Mobile, manufactured, modular. These types of homes sound similar, and they’re all prefabricated, but they differ in cost, customization, ease of financing, and in other ways, too.
When it comes to old-style mobile homes and modular vs. manufactured homes, here’s what to know if you’re considering a purchase.
Key Points
• Mobile homes are structures built before 1976. They differ from manufactured and modular homes in construction and regulatory standards.
• Manufactured homes are built on steel chassis, frequently placed on rented land, and comply with HUD Code.
• Modular homes are factory-built in sections, assembled on-site with permanent foundations, and must adhere to local building codes.
• Modular homes offer more customization and design flexibility.
• Modular homes typically cost more than manufactured homes due to foundation and land requirements.
What Is a Mobile Home?
Unlike a stick-built, or traditional, home built from the ground up, a mobile home was built in a factory before mid-1976. Original mobile homes looked like trailers, or campers. They have wheels and an exposed coupler for a trailer, making them easy to hook to a vehicle and move. But the name is a bit of a misnomer: Most are never moved.
Original mobile homes aren’t built anymore. They don’t meet the current safety standards, even if interior renovations can make them look appealing.
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What Is a Manufactured Home?
A manufactured home is built in a factory, then transported to its destination in one or more sections. Sound familiar? That’s because manufactured homes are the 2.0 version of mobile homes.
In 1976, the U.S. Department of Housing and Urban Development (HUD) changed the “mobile home” classification to “manufactured” legally and began to regulate the construction and durability of the homes.
More change and innovation have come with time. That is covered below.
What Is a Modular Home?
Modular homes start their lives in a factory, where modules of the homes are built. The pieces, usually with wiring, plumbing, insulation, flooring, windows, and doors in place, are transported to their destination and assembled like a puzzle.
Modular homes are comparable to stick-built homes in most ways other than birthplace.
How Mobile, Manufactured, and Modular Homes Differ
These homes may all share a starting point, but there are key differences to know, whether you’re a first-time homebuyer or not. For the sake of simplicity, let’s compare manufactured homes and modular homes.
Construction
Manufactured homes are built from beginning to end in a factory on a steel chassis with its own wheels. Once a manufactured home is complete, it’s driven to its destination, where the wheels and axles are usually removed and skirting added to make it look like a site-built home, or it may be attached to a permanent foundation.
Construction and installation must comply with the HUD Code (formally the Manufactured Home Construction and Safety Standards) and local building codes.
Modular homes are built in pieces in a factory, then transported to the property. From there, a team assembles the home on a permanent foundation.
While a modular home may be built states away from its final home, it needs to comply with the state and local building codes where it ultimately resides.
Manufactured Homes
Modular Homes
Fully factory-built?
Yes
No (but mostly)
Permanent foundation?
Not commonly
Yes
Construction regulated by
HUD Code
State and local codes
Design
There’s a fair share of design differences when it comes to modular vs. manufactured homes.
Manufactured homes come in three standard sizes:
• Single-wide: roughly 500 to 1,100 square feet
• Double-wide: about 1,200 to 2,000 square feet
• Triple-wide: 2,000+ square feet
The most significant limiting design factor of manufactured homes is the layout. As they must be delivered fully assembled on a trailer, they only come in a rectangular shape. In the case of single- or double-wides, there’s not much space to separate rooms or interior hallways to connect them.
In terms of design, there’s much more freedom in modular homes. They can be just about any style, from log cabin to modern, and can have more than one floor.
The design options of a modular home are similar to a stick-built home. Floor plan and style are only limited by a buyer’s budget and space. A modular home may look just like a site-built home upon completion.
Manufactured Homes
Modular Homes
Size limitations
Yes, single-, double-, or triple-wide
No
Shape limitations
Yes, rectangular only
No
Customization Options
Most makers of manufactured homes allow some customization, including:
• Custom kitchen layout and cabinetry
• Porches
• Custom layouts (within the confines of prefab shapes)
• Siding
• Built-in lighting
• Ceiling finish
• Fireplace
• Tiling
Similar to stick-built homes, modular homes have nearly endless customization options. From the style of the home to its size and layout, modular homes offer more flexibility for buyers.
Expense
The expense of a modular home vs. manufactured home can vary dramatically.
A modular home — also sometimes called a kit home — may cost less than a stick-built home, but it usually costs a lot more than a manufactured home.
Both modular and manufactured homes have a separate expense: land. In the case of manufactured homes, it may be possible to rent the land the home is delivered to, but owners of modular homes will need to buy the land they want to build on.
Another cost associated with modular homes is the foundation, which needs to be in place when the modules arrive. Manufactured homes affixed to a permanent foundation on land owned by the homeowner are considered real property, not personal property.
Here are some typical expenses associated with each home:
Manufactured Home
Modular Home
Average cost
$85 per square foot
$100,000-$200,000 per square foot (including installation but not land)
Foundation (slab)
$12,000 to $28,000
$6,000 to $20,000
Land
Is often rented; varies by location
$10,000-$100,000; varies by location
Another expense to keep in mind is financing. An existing modular home will qualify for a conventional mortgage or government-backed loan if the borrower meets minimum credit score, income, and down payment requirements.
Homebuyers building a new modular home often will need to obtain a construction loan.
Manufactured and mobile home financing is trickier. The key is whether the home is classified as real or personal property.
Manufactured homes classified as real property, including those used as accessory dwelling units that are at least 400 square feet, might qualify for a conventional or government-backed loan.
Financing options for mobile and manufactured homes classified as personal property include a chattel mortgage and an FHA Title I loan.
Mobile, manufactured, and modular homes have key differences. A manufactured home on leased land is not considered real property, while a modular home, always on its own foundation and land, is, and compares in most ways to a traditional stick-built home.
SoFi will finance a manufactured home if you qualify, refinance a construction-only loan to a traditional home mortgage loan or provide a mortgage for an existing modular home.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
FAQ
Is a modular home better than a manufactured home?
In terms of appreciation and resale value, a modular home has the edge over most manufactured homes. And if a manufactured home is on leased land, the owner may face lot fees that keep rising.
What’s the price difference between mobile, manufactured, and modular homes?
Generally, mobile and manufactured homes are much less expensive than modular homes. A mobile home, by its very definition, was built before mid-1976. The size of the price gaps depend on how customized the home is, where it is, and how large it is.
Between manufactured and modular homes, which is fastest to build?
Unless there are factory or supply chain delays, manufactured homes are typically faster to build than modular homes. (Of note: A modular home can often be built much faster than a stick-built home.)
Photo credit: iStock/Marje
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
*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.
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As of 2023, only 21% of people say now is a good time to buy a house according to a Gallup poll. This is due to high home prices and high interest rates. While the average home price has dropped since the last quarter of 2022, prices are still higher than normal. The median home price currently sits at $424,495 and mortgage rates as of June 2023 are 6.67% for 30-year fixed-rate mortgages and 6.03% for 15-year FRMs.
We’ve seen higher home prices and higher interest rates in the past year, so now may not be the worst time to buy. However, whether or not now is a good time to buy a house depends heavily on your unique financial situation and local market dynamics.
Determining When You’re Ready to Buy
Before you assess the current real estate market and pay close attention to interest rate fluctuations, it’s important to understand your financial and personal situation.
Here are a few factors you may want to consider before deciding if a new home is a good play right now.
Making Room in the Budget
When buying a home, the first thing you’ll need to budget for is a down payment.
While 20% of the home’s value is the benchmark, you may only need 3.5% if you apply for an FHA loan. But even 3.5% can be a chunk of change. If you want to buy a $200,000 house, 3.5% is $7,000.
Your home-buying budget should be large enough to cover a down payment as well as closing costs, which typically include homeowners insurance, appraisal fees, property taxes, and any mortgage insurance.
Remaining Consistent
How long do you plan to live in the city where you’re eyeing a home? If you plan on staying in the home long-term, now could be a good time to buy because staying put will give your home time to appreciate (subject to market fluctuations).
Since mortgage lenders pay close attention to job consistency and a steady income, you may also want to consider your job security. Especially during uncertain times, it’s crucial to feel confident knowing you can make your mortgage payments every month.
💡 Quick Tip: Buying a home shouldn’t be aggravating. Online mortgage loan forms can make applying quick and simple.
Checking Your Financial Profile
It’s a good idea to check your financial profile. Doing so may help you secure better financing terms when you purchase a home. Lenders will review your credit history, debt-to-income ratio, and assets, among other factors, to determine your eligibility for a mortgage.
Lenders review your credit history to gauge your creditworthiness and the level of risk to lend you money. They look at your debt-to-income ratio to indicate how much of your income goes toward debt payments every month.
If your ratio is high, it can show you’re overleveraged, which may mean you’re not in a position to take on more debt like a mortgage. You may also face a higher interest rate.
Last, a mortgage applicant can list assets like cash and investments. The more assets you have, the less risky lenders view you.
If renting a home in your community is less expensive than buying, you may want to hold off on a home purchase. Conversely, if renting is more expensive, you may be more enticed to purchase a new home.
Overall, if you find that these factors point you in the direction of homeownership, it’s possible you’re ready to buy a home and can begin determining the perfect time to pounce.
Financial institutions charge interest to cover the costs of loaning money when they offer you a mortgage. The interest rate they charge is influenced by the Federal Reserve, but mortgage-backed securities are considered to be the main driver.
When interest rates are low, borrowing money is less expensive to the borrower. As interest rates rise, borrowing money becomes more costly. The government has been slashing rates to keep buyers in the market.
But keep in mind that the rate and terms you qualify for will depend on financial factors including your credit score, down payment, and loan amount.
And, if interest rates go down after you purchase your home, you can always choose to refinance your mortgage in hopes of getting a lower rate.
💡 Quick Tip: A home equity line of credit brokered by SoFi gives you the flexibility to spend what you need when you need it — you only pay interest on the amount that you spend. And the interest rate is lower than most credit cards.
Timing the Real Estate Market
Essentially, to time any market, you want to aim to buy low and sell high. If you’re going to buy a property, you’ll want to ideally buy when there are more sellers than there are buyers—a buyer’s market.
In a buyer’s market, buyers have an abundance of homes to choose from. This may also give you leverage to ask for more concessions from sellers eager to close a deal, such as a seller credit toward your closing costs or help covering the cost of repairs.
Conversely, in a seller’s market, real estate inventory is low and demand is high, which may drive up home prices.
To identify the current market conditions, you may want to visit real estate websites like Zillow, Redfin, Realtor.com, or Trulia to look at inventory in your area or ZIP code.
Typically, it’s a buyer’s market if you see more than seven months’ worth of inventory.
If you see five to seven months of inventory, you’re in a balanced market that isn’t especially beneficial to buyers or sellers.
It’s a seller’s market when there is less than five months’ worth of inventory.
Understanding Local Economics and Trends
Because prices can vastly vary from area to area, real estate is often considered a location-driven market. This means that general rules of thumb might not be valid in every region or city.
Also, local economics may play a role in housing demand. For instance, if a large company decides to move its operations to a city, that city may experience a housing boom that creates a spike in home prices.
That said, hopeful buyers will want to pay close attention to the economic happenings and housing trends in their desired location.
The Takeaway
If you find a home that seems right for you, your employment is stable, and you can get a home loan with a good interest rate, buying may make sense. Then again, with interest rates and home prices still being on the high side, comparing the costs of renting and buying may be called for.
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.
About the author
Ashley Kilroy
Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
*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.
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.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Recourse loans are secured loans in which the lender can seize a borrower’s collateral and, if necessary, other assets, should the borrower default on the loan. Common types of recourse debt are auto loans, credit cards and, in most states, home mortgages. Recourse loans are low risk to lenders so they tend to have lower interest rates than non-recourse loans.
Non-recourse loans are also secured by collateral but in this case, the lender can only seize the collateral pledged for the loan; they can’t take any other assets. Non-recourse loans are less common than recourse loans and tend to have higher interest rates due to their higher risk.
Read on to learn more about how non-recourse and recourse loans compare.
What Is a Recourse Loan?
A recourse loan is a secured loan for which the lender can seize more than just the collateral if the borrower defaults. The lender is also able to seize other assets the borrower didn’t use as collateral, including income and money in bank accounts.
How Recourse Loans Work
When a borrower defaults on a recourse debt, the lender can seize not only the loan’s collateral, but can also attempt to attach other assets to collect what’s owed. In essence, the lender has additional recourse to recoup their losses.
Between recourse vs. nonrecourse debt, recourse debt favors the lender while nonrecourse debt favors the borrower.
Examples of Recourse Loans
Hard money loans, which are typically based on the value of the collateral rather than just the creditworthiness of the borrower, tend to be recourse loans.
An auto loan is one example of a recourse loan. If an auto loan borrower defaults on the loan, the lender has the right to seize the vehicle and sell it to recoup its losses. If the vehicle has depreciated, however, and the sale doesn’t cover the loan balance, the lender can ask for a deficiency judgment for the difference. In that case, the borrower’s wages could be garnished or the lender could seize other assets.
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What Is a Non-Recourse Loan?
A nonrecourse loan is a secured loan for which the lender cannot seize assets that weren’t put up as collateral in the original loan agreement.
How Non-Recourse Loans Work
When a borrower pledges collateral on a secured loan, the lender can take that asset — but no others — if the borrower defaults on the loan. The lender will typically sell the asset to recoup their loss on the loan. The lender has no other recourse than seizing the collateralized asset, even if the sale of that asset doesn’t cover the balance of the loan.
Examples of Non-Recourse Loans
Lenders may be cautious about offering non-recourse loans because it limits their ability to recoup losses in the event of a default. Therefore, loans are typically classified as recourse loans.
Mortgages are classified as non-recourse debt as a matter of law in 12 states, meaning the lender cannot pursue a borrower’s other assets if they default and end up in foreclosure. The financial consequences would likely be limited to foreclosures of the home and damage to the borrower’s credit score.
A lender might be willing to offer a non-recourse loan to an applicant with excellent credit and steady, verifiable income if confident in their ability to repay the debt.
Recourse vs Non-Recourse Loans
Both recourse and non-recourse debt can be secured by collateral, which a lender can seize in the event of nonpayment.
The biggest difference between the two is that the lender is prevented from pursuing other assets owned by the borrower to repay what’s owed on a non-recourse debt. Basically, the lender has no other recourse for repayment of the debt other than the collateral that secures the loan.
Recourse Loan
Non-Recourse Loan
Lender can seize assets other than those put up as collateral
Lender can seize only assets that were put up as collateral
Borrower can lose collateralized and other assets if they default
Borrower can lose collateralized asset and have a negative entry on their credit report if they default
Loan rate and terms are based on the value of asset used as collateral and creditworthiness of applicant
Lender may consider creditworthiness of applicant greater than value of collateral when determining loan rate and terms
Less risky for lenders
Less risky for borrowers
Pros and Cons of Recourse vs Non-Recourse Debt
Depending on whose perspective the situation is being viewed from, recourse and non-recourse debt each has benefits and drawbacks.
Pros and Cons of Recourse Loans
Recourse debt is more favorable to the lender than the borrower because this type of debt gives the lender more avenues to collect when a debt goes unpaid.
Approval for recourse loans, on the other hand, may be easier since they pose less risk for lenders.
From the borrower’s perspective, here are some pros and cons of recourse loans:
Pros of Recourse Loans
Cons of Recourse Loans
Approval qualifications may be less stringent than for a nonrecourse loan
Lender can seize collateralized asset and other assets if the borrower defaults
Interest rates can potentially be low
Borrower assumes greater risk than lender
Pros and Cons of Non-Recourse Loans
A non-recourse loan is more favorable to the borrower in the case of default. In that situation, the lender could only seize the asset put up as collateral, but couldn’t lay claim to any of the borrower’s other assets.
Non-recourse financing is usually riskier for the lender since they’re limited to collecting only the collateral when a borrower defaults. As such, lenders may charge higher interest rates for non-recourse loans and/or require borrowers to meet higher credit scores and income requirements to qualify.
From the borrower’s perspective, here are some pros and cons of non-recourse loans:
Pros of Non-Recourse Loans
Cons of Non-Recourse Loans
Only the asset put up as collateral can be seized if the loan is defaulted on
Borrower’s credit can be negatively affected if the lender must write off uncollected debt
Personal assets are not at risk
Interest rates may be high
Managing Recourse vs Non-Recourse Loans
Generally, the only reason for a borrower to be concerned about whether they have recourse vs. non-recourse debt is if they’re in danger of default. As long as they’re keeping up with their payments, whether a debt is recourse or non-recourse shouldn’t be an issue.
But if there is a concern about potentially falling behind in paying a debt, then it helps to do some research before borrowing. For example, if trying to qualify for a home loan, asking upfront whether the loan is treated as recourse or non-recourse debt under a particular state’s laws will help in the decision making.
Making a larger down payment, for example, means less a borrower has to finance. Ultimately, though, a borrower should do what is right for their particular financial situation. It may be better for some borrowers to choose a home loan that allows for a lower down payment so they can keep more cash in the bank to cover financial emergencies down the line.
If you’re planning to apply for a car loan, you might consider buying a vehicle that tends to hold its value longer or making a larger down payment. Those could both help you avoid ending up underwater on the loan if you happen to default for any reason.
Credit cards are revolving debt, not a lump sum being borrowed, so the amount owed can change month to month as purchases are made and paid off. Some ways to manage this type of recourse debt include:
• Keeping card balances low
• Paying the balance in full each month, if possible
• Setting up automatic payments or payment alerts as notification of when a due date is approaching
With any type of debt, recourse, or non-recourse, it’s important that you get in touch with your lender or creditor as soon as you think you’ll have trouble making payments. The lender may be able to offer options to help you manage payments temporarily. Depending on the type of debt, that may include:
Reaching out before a payment is missed can help you avoid loss of assets, as well as any negative impact on your credit.
💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.
Is a Recourse or a Non-Recourse Loan Best for You?
It’s likely you won’t have much of a choice between a recourse and a Non-Recourse loan when looking at financing options. Lenders are likely to offer only recourse loans because they have more options to recover losses if the borrower defaults on the loan.
If you are presented with both options, choosing a recourse or Non-Recourse loan may depend on your financial situation.
• A recourse loan may be a good option for those with a limited credit history because in exchange for additional avenues to recoup their losses, if necessary, a lender may offer low interest rates.
• A non-recourse loan could be a good option for an applicant with good credit and steady income, as the lender may consider them a low-risk borrower and not feel the need to have additional assets to secure the loan.
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FAQ
What does recourse mean in lending?
Recourse refers to a lender’s options when recouping losses when a borrower defaults on a loan. With a recourse loan, lenders can recoup defaulted loan balances by seizing both the loan collateral and — when necessary — the borrower’s other assets.
Are you required to pay a non-recourse loan?
Yes, borrowers are required to make payments on both recourse and non-recourse loans.
Are non-recourse loans more expensive?
Non-recourse loans can have higher interest rates than recourse loans because lenders may perceive them as having higher risk.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
If you own a home, you may be interested in tapping into your available home equity. One popular way to do that is with a home equity line of credit. This is different from a home equity loan, and can help you finance a major renovation or many other expenses.
Homeowners sitting on at least 20% equity — the home’s market value minus what is owed — may be able to secure a HELOC.Let’s take a look at what is a HELOC, how it works, the pros and cons and what alternatives to HELOC might be.
Key Points
• A HELOC provides borrowers with cash via a revolving credit line, typically with variable interest rates.
• The draw period of a HELOC is 10 years, followed by repayment of principal plus interest.
• Funds can be used for home renovations, personal expenses, debt consolidation, and more.
• Alternatives to a HELOC include cash-out refinancing and home equity loans.
• HELOCs offer flexibility but remember variable interest rates may result in increased monthly payments, and a borrower who doesn’t repay the HELOC could find their home at risk.
How Does a HELOC Work?
The purpose of a HELOC is to tap your home equity to get some cash to use on a variety of expenses. Home equity lines of credit offer what’s known as a revolving line of credit, similar to a credit card, and usually have low or no closing costs. The interest rate is likely to be variable (more on that in a minute), and the amount available is typically up to 85% of your home’s value, minus whatever you may still owe on your mortgage.
Once you secure a HELOC with a lender, you can draw against your approved credit line as needed until your draw period ends, which is usually 10 years. You then repay the balance over another 10 or 20 years, or refinance to a new loan. Worth noting: Payments may be low during the draw period; you might be paying interest only. You would then face steeper monthly payments during the repayment phase. Carefully review the details when apply
Here’s a look at possible HELOC uses:
• HELOCs can be used for anything but are commonly used to cover big home expenses, like a home remodeling costs or building an addition. The average spend on a bath remodel in 2023 topped $9,000 according to the American Housing Survey, while a kitchen remodel was, on average, almost $17,000.
• Personal spending: If, for example, you are laid off, you could tap your HELOC for cash to pay bills. Or you might dip into the line of credit to pay for a wedding (you only pay interest on the funds you are using, not the approved limit).
• A HELOC can also be used to consolidate high-interest debt. Whatever homeowners use a home equity credit line or home equity loan for — investing in a new business, taking a dream vacation, funding a college education — they need to remember that they are using their home as collateral. That means if they can’t keep up with payments, the lender may force the sale of the home to satisfy the debt.
HELOC Options
Most HELOCs offer a variable interest rate, but you may have a choice. Here are the two main options:
• Fixed Rate With a fixed-rate home equity line of credit, the interest rate is set and does not change. That means your monthly payments won’t vary either. You can use a HELOC interest calculator to see what your payments would look like based on your interest rate, how much of the credit line you use, and the repayment term.
• Variable Rate Most HELOCs have a variable rate, which is frequently tied to the prime rate, a benchmark index that closely follows the economy. Even if your rate starts out low, it could go up (or down). A margin is added to the index to determine the interest you are charged. In some cases, you may be able to lock a variable-rate HELOC into a fixed rate.
• Hybrid fixed-rate HELOCs are not the norm but have gained attention. They allow a borrower to withdraw money from the credit line and convert it to a fixed rate.
Note: SoFi does not offer hybrid fixed-rate HELOCs at this time.
HELOC Requirements
Now that you know what a HELOC is, think about what is involved in getting one. If you do decide to apply for a home equity line of credit, you will likely be evaluated on the basis of these criteria:
• Home equity percentage: Lenders typically look for at least 15% or more commonly 20%.
• A good credit score: Usually, a score of 680 will help you qualify, though many lenders prefer 700+. If you have a credit score between 621 and 679, you may be approved by some lenders.
• Low debt-to-income (DTI) ratio: Here, a lender will see how your total housing costs and other debt (say, student loans) compare to your income. The lower your DTI percentage, the better you look to a lender. Your DTI will be calculated by your total debt divided by your monthly gross income. A lender might look for a figure in which debt accounts for anywhere between 36% to 50% of your total monthly income.
Other angles that lenders may look for is a specific income level that makes them feel comfortable that you can repay the debt, as well as a solid, dependable payment history. These are aspects of the factors mentioned above, but some lenders look more closely at these as independent factors.
Example of a HELOC
Here’s an example of how a HELOC might work. Let’s say your home is worth $300,000 and you currently have a mortgage of $200,000. If you seek a HELOC, the lender might allow you to borrow up to 80% of your home’s value:
$300,000 x 0.8 = $240,000
Next, you would subtract the amount you owe on your mortgage ($200,000) from the qualifying amount noted above ($240,000) to find how big a HELOC you qualify for:
$240,000 – $200,000 = $40,000.
One other aspect to note is a HELOC will be repaid in two distinct phases:
• The first part is the draw period, which typically lasts 10 years. At this time, you can borrow money from your line of credit. Your minimum payment may be interest-only, though you can pay down the principal as well, if you like.
• The next part of the HELOC is known as the repayment period, which is often also 10 years, but may vary. At this point, you will no longer be able to draw funds from the line of credit, and you will likely have monthly payments due that include both principal and interest. For this reason, the amount you pay is likely to rise considerably.
Difference Between a HELOC and a Home Equity Loan
Here’s a comparison of a home equity line of credit and a home equity loan.
• A HELOC is a revolving line of credit that lets you borrow money as needed, up to your approved credit limit, pay back all or part of the balance, and then borrow up to the limit again through your draw period, typically 10 years.
The interest rate is usually variable. You pay interest only on the amount of credit you actually use. It can be good for people who want flexibility in terms of how much they borrow and how they use it.
• A home equity loan is a lump sum with a fixed rate on the loan. This can be a good option when you have a clear use for the funds in mind and you want to lock in a fixed rate that won’t vary.
Borrowing limits and repayment terms may also differ, but both use your home as collateral. That means if you were unable to make payments, you could lose your home.
If you’re ready to apply for a home equity line of credit, follow these steps:
• First, it’s wise to shop around with different lenders to reveal minimum credit score ranges required for HELOC approval. You can also check and compare terms, such as periodic and lifetime rate caps. You might also look into which index is used to determine rates and how much and how often it can change.
• Then, you can get specific offers from a few lenders to see the best option for you. Banks (online and traditional) as well as credit unions often offer HELOCs.
• When you’ve selected the offer you want to go with, you can submit your application. This usually is similar to a mortgage application. It will involve gathering documentation that reflects your home’s value, your income, your assets, and your credit score. You may or may not need a home appraisal.
• Lastly, you’ll hopefully hear that you are approved from your lender. After that, it can take approximately 30 to 60 days for the funds to become available. Usually, the money will be accessible via a credit card or a checkbook.
How Much Can You Borrow With a HELOC?
Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 90% of the value of your home (or, in some cases, even more), less the amount owed on your first mortgage.
Thought of another way, most lenders require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity line of credit.
Here’s an example. Say your home is worth $500,000, you owe $300,000 on your mortgage, and you hope to tap $120,000 of home equity.
Combined loan balance (mortgage plus HELOC, $420,000) ÷ current appraised value (500,000) = CLTV (0.84)
Convert this to a percentage, and you arrive at 84%, just under many lenders’ CLTV threshold for approval.
In this example, the liens on your home would be a first mortgage with its existing terms at $300,000 and a second mortgage (the HELOC) with its own terms at $120,000.
How Do Payments On a HELOC Work?
During the first stage of your HELOC (what is called the draw period), you may be required to make minimum payments. These are often interest-only payments.
Once the draw period ends, your regular HELOC repayment period begins, when payments must be made toward both the interest and the principal.
Remember that if you have a variable-rate HELOC, your monthly payment could fluctuate over time. And it’s important to check the terms so you know whether you’ll be expected to make one final balloon payment at the end of the repayment period.
Pros of Taking Out a HELOC
Here are some of the benefits of a HELOC:
Initial Interest Rate and Acquisition Cost
A HELOC, secured by your home, may have a lower interest rate than unsecured loans and lines of credit. What is the interest rate on a HELOC? The average HELOC rate in mid-November of 2024 was 8.61%.
Lenders often offer a low introductory rate, or teaser rate. After that period ends, your rate (and payments) increase to the true market level (the index plus the margin). Lenders normally place periodic and lifetime rate caps on HELOCs.
The closing costs may be lower than those of a home equity loan. Some lenders waive HELOC closing costs entirely if you meet a minimum credit line and keep the line open for a few years.
Taking Out Money as You Need It
Instead of receiving a lump-sum loan, a HELOC gives you the option to draw on the money over time as needed. That way, you don’t borrow more than you actually use, and you don’t have to go back to the lender to apply for more loans if you end up requiring additional money.
Only Paying Interest on the Amount You’ve Withdrawn
Paying interest only on the amount plucked from the credit line is beneficial when you are not sure how much will be needed for a project or if you need to pay in intervals.
Also, you can pay the line off and let it sit open at a zero balance during the draw period in case you need to pull from it again later.
Cons of Taking Out a HELOC
Now, here are some downsides of HELOCs to consider:
Variable Interest Rate
Even though your initial interest rate may be low, if it’s variable and tied to the prime rate, it will likely go up and down with the federal funds rate. This means that over time, your monthly payment may fluctuate and become less (or more!) affordable.
Variable-rate HELOCs come with annual and lifetime rate caps, so check the details to know just how high your interest rate might go.
Potential Cost
Taking out a HELOC is placing a second mortgage lien on your home. You may have to deal with closing costs on the loan amount, though some HELOCs come with low or zero fees. Sometimes loans with no or low fees have an early closure fee.
Your Home Is on the Line
If you aren’t able to make payments and go into loan default, the lender could foreclose on your home. And if the HELOC is in second lien position, the lender could work with the first lienholder on your property to recover the borrowed money.
Adjustable-rate loans like HELOCs can be riskier than others because fluctuating rates can change your expected repayment amount.
It Could Affect Your Ability to Take On Other Debt
Just like other liabilities, adding on to your debt with a HELOC could affect your ability to take out other loans in the future. That’s because lenders consider your existing debt load before agreeing to offer you more.
Lenders will qualify borrowers based on the full line of credit draw even if the line has a zero balance. This may be something to consider if you expect to take on another home mortgage loan, a car loan, or other debts in the near future.
What Are Some Alternatives to HELOCs
If you’re looking to access cash, here are HELOC alternatives.
Cash-Out Refi
With a cash-out refinance, you replace your existing mortgage with a new mortgage given your home’s current value, with a goal of a lower interest rate, and cash out some of the equity that you have in the home. So if your current mortgage is $150,000 on a $250,000 value home, you might aim for a cash-out refinance that is $175,000 and use the $25,000 additional funds as needed.
Lenders typically require you to maintain at least 20% equity in your home (although there are exceptions). Be prepared to pay closing costs.
Generally, cash-out refinance guidelines may require more equity in the home vs. a HELOC.
What is a home equity loan again? It’s a lump-sum loan secured by your home. These loans almost always come with a fixed interest rate, which allows for consistent monthly payments.
Personal Loan
If you’re looking to finance a big-but-not-that-big project for personal reasons and you have a good estimate of how much money you’ll need, a low-rate personal loan that is not secured by your home could be a better fit.
With possibly few to zero upfront costs and minimal paperwork, a fixed-rate personal loan could be a quick way to access the money you need. Just know that an unsecured loan usually has a higher interest rate than a secured loan.
A personal loan might also be a better alternative to a HELOC if you bought your home recently and don’t have much equity built up yet.
The Takeaway
If you are looking to tap the equity of your home, a HELOC can give you money as needed, up to an approved limit, during a typical 10-year draw period. The rate is usually variable. Sometimes closing costs are waived. It can be an affordable way to get cash to use on anything from a home renovation to college costs.
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.
Unlock your home’s value with a home equity line of credit brokered by SoFi.
FAQ
What can you use a HELOC for?
It’s up to you what you want to use the cash from a HELOC for. You could use it for a home renovation or addition, or for other expenses, such as college costs or a wedding.
How can you find out how much you can borrow?
Lenders typically require 20% equity in your home and then offer up to 90% or even more of your home’s value, minus the amount owed on your mortgage. There are online tools you can use to determine the exact amount, or contact your bank or credit union.
How long do you have to pay back a HELOC?
Typically, home equity lines of credit have 20-year terms. The first 10 years are considered the draw period and the second 10 years are the repayment phase.
How much does a HELOC cost?
When evaluating HELOC offers, check interest rates, the interest-rate cap, closing costs (which may or may not be billed), and other fees to see just how much you would be paying.
Can you sell your house if you have a HELOC?
Yes, you can sell a house if you have a HELOC. The home equity line of credit balance will typically be repaid from the proceeds of the sales when you close, along with your mortgage.
Does a HELOC hurt your credit?
A HELOC can hurt your credit score for a short period of time. Applying for a home equity line can temporarily lower your credit score because a hard credit pull is part of the process when you seek funding. This typically takes your score down a bit.
How do you apply for a HELOC?
First, you’ll shop around and collect a few offers. Once you select the one that suits you best, applying for a HELOC involves sharing much of the same information as you did when you applied for a mortgage. You need to pull together information on your income and assets. You will also need documentation of your home’s value and possibly an appraisal.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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Buying an investment property while living in a rental, sometimes referred to as “rentvesting,” can be a compelling and financially sound plan. An investment property that you can rent to others offers clear advantages — it can generate cash flow, let you build equity, and benefit you and your family for years to come.
Investment property options may include a vacation home, a multi-family home, a single-family home, or a condo that you will rent to others. If you are informed and manage a rental property wisely, it may produce a strong enough income for the unit to pay for itself.
But you need to contemplate a few disadvantages of this concept to successfully make the dream come true. Here, learn what needs to happen if you’re planning to buy an investment property while continuing to live in a rental.
Key Points
• It could be a smart financial move to buy an investment property while continuing to rent the place where you live.
• Potential benefits include capital growth and rental income.
• Challenges include a higher down payment than you would pay on a home you would live in, and stricter financing terms from lenders.
• Managing a rental property is time-consuming and involves landlord duties and regular maintenance tasks.
• Success requires detailed financial planning and effective management.
What Is Rentvesting?
The idea is about buying an investment property to rent to tenants while you continue to rent where you are (or, say, live with a significant other, or with your family). The rental income you earn can help you to pay your own rent, but it will also be necessary to cover the costs of owning your property.
Why Do It?
When you own a property, you have potential to achieve capital growth — your investment can increase in value as time passes. Maybe you’re not ready to settle down just yet. Or perhaps you don’t have the money to buy where you want to be. Rentvesting might be a way for you to grow your capital, anyway.
Buying an Investment Property
Purchasing an investment or rental property can be similar to buying a regular home. When you’re looking at buying an investment property that you don’t plan to live in, however, you will have to make some special considerations.
If you’ve decided to purchase an investment property and keep living in your current rental, that plan will affect what types of properties you look at, how you will finance the purchase property, and how much down payment you’ll need.
Here’s a quick summary of the difference between owner-occupied and non-owner-occupied rental properties.
Owner-Occupied
Non-Owner-Occupied
Down payment options from 3.5%
Down payment minimum tends to be 15%; some lenders require up to 25%
Lower interest rates by about ½ to ¾ of a basis point
Lower interest rates by about ½ to ¾ of a basis point
Keep in mind, if you buy a house with two to four units, live in one yourself, and rent the others, you may be able to finance the purchase as an owner-occupied property. You’ll qualify for reduced interest rates, lower down payment options, and more favorable loan options.
But you must live on the property and qualify as a first-time homebuyer. Financing a property with an owner-occupied loan without living on the property as this is considered a type of mortgage fraud.
How to Pull Off the Buy
Step 1: Get Preapproved for a Loan
Before you shop, make sure a lender is willing to give you a mortgage. Qualifying as a first-time buyer has positives. You may have a better debt-to-income ratio, as mentioned above. However, you may have a shorter credit history or a smaller down payment to work with. Whatever the case, it’s helpful to get some numbers from your lender to assist with your investment.
Typical requirements for a rental property mortgage:
• Credit score minimum of 620. Borrowers with scores of 740 and higher tend to receive better rates and terms.
• Down payment: Borrowers for investment real estate generally have to put down 15-25%.
• Debt-to-income ratio (DTI): This is the percentage of a borrower’s monthly income that goes toward debt. A 43% DTI is typically the highest ratio a borrower can have to qualify for a mortgage. When buying an investment property, a lender will generally allow you to count up to 75% of your expected rental income toward monthly income in the ratio.
• Savings: A borrower should have cash available to cover three to six months of mortgage payments, including principal, interest, taxes, and insurance.
Your lender will also take into account what programs you qualify for. Financing options for an investment property are wide, and underwriting standards can be stricter for rental property applicants.
Now that you have your budget and parameters set, you’re ready to find a property. You may want to enlist the help of a real estate agent who can serve as your first-time homebuyer guide, especially since you want to buy an investment property right off the bat.
Your agent can help you write an offer while your lender may be able to help you apply for a mortgage online. You’re well on your way to buying a house to rent at this stage.
Step 3: Think About the Future
If you’re buying an investment property, it shouldn’t be with only a short-term plan. Consider how this property might fit into your life in the long run. If you plan to get married and/or have kids, for example, you may want to look for a property that will suit you later. If you think other family members may need to move in with you down the road, room for them might be one of your criteria.
Step 4: Consider the Costs
Buying an investment property probably means carrying a mortgage, paying interest, and covering utilities and maintenance on the property. Home insurance is necessary and different plans apply depending on the property, so make sure you get covered. As an investor, you must also consider potential property management fees, periods of vacancy, and possible tax implications. Make certain you can afford these costs and still pay your own rent.
Step 5: Start Your Rental Business
Be sure to check local ordinances and business requirements for becoming a landlord. If you’ve got a plan and do your research, you may achieve success. Just don’t believe what you may see on TV, which makes owning a rental property look easy. Landlording is a tough job, and there’s a lot you need to know about the business before you start. Buying a house while renting is an endeavor that takes time and effort.
What to Know As a New Landlord
Unlike what you may have heard or imagined, becoming a landlord can be anything but light work. You’ll also want to research all you can and put proper systems in place. Here’s a little of what you can expect to encounter as a new landlord.
• Housing laws can make or break you. Are short-term rentals allowed (if that’s what you’re planning)? What rights does your tenant have? If you need to evict a tenant, what does the process look like? Will you benefit by putting your property in an LLC? Always research and understand local housing laws.
There’s a lot to navigate, and you may want to consider hiring a property management company that specializes in this.
• Determine how much to charge for rent. You’ll want to look at what other properties in the area are charging for rent and position yourself competitively. Also, consider what other landlords are allowing and charging when it comes to pets.
• Prescreening is key. The reliability of your tenant is so important. It’s incredibly stressful when you’re not paid rent. Don’t rent to someone who “feels” like they would be a good tenant. Do your due diligence. Check credit and their background, and call references.
• Create a plan for home maintenance, repairs, and other issues. If you’re hiring a property management company, plan for the expense. If you’re doing it yourself, make a list of contacts to call for the different issues that come up (electrical, plumbing, locks, handyman, etc).
• Have procedures in place for unit turnover. It’s an incredibly intense time when a tenant leaves and another needs to move in. How are you going to handle inspections? Cleaning? Deposits? You will need a system for logging such events and being prepared for changing tenants.
While landlording has a lot of responsibilities and risk, there can also be a lot of reward. If you’re really interested in buying a house while renting, you’ll find a way to make it work.
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
How much profit should you make on a rental property?
There’s no easy answer for how much profit you should make on a rental property. Some investors buy property for the appreciation alone. There are also a number of methods for determining how much profit investors want to make on an investment property, such as cash flow, the 1% rule, gross rent multiplier, cash on cash return, cap rate, or internal rate of return. Those can help provide guidelines.
Is it better to buy an investment property and live in it?
Possibly. If you live in your investment property, you can qualify for owner-occupied financing, which means lower down payments and better interest rates. But it also depends on your plans. If you want to renovate an investment property, living in it during renovations could be challenging.
Is rental property a good investment in 2025?
Rental demand is strong in 2025, but buying property is more dependent on your individual situation rather than market conditions.
Photo credit: iStock/luismmolina
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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.
