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If you get paperless mortgage statements or have autopay set up on your home loan, or even if you get statements in the mail, it can be easy to miss important information.

By paying close attention to exactly what’s included in your mortgage statements, you’ll avoid unpleasant surprises.

What Is a Mortgage Statement?

You probably became well versed on mortgage basics during the homebuying process. And you likely did the hard work of using a home mortgage calculator, qualifying for a mortgage, and getting that loan.

But what is a mortgage statement? It’s a document that comes from your home mortgage loan servicer. It’s typically is sent every month and includes how much you owe, the due date, the interest rate, and any fees and charges.

In the past, the information that was included and the format of a mortgage statement varied widely among lenders. Thanks to the Dodd-Frank Act, enacted in 2010, mortgage servicers must now include specific loan information and follow a uniform model for mortgage statements.

Statements also include information on any late payments, how much you’ll need to pay to bring your account back to where it should be, and any late fees you’re dinged with. You can also find customer service information on your mortgage statement.

Mortgage Statement Example

A mortgage statement has elements similar to those on a credit card or personal loan statement. As a picture is worth a thousand words, here’s a mortgage statement example, courtesy of the Consumer Financial Protection Bureau:

How to Read a Mortgage Statement

Deciphering what’s on a mortgage statement can help you understand how much you owe in a given month, how much you’re paying toward interest and principal, and how much you’ve paid for the year to date.

Let’s dig into the different parts of a home loan statement.

Amount Due

This can usually be found at the top of your mortgage statement and is how much you owe for that month. Besides the amount, you’ll find the due date and, usually, the late fee you’ll get hit with should you be too slow with your payment.

Explanation of Amount Due

This section breaks down why you owe what you owe. You’ll find the principal amount, the interest amount, escrow for taxes and insurance, and any fees charged. All of these will be tallied for a total of what you’ll owe that month.

Past Payment Breakdown

Below the section that explains the amount due, you’ll find a breakdown of your past payment: the date the payment was made, the amount, and a short description that may include late fees or penalties and transaction history.

Contact Information

This is typically located on the top left corner of the mortgage statement and contains your mortgage loan servicer’s address, email, and phone number, should you need to speak to a customer service representative. Note that like student loan servicers, a mortgage loan servicer might be different from your lender.

Your mortgage loan servicer processes payments, answers questions, and keeps tabs on your loan payments, and how much has been paid on principal and interest.

You probably know what escrow is. If you have an escrow account, your mortgage loan servicer is also tasked with managing the account.

Account Information

Your account information includes your account number, name, and address.

Delinquency Information

If you’re late on a mortgage payment, within 45 days you’ll receive a notice of delinquency, which might be included on your mortgage statement or be a separate document. You’ll find the date you fell delinquent, your account history, and the balance due to bring you back into good standing.

There should additionally be other information, such as costs and risks should you remain delinquent. There also might be options to avoid foreclosure. One possible tactic is mortgage forbearance, when a lender agrees to stop or reduce payment requests for a short time.

Escrow Account Activity

Many mortgages include an escrow account, from which the mortgage servicer pays the homeowner’s property taxes and/or homeowners insurance. If you have an escrow account, you should see how much of your current payment will go to it listed in the explanation of the amount due. You may also see how much you have paid into it during the past year in the past payment breakdown.

Your lender is also responsible for conducting an escrow analysis each year to assess what your costs will be for the next year. It must let you know the results, what your payments will be in the coming year, and whether your account currently has a surplus or a deficit.

Recommended: Refinance Your Mortgage and Save

Understanding the Details

Your mortgage statement includes many details, all to help you understand what you’re paying in interest, the fees involved, and what your principal and interest amounts are. It’s important to look at everything to make sure you understand what information is included. If you have trouble deciphering the information, call your mortgage servicer listed on the document.

If you have an adjustable-rate mortgage, the mortgage statement also might include information about when that interest rate might change.

Important Features to Know

Here are a few key elements related to your mortgage statement to be on the lookout for.

Delinquency Notice

As mentioned, you’ll receive a delinquency notice within 45 days should you fall behind on payments. Besides how much you owe to get back in good standing, the delinquency notice might also include your account history, recent transactions, and options to avoid foreclosure.

Escrow Balance

If you have an escrow account for your mortgage, the balance is how much money you currently have in your escrow account. This may be included in your annual escrow statement. (Your mortgage statement should show what you have paid for the year to date.) If you have difficulty finding your escrow balance, contact your mortgage servicer.

Interest Rate and Loan Term

Your loan’s current interest rate will appear on your mortgage statement. If you have an adjustable rate, you’ll also see the date that the rate will next adjust. Your loan term or the maturity date of the loan may be included on the statement as well. If they don’t and you want the information, contact your mortgage servicer.

Recommended: Mortgage Calculator with Taxes and Insurance

Using Your Mortgage Statement

Now that we’ve covered the elements of a mortgage statement, let’s go over how to use your mortgage statement and make the most of it.

Making Sure Everything Is in Order

Comb through your mortgage statement and check to see that everything is accurate and up to date. Inaccurate information can lead to overpaying, potentially falling behind on payments, and/or other headaches.

Keeping Annual Mortgage Statements

While you might not need to hold on to your monthly mortgage statements for too long, make sure you have access to your annual mortgage statements for a longer period of time. If you run into an IRS audit, you may be required to provide documentation for the past three years.

Making Your Payment

There are a handful of ways you can make payments on your mortgage.

Online. This is probably the most common and simplest way to submit a mortgage payment. It’s usually free, and once you set up an account online and link a bank account to draw payments from, you’re set. You can also set up autopay, which will ensure that you make on-time payments. In some cases, you might be able to get a discount for setting up auto-debit.

Coupon book. A mortgage servicer might send you a coupon book to use to make payments instead of sending mortgage statements. A coupon book has payment slips to include with payments. The slips offer limited information.

Check in the mail. As with any other bill, you can write a check and drop it in the mail. However, sending a payment by snail mail might mean that your payment doesn’t arrive on time. If you are going this route, send payments early and consider sending them via certified mail.

Spotting Errors or Irregularities

If you discover an error on your mortgage statement, it’s important to get it corrected as soon as possible, even if it’s just a misspelling of a street name. To do this, you can start by telephoning your mortgage servicer to report the problem. Some problems the company may be able to fix over the phone.

If the mortgage servicer can’t resolve the issue over the phone, it may ask you to send a letter. This will allow you to document what the problem is and offer any evidence you have to support your case. The provider is generally obligated to make the change or conduct an investigation. The provider also has to let you know what their ultimate decision is.

How Long to Keep Mortgage Statements

Just as you’d want to hold on to billing statements for other expenses, you’ll want to keep your mortgage statements in case you find inaccuracies down the line. Plus, the statements come in handy for tax purposes and for your personal accounting.

So how long should you keep your mortgage statements? Provided you can find your statements online by logging in to your account, you don’t need to hold on to paper statements for long. In fact, you can probably get rid of paper copies if you have access to them online. It might be a good idea to download the documents to your computer.

Other documents, such as your deed, deed of trust, promissory note, purchase contract, seller disclosures, and home inspection report, you should keep as long as you own the home.

Consider holding on to annual mortgage statements for several years in a safe place. It’s a good idea to store them on your computer and have hard copies on hand.

The Takeaway

It’s easy to gloss over mortgage statements, but not knowing what’s in them every month and not noticing any changes can result in costly mistakes. It’s also eye-opening to see how much of a payment goes to principal and how much to interest. Having that information at hand can also be helpful if you are considering a mortgage refinance.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is a mortgage interest statement?

A mortgage interest statement is a tax form (Form 1098) used to report potentially tax-deductible expenses, including mortgage interest payments. It’s not the same as a mortgage statement, which is a document you receive from your mortgage servicer, usually every month, that shows how much your next payment will be, the due date, and any fees and charges, as well as other information.

How do I get my mortgage statement?

You should receive a statement monthly, either in the mail or via an alert from your mortgage servicer saying the bill is due. If you don’t receive a statement and can’t access it online, contact your lender promptly.

What is a mortgage servicer?

A mortgage servicer is a company that manages home loans. It sends your statement and collects and processes your payment every month, as well as provides customer support. A mortgage servicer may be different from your lender, which is the institution that approved your application and loaned you the funds to buy your property.

What should I check on my mortgage statement each month?

It’s a good idea to review your mortgage statement to ensure that there are no errors or unpleasant surprises. In particular, you’ll want to make sure that your last payment was received on time and check for any potential new or changed fees or rate changes.

Are mortgage statements available online?

In many cases, you can access your mortgage statements on the website of your mortgage lender or servicer.

Can I use my mortgage statement for tax purposes?

If you want to claim a mortgage interest tax deduction on your federal taxes, you can’t use your monthly mortgage statement. Instead, you’ll need to use a 1098, which is the form your mortgage lender or servicer uses to declare how much mortgage interest you have paid in the last year.

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Photo credit: iStock/Tijana Simic

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

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.

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

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

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

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

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.

SOHL-Q325-029

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It is very unlikely that you can directly pay your mortgage lender with a credit card. However, there are a few workarounds that can help you pay your home loan with plastic. But it’s important to understand other factors involved when paying your mortgage with this kind of card, such as possible fees and other financial consequences.

Read on to learn how to pay your mortgage with a credit card and what to consider before you do so.

How to Pay Your Mortgage With a Credit Card

If you’re wondering if you can pay your mortgage with a credit card – It’s highly unlikely that you can do so directly. That said, there are several ways you can use workarounds to pay your mortgage with a credit card, including using a money order, utilizing third-party services, and getting a cash advance.

Use a Third-Party Service

Some third-party services facilitate mortgage payments using your credit card and send a payment to your lender on your behalf. Companies like Plastiq allow you to use select credit cards to make mortgage payments through their platform.

For the privilege, you’ll most likely need to pay a convenience fee — Plastiq charges a processing fee of 2.90% — each time you make a mortgage payment using your credit card. And, depending on how that payment is delivered (say, check or bank transfer), you may also be charged an additional fixed fee that can range from 99 cents to $39. You may also have the option to make recurring payments or to make your payments manually.

Buy a Money Order

Depending on your location and the retailer, you may be able to purchase a money order with your credit card. Then you’ll simply take the money order and deposit it at your bank and transfer the amount to your mortgage lender.

Keep in mind that most retailers may not accept credit cards as a form of payment for money orders — several major companies, including 7-11 and Western Union, have ceased this service – so it’s best to check ahead of time if you plan to use plastic. Even if you can, money orders tend to have a limit of $1,000. That means if you want to go this route, it may take you a few transactions before your money orders total enough for your mortgage payment.

Additionally, you may incur a fee for each money order you buy. Also keep in mind that some credit card issuers treat money order purchases as cash advances, which can result in a fee and interest charges at a rate that’s usually higher than the standard purchase APR on a credit card.

Transfer a Balance to Your Bank Account

You could attempt to conduct a balance transfer, with the funds going into your bank account — some credit card issuers may allow this type of transaction. Most commonly, credit card issuers provide cardholders with balance transfer checks to facilitate these types of transactions. There may be balance transfer fees involved, and interest may accrue depending on your credit card terms.

Get a Cash Advance

As another method to pay your mortgage with a credit card, you can get a cash advance at the ATM with your credit card. You’d then deposit the cash into your bank account and use the funds to make your mortgage payments. You could also consider using the funds to purchase a cashier’s check and then mailing it to your lender.

Going this route most likely means you’ll have to pay a cash advance fee, and interest on cash advances will accrue on your credit card with no grace period and often at a significantly higher rate than on your everyday purchases. Credit limits may be lower for cash advances as well.

Recommended: Charge Card Advantages and Disadvantages

Use a Payment App or Digital Wallet

Increasingly many consumers now use payment apps called digital wallets – like Apple Pay, Google Pay, and Samsung Pay, among others – to store payment information so that they can make payments quickly and easily. These apps are common now for point-of-sale transactions of all kinds, so you may wonder if this is a way to pay your mortgage with a credit card. Some lenders might allow you to pay with a digital wallet, but they would still typically require that your payments come from a debit card or bank account, not a credit card.

Do All Mortgage Lenders Accept Credit Card Payments?

No, most mortgage lenders do not accept credit card payments directly from the borrower.

If you’re curious about why this is, know that paying debt with a credit card isn’t usually a financially responsible move. Mortgage companies likely don’t want the added risk when someone is paying for their home loan with credit vs. cash. Also, it can be expensive for lenders to accept credit cards, given that processing and other fees can take a bite out of every incoming amount of money.

Factors to Consider When Paying a Mortgage With a Credit Card

Before paying your mortgage with a credit card, consider the following.

Fees vs Rewards

Similar to those considering paying taxes with a credit card, many people may want to pay their mortgage with a credit card because they want to earn rewards. Since third-party services will charge you fees — or you’ll pay the fees charged directly by your credit card issuer for balance transfers or cash advances — you’ll want to make sure the value of the rewards outweighs what you’re paying in fees.

Remember, the fees may seem small, but they can quickly add up over time. Also, in many cases, rewards cards may only count certain transactions as eligible for rewards. Many issuers don’t consider balance transfers as qualifying transactions, for example.

The Cost of Interest

If you don’t pay off your balance each month, interest will start to accrue on your credit card — and credit card interest rates are typically much higher than your mortgage interest rate, even if you have a good APR for a credit card.

Additionally, if you go the cash advance route, these transactions may have higher credit card interest rates, and there’s no interest-free grace period.

Effect on Your Credit Score

If your credit card balance starts to get too overwhelming and you miss making the credit card minimum payment, it could negatively impact your score.

Even if you make on-time payments, having a high balance could affect your credit utilization, which is the ratio between your balance and your available credit. The higher your credit utilization, the more it could negatively impact your score.

Challenges You May Face When Paying a Mortgage With a Credit Card

One challenge with using a credit card for mortgage payments is the time it takes to do so. Any of the above-mentioned methods will take you some time and effort to complete successfully. That’s because it’s unlikely your lender will accept a direct credit card payment and you will instead have to use a workaround.

There are also the fees to consider — determining whether paying the extra charges and potentially a higher interest rate is worth it takes some careful calculations.

Limited Payment Channels

Even with a workaround, your options for paying your mortgage with a credit card are quite limited. Major vendors have stopped accepting credit card payments for money orders, so the most viable methods are probably using a third=party service or getting a balance transfer or cash advance from your credit card, all of which cost money.

Potential for Increased Debt

Since credit card APRs are typically much higher than mortgage rates, putting your mortgage payment on your credit card (even indirectly) will mean that you’re risking hefty interest on top of your mortgage payment. And, since cash advances and balance transfers are among your most likely options and those typically come at even higher APRs, using them to pay for your mortgage opens you up to even more debt.

Should You Pay Your Mortgage With a Credit Card?

Making mortgage payments with a credit card might possibly be a good idea if you’re looking for a way to earn more rewards or get some financial breathing room. However, given the downsides, such as high fees and the impact it may have on your credit, you may be better off pursuing other options first. Also keep in mind that using a credit card to pay your mortgage may trigger a higher cash-advance interest rate than your typical interest rate since you can’t pay directly.

Alternatives to Using a Credit Card for Your Mortgage

Here are several options you can choose from instead of paying your mortgage with a credit card. Let’s start with what to do if the situation is urgent.

•   Consider mortgage forbearance: If you’re struggling with your payments and experiencing a significant hardship, you can contact your lender to see if mortgage forbearance is possible. This could allow you to temporarily stop paying or have your monthly payments reduced until you can get back on your feet.

•   Seek help from a housing counselor: You can find a reputable housing counselor that’s approved by the U.S. Department of Housing and Urban Development (HUD) by contacting the Homeowners HOPE Hotline or using the housing counselor tool on the Consumer Financial Protection Bureau’s website. They could suggest options to help you manage your mortgage payments. You may have to pay a small fee for the service, but it could be more affordable than using a credit card to pay your mortgage.

Refinancing or Loan Modification

If mortgage forbearance doesn’t seem necessary yet, there are other options worth considering: refinancing and loan modification.

Refinancing involves replacing your old mortgage with a new one – ideally with terms that will make it more manageable for you. The new mortgage might have a longer term or a better interest rate, resulting in lower monthly payments. The downside is that you’ll need to pay closing costs and, usually, to get more advantageous terms, you’ll need a good credit score and a regular income.

If refinancing doesn’t seem like a good option for you, you could go to your lender and request loan modification – changes in the terms of your mortgage that will make it easier for you to make your payments. This could involve a longer term or a better interest rate, for instance. Your lender is not under any obligation to offer this option, but it’s worth asking.

Personal Loan or HELOC

Another option to help with your mortgage payments could be a loan. Both personal loans and home equity lines of credit (HELOCs) are flexible loan types that might help you manage your mortgage in the short term. A personal loan is typically available at a fixed interest rate for up to $100,000 or even more. It’s usually paid back over a term of up to 10 years. A HELOC is a revolving line of credit, usually with adjustable interest rates. You can draw out funds, up to a set amount, during the initial draw period and during the subsequent repayment period, you pay back what you’ve borrowed, with interest. A HELOC is secured with your home equity, so the interest rate is typically lower than it is with a personal loan, but if you don’t make your payments, your house is at risk.

The Takeaway

While you probably can’t pay your mortgage directly with a credit card, there are workarounds that are possible, as long as you understand what you’re getting into and are strategic about what you’re doing. Before you move forward with paying your mortgage with your credit card, make sure you weigh the fees involved vs. the rewards you could earn as well as any interest you could accrue and potential impacts to your credit. Understanding the pros and cons of this scenario is an important step in using your credit card responsibly.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can you use a credit card to pay a mortgage?

Can you pay your mortgage with a credit card? Probably not directly, but you may be able to do so through indirect methods. Some of these include going through a third-party service, making a balance transfer, purchasing a money order using your credit card, or getting a cash advance. Each of these methods will come with its own set of fees and/or higher interest rates.

Can paying a mortgage with a credit card impact credit score?

If you end up with a high balance on your credit card as a result of your mortgage payment, it could negatively impact your score if you have a high credit utilization. Or, if you end up missing or being late on a payment (perhaps you’re struggling to make the monthly payments), then your score could also be impacted.

Are there fees for paying a mortgage with a credit card?

There will probably be fees, depending on how you use your credit card to pay for your mortgage. For instance, you may incur balance transfer, cash advance, or third-party fees.

What are the risks of using a credit card to cover mortgage payments?

You would likely need to use a workaround to pay your mortgage with a credit card, which can require some advance planning and time. And typically, the workarounds will either involve third-party fees and/or repaying your credit card company at a higher-than-usual APR. Building up debt in this way can also have a negative impact on your credit score.

Is it ever a good idea to pay a mortgage with a credit card?

It’s rarely a good idea to pay your mortgage with a credit card. If it’s an emergency and paying with a credit card is your only option, it’s likely better than defaulting on your loan. If you have a new credit card with a signup bonus spending threshold you need to reach within a short time period, it might be worth it to consider paying through a third-party service so long as you are sure you’ll be able to pay off your credit card swiftly.

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Photo credit: iStock/vgajic

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

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.

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

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.

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

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.

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

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.

SOHL-Q325-025

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Have you heard the term “piggyback mortgage” and wondered what it is? At its most basic, a piggyback mortgage can be considered a second mortgage. It’s usually either a home equity loan or home equity line of credit (HELOC).

Piggyback mortgage loans can sometimes also be a wise option for homebuyers looking to finance a home without having a significant down payment available. In this situation, the piggyback mortgage is taken out at the same time as the main mortgage and put toward the down payment. The benefit is that it may help you pay less over the life of the loan because you don’t need to pay for private mortgage insurance (PMI).

Read on to learn more about what a piggyback loan is and how it works.

What Is a Piggyback Mortgage Loan?

Homebuyers can use a piggyback mortgage loan to help fund the purchase of a property. Essentially, they take out a primary loan and then a second loan, “the piggyback loan,” to fund the rest of the purchase.

Using the strategy helps homebuyers reduce their mortgage costs by enabling them to put down a 20% down payment. It also helps them avoid the need for private mortgage insurance, which is usually required for those who don’t have a 20% down payment.

Note: SoFi does not offer piggyback loans at this time.

Recommended: How to Qualify for a Mortgage

How Do Piggyback Loans Work?

When appropriate for a homebuyer’s unique situation, a piggyback mortgage might potentially save them money in monthly costs and reduce how much they need to come up with for the down payment.

Here’s an example of how piggyback mortgages work:

Jerry is buying a home for $400,000. He doesn’t want to put down more than $40,000 from his savings account for the down payment. This eliminates several mortgage types. He works with his lender through the prequalification and preapproval process to secure a first mortgage for $320,000, then with a piggyback mortgage lender to secure a piggyback mortgage of $40,000, and finishes the financing process with his total 20% down payment of $80,000, the sum of his saved money and the piggyback mortgage.

Piggyback home loans were a popular option for homebuyers and lenders during the housing boom of the early 2000s. But when the housing market crashed in the late 2000s, piggyback loans became less popular, as a lack of equity made homeowners more vulnerable to loan defaults.

Fast forward to today’s housing market. With the cost of living rising in certain areas, piggybacks are starting to become a viable option again.

Recommended: First-Time Homebuyer Guide

Types of Piggyback Loans

Here are some types of piggyback loans to consider:

A 80/10/10 Piggyback Loan

There are different piggyback mortgage arrangements, but an 80/10/10 loan tends to be the most common. In this scenario, a first mortgage represents 80% of the home’s value, while a home equity loan or HELOC makes up another 10%. The borrower’s down payment covers the remaining 10%.

In addition to avoiding PMI, homebuyers may use this piggyback home loan to avoid the conforming mortgage limits standard in their area.

A 75/15/10 Piggyback Loan

A loan with a 75/15/10 split is another popular piggyback loan option. In this case, a first mortgage represents 75% of the home’s value, while a home equity loan accounts for another 15%. And like the 80/10/10 split, the remaining 10% is the part of the down payment the borrower already has.

For example, a $450,000 75/15/10 loan would break down like this:

Main loan (75%): $337,500
Second loan (15%): $67,500
Down payment (10%): $45,000

See how these options stack up in chart form:

	80/10/10 Piggyback Loan	75/15/10 Piggyback Loan
Structure:	80% primary loan 10% 10% HELOC or home equity loan 10% down payment	75% primary loan 15% HELOC or home equity loan 10% down payment
Typical use:	Commonly used to avoid PMI and stay under jumbo loan limits	Commonly used when purchasing a condo to avoid higher mortgage rates

Average Piggyback Mortgage Rate

A piggyback loan usually has a higher interest rate than the primary mortgage, and the rate can be variable, which means it can increase over time. Let’s say your primary mortgage rate is 6.75%. The rate on the second mortgage might be 7.50%. If you borrowed $35,000 over a 10-year term with this piggyback mortgage, your monthly payment for that loan would be about $415. Of course, the exact rates you are able to secure from a piggyback mortgage lender would be based on how much you borrow, your credit score, current interest rates, and other variables.

Benefits and Disadvantages of a Piggyback Mortgage

A piggyback mortgage may help homebuyers avoid monthly PMI payments and reduce their down payment. But that’s not to say an 80/10/10 loan doesn’t come with its own potentially negatives.

There are pros and cons of piggyback mortgages to be aware of before deciding on a mortgage type.

Piggyback Mortgage Benefits

Allows you to keep some cash on hand. Some lenders request a down payment of 20% of the home’s purchase price. With the median American home price at $446,766 as of mid-2025, this can be a difficult sum of money to save, and paying the full 20% might wipe out a buyer’s cash reserves. A piggyback mortgage may help homebuyers secure their dream home but still keep cash in reserve.

Possibly no PMI required. What may be the largest motivator for securing a piggyback mortgage is that homebuyers may not be required to pay PMI, or private mortgage insurance, when taking out two loans. PMI is required until 20% of a home’s value is paid, either with a down payment or by paying down the loan’s principal over the life of the loan.

PMI payments can add a substantial amount to a monthly payment and, just like interest, it’s money that won’t be recouped by the homeowner when it’s time to sell. With an 80/10/10 loan, both loans meet the requirements to forgo PMI.

Potential tax deductions. Purchasing a home provides homeowners with potential tax deductions. Not only is there potential for some or all of the interest on the main mortgage loan to be tax deductible, but the interest on a qualified second mortgage may also be deductible if it is used to buy, build, or substantially improve the home.

Potential Downsides of Piggyback Mortgages

Not everyone qualifies. Piggyback mortgage lenders take on extra risk. Without PMI, there is an increased risk of a financial loss. This is why they’re typically only granted to applicants with strong credit. Even if it’s the best option for you, there’s no guarantee that a lender will agree to a piggyback loan scenario. You’ll see whether the odds are in your favor by going through the process of getting preapproved for your home loan.

Additional closing costs and fees. One major downside of a piggyback loan is that there are always two loans involved. This means a homebuyer may have to pay closing costs and fees on two loans at closing, though some lenders may offer low- or no-cost closings for home equity loans.

Savings could end up being minimal or lost. Before deciding on a piggyback loan arrangement, a homebuyer may want to assess the potential savings. While this type of loan has the potential to save money in the beginning, homeowners could end up paying more as the years and payments go on, especially because second mortgages tend to have higher interest rates.

To make a quick assessment, check whether the monthly payment of the second mortgage is less than the applicable PMI would have been on a different type of loan.

Here are the pros and cons of piggyback loans in chart form to help you decide if this kind of mortgage arrangement is right for you.

How to Qualify for a Piggyback Mortgage

It’s essential to keep in mind that you’re applying for two mortgages simultaneously when you apply for a piggyback home loan. While every lender may have a different set of requirements to qualify, you usually need to meet the following criteria for approval:

•   Your debt-to-income (DTI) ratio should not exceed 36%. Lenders look at your DTI ratio — the total of your monthly debt payments divided by your gross monthly income — to ensure you can make your mortgage payments. Therefore, both loan payments and all of your other debt payments shouldn’t equal more than 36% of your income, although some lenders may go higher.

•   Your credit score should be very strong. Because you are taking out two separate loans, your risk of default increases. To account for this increase, lenders require a strong credit score, usually over 700 (though some lenders may accept 680), to qualify. A higher credit score indicates you’re more creditworthy and less likely to default on your payments.

Before you apply for a piggyback loan, make sure you understand all of the requirements to qualify.

Refinancing a Piggyback Mortgage Loan

Sometimes homeowners will seek to refinance their mortgage when they have built up enough equity in their home. Mortgage refinancing can help homeowners save money on their loans if they receive a lower interest rate or better terms.

If you have a piggyback mortgage, however, refinancing could pose a challenge. It’s often tricky to refinance a piggyback loan because both lenders have to approve. In addition, if your home has dropped in value, your lenders may even be less inclined to approve your refinance.

On the other hand, if you’re taking out a big enough loan to cover both mortgages, it may help your chances of approval.

Recommended: How Much Does It Cost to Refinance a Mortgage?

Is a Piggyback Mortgage a Good Option?

Not sure if a piggyback mortgage is the best option for you? It may be worth considering in the following scenarios:

If you have minimal down payment resources: Saving up for a down payment can take years, but a piggyback mortgage may mean you can sign a contract years sooner than any other type of mortgage.

If you need more space for less cash: Piggyback loans often allow homeowners to buy larger, recently updated, or more ideally located homes than they can with a conventional mortgage loan. This advantage can make for a smart financial move if the home is expected to build equity quickly.

If your credentials are a match: It’s traditionally more difficult to qualify for a piggyback loan than other types of mortgages. For many lenders, you will need to have a strong credit score, stable income and employment history, and an acceptable DTI ratio lined up.

Piggyback Mortgage Alternatives

A piggyback mortgage certainly isn’t the only type available to hopeful homebuyers. There are other types of mortgage loans you may also want to consider.

Conventional Fixed-Rate Mortgage

This type of loan typically still requires PMI if the down payment is less than 20% of the home’s purchase price, but it is the most common type of mortgage loan by far. They’re often preferred because of their consistent monthly principal and interest payments.

Conventional loans are available in various terms, though 15-year and 30-year options are among the most popular.


💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

Adjustable-Rate Mortgage

Also known as an ARM, an adjustable-rate mortgage may start homebuyers out with an interest rate that’s lower than they’d get with a fixed-rate loan. However, the interest rate will only remain the same for a certain period of time, typically for one year up to just a few years.

After the initial term, rate adjustments will reflect changes in the index (a benchmark interest rate) the lender uses plus the margin (a number of percentage points) added by the lender.

Interest-Only Mortgage

For some homebuyers, an interest-only mortgage can provide a path to homeownership that other types of mortgages might not. During the first five years (some lenders allow up to 10 years), homeowners are only required to pay the interest portion of their monthly payments and can put off paying the principal portion until their finances more easily allow that.

FHA Loan

Guaranteed by the Federal Housing Administration, FHA loans automatically include built-in mortgage insurance, which makes these loans less of a risk to the lender. But while it’s not possible to save on monthly insurance payments, homebuyers may still want to consider this type of loan due to the low down payment requirements.

Other Options to Consider

Some other alternatives to a piggyback mortgage might include:

•   Speaking to a lender about PMI-free options

•   Quickly paying down a home loan balance until 20% of a home’s value is paid off and PMI is no longer required

•   Refinancing (if a home’s value has significantly increased) to allow the loan to fall below the percentage requirements for PMI

•   Saving for a larger down payment and reducing the need for PMI

The Takeaway

Before signing on for a piggyback mortgage, a homebuyer should fully understand all of their mortgage options. While a second mortgage might be the best option for one homebuyer, it could be the worst option for another. If you select a piggyback mortgage, understanding its benefits and potential setbacks may help you avoid financial surprises down the line.

FAQ

What is a piggyback fixed-rate second mortgage?

A piggyback fixed-rate second mortgage is a home equity loan or home equity line of credit (HELOC) with a fixed rate that is obtained at the same time as the primary mortgage on a home purchase. Because its rate is fixed, the interest rate does not change over the life of the loan.

Is it hard to get a piggyback loan?

Because piggyback borrowers typically don’t pay for private mortgage insurance, the requirements to obtain this type of loan can be more strict than they are for other home loans. You may need a credit score of 680-700 or more and a debt-to-income ratio of 36% or less.

What is the advantage of a piggyback loan?

A piggyback loan can help you avoid having to pay for private mortgage insurance (PMI) if you are making a low down payment on a home purchase. However, you’ll want to compare the costs of the second mortgage (including its closing costs) against the costs of PMI before making a decision.

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About the author

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

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.

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

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

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.

SOHL-Q325-047

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What is a second mortgage loan? 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. A second mortgage can help you fund anything 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 off a second mortgage. In this guide, we’ll discuss this and more about how to take out a second mortgage and when you might consider it.

What Does It Mean to Take Out a Second Mortgage?

What is a second mortgage loan? It’s a loan secured by your home that’s 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.”

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.

And since we’re looking at what it means to take out a second mortgage, it’s worth noting that it’s not called a second mortgage just because you probably took it out after your original mortgage. 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 home mortgage loan and only 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.

Second Mortgage Interest 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.

Cost of a Second Mortgage

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.

Repayment Terms and Requirements

If you’re wondering how a second mortgage works, that depends. The way you receive funds and repay each kind of second mortgage differs. You generally receive a home equity loan as a lump sum and, since it usually comes with a fixed interest rate, pay it back in equal monthly installments, making it easy to plan for. With a HELOC, you’ll get an initial draw period during which you can take out funds at will, up to a preset limit. You’ll have a minimum payment to make each month but can pay back the principal and draw it out again. During the repayment period that follows, you’ll pay back the loan, generally at an adjustable rate.

To qualify for a HELOC or a home equity loan, you’ll need to have sufficient equity in your home – generally enough so that after you take out the second mortgage, you’ll retain 20% or, at minimum, 15% equity. Lenders’ requirements vary, but typically they will want to see a credit score of at least 620. They will also look at your debt-to-income (DTI) ratio, which compares your monthly debt obligations with your monthly income, and generally will want it to be 43% or lower.

Example of a Second Mortgage

Let’s look at an example of how to take out a second mortgage. 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 that you’re borrowing 80% of your equity, that could give you a home equity loan or credit line of $220,000.

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 evaluate whether you 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, as long as you keep the funds sufficiently replenished. The repayment period is usually 20 years.

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

Piggyback Loan

A piggyback loan is a second mortgage you take out at the same time as your first mortgage in order to help fund your down payment so you can avoid paying private mortgage insurance (PMI). People generally have to pay PMI when they buy a home and make a down payment on a conventional loan of less than 20% of the home’s value.

Here’s how it works, if you have only a 10% down payment, you might take out a mortgage for 80% of your purchase price and a piggyback loan, typically at a higher and probably variable rate, for 10% of the purchase price to put toward your down payment so you’ll have the full 20%.

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, on the other hand, 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 have a low mortgage rate will generally not benefit from a mortgage refinance when the going interest rate exceeds theirs.

Pros and Cons of a Second Mortgage

What does it mean to take out a second mortgage, all in all? It’s 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 if 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) if they have less than 20% for the down payment for a conventional mortgage. A piggyback loan, or second mortgage, can be issued at the same time as the initial home loan and allow the buyer to meet the 20% threshold and avoid paying PMI.

People generally have to pay PMI when they buy a home and 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

•   Funding a blow-out wedding or other big event

•   Covering 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.

Funding Major Home Improvements

Building a garage or upgrading your kitchen are the kind of home improvements you could fund with a second mortgage. What’s more, if you itemize your federal taxes, some or all of the interest you pay on your second mortgage may be tax deductible if it’s used on home improvements. Consult with your tax adviser for the most up-to-date information.

Covering Education Expenses or Debt Consolidation

Getting a better interest rate on debt is a significant reason many people take out second mortgages. A second mortgage, especially a HELOC, can be an appealing way to finance education. Typically, its rates are lower than those of private student loans. Still it’s worth looking into federal loans, which may have even lower rates and don’t put your home at risk if you default.

Consolidating debt is another reason people take out second mortgages. Rather than paying often hefty credit card rates, for example, you could take out a second mortgage, pay off the high-interest debt, and pay back the second mortgage at a more reasonable rate over time. You can also use a home equity loan in particular to pay off multiple debts so that you’ll just have one predictable bill each month.

How to Get a Second Mortgage

If you’ve decided that a HELOC or home equity loan is the right choice for you, here’s how to get a second mortgage. Begin by assessing what you need and evaluate how much you can afford in payments each month.

Next, review typical requirements and evaluate how well you match up. Remember that requirements may vary somewhat from lender to lender.

After you’ve brushed up your credentials, start researching lenders. You might be able to get a slightly lower rate from the lender who provided your primary mortgage, but it’s worth looking around at the options and negotiating terms. Take into account whether you have enough to pay for closing costs or whether you’ll need to look for a no-closing-costs option or a lender who will waive the fees.
Once you’ve made a decision, submit your application If you’re approved, the lender will likely want to conduct an appraisal of your property. If all goes well, you’ll soon be signing papers and closing your loan.

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 prefer not to have a second mortgage, you may want to explore a cash-out refinance, which is another way to put some of your home equity to use.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is a HELOC a second mortgage?

Perhaps you’ve been wondering, “Is a HELOC a second mortgage?” The answer is yes: A HELOC (home equity line of credit) is one kind of second mortgage. It’s a revolving line of credit, but it is secured by your home, just as your mortgage is, and if you default on it, you risk losing your home.

Can you refinance a second mortgage?

You may be able to refinance a second mortgage, either on its own or in combination with your primary mortgage. If you’re interested in the combination refi, one major factor that determines whether you can refinance a second mortgage along with the first is whether you’ll have the 20% equity typically required.

Does a second mortgage hurt your credit?

You may be wondering, “What does it mean to take out a second mortgage when it comes to your credit?” Shopping for a second mortgage can cause a small dip in an applicant’s 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?

Many lenders will allow you to take about 85% of your home 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.

Can you have multiple second mortgages?

In theory you can have more than one second mortgage on the same property, but in practice it may be difficult. Lenders may subject your application to extra scrutiny or simply have a policy against it. If you buy a vacation property, it may be possible to get a second mortgage as well as a primary mortgage loan for the second home in addition to your primary and secondary mortgage on your primary residence.

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

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

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

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.

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.

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

SOHL-Q325-028

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What is a purchase-money mortgage loan? With this nontraditional kind of mortgage, the seller finances part or all of the property for the buyer, who usually does not qualify for traditional financing.

Keep reading to learn more about what a purchase-money mortgage loan is and the benefits and drawbacks of using one.

Purchase-Money Mortgage Definition

A purchase-money mortgage is also known as owner financing. The seller extends credit to the buyer to purchase the property. This can be a portion of the sale price or the full price.

In other words, the buyer borrows from the seller instead of from a traditional lender. The seller ultimately determines the interest rate, down payment, and closing costs. Both parties sign a promissory note. They record a deed of trust or mortgage with the county. The seller usually retains title until the financed amount is paid off.

A purchase-money loan is a nontraditional financing method that may be needed when the buyer cannot obtain one of the other different mortgage types for purchasing the property.

The promise to pay is secured by the property, so if the buyer stops paying, the seller can foreclose and get the property back.

If you’re considering a purchase-money mortgage, it may be useful to use a mortgage calculator tool to help you determine what potential payments on a purchase-money mortgage might be.

Recommended: How to Buy a Foreclosed Home the Simple Way

How Does a Purchase-Money Mortgage Work?

Not all buyers are in financial situations that make it easy for them to get a conventional home loan. Even diligent shopping for a mortgage may not help them get the home loan they need.

If a buyer has a profitable business, for example, but doesn’t have two years of tax returns to prove steady cash flow, most mortgage lenders won’t take on the risk.

Enter a purchase-money mortgage. With the right property, seller, and situation, a buyer could finance the home with a purchase-money mortgage. The seller would offer terms to the buyer — usually a higher interest rate and a short repayment term, with a balloon mortgage payment at the end — and the buyer would enter into the agreement. The seller would hold title until the loan payoff.

Buyers and sellers who work with seller financing often intend for the purchase-money mortgage to be refinanced into a traditional mortgage with a lower mortgage payment at a later date.

Purchase-Money Mortgage Example

Let’s say a homebuyer wants to purchase a $450,000 house. They have a down payment of $100,000 and are making a good salary but underwent a bankruptcy two years ago and can’t qualify for a traditional mortgage. They might be able to arrange with the seller to get a purchase-money mortgage for the remaining $350,000 with a balloon payment at the end of five years. By then, they should be eligible for a traditional mortgage.

Types of Purchase-Money Mortgages

Purchase-money mortgages can come in several forms.

Land Contract

A land contract (also called a contract for deed) is simply a mortgage from the seller. The buyer takes possession of the property immediately and pays the seller in installments.

Land contracts are often for five years or less, ending with a balloon payment.

Lease-Purchase Agreement

In a lease-purchase agreement, the buyer agrees to rent the property for a specified amount of time and then enter into a contract to purchase the property at a price that’s the current market value or a bit higher.

For this and a lease-option agreement, the seller typically requires a substantial upfront fee, an above-market lease rate, or both. Part of the monthly rent payment goes toward the purchase price.

Lease-Option Agreement

A lease-option agreement is similar to a lease-purchase agreement in that the buyer agrees to first rent the property for a specified amount of time. But with this agreement, the buyer has the option to purchase the property instead of making a commitment to purchase it.

Assumable Mortgage

Sometimes the seller may have a mortgage that has more favorable terms than are common at the point they wish to sell the home. When that’s the case, the buyer may be able to simply take on that mortgage, with the same terms, and continue to make payments when the seller leaves off. This requires that the mortgage lender approves, of course, and is typically more common with government-backed loans. The buyer may need to pay the seller for their equity, as well.

Hard Money Loan

A hard money loan is generally a short-term high-interest loan made by private investors, often for buyers who want to purchase commercial property. It may make sense if the buyers anticipate that they will be able to refinance within a few years, for example, if their credit will improve significantly.

Pros and Cons of Purchase-Money Mortgages for Buyers

Like any kind of loan, a purchase-money mortgage may have benefits and drawbacks for potential buyers.

Pros and Cons of Purchase-Money Mortgages for Sellers

Sellers will also want to consider carefully the plusses and minusses of purchase-money mortgages.

Recommended: How to Navigate the Mortgage Preapproval Process

The Takeaway

If you’re able to secure financing from a seller, a purchase-money mortgage may be a good fit — assuming you have an exit plan for a few years down the road. It’s smart for both buyers and sellers to know the risks and rewards of a purchase-money mortgage.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Who holds the title in a purchase-money mortgage?

The seller controls the legal title; the buyer gains equitable title by making payments.

Can a bank issue a purchase-money mortgage?

Yes, but it is not common. A buyer might pay for a house with a bank mortgage, cash, and a property seller mortgage. Both the mortgage issued by the third-party lender and the seller financing are considered purchase-money mortgages.

Does a purchase-money mortgage require an appraisal?

Not if the seller does not require one. With owner financing, the seller sets the terms, which may not include an appraisal.

Is a purchase-money mortgage the same as seller financing?

A purchase-money mortgage is essentially the same as seller financing, though there are several kinds of purchase-money mortgage, including land contracts and lease-purchase options, among others.

Should you buy with a purchase-money mortgage?

In general, if you can get a traditional mortgage, you may be better off with that, since typically you’ll get a lower interest rate and a longer term. However, if you can’t qualify for a traditional mortgage but can afford to make the necessary payments, a purchase=money mortgage can be a way to get a home sooner. Just be sure you understand the terms and have a plan to make sure you can refinance when the term is up.

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

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.

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.

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

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

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