What are FHA Loans?

FHA loans are mortgages that are provided by private lenders, but insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). This means that if a borrower defaults on an FHA-backed loan, the FHA will reimburse the lender for the loan’s unpaid principal balance.

Because FHA-approved lenders are taking less risk when they fund an FHA loan, they can offer this type of mortgage to borrowers who have lower credit scores, or who don’t have much saved for a down payment. FHA loans are especially popular with first-time homebuyers.

Consequently, you should have a clear financial goal in mind that makes up for the time and expense of mortgage refinancing.

FHA Loan Requirements

FHA mortgage requirements can vary by lender, but the basic FHA mortgage loan requirements include:

Credit Score and Down Payment

Generally, the FHA requires a 580 credit score with a minimum down payment of 3.5% to qualify for an FHA loan. If you can make a larger down payment — at least 10% — you may be able to find a lender who will accept a lower score (in the 500-579 range), but your interest rate and other terms may be less favorable.

Income Requirements

There is no set income requirement to get an FHA mortgage. It will be up to individual lenders to determine if your income, and income sources, are sufficient to qualify for a loan. Borrowers should expect to provide documentation that may include recent pay stubs, W-2 statements, bank statements, and income tax returns.

If you meet these refinancing mortgage requirements, you’re ready to start the qualification process.

How to Qualify for Mortgage Refinancing

You’re ready to apply, but how does mortgage refinancing work? You can check your eligibility and request lender quotes before you get too far into the application. The mortgage preapproval process is an evaluation with a lender that looks at your credit and income to determine whether or not you meet the mortgage refinance requirements.

You can also look at different types of mortgages and cash-out options with estimated monthly payments before you go through underwriting. Once you have a loan quote you like and the loan officer is confident in your preapproval, your application moves to the underwriting process.

Debt-to-Income (DTI) Ratio

Besides your credit score and income, lenders will look at your debt-to-income ratio, which compares your monthly debt payments with your monthly gross income. FHA guidelines generally allow a DTI ratio up to 43%. But if you have a strong credit score and meet other requirements, lenders may allow a DTI ratio of up to 50% on an FHA loan.

Property Requirements

You can only use FHA home loans to buy an owner-occupied property with up to four units. The property can’t be purchased solely as an investment property, and it can’t be a second home. (You must occupy the property within 60 days of closing.)

When you find the home you want to purchase, it must be appraised inside and out by an FHA-approved appraiser. The appraiser will assess the property’s market value and make sure it is safe and meets minimum standards.

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FHA Loan Limits

Each year, there are updated FHA guidelines on the maximum amount you can borrow based on housing costs and the cost of living in your region. The value of the property you plan to purchase (which is determined by your appraisal) must fall within these specific limits.

The following are the 2025 loan limits in most areas of the U.S.:

  Single-unit property: $524,225

  Two-unit property: $637,950

  Three-unit property: $771,125

  Four-unit property: $958,350

Limits in higher-cost areas range from $1,209,750 (for a single-unit property) to $2,211,600 (for a four-unit property). In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, limits range from $1,724,725 (for a single-unit property) to $3,317,400 (for a four-unit property).

If you’re curious about the loan limits in a specific area, you can search HUD’s FHA Mortgage Limits database.

How Does an FHA Loan Work?

A mortgage is a big commitment, so it’s important to do your due diligence before deciding what type of financing to get. Here are some points about how FHA loans work to keep in mind:

Loan Length

The most common term (or repayment period) for an FHA loan is 30 years, but a 15-year term is also available. If you want to pay off your home faster and can afford a higher monthly payment, the shorter-term loan will save you interest, and you’ll build home equity faster. But the monthly payments on a longer loan will be more affordable.

Interest Rate

Most FHA home loans come with a fixed interest rate, which means your interest rate will stay the same for the entire repayment period. Interest rates can be lower with an FHA-insured mortgage than with a conventional one, because FHA loans are a lower risk for lenders, but your creditworthiness (credit score, DTI, income, etc.) will also affect the rate you’re offered.

Down Payment

FHA loans are available with down payments as low as 3.5% (as long as you have a credit score of 580 or higher), which is a plus for buyers who can afford monthly payments but don’t have enough saved for a big down payment. Your lender can help you decide if a higher down payment is right for you, and how it could affect monthly payments and other aspects of your loan.

Another plus: Under FHA guidelines, 100% of your down payment can come from a no-strings-attached gift. (Rules for down payment gifts can vary with conventional loan lenders.) You also may be able to combine a first-time homebuyer assistance program with an FHA loan to lower your out-of-pocket costs.

Mortgage Insurance

No matter how big your down payment is, with an FHA loan, you must pay mortgage insurance.

FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% of the base loan amount, which can be rolled into the loan. There’s also an annual premium, which is divided by 12 and added to your monthly payment.

The cost of the annual premium will depend on your loan amount, your down payment, and the length of your loan. Currently, the annual MIP rate for new homebuyers is 0.15% to .75% of the total loan amount, and most borrowers can expect to pay around 0.55%.

If you get a 30-year FHA loan and put 3.5% down, you’ll be paying MIP for as long as you have the loan. (Some FHA borrowers eventually refinance to a conventional loan, which allows them to eliminate the monthly MIP.) If you put down at least 10%, you’ll pay MIP for 11 years.

Types of FHA Loans

The FHA’s popular program for homebuyers who wish to purchase a home with the intention of using it as their primary residence is called the Section 203(b) Basic Home Mortgage Loan. Though most FHA loans are fixed-rate loans, the FHA does insure adjustable-rate mortgage products under its Section 251 Adjustable-Rate Mortgage program. Rates reset three, five, seven, or 10 years into the loan.

The FHA also insures several other different types of loans, including the Section 203(k) Rehabilitation Mortgage. This loan program enables homebuyers to finance up to $35,000 in improvements to their home.

There’s also a Home Equity Conversion Mortgage (HECM), which is a reverse mortgage for those who are 62 and older, and an FHA Energy Efficient Mortgage for borrowers who want to finance energy-efficient improvements and save money on their energy bills. Streamline Refinancing is an option for existing FHA borrowers who want to refinance their loans with streamlined underwriting.

How Is an FHA Loan Calculated?

If you know the home price, down payment amount, loan term, and interest rate, you can use an online FHA Loan Calculator to estimate your basic FHA loan payment. (Or you can play around using different numbers.)

For example, let’s say your home purchase price is $300,000, your down payment is $10,500 (3.5%), the loan term is 30 years, the interest rate is 6.00%, your upfront MIP is $5,066, and your annual MIP is $133. In this scenario, your monthly payment (without homeowner’s insurance premiums, HOA fees, property taxes, etc.) would be about $1,745. The total cost of the mortgage would be approximately $633,354, and the total interest paid would be $343,854.

Guide for FHA Loan Buyers

What Is the Minimum Down Payment for an FHA Loan?

How Much Can You Borrow With an FHA Loan?

A few different factors will go into determining the actual amount you can borrow with an FHA loan, including:

•   Down payment: If you qualify for the minimum down payment allowed (3.5%), you may be able to borrow up to 96.5% of the purchase price of a home with an FHA loan.

•   Loan limits: As mentioned above, there are preset loan maximums that are based on housing costs in your region. While these amounts are adjusted to reflect costs in various parts of the U.S., FHA loan maximums may not be as high as those allowed with a conventional loan.

•   Financial factors: Lenders also will look at your credit score, income, and DTI ratio when deciding how much you can borrow. The standard FHA DTI maximum is 43%, but you may be allowed to borrow more if you have “compensating factors,” such as an especially strong credit score, other assets, or a very large down payment.

How to Apply for an FHA Loan

The process of applying for an FHA loan is much like getting a conventional loan. But remember: Even though the federal government backs this loan program, it doesn’t provide the funds. So your first step is to find an FHA-approved lender that can offer you a loan that fits your needs. You can search for a lender on the HUD website, or hop online to do some research and compare lenders and their terms. Consulting an FHA loan buyers guide can be helpful.

When you find a lender, you’ll have to file a formal application and provide information about yourself and the home you hope to buy.

If you meet the requirements set by your lender and the FHA, you can expect to be approved for your loan. You’ll go through the closing process — including paying any closing costs — and receive the keys to your home.

Pros and Cons of an FHA Loan

An FHA-insured mortgage can be a solid option for borrowers who might otherwise struggle to qualify for a home loan because FHA loan qualifications are more lenient. But it’s important to understand the benefits and downsides to this type of financing:

Who Should Get an FHA Loan

Homebuyers with mediocre credit or a minimal amount saved for a down payment may be good candidates for an FHA loan. First-time homebuyers may find an FHA loan offers their best chance to get their foot in the door of their own home.

How to Use an FHA Loan

You can use an FHA loan to buy, build, improve, or refinance the home you plan to live in. Once you have an FHA loan and purchase your home, you make your monthly mortgage payment just as you would with a conventional loan.

FHA Loan Examples

Here are a couple of examples of how an FHA loan might work for some hypothetical homebuyers.

Example 1: Joe and Ginny Smith – First-Time Homebuyers

The Smiths have been married for two years and want to purchase their first home. Both have good jobs and solid income potential for the future, but their credit scores (580 and 600 respectively) are lower than most lenders will accept for a conventional loan, and they have some student loan debt. They don’t have much saved to put a down payment on the $350,000 house they want to buy, but Ginny’s mom is gifting them $12,500 for that purpose. Here’s an estimate of how their FHA loan might break down if they have a 30-year mortgage at 6.50% interest:

  Home purchase price: $350,000

  Down payment amount: $12,500 (3.5%)

  Loan period: 30 years

  Interest rate: 6.50%

  Monthly payment amount (without taxes, homeowner’s insurance, HOA fees, etc.): $2,145

  Total interest paid: $440,593

  Total cost of mortgage before MIP: $778,093

  Upfront FHA MIP: $5,906
Monthly FHA MIP: $155 (paid for the life of the loan)

Example 2: Ben Jones – Longtime Renter Turned Homeowner

After declaring bankruptcy a few years ago and struggling to get his credit score up to 600, Ben is getting his financial life in order. He doesn’t mind living in a multi-family building, but he’s tired of paying rent and he wants to invest in (and make the rules for) his own property. After inheriting some money, he has enough for a decent down payment (about $50,000), and he finds a duplex for $450,000. He wants to live in one half of the building and rent the other unit for income to help make his monthly payment — which is allowed with an FHA loan. Here’s an estimate of how Ben’s FHA loan would break down if he gets a 30-year loan at 6.50% interest:

  Home purchase price: $450,000

  Down payment amount: $50,000 (11%)

  Loan period: 30 years

  Interest rate: 6.50%

  Monthly payment amount (without taxes, homeowner’s insurance, HOA fees, etc.): $2,542

  Total interest paid: $522,184

  Total cost of mortgage before MIP: $922,184

  Upfront FHA MIP: $7,000
Monthly FHA MIP: $183 (paid for 11 years because Ben put more than 10% down)

How Much Does It Cost to Get an FHA Loan?

FHA closing costs can vary significantly depending on the lender and location, but borrowers should plan to pay between 2% and 6% of the home’s purchase price. (That’s on top of the down payment amount.)

You may be able to roll some of these costs into your overall loan amount to avoid paying them upfront. And some costs may be negotiable. (It can’t hurt to ask!) You may even be eligible for a down payment assistance program that can help with closing costs — especially if you qualify as a first-time homebuyer.

FHA Loan closing costs may include:

•   Upfront MIP (1.75% of the loan principal)

•   Lender fees, which may include an application fee (paid when you apply), loan origination fee, processing or underwriting fee, document preparation fee, and points paid in advance to reduce the interest rate

•   Third-party fees, which can include an appraisal fee, title search, and title insurance fees

•   Per diem interest, which is the interest a mortgage lender may charge for the days between your closing date and the first day of the billing cycle for your new home

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FHA 203(b) Loans vs FHA 203(k) Loans

How to Find Competitive FHA Loan Rates

Because lenders’ rates and other terms can vary, it can make sense to shop around. It’s easy to check interest rates and other loan terms from a variety of lenders online. It’s also important to pay attention to lender fees, which can add to the overall cost of your loan. Read lender reviews, and ask family, friends, or your real estate professional for their recommendations.

Getting prequalified or going through the mortgage preapproval process can also give you a good idea of the loan terms you’ll qualify for.

And to get the most competitive loan offers, you’ll want to be sure your credit score, DTI ratio, and other personal financial details are in the best shape possible when you apply.

What Are FHA Loan Rates Expected to Do in 2025?

Mortgage rates can fluctuate for various reasons, including changes in the overall economy, inflation, and shifts in the financial markets. And though the Federal Reserve doesn’t set mortgage rates, when it raises or lowers its benchmark interest rate, those decisions can influence the interest rate homebuyers pay.

So if inflation continues to cool and the Fed lowers rates — as many economists are predicting — borrowing costs on many types of loans, including FHA mortgages, may drop.

That doesn’t necessarily mean you should wait for rates to go down. If you’re ready to buy and you can find the home you want at a price you can afford and qualify for a mortgage, you may want to talk to a financial professional about what makes the most sense for you.

What Are FHA Loan Rates Expected to Do in 2025?

Mortgage rates can fluctuate for various reasons, including changes in the overall economy, inflation, and shifts in the financial markets. And though the Federal Reserve doesn’t set mortgage rates, when it raises or lowers its benchmark interest rate, those decisions can influence the interest rate homebuyers pay.

So if inflation continues to cool and the Fed lowers rates — as many economists are predicting — borrowing costs on many types of loans, including FHA mortgages, may drop.

That doesn’t necessarily mean you should wait for rates to go down. If you’re ready to buy and you can find the home you want at a price you can afford and qualify for a mortgage, you may want to talk to a financial professional about what makes the most sense for you.

FHA Loan vs Conventional Loan

FHA and conventional mortgages have a few key differences that you’ll want to check out when you’re deciding which is right for you. Some points to consider when you’re looking at an FHA loan vs. a conventional mortgage include:

Credit Score and Down Payment Requirements

FHA loans are generally considered to be easier to qualify for than conventional loans. FHA borrowers typically need a credit score of 580 to be eligible to make a 3.5% down payment. And even with a lower score — in the 500 to 579 range — they may qualify with a 10% down payment.

In comparison, some lenders offer conventional mortgages with a down payment as low as 3%, but borrowers typically must have a credit score of 620 or higher to qualify for this amount.

Mortgage Insurance Requirements

Mortgage insurance is mandatory with an FHA loan, regardless of the down payment amount. If you get a 30-year FHA loan with a 3.5% down payment, you’ll be paying MIP for as long as you have the loan (unless you refinance to a conventional loan). If you put down at least 10%, you’ll pay MIP for 11 years.
With a conventional loan, you’re only required to have private mortgage insurance (PMI) if your down payment is less than 20%. And the insurance can be canceled once you have at least 80% equity in your home. Understanding PMI vs. MIP is important as you weigh the choice of loan options.

Loan Limits

Both conventional and FHA loans limit the amount a homebuyer can borrow, and these maximum loan sizes can vary by region.

In most areas of the U.S., the 2025 FHA loan limit for a single-family home is $524,225, but the maximum in more expensive markets can go as high as $1,209,750.

Conventional loans are subject to the conforming loan limit set by the Federal Housing Finance Agency. For 2025, that limit is $806,500 for most areas of the U.S., with a ceiling of $1,209,750 in more expensive regions. Mortgages that exceed that threshold are considered nonconforming jumbo loans and are subject to more stringent underwriting standards.

Property Requirements

FHA-insured loans also have stricter property requirements, designed to protect both borrowers and lenders. While appraisals for conventional loans focus primarily on the property’s market value, an FHA appraisal will also check the property for safety, sound construction, and adherence to code restrictions. The purchased home also must be the borrower’s primary residence.

Mortgage Rates

Mortgage rates for FHA loans are typically lower than the rates for conventional loans. But because FHA loans require MIP, often for the life of the loan, borrowing with an FHA loan may cost more overall.

Alternatives to an FHA Loan

FHA loans and conventional loans are just two among the many different types of mortgage loans available to homebuyers. Other loan programs that can provide competitive rates and mortgage terms for borrowers include:

•   VA loans: A loan guaranteed by the U.S. Department of Veterans Affairs can be an excellent option for eligible members of the U.S. military and surviving spouses. There are no income limits on VA loans, and there are no longer standard loan limits on VA direct or VA-backed home loans.

•   USDA loans: These loans are guaranteed by the U.S. Department of Agriculture and are meant to help moderate- to low-income borrowers buy homes in eligible (typically rural) areas. Loan limits and income limits are based on the home’s location.

•   First-time homebuyer programs: If you have the resources to manage a higher monthly payment but you need some help with your down payment, there are many local, state and federal down payment assistance programs that can help. There may be limits on how much an eligible home can cost, or on the homebuyer’s income, but it’s worth checking out what’s available.

The Takeaway

If you’re worried about qualifying for a home mortgage loan because your credit isn’t exactly stellar or you don’t have much saved for a down payment, an FHA-insured loan might be right for you. Because FHA-approved lenders are taking less risk when they fund a government-backed FHA loan, FHA loan qualifications for borrowers are typically more lenient and interest rates may be lower

There are some downsides to FHA loans, however, including the requirement that borrowers pay mortgage insurance, which can make the loan more expensive over time.
To find a mortgage and monthly payment that’s a good fit for you — whether it’s an FHA loan, a conventional loan, or some other option — it’s a good idea to research and compare what various lenders have to offer. And if you have questions, you can seek advice from a qualified mortgage professional.

What is Mortgage Refinancing?

Refinancing a mortgage is when you get a new mortgage with different terms from the old one. The new lender pays off the original balance you owed, then begins to receive payments from you.

People refinance for a number of reasons, such as qualifying for a lower interest rate, changing the payment term, or cashing out some of their equity. In order to refinance your home loan, you need to submit a full application, get a home appraisal, and pay closing costs.

Consequently, you should have a clear financial goal in mind that makes up for the time and expense of mortgage refinancing.

Mortgage Refinancing Requirements

•   Credit score: Most lenders require a minimum score based on the type of mortgage you’re applying for.

•   Equity: If you’re doing a cash-out refinance, you’ll need enough equity to cover the new mortgage balance plus the amount of money you want to borrow against the property.

•   Debt: The lender evaluates your current debt load along with the new mortgage payment to make sure it’s affordable.

•   Income: Your debt-to-income ratio is calculated to compare how much of your income is put toward debt payments each month (including your mortgage). Each lender has its own requirement, but it’s usually 50% or less.

•   Employment verification: You must verify that you have steady income, often with recent pay stubs or federal tax returns.

•   Assets for closing costs: Just as with any other home loan, you’ll have to show you have the funds to cover closing costs. The average closing costs for a refinance is $5,000.

•   Appraisal: Your home must be appraised to make sure the value is equal to or greater than your new mortgage balance.

If you meet these refinancing mortgage requirements, you’re ready to start the qualification process.

How to Qualify for Mortgage Refinancing

You’re ready to apply, but how does mortgage refinancing work? You can check your eligibility and request lender quotes before you get too far into the application. The mortgage preapproval process is an evaluation with a lender that looks at your credit and income to determine whether or not you meet the mortgage refinance requirements.

You can also look at different types of mortgages and cash-out options with estimated monthly payments before you go through underwriting. Once you have a loan quote you like and the loan officer is confident in your preapproval, your application moves to the underwriting process.

At this point, you may be asked to submit extra documentation and you’ll also need to pay for the appraisal. Home appraisal fees range from $200 to $600, and you usually must pay for it at the time the service is completed.

How Does Mortgage Refinancing Work?

You understand the basic process, but how does refinancing a mortgage work in terms of updating your loan?

Here’s what happens. Depending on your financial situation and your existing mortgage, you may want to change the terms of your home loan (we’ll get to potential reasons to do this in a bit). You typically can’t negotiate those terms with the lender, so you can instead shop around for a new mortgage at different lenders (you can also include your original lender in your search).

Once you find new loan terms that fit your goals, you go through the refinancing application process. After closing, the new lender pays off your mortgage balance with the old lender. Then you start making payments on your new loan according to the updated terms.

Common loan terms that can be changed with a refinanced mortgage include:

•   Interest rate (amount and type, such as fixed or adjustable)

•   Length of loan term

•   Mortgage insurance

•   Loan balance

On average, it takes 30 to 45 days to refinance a mortgage.

Types of Mortgage Refinancing

There are several types of mortgage refinancing options, whether you’re trying to lower your cost of living, change your loan term, or get a different rate. Each option depends on your goals and eligibility.

•   Rate and term: A rate and term refinance is when you get a new loan in order to access a different rate, term, or both. Refinancing mortgage rates could be lower, or you could swap an adjustable loan for a new one before your current rate adjusts.

•   Cash-out refinance: A cash-out refinance allows you to borrow more money than you currently owe. You receive the cash based on your equity and take out a larger mortgage balance, which can be used for just about anything.

•   Cash-in refinance: A cash-in refinance is the opposite, where you take out a new mortgage and pay a lump sum to pay down the mortgage balance. This increases your equity and could help you qualify for better loan terms, especially if you had a low down payment when you first purchased your home.

•   Streamline refinance: Some borrowers may be eligible for a streamline refinance with government-guaranteed loans for existing FHA, VA, and USDA mortgages. Usually the application process is quicker. The goal is to lower your monthly payments.

•   No-closing-cost refinance: While some refinances may be advertised as having “no closing costs,” the term is misleading. You still have to pay closing costs, but you will either roll them into the new mortgage balance or pay them in the form of a higher interest rate.

How Is Mortgage Refinancing Calculated?

You can use a mortgage refinancing calculator to compare new loan terms to your existing ones. Here is the information you’ll need to see how your payments and overall costs stack up:

•   Current mortgage payment and interest rate

•   Remaining balance

•   Remaining loan term in years

•   New interest rate

•   New loan term in years

•   Refinancing fee estimates

Once you enter in all of these details, you’ll see an estimate of your new monthly payment, along with a comparison of any potential savings (or extra costs) in interest over time. Finally, the calculator will show you how many months it will take to recoup the costs of refinancing so you can estimate whether or not you plan to live in the home that long.

How Much Can You Borrow With Mortgage Refinancing?

With a rate and term refinance, you’ll borrow the same amount as your existing mortgage balance, unless you decide to roll in some closing costs or pay down a lump sum of your loan.

With a cash-out refinance, you can borrow up to 80% of your home’s value. That means you would subtract your outstanding mortgage balance from 80% of the appraised value, and that’s the amount you could borrow — assuming you meet the requirements to handle the new payments.

The cash-out funds can be used however you’d like. Many homeowners use the funds to pay off other debts, pay for home renovations, or cover education expenses. In recent years, the number of cash-out refinances has increased alongside the cost of living in the U.S.

How to Apply for Mortgage Refinancing

Here are the steps for refinancing a mortgage explained.

1.    Research lenders based on our refinance goals.

2.    Get prequalified for a new mortgage with several lenders based on the terms you’re looking for.

3.    Choose a lender based on their provided loan estimates.

4.    Submit a formal application, along with financial documents such as bank statements, pay stubs, and tax returns.

5.    Answer any questions from your loan officer or underwriter to keep your application on track.

6.    Get an appraisal on your home.

7.    Review your closing disclosure and sign your new loan agreement.

After you complete your closing, the new lender pays off your old mortgage balance from the previous lender.

How to Refinance a Home Mortgage

20 Mortgage Refinance Questions to Ask Before Taking the Plunge

Pros and Cons of Mortgage Refinance

As you consider refinancing your mortgage, here are some benefits and drawbacks to consider.

Who Should Get Mortgage Refinancing

Is mortgage refinancing right for you? There are several scenarios when it makes sense (and some when it doesn’t).

You plan to stay in your home for a while: Make sure you plan to live in your home for at least the next few years. Even if a refinance saves you money, it takes time to recoup the closing costs.

You qualify for a better interest rate: Whether rates have dropped since you got your original mortgage or your credit score has increased since you qualified as a first-time home buyer, you could save money over time.

Your adjustable rate is about to change: Refinancing can help you switch from an adjustable rate to a fixed one. If your rate is about to adjust, compare fixed rate options to see what’s a better deal.

You have an FHA loan and 20% equity: Your annual FHA mortgage insurance premium may be permanent if you took out your original loan after 2013 and your down payment was less than 10%. In this scenario, the only way to stop paying the premium is to refinance.

When to Refinance a Mortgage

In addition to the scenarios above, there are a few things you should track when choosing the best time to refinance.

•   Your credit score: Avoid refinancing at the same time you’re seeking financing for other major purchases, like a car.

•   Interest rates: The biggest changes tend to happen around the Federal Reserve’s Open Market Committee (FOMC) calendar. Check to see if rates drop (or rise) after these meetings.

•   Your home equity: Look at recently sold homes in your neighborhood to estimate how much yours could be worth. This gives you an idea of how much equity you may have.

What Are Mortgage Refinancing Rates Expected to Do in 2025?

Mortgage rates began to cool in the second half of 2024 and that trend is expected to continue. Freddie Mac expects refinances to increase in 2025 thanks to even more rate cuts.

Mortgage Refinancing Examples

Here are two examples of how it might look to refinance a mortgage:

1.    Rate and term refinance: A homeowner with an FHA mortgage reaches 20% equity in his home. Average monthly expenses have increased, so he wants to cut costs in other areas. He pays 0.5% of his mortgage balance each year in FHA mortgage insurance premium, which is about $1,500 on his $300,000 balance. Refinancing to a conventional loan would save $125 per month, and even more if he can get a lower rate.

2.    Cash-out refinance: A married couple has lived in their home for seven years. Over that time, their home value has increased from $250,000 to $500,000, leaving them with more than $250,000 in equity after making payments over the years. Their daughter is about to head to college and they want to tap into their equity to help pay for it. But since their mortgage rate is fixed at 3.99%, they end up opting for a home equity line of credit (HELOC) instead of a cash-out refinance in order to preserve that lower rate.

How Much Does It Cost to Refinance a Mortgage?

There are a number of costs involved with refinancing a mortgage, including:

•   Appraisal fee

•   Origination fee

•   Mortgage points

•   Title insurance

•   Recording fee

Your original mortgage lender may also charge a prepayment penalty for closing the loan early. This fee is rare, but it’s still worth researching so you’re not surprised. If you have a jumbo loan, you may also have some extra-large costs associated with refinancing so carefully consider what you will spend on a refinance vs. what you will save.

7 Signs It’s Time for a Mortgage Refinance

How Much Does It Cost to Refinance a Mortgage?

How to Find Competitive Refinance Rates

To get the best rates and lowest overall cost in a refinance, compare at least three different lenders. Remember, even if a simple interest rate is lower, hefty lender fees could negate any savings.

Mortgage Refinancing vs HELOC

Both a cash-out refinance and a home equity line of credit (HELOC) allow you to tap into your home’s value, but there are different pros and cons to each option. One key difference is that a HELOC allows you to borrow only as much as you need at any given time, while a cash-out refi will deliver one lump sum payment. Here’s how the differences lineup:

Alternatives to Mortgage Refinancing

There are a few other options to consider if refinancing doesn’t feel like a perfect fit.

Recasting: Instead of refinancing with a new loan, you could make a large payment to your existing lender in order to recast your loan. The lender then lowers the balance and re-amortizes your payments so they reflect the lower balance. This is a good solution if you’re looking to lower your monthly expenses and you have cash on hand.

Make extra payments: If you’re considering refinancing to shorten your loan term, you could simply pay more principal each month without getting a new mortgage. You’d still pay off your loan sooner and wouldn’t have to pay closing costs or lose a competitive interest rate if you have one.

Move to a new location: If you need to lower your monthly mortgage payments — or expenses generally — consider moving to a more affordable area where your money could go further.

The Takeaway

Borrowers have two options for a mortgage refinance: a new loan with terms or rates that will ideally lower your monthly payment, or a cash-out refinance that won’t necessarily save you money but can free up funds to help you meet other financial goals. Refinancing is a similar process to applying for a home loan, so consider the decision carefully. Examine the costs associated and consider how long you expect to own your home before committing to a refinance with a lender you can trust.

What Are HELOCS and Home Equity Loans?

HELOCs and home equity loans are two types of financing that allow borrowers to use their home as collateral to get the money they need.

Because the financing is secured and lenders are taking less risk, borrowers typically can find more competitive terms with these financing options than they might get with an unsecured personal loan or credit card. Interest rates are often more competitive, for example, and you may be able to borrow more.

Both HELOCs and home equity loans can be good choices for homeowners who are looking to access some cash, but each works a bit differently.

A HELOC is a revolving line of credit, which means you can borrow and make payments on an ongoing basis. With this type of financing, you’ll pay interest (usually at a variable rate) only on the amount you’ve actually borrowed, not the entire amount available to you.

In contrast, a home equity loan, sometimes called a second mortgage, is a lump-sum, fixed-rate loan that is repaid in regular installments over a specific length of time.

HELOC and Home Equity Loan Requirements

The eligibility requirements for HELOCs and home equity loans vary by lender, but they share some common criteria, including:

Sufficient Equity in Your Home

Lenders generally want borrowers to have a minimum of 15% to 20% equity in their home.

What is home equity? Your equity is the difference between your home’s current value and what you still owe on the mortgage, expressed as a percentage. So, for example, if your home is worth $300,000 and you still owe $200,000, you have $100,000, or 33%, equity in your home.

If you’re trying to determine if you can qualify for a HELOC and you aren’t sure what your home is worth, you can get an estimate using online tools. But when you actually apply for the HELOC, your lender will likely require that you get a home appraisal.

Good Credit

Expect scrutiny similar to what you likely experienced in the mortgage preapproval process: A credit score in the upper-600s is usually the minimum that’s necessary to get this type of financing. (This puts you in what is typically considered the “good” credit score range.) If your score is lower, but your application is strong in other areas, you may still qualify with some lenders. But the higher your credit score, the better the chances that you’ll be approved and get a lower interest rate.

Low Debt-to-Income (DTI) Ratio and Income Documentation

Don’t be surprised if applying for home equity financing gives you flashbacks to when you were trying to qualify as a first-time homebuyer. Lenders will want to know that you can afford to add another monthly payment to your current debt load, so they’ll calculate your DTI ratio (how much you owe in monthly debt payments compared to your monthly income). Home equity lenders generally look for a DTI that’s below 50%, but the lower your DTI, the better.

Lenders also will ask for income documentation, including recent W-2 statements, pay stubs, and/or income tax returns, to ensure you have enough income to manage your payments

What Is a Home Equity Line of Credit (HELOC)?

What Is a Home Equity Loan and How Does It Work?

How does a HELOC Work

HELOCs typically have two phases:

The Draw Period

Once a borrower is approved for a HELOC, the draw period begins. During this phase, the borrower can withdraw funds from the account at any time and in whatever amount is needed (up to the approved credit limit). The borrower usually is required to make interest payments during the draw period, but payments toward the principal may be optional.

The Repayment Period

When the draw period ends — usually after about 10 years — access to the line of credit ends and a new repayment schedule will be established based on the balance the borrower still owes. The repayment period typically lasts 10 to 20 years, and borrowers should be prepared for their variable interest rate to fluctuate during this time.

How Is a HELOC Calculated?

Here’s how you can get a general idea of what your HELOC might look like, based on your home equity.

•  Start by estimating how much your home is worth.

•  Next, multiply your home’s value by the percentage your lender will allow you to borrow.

•  Then, subtract what you currently owe on your home loan from the amount you’re qualified to borrow.

Let’s say, for example, that your home is worth $300,000, you still owe $200,000 on your mortgage, and your lender says you qualify to borrow up to 80% of your home’s value.

First, you’d multiply your home’s value by the percentage your lender will allow you to borrow.

  $300,000 x 0.8 = $240,000

Then, you would subtract the amount you owe on your mortgage from the amount you qualify to borrow:

  $240,000 – $200,000 = $40,000

In this example, your HELOC limit would be $40,000.

How Much Can You Borrow with a HELOC?

Depending on your credit, DTI, and other factors, you may be able to borrow up to 85% (or, in some cases, even more) of the value of your home, minus the amount you owe on your first mortgage.

If you’re wondering if that will be enough for your needs, remember that your home may be worth more than you think. Rising prices have made it tough for first-time homebuyers to get into the housing market in recent years, but thanks to those rising costs, current homeowners have seen a spike in their home equity. Even if you’ve only had your home for a few years, you may have enough equity built up to pay for a kitchen remodel or a new pool and patio out back.

That doesn’t mean you have to or should borrow the largest amount possible, however. To be safe, you may find it makes sense to hold onto a chunk of your equity (20% or more), just in case home prices fall.

Recommended: Different Types of Mortgage Loans

How to Apply for a HELOC

If you want to avoid potential delays and get the best possible loan terms for your financial situation, it can help to do your homework before applying for a HELOC. Here are some steps to consider:

1. Check Your Financial Health

If you aren’t sure where you stand financially, it can be a good idea to check your credit scores, calculate your DTI, and get a good estimate of your home equity before you apply for a HELOC. That way there won’t be any surprises.

2. Compare Lenders

Loans can vary significantly from one lender to the next, so don’t hesitate to do some online comparison shopping. It’s important to see what offers you might qualify for when it comes to interest rates, but also how much you can borrow, repayment terms, eligibility requirements, and fees.

3. Gather Your Documentation

Making sure you have the documents you need (proof of income, recent tax returns, mortgage info, etc.) all in one place can make the application process go more smoothly.

4. Submit Your Application

When you’ve settled on the lender you think has the best terms for you, it’s time to submit your application. You can do this from home with an online application. Or, if you prefer and your lender has a brick-and-mortar location near you, you can go in person.

5. Get a Home Appraisal

Your lender will likely require a home valuation as part of the application process. If you haven’t already, you may want to set aside some time to clean up and fix things that might hurt your home appraisal.

6. Prepare for Closing

If your lender approves your application, the next step is the closing process, which will include signing documents and paying any necessary closing costs.

HELOCs vs Home Equity Loans

There’s no one-size-fits-all answer when choosing between a HELOC and a home equity loan. Ultimately, it’ll be up to you to decide which type of financing is the best fit for your finances, your needs and goals, and your comfort level. Here’s a quick breakdown of some of the differences between these two types of financing that you may want to keep in mind:

Pros and Cons of a HELOC vs a Home Equity Loan

Understanding the advantages and downsides of each type of financing can also help borrowers decide between a HELOC and home equity loan. Here are some points to consider:

Pros and Cons of a HELOC

What sets a HELOC apart from a home equity loan is that you pay interest only on the funds you’ve drawn, not the entire line of credit that’s available, which can keep your monthly costs down. And as you make payments, the line of credit is replenished, so you can borrow repeatedly during the draw period.

A potential downside of a HELOC vs. a home equity loan, however, is that a HELOC’s interest rate is usually variable. So if rates go up, it could make paying back what you borrowed more expensive than you planned. Here’s a summary of a HELOC’s pros and cons.

Pros and Cons of a Home Equity Loan

A lump-sum, fixed-rate home equity loan can be a good fit for borrowers who need all their money upfront, and for those who like to plan and want to know exactly what their monthly payments will be. But the costs associated with a home equity loan may be higher than with a HELOC. Here’s a summary of some of the pros and cons of a home equity loan:

Who Should Get a HELOC?

Because you can draw just what you need at any one time, and pay interest only on the amount you borrow, a HELOC can be a useful tool for those whose cost of living is unpredictable (so they aren’t sure how much they’ll need) or those who don’t need all their money upfront.

Who Should Get a Home Equity Loan?

A lump-sum home equity loan may be a better choice for borrowers who know exactly how much they need and expect to use most of the money right away. Borrowers who prefer a structured loan with regular payments also might prefer this type of financing.

HELOC vs Home Equity Loan: How They Compare

The Different Types of Home Equity Loans

How to Use a HELOC

You can use a HELOC for just about anything, but this type of financing can be especially useful for borrowers who expect their costs will be spread out over time. A HELOC can be a good way to pay for home improvement costs or educational expenses, for example, or to cover ongoing medical or dental treatments. It also can be used as a “rainy day” fund when emergency expenses come up.

HELOC Examples

Here are a couple of examples of how a HELOC might work for some hypothetical homeowners:

Example 1: Joe and Jane Johnson want to renovate their kitchen. They expect to spend $50,000 or more, but they don’t need the entire amount upfront, so they choose a HELOC to help finance the project. The Johnsons’ house is worth $450,000, and they owe $300,000 on their mortgage, so they have home equity valued at $150,000 to use as collateral.

Their lender will allow a total debt of $382,500 (85% of $450,000) to be attached to the property, which means the maximum HELOC they can get is $82,500.

  $450,000 x 0.85 = $382,500

   v$382,500 – $300,000 = $82,500

Example 2: Cindy Smith’s daughter needs braces, and the orthodontist says it will cost $7,000. Cindy’s house is worth $200,000, and she still owes $150,000 on her mortgage, so she has $50,000 in collateral to use toward a HELOC.

Cindy’s lender will allow a total debt of $160,000 (80% of $200,000) to be attached to her property, so she gets a HELOC for $10,000.

   $200,000 x .8 = $160,000

   $160,000 – $150,000 = $10,000

Cindy makes payments toward both the interest and principal every month to keep her balance down. And when she’s done paying for her daughter’s braces, she uses the replenished account to help her daughter pay some college expenses.

How Much Does It Cost to Get a HELOC?

Closing costs for HELOCs are generally lower than the typical homebuying closing costs or a cash-out refinance (which can range between 2% to 5% of the loan amount). But you still may encounter some fees when opening a HELOC.

The appraisal fee, which could be $150 to $500 or more, will likely be the highest expense. But other costs may include an application fee (paid when you apply), a loan origination fee, and administrative fees that cover the lender’s costs for opening your line of credit. You also may be charged a maintenance fee each year that your account is open.

Some lenders also may charge a transaction fee any time you make a withdrawal from your HELOC, an inactivity fee if you don’t use the account for a while, or an early termination fee if you close the account shortly after you open it.

These fees can add up over the years, so it’s important to be clear on what you’ll be charged before you sign on the dotted line.

How to Find Competitive HELOC Interest Rates

Because lenders’ rates and other terms can vary, it can make sense to shop around for the best offer you can get on a HELOC.

You don’t have to limit your list of contenders to just your current home mortgage lender. These days, it’s easy to hop online and get estimates from a variety of lenders, including large and small banks, credit unions, and online lenders. And while you’re there, you can look at more than just their rates. You may want to compare their qualification requirements, loan minimums and maximums, fees, the length of the draw and repayment periods they’re offering, and other factors.

What are Home Equity Rates Expected to Do in 2025?

As inflation has cooled and the Federal Reserve has signaled a rate drop on the horizon, many economists expect borrowing costs on home equity loans and HELOCs will likely fall.

HELOCs could become the more attractive financing option, because they typically come with a variable rate that may go down in a changing rate environment. Still, it’s important to weigh every factor and how it pertains to your individual situation before making a choice between a HELOC and a home equity loan.

Home Equity Loans and HELOCs vs Refinancing

Of course, there’s one more way you might be able to extract some money from your home (without selling it): A cash-out refinance is another option for homeowners who need funds for a major home project or other expense.

While a home equity loan or HELOC provides borrowers with a loan or line of credit that’s separate from their mortgage, a cash-out refinance involves taking out a completely new mortgage loan that will allow you to pay off your old mortgage plus receive a lump sum of cash.

The lender will decide how much more you can borrow based on your home’s value and other factors, then add that to the balance owed on your old mortgage to determine the amount of your new mortgage.

If you need a lump sum for a large expense, a cash-out refi might be something to look at — especially if you can get a lower interest rate or better loan terms. You’ll only have one payment to make, and one creditor to keep track of. But the requirements for getting a cash-out refinance can be stricter than those for a HELOC or home equity loan, and the costs may be higher.

Other Alternatives to a HELOC

Besides a home equity loan or cash-out refinance, other funding options you may want to compare to a HELOC include:

An Unsecured Personal Loan or Line of Credit

If you can qualify for an unsecured personal loan or personal line of credit in the amount you need, you could keep building equity in your home and avoid putting your home at risk of foreclosure. The interest rate with unsecured financing will likely be higher, though.

Credit Cards

Credit cards typically come with higher interest rates than HELOCs, which can make them much more expensive if you carry a large balance from month to month. But if you don’t need to borrow a lot at one time or carry a balance, a credit card can provide quick, convenient, and collateral-free access to funds. You also may be able to find a card that rewards you with cash back or credit card points you can use for travel or other purposes.

The Takeaway

If you’re looking for an affordable way to get the money you need for home projects, unexpected bills, or just about any other important expense, a home equity line of credit, or HELOC, may be your answer.

With a HELOC, you can turn your home equity into cash using a revolving line of credit that’s secured with your home. But unlike a home equity loan, you’ll pay interest (usually at a variable rate) only on what you actually borrow, not the entire amount available to you.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.