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Home equity loans, home equity lines of credit (HELOCs), and cash-out refinances are all borrowing options that allow you to access the equity you’ve built in your home. By tapping into home equity — the difference between your home’s current value and the amount still owed on the mortgage — you can secure funds to meet other financial goals, such as making home improvements.

While these three types of loans do have similarities, there are key differences in how each one works. Understanding the differences in a home equity loan vs. HELOC vs. cash-out refi can help you better determine which option is right for you.

Defining Home Equity Loan, HELOC, and Cash-Out Refi

To start, it’s important to know the basic definitions of home equity loans, HELOCs, and cash-out refinances.

Home Equity Loan

A home equity loan lets you borrow a lump sum that you’ll then repay over a set period of time in regular installments at a fixed interest rate. Generally, lenders will allow you to borrow up to 85% of your home’s equity.

This loan is in addition to your existing mortgage, making it a second mortgage. As such, you’ll usually make payments on this loan in addition to your monthly mortgage payments. To better understand what kind of payment may be due each month, consider using a home equity loan calculator.

HELOC

A HELOC is a line of credit secured by your home that you can access on an as-needed basis, up to the borrowing limit. The amount of the line of credit is determined by the mortgage lender and is based on the amount of equity you’ve built, though it can be up to 90% of the equity amount. Like a home equity loan, this is a second mortgage that you assume alongside your existing home loan.

How HELOCs work is somewhat like a credit card, in that it’s a revolving loan. For example, if you’re approved for a $30,000 HELOC, you can access it when you want, for the amount you choose (though there may be a minimum draw requirement). You’re only charged interest on and responsible for repaying the amount you borrowed.

Another point to keep in mind is that there’s a draw period of up to 20 years, during which you can access funds, and a repayment period of 10-20 years. During the draw period, the monthly payments can be relatively low because you only pay interest. During the repayment period, meanwhile, the payments can increase significantly because you have to pay both principal and interest.

Cash-Out Refinance

A cash-out refinance is a form of mortgage refinancing that lets you refinance your current mortgage for more than what you currently owe in order to receive extra funds. With a cash-out refinance, your current mortgage is replaced by an entirely new loan.

As an example, let’s say you own a home worth $200,000 and owe $100,000 on your mortgage at a high interest rate. You could refinance at a lower interest rate while at the same time taking out a larger mortgage. For instance, you could refinance the mortgage at $130,000. In this case, $100,000 would replace the old mortgage, and you would receive the remaining amount of $30,000 in cash.

Recommended: First-Time Homebuyer Guide

Home Equity Loans and HELOCs vs. Cash-Out Refi

Here’s a look at how a home equity loan vs. HELOC vs. cash-out refinance stacks up when it comes to everything from borrowing limit to interest rate to fees:

Borrowing Limit

With a home equity loan, lenders generally allow you to borrow up to 85% of your home’s equity. HELOCs allow you to tap a similar amount, sometimes as much as 90%. Cash-out refinances, meanwhile, have a slightly lower borrowing limit — up to 80% of your equity. The exception is a Veterans Affairs (VA) cash-out refi. This lets you borrow up to 100% per VA rules, although some lenders may impose a lower ceiling.

Interest Rate

With a HELOC, the interest rate is usually adjustable. This means the interest rate can rise, and if it does, the monthly payment can increase. Home equity loans, meanwhile, generally have a fixed interest rate, meaning the interest rate remains unchanged for the life of the loan. This allows for more predictable monthly payment amounts.

A cash-out refinance can have either a fixed rate or an adjustable rate. If you opt for an adjustable rate, you may be able to access more equity overall.

Type of Credit

Both home equity loans and cash-out refinances are installment loans, where you receive a lump sum that you’ll then pay back in regular installments. A HELOC, meanwhile, is a revolving line of credit. This allows you to take out and pay back as much as you need at any given time during the draw period.

Fees

With a home equity loan, HELOC, or cash-out refinance, you may pay closing costs. While HELOC closing costs may be similar to a home equity loan, you may incur other costs periodically as well, such as annual fees, charges for inactivity, and early termination fees.

When It Might Make Sense to Borrow

When comparing a home equity loan vs. HELOC vs. cash-out refi, it’s clear to see that they each have varying use cases. With a fixed interest rate, home equity loans can allow for predictable payments. Their lower interest rates can make them a good option if you want to consolidate higher-interest debt, such as credit card debt.

HELOCs, meanwhile, provide more flexibility, as you can take out only as much as you need, allowing you to continually access funds over a period of time. A cash-out refinance can be a good option if you want to receive a large lump sum of money, such as to pay off debt or finance a large home improvement project.

Which Option Is Better?

Like most things in the world of finance, the answer to whether a cash-out refinance vs. HELOC vs. home equity loan is better will depend on your financial circumstances and unique needs.

In all cases, you’re borrowing against the equity you’ve built in your home, which comes with risks. If you’re unable to make payments on your HELOC or cash-out refinance or home equity loan, the consequence could be selling your home or even losing it to foreclosure.

Scenarios Where Home Equity Loans Are Better

A home equity loan can be the right option in certain scenarios, including when:

•   You want fixed, regular second mortgage payments: A home equity loan will generally have a fixed interest rate, which can be helpful for budgeting, as monthly payments will be more predictable. You may appreciate this regularity for your second monthly mortgage payment.

•   You want to get a lump sum while keeping your existing mortgage intact: Unlike a HELOC, where you draw just as much as you need at any given time, a home equity loan gives you a lump sum all at once. Plus, unlike a cash-out refinance, you aren’t replacing your existing mortgage. That way, if the terms of your current mortgage are favorable, those can remain as is.

Recommended: The Different Types of Home Equity Lending

Scenarios Where HELOCs Are Better

In the following situations, a HELOC may make sense:

•   You have shorter-term or specific needs: Because HELOCs generally have a variable interest rate, they can be useful for shorter-term needs or for situations where you may want access to funds over a certain period of time, such as when completing a home renovation.

•   You want the option of interest-only payments: During the draw period, HELOC lenders often offer interest-only payment options. This can help keep costs lower until the repayment period, when you’ll need to make interest and principal payments. Plus, you’ll only make payments on the balance used. A HELOC interest-only repayment calculator can help you understand what those monthly payments may be.

Scenarios Where Cash-Out Refi Is Better

Cash-out refinances can make sense in these scenarios:

•   You need a large sum of money: If you need a large sum of money or you’re looking to improve your financial situation on the whole, a cash-out refinance can make sense.

•   You can get a lower mortgage rate than you currently have: If refinancing lets you secure a lower interest rate than your current mortgage offers, then that could be a better option than taking on a second mortgage, as you would with a home equity loan or HELOC. If interest rates have risen since you first took out your loan, however, a cash-out refi could mean paying more in interest over the life of the loan.

•   You want just one monthly payment: Because a cash-out refinance replaces your existing mortgage, you won’t be adding a second monthly mortgage payment to the mix. This means you’ll have only one monthly payment to stay on top of.

•   You have a lower credit score but still want to tap your home equity: In general, it’s easier to qualify for a cash-out refinance vs. HELOC or home equity loan since it’s replacing your primary mortgage.

The Takeaway

Cash-out refinancing, HELOCs, and home equity loans each have their place in your toolbox as a homeowner. All three options give you the ability to turn your home equity into cash, which can make it possible to achieve important goals, consolidate debt, and improve your overall financial situation.

Homeowners interested in tapping into their home equity may consider getting a HELOC or taking a cash-out refinance with SoFi. Qualifying borrowers can secure competitive rates, and Mortgage Loan Officers are available to walk borrowers through the entire process.

FAQ

Can you take out a HELOC and cash-out refi?

If you qualify, you can get both a home equity line of credit and a cash-out refinance. Qualified borrowers can use their cash-out refinance to help repay their HELOC.

Is it easier to qualify for a HELOC or cash-out refi?

It’s generally easier to qualify for a cash-out refinance. This is because the cash-out refi assumes the place of the primary mortgage, whereas a home equity line of credit is a second mortgage.

Can you borrow more with a HELOC or cash-out refi?

Ultimately, the amount you can borrow with either a cash-out refi or home equity line of credit (HELOC) will depend on how much equity you have in your home. That being said, a HELOC can offer a slightly higher borrowing limit than a cash-out refi, at up to 90% of a home’s equity as opposed to a top limit of 80% for a cash-out refinance.

Are HELOCs or cash-out refi tax deductible?

Interest on your cash-out refinance or home equity line of credit can be tax-deductible so long as you use the funds for capital home improvements. This includes projects such as remodeling and renovating.

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

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

SOHE-Q126-080

Putting an offer on a home involves more than naming a price. Assuming you’ve been preapproved for a mortgage and you’ve found a home in your price range, there’s a customary method to follow in submitting an offer that stands out but also protects you.

In a hot market — where you may encounter a bidding war, compete against cash buyers, or be asked to waive a contingency — it can be vital to know the process. But even in a less heated market, it’s important to know the steps involved in making an offer on a house and what to do if you change your mind after making an offer. (it happens!). Read on for tips that will get you from homebuyer to homeowner.

Making an Offer on a House

So let’s say you’ve found that mid-century marvel or stately townhome of your dreams. You’re ready to go for it. Here’s how the process of making an offer in real estate typically goes.

1. Determine Your Offer Price

A home’s listing price is often set by comparing it to similar homes in the area that are for sale, then adjusting up or down based on additional amenities or detrimental issues. But as the old saying goes, “A home is generally worth what someone is willing to pay for it.”

You may find a property that’s fairly well-priced and consider coming in close to asking, or you may want to adjust your offer if you feel that it’s priced too high or needs a lot of work.

There are many things to consider when trying to find the right offer price.

•   A common way to break down a listing amount is by price per square foot, but that often includes only the heated, livable spaces. A home can (and should) be priced higher than average for the area if it includes extra rooms (such as a garage or attic), outbuildings, or extra land, which adds to its value. Superior workmanship or permitting in place for potential changes can also play a role in increasing the price.

•   Check the home’s history on the multiple listing service. It records every transaction related to the house, including property type, square footage, price history, and how long the home has been on the market. It can give you a good idea of where the sellers are coming from in terms of what they paid for the property.

•   Take a look at other properties in the area that have recently sold. Is the price per square foot more or less than the home you have your eye on? One key to an accurate read on the local market is to ensure you’re comparing apples to apples when it comes to the number of bedrooms, bathrooms, square footage, garage space, and other amenities. Your broker can likely provide what are known as “comparables” for the area to help with this process.

Recommended: Mortgage Preapproval Need to Knows

2. Incorporate All the Fees

It can also be important to look at factors not directly related to the price of the property that could affect your overall cash flow. One big consideration is closing costs, which typically average 2%-5% of the total cost of the home. For example, if you’re considering a $400,000 mortgage loan, the closing costs (origination fees, title search, any points, and more) would be between $8,000 and $24,000.

It’s also important to estimate the amount of money you’ll spend making repairs or changes to the property once you move in. As long as the repairs aren’t related to health or safety issues, which could affect financing, one tactic could be to lower your offer price in order to free up cash for future upgrades.

Or you might plan on getting a home improvement loan after buying the house, provided you have enough equity to access those funds.

3. Determine Your Earnest Money Deposit

The next step in making an offer in real estate is to figure out your earnest money. What’s earnest money? It’s a good-faith deposit that buyers place with the offer upfront, usually amounting to around 1%-3% of the offer price, to show that they’re serious, especially when there are multiple offers on a property.

The earnest money is held in escrow by the title company. Showing purchase intent in this way can help you get to the top of the seller’s list.

Customs and laws pertaining to an earnest money deposit can vary from state to state, and even from county to county, so it’s important to understand the rules that determine when the money is (and isn’t) refundable.

4. Protect Yourself With Contingencies

The time between a signed offer and closing day is called the due diligence period, and it’s when you’ll normally set up a home inspection and possibly a land survey or other inspections for specialty items, such as a septic system or a pool, and the lender will order an appraisal.

Because the contract is signed before the inspections and appraisal take place, contingencies give you an out if you discover a deal-breaker.

Here are the most common contingencies when making offers in real estate:

•   Financing: This lays out the specifics of your financing, which the lender must fully approve within the contingency period. This protects you in case financing falls through.

•   Appraisal: If the appraisal comes back lower than the agreed-upon price, you and the seller may find yourselves renegotiating.

•   Inspection: You usually have 10 days after signing the contract to order an inspection, and the contingency remains in place until it comes back without uncovering any major issues with the property that were previously unknown. Based on the findings, you can cancel the contract or negotiate repairs or the purchase price. (If the seller agrees to pay, these are called seller concessions.)

•   Title search: A preliminary title report shows the home’s past and present owners and any liens or judgments against the property. If any title disputes are unable to be resolved before closing, you have the option to exit the sale.

In some situations, the list of contingencies can be long. But once they’re all satisfied and lifted during the given time frames, the option to buy turns into a binding commitment to purchase the home.

5. Submit a Written Offer

In real estate, the best way to make an offer official is to put it in writing. If you’re working with a real estate agent, the agent will have a form that you can fill out together that lists the offer price and contingencies and covers all the state rules and regulations.

If you’re flying solo, working with a real estate lawyer or title company can help ensure that your offer covers all the necessary legal language and is legally valid.

This concept goes both ways. As the buyer, it’s a smart idea to make sure all correspondence, counteroffers, and property disclosures are put in writing by the seller as well.

Recommended: How to Win a Bidding War

6. Move Ahead, Move On, or Move Things Around

Once you submit your written offer, one of three things is likely to happen: The sellers sign the document and enter into a binding contract, they reject the offer outright, or they submit a counteroffer.

In this last case, the sellers may counter with changes that are better suited to them. (If your offer includes a price reduction to accommodate repair costs, for example, the seller might ask for the full asking price and offer a credit back at closing instead.)

A counteroffer puts the ball back in the buyer’s court for approval, rejection, or another counteroffer, and it can keep going back and forth until both parties agree to the terms and sign the document or one party calls it a day.

What if You Change Your Mind About Buying a House?

Contingencies give you a way out in the event of some unforeseen issue, but what if you just decide you don’t want the house? Cold feet can be a real thing!

Although the laws vary by state on this topic as well, in most instances, a buyer is allowed to withdraw an offer until the moment the offer is accepted. However, once the offer document is signed by both parties, it’s considered a binding agreement.

At that point, the sellers may be well within their rights to walk away with your earnest money if you don’t decide to move forward.

The Takeaway

How to make an offer on a house? It pays to understand comps, contingencies, the temperature of the market, earnest money, and counteroffers. You’ll consider your price, keeping track of all fees that will be involved, and make your bid in writing, typically with what’s known as an earnest money deposit. Then sit back and await the seller’s response.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Should I use a real estate agent to buy a house?

An agent familiar with the local market can help you determine the right offer amount and hold your hand during the negotiation process, which is especially helpful in a hot (seller’s) market. An agent can also help coordinate everything leading up to the closing and ensure that you (and your financing) meet critical deadlines.

Is a deposit required when making an offer on a house?

Yes, your offer will come with what is called earnest money, a good-faith deposit of 1%-3% of the proposed purchase price. This will be held in escrow during negotiations about the house.

What are real estate contingencies?

Contingencies are essential safeguards in a real estate contract that allow you to withdraw from a purchase if you discover any deal-breaking issues during the due diligence period. These clauses ensure that you aren’t legally bound to a property that has significant undisclosed problems.

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

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

SOHL-Q126-218

A short-term bridge loan allows homeowners to use the equity in their existing home to help pay for the home they’re ready to purchase.

But there are pros and cons to using this type of financing, and a bridge loan can prove expensive.

Is a bridge loan easy to get? Not necessarily. You’ll need sufficient equity in your current home and stable finances.

Read on to learn how to bridge the gap between addresses with a bridge loan or alternatives.

What Is a Bridge Loan?

A bridge loan, also known as a swing loan or gap financing, is a temporary loan that can help if you’re buying and selling a house at the same time.

Just like a mortgage, home equity loan, or HELOC, a bridge loan is secured by the borrower’s current home (meaning a lender could force the sale of the home if the borrower were to default).

Most bridge loans are set up to be repaid within a year.

Note: SoFi does not offer bridge loans at this time. However, SoFi does offer HELOC options.

How Does a Bridge Loan Work?

Typically, lenders only issue bridge loans to borrowers who will be using the same financial institution to finance the mortgage on their new home, but even if you prequalified for a new mortgage with that lender, you may not automatically get a bridge loan.

What are the criteria for a bridge loan? You can expect your financial institution to scrutinize several factors — including your credit history and debt-to-income ratio — to determine if you’re a good risk to carry that additional debt.

You’ll also have to have enough home equity (usually 20%) in your current home to qualify for this type of interim financing.

Lenders typically issue bridge loans in one of two ways:

•   One large loan: Borrowers get enough to pay off their current mortgage plus a down payment for the new home. When they sell their home, they can pay off the bridge loan.

•   Second mortgage: Borrowers obtain a second mortgage to make the down payment on the new home. They keep the first mortgage on their old home in place until they sell it and can pay off both loans.

It’s important to have an exit strategy. Buyers usually use the money from the sale of their current home to pay off the bridge loan. But if the old home doesn’t sell within the designated bridge loan term, they could end up having to make payments on multiple loans.

Bridge Loan Costs

A bridge loan may seem like a good option for people who need to buy and sell a house at the same time, but the convenience can be costly.

Because these are short-term loans, lenders tend to charge higher interest rates with more upfront costs to make bridge lending worth their while. You can expect to pay:

•   1% to 5% of the loan amount in closing costs

•   6.00%-12.00% interest rates

Interest rates for bridge loans are generally higher than conventional loan rates.

Repaying a Bridge Loan

Many bridge loans require interest-only monthly payments and a balloon payment at the end, when the full amount is due. Others call for a lump-sum interest payment that is taken from the total loan amount at closing.

A fully amortized bridge loan requires monthly payments that include both principal and interest.

How Long Does It Take to Get Approved for a Bridge Loan?

Bridge loans from conventional lenders can be approved within a few days, and loans can often close within three weeks.

A bridge loan for investment property from a hard money lender can be approved and funded within a few days.

Examples of When to Use a Bridge Loan

Most homebuyers probably would prefer to quickly sell the home they’re in, pay off their current mortgage, and bank the down payment for their next purchase long before they reach their new home’s closing date. They could then go about getting a mortgage on their new home using the down payment they have stashed away.

Unfortunately, the buying and selling process doesn’t always go as planned, and it sometimes becomes necessary to obtain interim funding. Common scenarios when homebuyers might consider a bridge loan include the following.

You’re Moving for a New Job or Downsizing

You can’t always wait for your home to sell before you relocate for work. If the move has to go quickly, you might end up buying a new home before you tie up all the loose ends on the old home.

Or maybe you’ve fallen in love with a smaller home that just hit the market, decided that downsizing your home is the way to go, and you must act quickly.

Your Closing Dates Don’t Line Up as Hoped

Even if you’ve accepted an offer on your current home, the new home’s closing might be weeks or even months away. To avoid losing the contract on the new home, you might decide to get interim funding.

You Need Money for a Down Payment

If you need the money you’ll get from selling your current home to make a down payment on your next home, a bridge loan may make that possible.

Bridge Loan Benefits and Disadvantages

As with any financial transaction, there are advantages and disadvantages to taking out a bridge loan. Here are some pros and cons borrowers might want to consider.

Benefits

The main benefit of a bridge loan is the ability to buy a new home without having to wait until you sell your current home. This added flexibility could be a game changer if you’re in a time crunch.

Another bonus for buyers in a hurry: The application and closing process for a bridge loan is usually faster than for some other types of loans.

Disadvantages

Bridge loans aren’t always easy to get. The standards for qualifying tend to be high because the lender is taking on more risk.

Borrowers can expect to pay a higher interest rate, as well as several fees, while borrowers who don’t have enough equity in their current home may not be eligible for a bridge loan.

If you buy a new home and then are unable to sell your old home, you could end up having to make payments on more than one loan. Worst-case scenario, if you can’t make the payments, your lender might be able to foreclose on the home you used to secure the bridge loan.

Alternatives to Bridge Loans

If the downsides of taking out a bridge loan make you uneasy, there are options that might suit your needs.

Home Equity Line of Credit (HELOC)

Rather than the lump sum of a home equity loan, a home equity line of credit lets you borrow as needed, up to an approved limit, from the equity you have in your house. The monthly payments are based on how much you actually withdraw, and the interest rate is usually variable.

You can expect to pay a lower rate on a HELOC than a bridge loan, but there still will be closing costs. And there may be a prepayment fee, which could cut into your profits if your home sells quickly. (Because your old home will serve as collateral, you’ll be expected to pay off your HELOC when you sell that home.)

Many lenders won’t open a HELOC for a home that’s on the market, so it may require advance planning to use this strategy.

Home Equity Loan

A home equity loan is another way to tap your equity to cover the down payment on your future home.

Because home equity loans are typically long term (up to 30 years), the interest rates available, usually fixed, may be lower than they are for a bridge loan. And you’ll have a little more breathing room if it takes a while to sell the old home.

You can expect to pay some closing costs on a home equity loan, though, and there could be a prepayment penalty. Keep in mind, too, that you’ll be using your home as collateral to get a home equity loan. And until you sell your original home, unless it’s owned free and clear, you’ll be carrying more than one loan.

401(k) Loan or Withdrawal

If you’re a first-time homebuyer and your employer plan allows it, you can use your 401(k) to help purchase a house. But most financial experts advise against withdrawing or borrowing money from your 401(k).

Besides missing out on the potential investment growth, there can be other drawbacks to tapping those retirement funds.

Personal Loan

If you have a decent credit history, a solid income, and typical personal loan requirements, you may be able to find a personal loan with a competitive fixed interest rate and other terms that are a good fit for your needs.

Other benefits:

•   You can sometimes find a personal loan without the origination fees and other costs of a bridge loan.

•   A personal loan might be suitable rather than a home equity loan or HELOC if you don’t have much equity built up in your home.

•   You may be able to avoid a prepayment penalty, so if your home sells quickly, you can pay off the loan without losing any of your profit.

•   Personal loans are usually unsecured, so you wouldn’t have to use your home as collateral.

The Takeaway

A bridge loan can help homebuyers when they haven’t yet sold their current home and wish to purchase a new one. But a bridge loan can be expensive and not all that easy to get. Only buyers with sufficient equity and strong financials are candidates.

If you find yourself looking to bridge the gap between homes, you might also consider a HELOC, a home equity loan, or a personal loan, among other alternatives. With a little due diligence and some paperwork, you’ll soon be financially prepared to purchase your next home.

FAQ

What are the cons of a bridge loan?

It can be harder to qualify for a bridge loan than for a standard home loan, and both costs and interest rates may be higher as well. And taking out a bridge loan means you may have to make payments on two loans if your first property doesn’t sell.

Why would someone get a bridge loan?

A homebuyer who has found their perfect next property but who is in a short-term cash crunch might opt for a bridge loan if they feel very confident that they can sell their current home quickly. This might be especially true in a hot market, where there’s lots of competition for homes and the buyer wants to move quickly.

What’s the difference between an open and closed bridge loan?

An open bridge loan doesn’t have a fixed repayment date, meaning you can repay the loan whenever you have the money. They’re more flexible, but they also come with higher interest rates and fees. Closed loans have a fixed repayment date, such as when you close a house sale, and they often come with lower interest rates.

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

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

SOHL-Q126-251