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Credit cards and personal lines of credit both allow you to borrow money over time until you hit a credit limit. You typically pay back what you owe on a monthly basis, paying interest on your balance.

Each method has its pros and cons (for example, while a line of credit may have a lower interest rate, it likely won’t offer rewards and may be tougher to qualify for). Here, you’ll learn the ins and outs of a personal line of credit vs. a credit card so you can decide which is right for you.

What Is a Personal Line of Credit?

A personal line of credit operates under the same concept as a credit card, with slight differences. It’s a type of revolving credit that allows you to borrow a set amount, which is typically based on your income. Here are details to know:

•   The majority of personal lines of credit are unsecured, meaning there’s no collateral at risk if you default on payments. However, you can obtain a secured personal line of credit at some institutions if you put down a deposit. This deposit will be used to pay your balance due if you default on payments, but it can also help you achieve a lower interest rate. Personal loans secured by a deposit are typically used as a method for building credit.

•   A home equity line of credit (or HELOC) is similar to a secured personal line of credit in that your house acts as the collateral in the loan. You’re borrowing against the equity in your home. If you default on payments, your house could be foreclosed on to make up the difference.

💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.

How Does a Personal Line of Credit Work?

Get acquainted with how a personal line of credit works:

•   As with any other credit transaction, personal lines of credit are reported to the three major credit bureaus. You will have to provide details about your financial standings in order to qualify for a personal line of credit. Typically, this comes in the form of demonstrating your income, in addition to other requirements.

•   The interest rate for a personal line of credit usually fluctuates with the market conditions, such as the prime rate. You may also have to pay a fee each time you use your personal line of credit.

•   Some banking institutions may require you to have a checking account established with them before offering you a personal line of credit. This is critical for using your personal line of credit, since the money can be transferred to a linked checking account. (In some cases, you might receive funds via a payment card (similar to a debit card) or use special checks to move the funds.

•   Personal lines of credit contain what’s called a “draw period.” During this predetermined amount of time, you can use your available credit as you please, as long as you don’t go over the limit.

•   Once the draw period reaches its end, you may be required to either pay your remaining balance in full or pay it off by a certain date after that.

What Is a Credit Card?

Is a credit card a line of credit? Not exactly. A credit card is a type of unsecured revolving credit that includes a credit limit. This limit is determined by your financial situation, which requires a hard credit check. There are credit cards for practically all types of credit scores, from poor all the way up to excellent.

Many credit cards offer rewards in the form of cash back or travel rewards. You may also receive a bonus for signing up for a new account, either as rewards or as an interest-free, introductory financing period. Also, a credit card can offer cardholder benefits such as purchase protection or travel insurance.

How Does a Credit Card Work?

Your personal bank or other financial institutions may offer their own credit cards, but you don’t have to belong to a particular bank or lender in order to qualify for a credit card. After you’ve applied for a credit card and been approved, the lender will likely set a credit limit.

•   When you make a purchase with a credit card, it constitutes a loan. At the end of each billing cycle you’ll receive a statement. You can usually avoid interest charges by paying your statement balance in full.

•   If you choose to pay a lesser amount, you’ll incur interest charges. Credit cards typically charge high interest, so it’s important to stay on top of the amount you owe, which can increase quickly.

•   If you don’t make a payment by the statement due date, you will likely also incur a late payment fee. Interest charges and fees are added to the account balance, and interest will accrue on this new total.

•   If you miss payments by 60 days typically, you could be assessed a higher penalty APR.

Recommended: Average Personal Loan Rates

Personal Lines of Credit Vs Credit Cards Compared

Now that you know a bit more about each of these options, you know that the answer to “Is a line of credit the same as a credit card?” is no. Now, take a closer look at the difference between a line of credit and a credit card.

Similarities

Both personal lines of credit and credit cards are types of revolving credit. This means you can borrow up to a certain amount as it suits you, as long as you pay the balance back down in order to make room for future purchases.

Both personal lines of credit and credit cards also report your balance and payment history to the three major consumer credit bureaus.

Differences

Here’s a quick summary of the main differences between personal lines of credit and credit cards.

Features	Personal Line of Credit	Credit Card
Interest rate	Typically lower than credit cards	Typically higher than personal lines of credit
Borrowing limit	Often up to $50,000 or more	Typically, $28,000 but varies
Rewards	None	Many cards offer cash back or travel rewards
Fees	Annual fee, late payment fees, fees for drawing on account	Annual fees, balance transfer fees, late payment fees and penalty APRs, overdraft fees
Application process	Can be lengthy	Usually very simple
Grace period	No	Yes
Other benefits	Good for emergency and/or unexpected expenses	Many cards offer travel insurance, purchase protection, and other benefits.

💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why credit card consolidation loans are so popular.

Pros and Cons of Personal Lines of Credit

There are times when a personal line of credit can make life much simpler. However, you may have to accept certain tradeoffs.

Pros	Cons
Lower fees for a cash advance	Potential fees for usage
High borrowing limits	Preset credit lifespan
Lowwe interest rates	No spending rewards or perks
Funds can be used at your discretion	No interest-free grace period
You only pay interest on what you borrow	Annual fee

Pros and Cons of Credit Cards

Credit cards are a powerful financial tool you can use to wisely manage your spending. Knowing the terms of the game, however, is just as important as learning how to be responsible with credit cards.

Pros	Cons
Many cards offer rewards for spending	Some cards have annual fees
Can be used for retail purchases	Typically high interest rates
One for practically every credit score	Hefty fees for cash advances
Useful tool in establishing and/or rebuilding credit	Balance transfer fees

Recommended: Credit Score vs. FICO® Score

Alternatives to Revolving Credit

Besides personal lines of credit and credit cards, there are a few other types of financial products you can use to access credit.

Personal Loans

It may be easy to get personal loans vs. lines of credit confused, but it’s crucial to know the difference. For example, a personal line of credit is a potential amount that can be borrowed. Personal loans, however, are a lump sum of money that you receive shortly after your approval. Here’s how this kind of loan typically:

•   Obtaining either a secured or unsecured personal loan requires a credit check. The potential amount you may be able to borrow ranges from $1,000 all the way up to $40,000 or more.

•   Some personal loans are taken out for a specific purpose, such as a home renovation, a personal line of credit can often be used for whatever reason crops up. For example, you may want to go with a personal loan instead of a line of credit if you need to make home renovations.

•   A personal loan rate calculator can be used to see what terms you may be able to expect. While these calculators may not give you the exact terms you’ll receive if you do obtain a personal loan, they can be a great starting place.

Auto Loan

Many people don’t have thousands of dollars sitting around to help pay towards a new car, so they use auto loans. An auto loan is a kind of personal loan that’s secured by the title of the vehicle.

If the borrower fails to pay the loan, the vehicle can be repossessed. And the name of the lender typically appears on the title of the car, so the loan must be paid off before the car can be sold.

Mortgage

A mortgage, or home loan, is a loan that’s secured by a real estate property. Because of the inherent value of real estate, a home mortgage can often have a lower interest rate than other types of secured loans. Most home mortgages are installment loans that have a fixed repayment period, such as 30 years or 15 years.

A home equity loan or a home equity line of credit is a second mortgage taken out against the existing equity in a property. Because of their low interest rates these are sometimes used instead of unsecured personal loans.

Student Loans

Student loans can allow students to fund their education; you may not need to start paying those loans off until you’ve graduated.

Federal student aid can help pay for college-related costs as well. The Free Application for Federal Student Aid (FAFSA®) is one way to determine how much and what type of federal student aid students and parents might qualify for. Some individual colleges also use the FAFSA in determining eligibility for their own financial aid programs.

Private student loans are another option, both for loans and to refinance federal loans. In terms of the latter, however, there are two important considerations:

•   If you refinance federal student loans with private loans, you forfeit the federal benefits and protections, such as forgiveness.

•   If you refinance for an extended term, you may pay more interest over the life of the loan.

•   For these reasons, think carefully about whether private student loans suit your situation.

The Takeaway

Personal lines of credit are similar to credit cards in that they are both generally unsecured loans issued based on your personal creditworthiness. By understanding how a credit card differs from a personal line of credit, you can choose the loan that best fits your needs or decide to access cash through an alternative method.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Here’s a list of the most common questions associated with personal lines of credit and credit cards.

Is a personal line of credit the same as a credit card?

Personal lines of credit and credit cards are similar but not the same. A credit card is a form of payment accepted by merchants and a kind of revolving loan. A personal line of credit is a revolving loan, and the funds are typically transferred to the borrower’s personal bank account before they are used for purchases. Credit cards can also have numerous benefits not offered by a personal line of credit but the interest rate may be higher.

Are there additional risks to lines of credit vs credit cards?

Both personal lines of credit and credit cards require you to pay back what you owe, whether it’s on a monthly basis or at the end of the draw period, in the case of a line of credit. Making late payments or missing payments can negatively affect your credit score and incur fees.

Do personal lines of credit affect your credit score?

Yes, personal lines of credit, just like credit cards, are subject to reporting to the major credit bureaus. If you make late payments or miss payments, your credit score can be negatively affected. However, personal lines of credit can also be used to build your credit if you make your payments on time and use your credit responsibly.

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Photo credit: iStock/Deepak Sethi

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

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

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

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 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.

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Subprime mortgages allow borrowers with lower credit scores to obtain homeownership, but the homebuyers pay a steep price for the privilege, thanks to the higher risk to lenders. Fortunately, there is hope for subprime borrowers who raise their credit profiles through consistent, on-time payments: They can look into refinancing. Here’s a closer look at the subprime mortgage world.

What Is a Subprime Mortgage?

A subprime mortgage is a housing loan made to a borrower with a subprime credit score, typically one in the 580 to 669 range, although what constitutes a prime and subprime credit score can vary among lenders and organizations. A credit score above 670 is considered prime, according to Experian, which tracks data on the credit industry. (And generally speaking, to qualify for the best interest rates, a borrower needs a “super prime” score of 740 or better.)

Borrowers with lower credit scores represent a greater risk to the lender; they are statistically more likely to have trouble paying on time. So subprime mortgages often come with higher interest rates and larger down payments to help protect the lender from the increased risk of default.

Subprime borrowers accept these terms because they cannot qualify for a conventional mortgage — one from a private lender like a bank, credit union, or mortgage company — with lower costs. Subprime mortgages are different from government-backed loans for borrowers with low credit scores (such as FHA loans backed by the Federal Housing Administration).


💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.

How Subprime Mortgages Work

The main difference between a mortgage loan offered to a prime borrower vs. a subprime borrower is cost. Borrowers go through the same rigorous underwriting process with a lender and must submit documentation to verify income, employment, and assets.

But in the end, a prime borrower is offered the best rates, while a subprime borrower with so-called bad credit has to put more money down, pay more in fees, and pay a much higher interest rate over the life of the loan. Subprime mortgages also are often adjustable-rate mortgages, which means the payment can go up based on market indices after a predetermined period of time.

Subprime Mortgages and the 2008 Housing Market Crash

Subprime mortgages became popular in the 2000s as more high-risk mortgages were made available to subprime borrowers. In 2005, subprime mortgages accounted for 20% of all new mortgage loans.

It became possible for a lender to originate more of these high-risk mortgages because of a new financial product called private-label mortgage-backed securities, sold to investors to fund the mortgages. The investments masked the risk of the subprime mortgages within.

Home prices soared as more borrowers sought out the various subprime mortgages being offered. Rising home prices also protected the investors of mortgage-backed securities from losses.

When the housing market had passed its peak and borrowers had no viable option for selling or refinancing their homes, properties began to fall into default. In an attempt to reduce their risk exposure, lenders originated fewer loans and increased requirements for all borrowers. This depressed the market further.

Financial institutions that had taken strong positions in mortgage-backed securities were also in trouble. Many of the largest banking institutions in the world filed for bankruptcy, and the world learned once again what stock market crashes are.

In response to the financial crisis, the Federal Reserve implemented low mortgage rates in an attempt to jumpstart the economy.

Subprime Mortgage Regulations

In the wake of the financial crisis, Congress passed the Dodd-Frank Act to reduce excessive risk-taking in the mortgage industry. It established rules for what qualified mortgages are, which gave lenders a set of rules to follow to ensure that borrowers had the ability to repay the loans they were applying for.

It also provided regulation of qualified mortgages, including:

•   Limiting mortgages to 30-year terms

•   Limiting the amount of debt a borrower can take on to 43%

•   Barring interest-only payments

•   Barring negative amortization

•   Barring balloon payments

•   Putting a cap on fees and points a borrower can be charged for a loan

Subprime mortgages are not qualified mortgages. Borrowers who seek non-qualified mortgage loans may include self-employed people who want a more flexible financial verification process, people who have high debt, and people who want an interest-only loan.

Types of Subprime Mortgages

The most common types of subprime mortgages are adjustable-rate mortgages (ARMs), extended-term mortgages, and interest-only mortgages.

•   ARMs. Adjustable-rate mortgages have an interest rate that will change over the life of the loan. They often come with a low introductory rate, which after a predetermined time period changes to a rate tied to market indices.

•   Extended-term mortgages. A subprime mortgage may have a term of 40 years instead of the typical 30-year term. Add to this the higher interest rate, and borrowers pay much more for the mortgage over the life of the loan.

•   Interest-only mortgages. Interest-only loans offer borrowers the ability to only repay the interest part of the loan for the first part of the repayment period. Borrowers have the option of not repaying any principal for five to 10 years. The annual percentage rate is typically higher than for conventional loans. Origination fees may be higher as well.

The “dignity mortgage,” a new kind of subprime loan, could help borrowers who expect to redeem their creditworthiness. The borrower makes a down payment of about 10% and agrees to pay a higher rate of interest for a number of years, typically five. After that period of on-time payments, the amount paid toward interest goes toward reducing the mortgage balance, and the rate is lowered to the prime rate.

Subprime vs Prime Mortgages

Subprime mortgages have many of the same features as prime mortgages, but there are some key differences.

Subprime Mortgage	Prime Mortgage
Higher interest rate	Lower interest rate
Borrowers have fair credit, with scores generally between 580 and 669	Borrowers have good credit, with scores generally from 670 to 739
Larger down payment requirements	Smaller down payment requirements
Smaller loan amounts	Larger loan amounts
Higher fees	Lower fees
Longer repayment periods	Shorter repayment periods
Often an adjustable interest rate	Fixed or adjustable rates

Applying for Subprime Mortgages

Most lenders require a minimum credit score of 620 for a conventional mortgage, but there are lenders out there that specialize in subprime mortgages.

Generally, applying for a subprime mortgage is much the same as applying for a traditional mortgage. Lenders will check your credit and analyze your finances. They will ask for proof of income, verification of employment, and documentation of assets (such as bank statements). They may also ask for documentation regarding your debts or negative items in your credit reports.

Mortgage rates for subprime loans will vary depending on the prime rate, lending institution, the home’s location, the loan amount, the down payment, credit score, the interest rate type, the loan term, and loan type. The rate is typically much higher than a prime mortgage’s.

A mortgage calculator can help you find out what your monthly payments will be with a subprime mortgage. Simply adjust your mortgage rate to the one quoted by a lender for your credit situation.

Alternatives to Subprime Mortgages

Subprime loans are not the only option for borrowers with fair credit scores. Borrowers with credit issues can also look at mortgages backed by the FHA and the Department of Veterans Affairs (VA).

FHA loans have more flexible standards for borrowers than conventional loans. Though borrowers can obtain a mortgage with a credit score as low as 500 (assuming they have a 10% down payment), FHA loans are not considered subprime mortgages. Instead, FHA loans are government-backed loans that provide mortgage insurance to FHA-approved lenders to use if the borrower defaults on the loan.

For many borrowers with good credit and a moderate down payment, FHA loans are more expensive and don’t make sense. However, for borrowers with lower credit scores and smaller down payments, an FHA loan could be the best option.

VA loans have no minimum credit requirement, but instead, lenders review the entire loan profile. The VA advises lenders to consider credit satisfactory if 12 months of payments have been made after the last derogatory credit item (in cases not involving bankruptcy).


💡 Quick Tip: Keep in mind that FHA home loans are available for your primary residence only. Investment properties and vacation homes are not eligible.1

The Takeaway

Subprime mortgages allow borrowers with impaired credit to unlock the door to a home, but to mitigate risk, the lender may charge more for the loan. Borrowers considering this type of mortgage would be smart to look closely at terms and costs, and to also consider other options such as FHA loans.

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.

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Photo credit: iStock/shapecharge

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 for more information.

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

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Heard of a no-closing-cost mortgage or refinance? Sounds divine, but mortgage closing costs are as certain as death and taxes. They must be accounted for, one way or the other.

You may be spared the pain of paying closing costs upfront, depending on the type of loan and the lender’s criteria, but they won’t just magically disappear. Instead, you’ll either be given a higher interest rate on the mortgage to cover those costs or see the costs added to your principal balance.

If you’re thinking about what’s needed to buy a house, keep closing costs in mind and understand the pros and cons of rolling these costs into your loan.

What Are Closing Costs?

A flock of fees known as closing costs on a new home are part and parcel of a sale. They typically range from 2% to 5% of the home’s purchase price. Closing costs include origination fees, recording fees, title insurance, the appraisal fee, property taxes, homeowners insurance, and possibly mortgage points. Some of the costs are unavoidable; lender fees are negotiable.

Closing costs come into play when acquiring a mortgage and when refinancing an existing home loan.

You may cover closing costs with a cash payment at closing, with your down payment, or by tacking them on to your monthly loan payments. You may also be able to negotiate with the sellers to have them cover some or all of the closing costs.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

Can Closing Costs Be Rolled Into a Loan?

If you’re buying a home and taking out a new mortgage, your lender may allow you to roll your closing costs into the loan, depending on:

•   the type of home loan

•   the loan-to-value ratio

•   your debt-to-income (DTI) ratio

Rolling closing costs into your new mortgage can raise the DTI and loan-to-value ratios above a lender’s acceptable level. If this is the case, you may not be able to roll your closing costs into your loan. It’s also possible that if you roll in your closing costs, your loan-to-value ratio will become high enough that you will be forced to pay for private mortgage insurance. In that case, it may be worth it to pay your closing costs upfront if you can.

If you hear of someone who’s taken out a mortgage and says they rolled their closing costs into their loan, they may have actually acquired a lender credit — the lender agreed to pay the closing costs in exchange for a higher interest rate in a “no-closing-cost mortgage.” A no-closing-cost refinance works similarly.

Not all closing costs can be financed. For example, you can’t roll in the cost of homeowners insurance or prepaid property tax. Some of the costs that may be included are the origination fees, title fees and title insurance, appraisal fees, discount points, and the credit report fee.

What about government-backed mortgages? Most FHA loan closing costs can be financed. And VA loans usually require a one-time VA “funding fee,” which can be rolled into the mortgage.

USDA loans will allow borrowers to roll closing costs into their loan if the home they are buying appraises for more than the sales price. Buyers can then use the extra loan amount to pay the closing costs.

Finally, for FHA and USDA loans, the seller may contribute up to 6% of the home value as a seller concession for closing costs.

How to Roll Closing Costs Into an Existing Home Loan

When you’re refinancing an existing mortgage and you roll in closing costs, you add the cost to the balance of your new mortgage. This is also known as financing your closing costs. Instead of paying for them up front, you’ll be paying a small portion of the costs each month, plus interest.

Pros of Rolling Closing Costs Into Home Loans

If you don’t have the cash on hand to pay your closing costs, rolling them into your mortgage could be advantageous, especially if you’re a first-time homebuyer or short-term homeowner.

Even if you do have the cash, rolling closing costs into your loan allows you to keep that cash on hand to use for other purposes that may be more important to you at the time.

Cons of Rolling Closing Costs Into Home Loans

Rolling closing costs into a home loan can be expensive. By tacking on money to your loan principal, you’ll be increasing how much you spend each month on interest payments.

You’ll also increase your DTI ratio, which may make it more difficult for you to secure other loans if you need them.

By adding closing costs to your loan, you are also increasing your loan to value ratio, which means less equity and, often, private mortgage insurance.

Here are pros and cons of rolling closing costs into your loan at a glance:

Pros of Rolling In Costs	Cons of Rolling In Costs
Allows you to afford a home loan if you don’t have the cash on hand	Increases interest paid over the life of the loan
Allows you to keep cash for other purposes	Increases DTI, which can lower your ability to secure future credit
May allow you to buy a house sooner than you would otherwise be able to	Increases loan to value ratio, which may trigger private mortgage insurance
	Reduces the amount of equity you have in your home

Is It Smart to Roll Closing Costs Into Home Loans?

Whether or not rolling closing costs into a home loan is the right choice for you will depend largely on your personal circumstances. If you don’t have the money to cover closing costs now, rolling them in may be a worthwhile option.

However, if you have the cash on hand, it may be better to pay the closing costs upfront. In most cases, paying closing costs upfront will result in paying less for the loan overall.

No matter which option you choose, you may want to do what you can to reduce closing costs, such as negotiating fees with lenders and trying to negotiate a concession with the sellers in which they pay some or all of your costs. That said, a seller concession will be difficult to obtain if your local housing market is competitive.


💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

The Takeaway

Closing costs are an inevitable part of taking out a home loan or refinancing one. Rolling closing costs into the loan may be an option, but it pays to carefully consider the long-term costs of avoiding paying closing costs up front before you commit to your 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

What is a no-closing-cost mortgage?

The name of this kind of mortgage is a bit misleading. Closing costs are in play, but the lender agrees to cover them in exchange for a higher interest rate or adds them to the loan balance.

How much are home closing costs?

Closing costs are usually 2% to 5% of the purchase price of a home.

Can you waive closing costs on a home?

Some closing costs must be paid, no matter what. But you can try to negotiate origination and application fees with your lender. You may even be able to get your lender to waive certain fees entirely.

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Photo credit: iStock/kate_sept2004

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 for more information.

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

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

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A mortgage contingency allows homebuyers to exit the purchase contract without legal repercussions should they be unable to secure financing by the agreed-upon deadline.

Consider this scenario: You found a gem of a home that many others are eyeballing. You make an offer and cough up earnest money to show that you mean business. You’ve been preapproved for a mortgage, so financing seems a shoo-in — until you hit a snag. That’s when a mortgage contingency becomes important.

If you’re unable to obtain financing by the deadline, you can walk away from the purchase agreement and have your earnest money returned.

Some non-cash buyers consider waiving the mortgage contingency to make their offer more competitive in a hot market, but of course, that involves risk. Here’s the scoop on the financing contingency.

What Is a Mortgage Contingency?

Should something unexpected happen, like a job loss or the inability to sell an existing home, a mortgage contingency clause in the purchase agreement allows buyers to back out of the contract and have their earnest money returned. An earnest money deposit isn’t small potatoes for anyone, but that’s especially true for those who are competing against multiple offers: Buyers might lay down as much as 10% of the home’s sale price as a good-faith deposit.

A mortgage contingency also protects both buyers and sellers from uncertainty in the real estate transaction. It’s one of several contingencies that buyers might include in the contract when the property listing status changes to contingent but not yet pending.


💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

The Mortgage Contingency Clause

The mortgage contingency clause gives the buyers a time frame to go shopping for a mortgage or move beyond preapproval. Though the clause may vary from contract to contract, most will allow buyers to back out of the contract if they do not directly cause the financing to fail. The earnest money held in escrow is returned to the buyer.

Even when buyers have mortgage preapproval, financing can fall through at the last minute. This is the legal “out” if that happens.

Recommended: What Is the Difference Between Pending and Contingent Offers?

How Mortgage Contingency Works

Buyers find a home and make an offer and the seller’s real estate agent or attorney draws up a contract for the purchase of the property. Many buyers include in their offer a mortgage contingency, which has a deadline. If the sellers agree to this contingency (and other conditions of the offer), they sign the contract. The mortgage contingency becomes legally binding at this point.

Next, buyers complete a full application with the lender of their choice. The lender will review the buyer’s finances in-depth, and mortgage underwriting will make a final decision on whether or not to approve the loan.

If the mortgage is denied, the buyers are able to exit the contract and have their earnest money returned when a mortgage contingency is included.

In the absence of a mortgage contingency, the sellers would be able to keep the buyers’ earnest money and put the property back on the market to find another buyer.

How Long Does a Contingency Contract Last?

When buyers submit an offer, they will suggest a deadline for mortgage financing alongside the mortgage contingency. Typically, the time frame to secure a loan is 30 to 60 days.

Mortgage Contingency Clause Elements

Some mortgage contingency clauses are simple and give the buyers absolute discretion in obtaining financing acceptable to them. In others, financing is more specifically described. This variance depends on your contract and state law. Elements can include a mortgage contingency deadline, type of mortgage, amount needed, closing fees, and interest rate.

Mortgage Contingency Deadline

The mortgage contingency deadline is how long the buyer has to find approval for a mortgage. The deadline is often suggested by the buyer in the contract when an offer is made on the property.

When the seller signs the offer, the contingencies become legally binding and must be followed in good faith. Should a buyer need an extension of the deadline, an addendum must be submitted to and agreed upon by the seller.

Type of Mortgage

There are many different types of mortgages a buyer can use to purchase property, so while one loan may not work for a buyer’s situation, another may. Buyers may have the option of selecting a conventional or government-insured loan, a jumbo loan, a mortgage with a term of 30, 15, or other years, or an interest-only mortgage. A lender can help walk buyers through their options.

Amount Needed

A mortgage contingency clause can also designate the amount needed to secure the loan. A mortgage calculator tool can help buyers estimate how much a mortgage payment is going to be and the total amount a borrower can qualify for.

Closing Fees

The mortgage contingency can stipulate what closing fees and mortgage points are acceptable.

Maximum Interest Rate

An interest rate can be specified that the lender must provide before the mortgage contingency is satisfied. This makes it so the buyer can back out of the contract if the costs are too high.

Can You Waive a Mortgage Contingency?

Yes. Mortgage preapproval can help make your offer more competitive, but you may still waive the mortgage contingency. In that case, your earnest money is at risk, and you’re not able to renegotiate the contract if the appraisal comes in low. Keep in mind that FHA and VA loans do not allow buyers to waive the appraisal (which is an important part of the financing contingency).

Reasons to Waive a Mortgage Contingency

There are some scenarios where it doesn’t make sense to include a mortgage contingency in the contract:

•   When the buyer is able to pay cash for the property. Cash buyers do not have to include a mortgage contingency.

•   When owner financing is involved. If the current owner of the home is financing the sale, buyers do not need to include a mortgage contingency.

•   When competition is extremely high. It might be a good idea to look at this option as a last resort, but in a market where sellers only accept offers without contingencies, this could be a buyer’s only way to win the contract.

💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.

Other Common Types of Contingency Clauses

The financing contingency isn’t the only common one in a contract. Some others are:

•   Inspection contingency. This is a contingency that allows the buyer to exit the contract should the property fail a home inspection.

•   Appraisal contingency. This contingency is connected to the financing contingency. Should the property fail to appraise for the amount needed to finance the loan, the buyer would have the option of renegotiating or dropping the contract.

•   Title contingency. A property needs to be free of title defects for the sale of the property to go through.

•   Sale of home contingency. This contingency allows buyers to sell their current home before completing the purchase of a new home.

Recommended: How to Read a Preliminary Title Report

The Takeaway

A mortgage contingency protects homebuyers’ ability to get their earnest money back if financing falls through. Waiving the mortgage contingency in a hot market could put some house hunters at the front of the line, but it’s a risk only those feeling confident in their financial situation should take.

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 waive a mortgage contingency?

Yes. Even if you need to obtain financing, waiving the mortgage contingency is an option.

What does no mortgage contingency mean?

No mortgage contingency means that buyers are willing to take on the risk of losing their earnest money if they are unable to secure financing by the closing deadline.

Should you waive mortgage contingency?

Homebuyers willing to take the risk of losing their earnest money to the seller to better compete are best poised to waive the mortgage contingency. Buyers who are not willing to risk their earnest money should not waive the mortgage contingency.

How long does a mortgage contingency usually take?

A mortgage contingency is usually set between 30 and 60 days.

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Photo credit: iStock/kate_sept2004

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 for more information.

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

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

This article is not intended to be legal advice. Please consult an attorney for advice.

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When it comes to a personal loan vs. a personal line of credit, the two main differences are how the loan funds are disbursed to the borrower and how the credit is repaid.

There are also similarities between these two financial products. Funds from each can be used for a variety of expenses, with few exceptions. Also, to approve a personal loan or line of credit, lenders will run a hard credit check during the application process.

Deciding whether a personal loan or a personal line of credit might be right for you can require looking at a few different factors. Here, you’ll learn more about this important topic so you can make the best choice for your specific situation.

What Is a Personal Line of Credit and How Does It Work?

A personal line of credit (LOC) is a type of revolving credit similar to a credit card. But funds are typically accessed by writing checks provided by the lender or requesting a funds transfer to your checking account instead of by using a card.

An LOC typically allows the borrower to withdraw funds repeatedly, up to the credit limit. Any funds that are withdrawn are subject to repayment with interest. When they are repaid, they can be accessed again up to your particular credit limit. There may be a limit on the number of years the line of credit is available.

Additional points to know:

•   Some lenders may assess fees associated with an LOC. There may be a maintenance charge for inactive accounts. There may also be ongoing fees, monthly or annual, even if the LOC is being used. Some other expenses may include application fees, check processing fees, and late fees, among others. It’s important to be aware of any potential fees before you sign an LOC agreement.

•   Personal lines of credit are usually unsecured, although you may be able to put up collateral to get a lower interest rate. A home equity line of credit, or HELOC, is an example of a secured line of credit.

•   Typically, a personal LOC will be offered by a bank or credit union, and you might have to have another account with the lending institution to be considered for an LOC.

•   If your LOC is unsecured, the interest rate will probably be variable, which means it could go up or down during the loan’s term, and your payments could vary. But you’ll only be charged interest on the amount you withdraw. If you’re not using any LOC funds, you won’t be charged interest.

If you expect to have ongoing expenses or if you have a big expense (like a wedding or home renovation) but don’t know what your final budget will be, this type of borrowing might be a useful financial tool.

A personal LOC also may be the right fit if you need some flexibility with your borrowing. For example, self-employed workers who know they’ll be paid by a client but aren’t sure exactly when, can tap into their line of credit to pay expenses while they wait. They can pay that money back when they receive payment from the client, and they won’t have to use high-interest credit cards or borrow from other savings to make ends meet.

Of course, there are downsides to that easy-to-access money. Here’s a closer look:

•   Since unsecured lines of credit are considered by lenders to be riskier than their secured counterparts, it can be more difficult to qualify at a favorable interest rate.

•   Once you have access, it may be tempting to use the funds for purposes other than originally planned. Keeping in mind the intended purpose for the funds may help you stick to it and not use the funds for other purchases.

💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

Pros and Cons of Personal Lines of Credit

Having funds that can be accessed as needed can be helpful. But there are also some drawbacks to consider. Take a look at how the pros and cons stack up for personal lines of credit.

Pros of Personal Lines of Credit

•   Easy access to funds.

•   Open-ended vs. set distribution of money.

•   Minimal limits on use of funds.

•   Can be useful for ongoing expenses.

Cons of Personal Lines of Credit

•   May have a higher interest rate than other forms of credit.

•   Typically are unsecured, so may be more difficult to qualify for than other forms of credit.

•   Interest rate may be variable, presenting a budgeting challenge.

•   Ease of access can be tempting to use for impulse shopping.

What Is a Personal Loan and How Does It Work?

A personal loan, on the other hand, is a fixed amount of money disbursed to the borrower in a lump sum. If the loan has a fixed interest rate, as is typical for personal loans, the payments are in fixed installments for the term of the loan. If the loan has a variable interest rate, the monthly payments may fluctuate as the interest rate changes in accordance with market rates.

Because personal loans typically have lower interest rates than credit cards, they’re often used to pay off other debts such as home and car repairs or medical bills, or to consolidate other higher-interest debts such as credit card balances into one manageable — and potentially lower — monthly payment.

Here are some more ways these loans are often used:

•   A personal loan can be a helpful tool for debt consolidation. If you can qualify for a personal loan that has a lower interest rate than your other outstanding debts, you may be able to save money in the long run by consolidating those debts. In order for this financial strategy to work, it’s important to stop using the old sources of credit to avoid going deeper into debt.

•   A personal loan also could be a suitable choice for paying for a wedding or home renovation. But it’s important that you feel confident about being able to repay the loan on time and in full. If you don’t responsibly manage a personal loan — or any kind of debt, for that matter — your credit can be adversely affected.

•   You can apply for a secured or unsecured personal loan. A secured loan, which is backed by collateral, is typically considered less of a risk by lenders than an unsecured loan is. Collateral is an asset the borrower owns — a vehicle, real estate, savings account, or other item of value. If the borrower fails to repay a secured loan, the lender has the right to take possession of the asset that was put up as collateral.

Here are a few more points about how the process of getting a personal loan can work:

•   An applicant’s overall creditworthiness will be considered during the approval process. Generally, an applicant with a higher credit score will qualify for a lower interest rate, and vice versa.

•   Some lenders charge personal loan fees such as origination fees or prepayment penalty fees. Before signing a loan agreement, it’s important to be aware of any fees you may be charged.

💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.

Pros and Cons of Personal Loans

When you need a set amount of money for an expense, a personal loan can be a good choice. Along with the benefits of using this financial tool also come a few drawbacks to consider.

Pros of Personal Loans

•   May be a good choice for large, upfront expenses.

•   Typically have fixed interest rates.

•   Steady payments may be easier to budget for.

•   May have a lower interest rate than credit cards.

Cons of Personal Loans

•   Unsecured personal loans may have higher interest rates than other forms of secured credit.

•   May need a higher credit score to qualify for lower interest rates.

•   If not used responsibly, it can add to a person’s debt load instead of alleviating it.

•   May have fees.

Major Differences Between Personal Lines of Credit and Personal Loans

When you’re looking for the right source of funding for your financial needs, it can help to compare different types. Here are some specifics to consider when looking at personal LOCs and personal loans.

Personal Line of Credit	Personal Loan
Typically has a fixed interest rate	More likely to have a variable interest rate
Fixed interest rate may make it easier to budget payments	Variable interest rate may present a budgeting challenge
Fixed, lump sum	Open-ended credit, up to approved limit
Interest is charged during entire loan term	Interest is only charged on withdrawn amounts
Revolving debt	Installment debt

Considering the Type of Debt

When you’re thinking about applying for a personal LOC or a personal loan, it’s important to consider the effect borrowing money can have on your credit score. If you borrow money without a repayment plan in place, you could run into trouble no matter which borrowing option you go for. But each is looked at differently by the credit bureaus.

A personal LOC is revolving debt, which means it will factor into your credit utilization ratio — how much you owe compared to the amount of credit that’s available to you. This can count as the second most weighty factor (at 30%) toward your score.

For a FICO® Score, keeping your total credit utilization rate below 30% is recommended. That means if your credit limit on is $15,000, you would use no more than $4,500.

•   Using a large percentage of your available credit can have a negative effect on your credit score. And lenders may see you as a high-risk applicant because they may assume you’re close to maxing out your credit cards.

•   Using a small percentage of your available credit can work in your favor. If your credit utilization ratio is low (under 10%), it signifies to potential lenders that other lenders have determined you to be a good risk, but you don’t need to use the credit that’s been extended to you.

•   Having a low credit utilization rate by using just a little of your available credit could actually have a more positive effect on your credit score than not using any of it at all. Lenders generally look for signifiers of a healthy relationship with credit.

A personal loan is installment debt and isn’t considered in your credit utilization ratio. In fact, if you pay off your revolving debt with a personal loan, it potentially can lower your credit utilization ratio and have a positive effect on your credit score. A personal loan also can add some positive variety to your credit mix — something else that’s calculated into your credit score.

Personal LOC or Personal Loan: Which Is Right for You?

Before you decide to take out a line of credit or a personal loan, it’s wise to compare lenders. Look at the annual percentage rate and whether it’s fixed or variable. You can also take into account any fees you might have to pay, including origination fees, annual fees, access fees, prepayment penalties, and late payment fees.

Estimating the total cost of the loan until it’s paid in full, including the principal loan amount, interest owed, and any fees or penalties you could potentially be charged, will help you figure out how much the loan will actually cost you.

You might use an online personal loan calculator to help you assess these total costs.

The Takeaway

Deciding when and how to borrow money can be a tough decision. Personal loans and personal lines of credit each have their pros and cons. Personal lines of credit allow you to borrow up to a credit limit, while personal loans disburse a lump sum. Interest rates, fees, and other features may vary. It’s wise to consider your needs and options carefully, reading the fine print on possible offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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

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

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 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.

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