollar you need to borrow or earn.
Grad students may rely on a combination of financing to pay for their education. Student loans are often a part of this plan. Like undergraduate loans, graduate students have both federal and private student loan options available to them.
Federal Loans for Graduate School
Depending on the loan type, payments on these student loans can be deferred until after graduation and sometimes qualify you for certain tax deductions (like taking a tax deduction for interest paid on your student loans).
There are different types of federal student loans, and each type has varying eligibility requirements and maximum borrowing amounts. Graduate students may be eligible for the following types of federal student loans:
• Direct Unsubsidized Loans. Eligibility for this loan type is not based on financial need.
• Direct PLUS Loans. Eligibility for this loan type is not based on financial need. A credit check is required to qualify for this type of loan.
• Direct Consolidation Loans. This is a type of loan that allows you to combine your existing federal loans into a single federal loan.
Federal Student Loan Forgiveness Programs
Federal student loan forgiveness programs either assist with monthly loan payments or can discharge a remaining federal student loan balance after a certain number of qualifying payments.
One such program is the Public Service Loan Forgiveness (or PSLF) program. The PSLF program allows qualifying federal student loan borrowers who work in certain public interest fields to discharge their loans after 120 monthly, on-time, qualifying payments.
Additionally, some employers offer loan repayment assistance to help with high monthly payments. While loan forgiveness programs don’t help you with the upfront cost of paying for grad school, they may offer a meaningful solution for federal student loan repayment. (Unfortunately, private student loans don’t qualify for these federal programs.)
Private Loans for Graduate School
If you’re not eligible for scholarships or grants, or you’ve maxed out how much you can borrow using federal student loans, you can apply for a private student loan to help cover the cost of grad school.
Private graduate school loan rates and terms will vary by lender, and some private loans have variable interest rates, which means they can fluctuate over time. Doing your research with any private lender you’re considering is worth it to ensure you know exactly what a loan with them would look like.
Make sure to consider several different types of private student loan lenders before you make your decision. Private student loans are one area where it pays to be a savvy shopper. You’ll want to consider origination fees, payment schedules, and interest rates.
Steps to Take Before Applying to Graduate School
Before applying to graduate school it’s important to consider things like the earning potential offered by the degree in comparison to the cost. At the end of the day, only you can decide if pursuing a specific graduate degree is worth it. Here are a few steps to take before applying to grad school.
1. Research Potential Earnings by Degree
Perhaps you are already committed to one degree path, like getting your JD to become a lawyer. In that case you should have a good idea of what the earning potential could be post-graduation.
If you’re considering a few different graduate degrees, weigh the cost of the degree in contrast to the earning potential for that career path. This could help you weigh which program offers the best return.
2. Complete the FAFSA
Regardless of the educational path you choose, filling out the FAFSA is a smart move. It’s completely free to fill out and you may qualify for aid including grants, work-study, or federal student loans. Federal loans have benefits and protections not offered to private loans, so they are generally prioritized over private loans.
3. Explore Financing Options
As mentioned, you may need to rely on a combination of financing options. When scholarships, grants, and federal student loans aren’t enough — private loans can help you fill in the gaps.
When comparing private lenders be sure to review the loan terms closely — including factors like the interest rate, whether the loan is fixed or variable, and any other fees. Review a lender’s customer service reputation and any other benefits they may offer too.
The Takeaway
Grad school is a big investment in your education, but the good news is there are grants and scholarships that you won’t have to pay back. Some employers may also offer tuition reimbursement benefits, or you could find work as a resident advisor or teaching assistant to supplement your tuition costs. If you need more funding to cover the cost, there are federal and private student loans.
Taking the time to find the best combination of loans and funding is crucial. Taking it one step at a time can help you to assess all the options available and make the best financial decision for you. If you’re interested in private student loans, consider SoFi. Interested applicants can easily apply online and SoFi private student loans have zero fees.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
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 Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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.
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.
If you own a home, you may be interested in tapping into your available home equity. One popular way to do that is with a home equity line of credit. This is different from a home equity loan, and can help you finance a major renovation or many other expenses.
Homeowners sitting on at least 20% equity — the home’s market value minus what is owed — may be able to secure a HELOC.
Here, you’ll take a closer look at this loan product, including:
• What is a HELOC loan?
• How does a HELOC loan work?
• What are the pros and cons of a HELOC?
• What are alternatives to a HELOC?
How Does a HELOC Work?
The purpose of a HELOC is to tap your home equity to get some cash to use on a variety of expenses. Home equity lines of credit offer what’s known as a revolving line of credit, similar to a credit card, and usually have low or no closing costs. The interest rate is likely to be variable (more on that in a minute), and the amount available is typically 75% to 85% of your home’s value.
Once you secure a HELOC with a lender, you can draw against your approved credit line as needed until your draw period ends, which is usually 10 years. You then repay the balance, typically over 20 years, or refinance to a new loan. Worth noting: Payments may be low during the draw period; you might be paying interest only, and then face steeper monthly payments during the repayment phase. Carefully review the details when applying for a HELOC to understand what kind of debt you will be taking on.
Here’s a look at possible HELOC uses:
• HELOCs can be used for anything but are commonly used to cover big home expenses, like a home remodeling costs or building an addition. These expenditures have been rising steeply: The number of home-improvement projects grew 17% to almost 135 million and spending ticked up 20% to $624 billion, according to recent American Housing Survey data.
• Personal spending: If, for example, you are laid off, you could tap your HELOC for cash to pay bills. Or you might dip into the line of credit to pay for a wedding (you only pay interest on the funds you are using, not the approved limit).
• A HELOC can also be used to consolidate high-interest debt. Whatever homeowners use a home equity line or loan for — investing in a new business, taking a dream vacation, funding a college education — they need to remember that they are using their home as collateral. That means if they can’t keep up with payments, the lender may force the sale of the home to satisfy the debt.
HELOC Options
Most HELOCs offer a variable interest rate, but you may have a choice. Here are the two main options:
• Fixed Rate With fixed-rate home equity lines of credit, the interest rate is set and does not change. That means your monthly payments won’t vary either.
• Variable Rate Most HELOCs have a variable rate, which is frequently tied to the prime rate, a benchmark index that closely follows the economy. Even if your rate starts out low, it could go up. Or, in these inflationary times, it might go down in the future. A margin is added to the index to determine the interest you are charged. In some cases, you may be able to lock a variable-rate HELOC into a fixed rate.
• Hybrid fixed-rate HELOCs are not the norm but have gained attention. They allow a borrower to withdraw money from the credit line and convert it to a fixed rate.
HELOC Requirements
Now that you know what a HELOC is, think about what is involved in getting one. If you do decide to apply for a home equity line of credit, you will likely be evaluated on the basis of these criteria:
• Home equity percentage: Lenders typically look for at least 15% or more commonly 20%.
• A good credit score: Usually, a score of 680 will help you qualify, though many lenders prefer 700+. If you have a credit score between 621 and 679, you may be approved by some lenders.
• Low debt-to-income (DTI) ratio: Here, a lender will see how your total housing costs and other debt (say, student loans) compare to your income. The lower your DTI percentage, the better you look to a lender. Your DTI will be calculated by your total debt divided by your monthly gross income. A lender might look for a figure in which debt accounts for anywhere between 36% to 50% of your total monthly income.
Other angles that lenders may look for is a specific income level that makes them feel comfortable that you can repay the debt, as well as a solid, dependable payment history. These are aspects of the factors mentioned above, but some lenders look more closely at these as independent factors.
Example of a HELOC
Here’s an example of how a HELOC might work. Let’s say your home is worth $300,000 and you currently have a mortgage of $200,000. If you seek a HELOC, the lender might allow you allows you to borrow up to 80% of your home’s value:
$300,000 x 0.8 = $240,000
Next, you would subtract the amount you owe on your mortgage ($200,000) from the qualifying amount noted above ($240,000) to find how big a HELOC you qualify for:
$240,000 – $200,000 = $40,000.
One other aspect to note is a HELOC will be repaid in two distinct phases:
• The first part is the draw period, which typically lasts 10 years. At this time, you can borrow money from your line of credit. Your minimum payment may be interest-only, though you can pay down the principal as well, if you like.
• The next part of the HELOC is known as the repayment period, which is often also 10 years, but may vary. At this point, you will no longer be able to draw funds from the line of credit, and you will likely have monthly payments due that include both principal and interest. For this reason, the amount you pay is likely to rise considerably.
Difference Between a HELOC and a Home Equity Loan
Here’s a comparison of a home equity line of credit and a home equity loan.
• A HELOC is a revolving line of credit that lets you borrow money as needed, up to your approved credit limit, pay back all or part of the balance, and then borrow up to the limit again through your draw period, typically 10 years.
The interest rate is usually variable. You pay interest only on the amount of credit you actually use. It can be good for people who want flexibility in terms of how much they borrow and how they use it.
• A home equity loan is a lump sum with a fixed rate on the loan. This can be a good option when you have a clear use for the funds in mind and you want to lock into a fixed rate that won’t vary.
Borrowing limits and repayment terms may also differ, but both use your home as collateral. That means if you were unable to make payments, you could lose your home.
If you’re ready to apply for a home equity line of credit, follow these steps:
• First, it’s wise to shop around with different lenders to reveal minimum credit score ranges required for HELOC approval. You can also check and compare terms, such as periodic and lifetime rate caps. You might also look into which index is used to determine rates and how much and how often it can change.
• Then, you can get specific offers from a few lenders to see the best option for you. Banks (online and traditional) as well as credit unions often offer HELOCs.
• When you’ve selected the offer you want to go with, you can submit your application. This usually is similar to a mortgage application. It will involve gathering documentation that reflects your home’s value, your income, your assets, and your credit score. You may or may not need a home appraisal.
• Lastly, you’ll hopefully hear that you are approved from your lender. After that, it can take approximately 30 to 60 days for the funds to become available. Usually, the money will be accessible via a credit card or a checkbook.
How Much Can You Borrow With a HELOC?
Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 85% of the value of your home (or, in some cases, even more), less the amount owed on your first mortgage.
Thought of another way, most lenders require your combined loan-to-value ratio (CLTV) to be 85% or less for a home equity line of credit.
Here’s an example. Say your home is worth $500,000, you owe $300,000 on your mortgage, and you hope to tap $120,000 of home equity.
Combined loan balance (mortgage plus HELOC, $420,000) ÷ current appraised value (500,000) = CLTV (0.84)
Convert this to a percentage, and you arrive at 84%, just under many lenders’ CLTV threshold for approval.
In this example, the liens on your home would be a first mortgage with its existing terms at $300,000 and a second mortgage (the HELOC) with its own terms at $120,000.
Turn your home equity into cash with a HELOC brokered by SoFi.
Access up to 95% or $500k of your home’s equity to finance almost anything.
How Do Payments On a HELOC Work?
During the first stage of your HELOC loan (what is called the draw period), you may be required to make minimum payments toward your HELOC. These are often interest-only payments.
Once the draw period ends, your regular HELOC repayment period begins, when payments must be made toward both the interest and the principal.
Remember that if you have a variable-rate HELOC, your monthly payment could fluctuate over time. And it’s important to check the terms so you know whether you’ll be expected to make one final balloon payment at the end of the repayment period.
Pros of Taking Out a HELOC
Here are some of the benefits of a HELOC:
Initial Interest Rate and Acquisition Cost
A HELOC, secured by your home, may have a lower interest rate than unsecured loans and lines of credit. What is the interest rate on a HELOC? The average HELOC loan rate as of December 15, 2022, was 7.31%.
Lenders often offer a low introductory rate, or teaser rate. After that period ends, your rate (and payments) increase to the true market level (the index plus the margin). Lenders normally place periodic and lifetime rate caps on HELOCs.
The closing costs may be lower than those of a home equity loan. Some lenders waive HELOC closing costs entirely if you meet a minimum credit line and keep the line open for a few years.
Taking Out Money as You Need It
Instead of receiving a lump-sum loan, a HELOC gives you the option to draw on the money over time as needed. That way, you don’t borrow more than you actually use, and you don’t have to go back to the lender to apply for more loans if you end up requiring additional money.
Only Paying Interest on the Amount You’ve Withdrawn
Paying interest only on the amount plucked from the credit line is beneficial when you are not sure how much will be needed for a project or if you need to pay in intervals.
Also, you can pay the line off and let it sit open at a zero balance during the draw period in case you need to pull from it again later.
Cons of Taking Out a HELOC
Now, here are some downsides of HELOCs to consider:
Variable Interest Rate
Even though your initial interest rate may be low, if it’s variable and tied to the prime rate, it will likely go up and down with the federal funds rate. This means that over time, your monthly payment may fluctuate and become less (or more!) affordable.
Variable-rate HELOCs come with annual and lifetime rate caps, so check the details to know just how high your interest rate might go.
Potential Cost
Taking out a HELOC is placing a second mortgage lien on your home. You may have to deal with closing costs on the loan amount, though some HELOCs come with low or zero fees. Sometimes loans with no or low fees have an early closure fee.
Your Home Is on the Line
If you aren’t able to make payments and go into loan default, the lender could foreclose on your home. And if the HELOC is in second lien position, the lender could work with the first lienholder on your property to recover the borrowed money.
Adjustable-rate loans like HELOCs can be riskier than others because fluctuating rates can change your expected repayment amount.
It Could Affect Your Ability to Take On Other Debt
Just like other liabilities, adding on to your debt with a HELOC could affect your ability to take out other loans in the future. That’s because lenders consider your existing debt load before agreeing to offer you more.
Lenders will qualify borrowers based on the full line of credit draw even if the line has a zero balance. This may be something to consider if you expect to take on another home mortgage loan, a car loan, or other debts in the near future.
What Are Some Alternatives to HELOCs
If you’re looking to access cash, here are HELOC options.
Cash-Out Refi
With a cash-out refinance, you replace your existing mortgage with a new mortgage given your home’s current value, with a goal of a lower interest rate, and cash out some of the equity that you have in the home. So if your current mortgage is $150,000 on a $250,000 value home, you might aim for a cash-out refinance that is $175,000 and use the $25,000 additional funds as needed.
Lenders typically require you to maintain at least 20% equity in your home (although there are exceptions). Be prepared to pay closing costs.
Generally, cash-out refinance guidelines may require more equity in the home vs. a HELOC.
What is a home equity loan again? It’s a lump-sum loan secured by your home. These loans almost always come with a fixed interest rate, which allows for consistent monthly payments.
Some lenders will reduce or waive the closing costs if you don’t pay off the loan within a particular period.
Personal Loan
If you’re looking to finance a big-but-not-that-big project for personal reasons and you have a good estimate of how much money you’ll need, a low-rate personal loan that is not secured by your home could be a better fit.
With possibly few to zero upfront costs and minimal paperwork, a fixed-rate personal loan could be a quick way to access the money you need. Just know that an unsecured loan usually has a higher interest rate than a secured loan.
A personal loan might also be a better alternative to a HELOC if you bought your home recently and don’t have much equity built up yet.
The Takeaway
If you are looking to tap the equity of your home, a HELOC can give you money as needed, up to their approved limit, during a typical 10-year draw period. The rate is usually variable. Sometimes closing costs are waived. It can be an affordable way to get cash to use on anything from a home renovation to college costs.
If a home equity line of credit sounds right for you, see what SoFi offers. We have HELOC options that allow you to access up to 95% or $500,000 of your home’s value at competitively low rates. Plus, the application process is quick and convenient.
Unlock your home’s value with a home equity line of credit brokered by SoFi.
FAQ
What can you use a HELOC for?
It’s up to you what you want to use the cash from a HELOC for. You could use it for a home renovation or addition, or for other expenses, such as college costs or a wedding.
How can you find out how much you can borrow?
Lenders typically require 20% equity in your home and then offer up to 85% or even more of your home’s value, minus the amount owed on your mortgage. There are online tools you can use to determine the exact amount, or contact your bank or credit union.
How long do you have to pay back a HELOC?
Typically, home equity lines of credit have 20-year terms. The first 10 years are considered the draw period and the second 10 years are the repayment phase.
How much does a HELOC cost?
When evaluating HELOC offers, check interest rates, the interest-rate cap, closing costs (which may or may not be billed), and other fees to see just how much you would be paying.
Can you sell your house if you have a HELOC?
Yes, you can sell a house if you have a HELOC. The home equity line of credit balance will typically be repaid from the proceeds of the sales when you close, along with your mortgage.
Does a HELOC hurt your credit?
A HELOC can hurt your credit for a short period of time. Applying for a home equity line can temporarily lower your credit score because a hard credit pull is part of the process when you seek funding. This typically takes your score down a bit.
How do you apply for a HELOC?
First, you’ll shop around and collect a few offers. Once you select the one that suits you best, applying for a HELOC involves sharing much of the same information as you did when you applied for a mortgage. You need to pull together information on your income and assets. You will also need documentation of your home’s value and possibly an appraisal.
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.
