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House hacking is a relatively new term for an old-school goal: Finding a way to earn income from a property you own while you also reside there.

Generally, house hacking is defined as renting out parts of your home (one or two rooms, a basement apartment, or one side of a duplex, for example), and using your tenants’ payments to help cover your mortgage and other expenses. But whether you’re a first-time homebuyer, an aspiring real estate investor — literally trying to get a foot in the door of a high-priced housing market — or a longtime homeowner hoping to earn some passive income, there are multiple house-hacking methods to consider.

You’re really only limited by the amount of time and effort you want to put in … and, of course, the homeowners association (HOA) rules and zoning laws in your area. Read on for a look at some of the benefits and challenges of house hacking, and some ways you might put an income-generating home-sharing strategy into action.

How House Hacking Works

In its most basic form, house hacking isn’t that different from sharing an apartment with one or several roommates, with everyone paying their portion of the rent to a landlord or management firm. Except in this scenario, you’re the landlord. You own the house, condo unit, or multi-family building, and you also live there. And you’re using your property as a tool to earn money to make your monthly mortgage loan payments and cover other costs; pay down student loans and other debts; or grow your savings.

Benefits of House Hacking

Millennials and Gen Zers often use a house hack as a way to cut the costs of homeownership. And for those interested in real estate investing, it may also be a step toward building a portfolio of properties. But it could also be an opportunity for boomers who own a home to create a passive income stream in retirement (and maybe enjoy a little company while they’re at it). These are are some of the benefits a house-hacking strategy, done right, can offer:

Reducing Expenses While Building Equity

Housing prices can be daunting, especially for first-time homebuyers who often are just starting out on their own. For those on a tight budget, house hacking may make homeownership more affordable by reducing the burden of monthly payments, and possibly helping to cover other costs, such as insurance, HOA fees, and maintenance. Meanwhile, successful house hackers can look forward to building equity — in a starter home that leads to something bigger or better, or maybe the forever home they hope to live in with their future family someday.

Accessing the Tax Benefits of Homeownership

How does homeownership affect your taxes? If you itemize on your tax return, you may be able to deduct several expenses, including your mortgage interest, property taxes, certain home improvements, and some of the costs of purchasing a home. It’s important to remember, though, that you’ll also have to include the income from your tenants’ rent payments on your return. Talk with a tax professional about your new benefits and obligations.

Testing Out a Rental Property Career

Want to get a feel for what life as a landlord might be like? Living on-site with your tenants can give you an up-close-and-personal look at what property management involves, from dealing with late payments to making sure appliances and fixtures are working.

Building Wealth

Single- and multi-family homes don’t always appreciate with time, but if you take care of your property, and choose the location carefully, you may see an increase in your property’s value, which can add to your equity and your net worth. (You also may be able to charge higher rental prices over time, which could further help you grow your wealth.)

House-Hacking Strategies for Beginners

If you think house hacking might be something you want to try, you’re probably wondering how to get started. It can be a good idea to do some research first, to determine what is and isn’t allowed in your community, city, or county. And, of course, you’ll want to choose a hack that fits with your priorities.

Here are some tips on how to house hack that could be especially useful for beginners:

Renting Out Extra Rooms

If you already own a home, or plan to purchase one soon, renting out extra rooms may be the easiest way to dip your toe into house hacking. You can get help with your mortgage payments and perhaps other costs, including utilities. And if the experiment doesn’t work out, you can always find a new housemate or, if you can afford it, opt for going it alone.

Offering Short-Term Rentals

Not sure you want to commit to a long-term lease? You may want to consider offering a spare room on a short-term rental platform. Your rental income may not be as stable, and the cleaning and guest prep associated with turnover may be challenging, but you’ll get more me-time alone in your home with this option. (Just make sure you aren’t breaking any HOA or other rules.)

Trying a Live-In Flip

Forget about finding suitable housemates: With this strategy, you can go it alone (or team up with a like-minded weekend warrior) to buy and renovate a property with the idea of selling it for a profit in a few months. In the meantime, you can live in the place yourself — as long as it’s deemed habitable. Keep in mind, though, that you’ll be paying the mortgage during that time, while also dealing with repairs and other expenses. So unless you have enough money stashed away, or a few co-investors, the upfront costs may be problematic.

Buying a Multifamily Home

By purchasing a multifamily property, you may be able to maintain a little more personal privacy while also reaping the benefits of bigger rent payments. Anything larger than a duplex might be an ambitious undertaking for a beginner, though — unless you’re willing to go full-on landlord, and set rules, manage repairs, collect rent, and deal with potential disputes with or between your neighbors.

Financial Considerations When House Hacking

If you’re preparing to purchase a property with a plan to house hack, there are several financial considerations to keep in mind.

Researching Your Best Financing Options

As an owner-occupant, you may qualify for a few different types of mortgages, including a conventional loan from a private lender or a government-backed FHA or VA loan. Taking the time to compare loan types and lenders can be an important part of going through the mortgage process and getting the interest rate and loan term that best suit your needs.

For example, if you plan to expand your real estate portfolio using the BRRRR method (buy, rehab, rent, refinance, and repeat), having a good relationship with your lender can help you move on to the next property with fewer worries.

Finding the Best Property for Your Budget

Even if you’re buying a home you expect to live in for a while, it can still be helpful to look at your purchase as a business decision. That means considering the location, the condition of the property, the rental potential, what you might charge, if you want a separate entrance for a tenant, etc. Also, as a beginner, you may want to get some professional advice from a real estate agent or an experienced real estate investor.

Deciding If Your Choices Make Financial Sense

Whether you’re looking at sharing a single-family home with one housemate or a building with several tenants, don’t forget to run the numbers to be sure the arrangement makes financial sense. Add up all your costs vs. what you hope to take in. Will the net amount help you achieve your financial goals?

Recommended: Understanding Mortgage Basics

Risks and Challenges of House Hacking

It’s not hard to imagine where this could all go wrong. House hacking is not without risk. Being a landlord for just one housemate (even a friend) turns out to be more than some people are willing or able to deal with. Some potential pitfalls include:

Maintaining Work-Life Balance

House hacking can blur the lines between what is your home and what is your business/investment. It’s not unlike working from home every day — except your tenants may be even more demanding than your family or your boss. As a live-in landlord, you may find it more difficult to go on vacation, have a pet, throw a party, or take a new job on short notice.

Tenant Troubles

Depending on how much of your space will be shared, the lack of privacy could get old. And even with careful vetting, personality differences (noise, cleanliness, tenant disputes) may become a problem.

Occupancy Instability

If you’re relying on the extra rental income to manage your mortgage payments, keeping your extra room, basement apartment, or multiple units occupied could make or break your ability to hold on to your home. When you budget for income with a long-term tenant, it’s wise to assume your property won’t be rented 100% of the time.

Increased Wear and Tear

With multiple occupants, with or without pets or children, your property might show more wear and tear than a standard owner-occupied home in the neighborhood. This could mean higher maintenance and repair costs than you expected, or it could lower the resale value if you decide to move on.

Recommended: Home Mortgage Calculator

The Takeaway

If all goes well, house hacking can provide an effective way to help pay off your mortgage, build equity, expand your real estate portfolio, and grow your net worth. But making it work can take patience and planning. Beginners may want to start with small steps — renting to just one or two housemates or tenants, for example, and becoming familiar with the appropriate financing options for your needs — before building up to a bigger investment.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What financial factors should I consider when house hacking?

If you plan to purchase a home or building, it’s a good idea to be sure the loan type and terms fit both your short- and long-term goals, that the property costs will fit with your budget, and that the amount you expect to net from your rentals makes sense for the time and effort you’ll put in and the risk you’re taking.

Are there risks involved with house hacking?

Yes, there are both personal and financial risks involved with house hacking.

Can I house hack with a mortgage?

Absolutely. Using the income from your house hack to help pay down your mortgage is typically one of the primary goals of investors who choose to use this strategy.

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Photo credit: iStock/andresr

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

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

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

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


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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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It may seem as though transferring a mortgage — allowing a new borrower to take over the payments for the remainder of the loan term and relieving the original borrower of that obligation — would be a pretty straightforward process.

It isn’t.

For one thing, most lenders don’t allow mortgage transfers as a general rule. (Note: This includes SoFi.) And even when transfer of a mortgage is allowed — a government-backed loan may be assumable, for example, if the lender approves it — the process can be complicated and time-consuming.
If you’re considering pursuing a mortgage transfer, read on to learn some of the basics.

What Is a Mortgage Transfer?

A mortgage transfer involves reassigning an existing home loan from the original borrower to a different borrower, and letting the person (or entity) who assumes the loan keep the same interest rate, loan amount, loan length, and monthly payment.

The new borrower takes over all responsibility for paying off the remaining loan balance without getting a new loan, and the original borrower is legally released from any obligation.

A mortgage transfer can help both original and potential new owners: It may make it easier for the homeowner to attract potential buyers, for example, with the prospect of getting a lower interest rate than is currently available. And the homebuyer can look forward to saving money over the life of the loan and possibly paying off the home sooner.

Recommended: Mortgage Basics

How a Mortgage Transfer Works

The only way to make the transfer of a mortgage official is to work through your lender, and the process typically requires several steps, including:

Getting Your Lender’s Approval

If your lender won’t approve the transfer, you won’t be able to move forward — and it’s quite possible your lender will say no. Most conventional mortgages tend to have something called a “due-on-sale” clause,” which says the balance of the loan must be fully repaid in order for the original owner to be rid of the loan obligation. And even if you have an assumable mortgage (an FHA or VA loan, for example), the lender will have to approve the new borrower and the transfer.

That said, no matter what type of loan you have, you can always ask. There are some special situations in which a lender must agree to a transfer, despite the “due-on-sale” clause.

Filing the Proper Paperwork

If you are allowed to do a transfer, both the original and new borrower should prepare for some paperwork. The lender will likely want to verify the homeowner’s reasons for transferring the loan and check on the loan’s current status. And the new borrower can expect the lender to do a credit check and ask for documentation of employment and income to ensure he or she can manage the payments.

To avoid delays, borrowers should be ready to answer the lender’s questions and provide documentation as quickly as possible. You may find it makes sense to hire an attorney to help with this process.

Keeping the Loan in Good Standing

It may take several weeks for the transfer to go through, and any payments that are due during that waiting period should be made on time. If your loan becomes delinquent, it could affect the transfer. Homeowners also should be diligent about keeping up to date with required insurance policies, property taxes, and any homeowners association fees.

Paying the Appropriate Taxes

Most states charge a real estate transfer tax when real estate is sold or transferred. The amount and who’s responsible for this payment (the original borrower, the new borrower, or both) varies depending on where you live. Your attorney and/or lender should be able to help you understand your tax responsibility.

When Can You Transfer a Mortgage?

If you have a government-backed mortgage, your loan transfer request can likely be approved as long as the person assuming the mortgage meets the lender’s qualifications. But if you have a mortgage with a “due-on-sale” clause, which generally prohibits a borrower from transferring a loan to another borrower, you may only be able to get a transfer approved under special circumstances.

Transferring a Mortgage to Another Person

•   The federal law that allows lenders to include the due-on-sale clause in their contracts lists several situations in which the clause isn’t enforceable, including:

•   The transfer is made due to the death of a spouse, joint tenant, or relative.

•   The transfer is part of a living trust arrangement in which the new borrower is a beneficiary.

•   The transfer is part of a divorce or separation agreement in which the ex-spouse continues to live in the home.

•   The transfer is passing the property to an immediate family member.

Mortgage Transfer vs. Refinancing

If you’re a homeowner whose mortgage (or situation) isn’t eligible for a transfer, but you’re struggling to make your monthly payments or you want to make some changes to your current loan terms, you might consider a mortgage refinance. This could allow you to:

•   Extend the length of the loan with the goal of reducing your monthly payments.

•   Shorten the loan term and pay less interest over the life of the loan.

•   Add a second borrower to the refinanced loan to help with making payments.

•   Switch from a variable rate to a fixed interest rate. (If your loan’s current adjustable rate already has or is about to increase, you may benefit from a more reliable and possibly lower fixed rate.)

•   Get a lower interest rate. If your credit profile has improved, or interest rates have dropped since you got your loan, you may qualify for a lower rate.

•   Do a cash-out mortgage refinance and use some of your equity to pay other expenses.

None of these options will remove the original borrower’s responsibility for paying the loan the way a mortgage transfer can. But it could relieve some of the financial stress.

Benefits and Drawbacks of Transferring a Mortgage

As mentioned above, a mortgage transfer can be beneficial for both the original homeowner and the person taking over the loan. Here are a few of the pros and cons involved with a mortgage transfer:

Benefits

•   Lower interest rate for the new borrower: If the owner’s interest rate is lower than current market rates, a transfer could result in significant savings for the new borrower.

•   Fewer closing costs: Assuming a loan typically can mean fewer closing costs than getting a new mortgage. The new borrower may be able to avoid paying an origination fee, appraisal fee, and other costs typically associated with the standard mortgage process.

•   Savings can make a home more appealing to buyers: If buyers see that they can get a lower interest rate and avoid some closing costs, it might make the sale more attractive.

Drawbacks

•   Higher upfront costs: As part of transferring the loan, buyers typically must cover the equity the seller has built up in the home, which may require a hefty upfront payment.

•   Limited loan options: Since most mortgages can’t be transferred, few sellers can offer this option to buyers. Those that do will likely be transferring FHA, VA, or USDA loans, which means as a buyer, you likely won’t have your choice of different mortgage types.

•   Mortgage insurance: If the transferred mortgage is an FHA loan with an annual mortgage insurance premium (MIP), the buyer should expect to continue paying that amount in addition to other loan costs. FHA MIP is unavoidable, and payments typically last for the life of the loan.

The Takeaway

A mortgage transfer can have benefits for both homeowners and homebuyers, especially if mortgage rates at the time of the transaction are significantly higher than the rate assigned to the original home loan. But most conventional loans aren’t eligible for mortgage transfers, except in specific circumstances. And even if you have a mortgage that is assumable (such as an FHA loan), a transfer isn’t automatic. The lender must approve the new borrower before the transfer can go through.
Before moving forward with a mortgage transfer, which can be a complicated process, it can be a good idea to compare the pros and cons of different loan options to be sure you’re making the best choice for your needs.

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

Are there fees associated with transferring a mortgage?

Yes, there may be some fees associated with transferring a mortgage, but closing costs are typically lower than with the standard mortgage process.

What documents are needed for a mortgage transfer?

Documents required for a mortgage transfer may include the original loan agreement/mortgage documents, new borrower’s loan application, original borrower’s authorization for the transfer, and proof of income and other financial documentation for the buyer.

How does a mortgage transfer affect interest rates?

When you transfer a mortgage, the interest rate and other terms of the original loan stay the same.

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Photo credit: iStock/Delmaine Donson

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

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

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

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


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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
This article is not intended to be legal advice. Please consult an attorney for advice.

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.

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Homeowners with a mortgage typically make monthly payments toward the loan principal and interest. But borrowers can choose to make biweekly mortgage payments instead, resulting in 13 full payments over a one-year period.

Opting for this mortgage payment strategy may come with advantages and drawbacks, including impacts on your savings and reducing the interest you pay over the life of the loan. Here’s what to know about the potential pros and cons of making mortgage payments biweekly.

Understanding Biweekly Mortgage Payments

So how do biweekly mortgage payments work in practice? A biweekly mortgage payment involves a borrower paying half of their monthly payment every two weeks rather than in full each month.

With 52 weeks in a year, these 26 biweekly payments amount to an extra month’s payment every year. Over the course of a 30-year mortgage term, this can help whittle down your mortgage principal — the amount you borrowed to buy your home — and speed up your mortgage repayment by several years.

Before you start making extra or biweekly payments, it’s a good idea to check to make sure you won’t encounter a prepayment penalty for paying off the mortgage before the end of the loan term.

Recommended: Mortgage Repayment Calculator

Pros of Biweekly Mortgage Payments

If you’re looking to pay off your mortgage early, paying the mortgage biweekly could be beneficial. Below are some advantages of paying your mortgage biweekly.

•   Save thousands in interest payments over the life of the loan by reducing the accumulation of interest on your mortgage.

•   Build home equity faster by making additional payments toward the loan principal.

•   If you have private mortgage insurance (PMI), reach 20% equity in your home sooner to cancel PMI and lower your mortgage payment.

•   Pay off your mortgage several years in advance, freeing up finances for other financial goals, such as retirement.

Cons of Biweekly Mortgage Payments

Paying off your mortgage early has a lot of appeal, but it’s important to consider the potential disadvantages of biweekly mortgage payments.

Here are some drawbacks of this mortgage repayment strategy to keep in mind.

•   Potential risk of facing prepayment penalties if you pay your mortgage off early, depending on the terms of the loan agreement.

•   Lenders may charge a fee for setting up biweekly mortgage payments to recoup lost interest from paying off the mortgage early.

•   Committing to a biweekly payment plan consumes more of your budget, which can impact your ability to manage the other costs of owning a home and your financial goals.

Recommended: Home Equity Line of Credit

How to Calculate Potential Savings

How much could you save by making mortgage payments biweekly? Here’s an example of how to crunch the numbers and determine how much you could save.

Let’s say you make a 20% down payment on a home and have a $240,000 mortgage principal with a 6.50% interest rate and 30-year loan term. This amounts to a monthly payment of around $1,516, not accounting for property taxes and home insurance. As a biweekly mortgage payment, you’d pay $758.

Every year, this means putting an extra $1,516 toward the mortgage principal on top of your monthly mortgage payments. Here’s how a biweekly vs. monthly mortgage payment breaks down in terms of loan term and potential savings, assuming you begin making biweekly payments from the outset of the loan.

With monthly mortgage payments:

•   Monthly payment: $1,516

•   Total annual payment: $18,912

•   Loan term: 30 years

•   Total interest paid: $306,106

With biweekly mortgage payments:

•   Biweekly payment: $758

•   Total annual payment: $19,708

•   Loan term: 24 years

•   Total interest paid: $235,609

By setting up biweekly payments from the start, you’d pay off the mortgage six years early and save $70,497 in interest. Even if you have fewer years left on your mortgage, there’s still potential for significant savings on the mortgage interest. (You can use a mortgage calculator to see how much interest you pay over the life of your mortgage.)

Who Benefits Most from Biweekly Payments?

Getting out of debt and paying off a mortgage sooner could be advantageous for any homeowner, but there are some scenarios when it might make more financial sense.

Borrowers with high interest rates on their mortgage could benefit from making biweekly mortgage payments. Putting an extra monthly payment toward the loan principal each year helps diminish how much interest accrues on the mortgage, adding up to considerable savings.

However, it’s important to take a comprehensive look at your finances to determine where extra payments on debt could be the most effective. If you have a personal loan or credit card debt with a higher interest rate than your mortgage rate, you could save more by tackling these high-interest debts first before setting up biweekly mortgage payments.

Since this approach essentially adds an additional monthly payment each year, it’s worth reevaluating your household budget to ensure you can cover the cost without impacting other financial goals. From a budgeting standpoint, making biweekly mortgage payments could be easier for those who have steady income and receive a paycheck every two weeks.

Implementing Biweekly Payments

There are some steps to follow and key considerations when setting up biweekly mortgage payments.

First, reach out to your lender to see if it allows biweekly payments and if you’ll be liable for prepayment penalties. (Fortunately, prepayment penalties are typically limited to instances where a borrower pays off the mortgage within five years or less.)

It’s also worth asking how the lender will apply extra payments if you set up biweekly payments. Specifically, confirm that the extra funds are applied to the mortgage principal rather than interest or your escrow. Note that having the half monthly payment applied right away can lead to more savings than if the lender waits until the second half is received.

Alternatives to Biweekly Mortgage Payments

Biweekly mortgage payments might not work for everyone. If you’re not ready to commit to paying your mortgage biweekly, there are some alternative options that could help save money on mortgage loans.

•   Increase your monthly payment: Round up monthly payments to the nearest hundred dollar amount (e.g., paying $1,600 instead of $1,516) to put more money toward the mortgage principal.

•   Make a lump-sum payment: Apply a tax refund, extra savings, or bonus as a one-off payment toward the principal when it makes sense for your budget.

•   Mortgage refinance: Reduce your mortgage term from 30 years to 15 years to save on interest, though this will result in a larger monthly payment.

The Takeaway

Paying off your mortgage early with biweekly payments could save you thousands in interest and shorten your mortgage term by several years. But first, it’s worth paying off other high-interest debt and checking how your lender applies extra payments before committing to this payoff strategy.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I switch to biweekly payments on an existing mortgage?

You may be able to switch an existing mortgage to biweekly payments, but you’ll need to check with your lender first. Otherwise, making payments every two weeks may not get applied to the mortgage principal as intended.

Will biweekly payments affect my taxes or escrow?

Biweekly payments do not affect your taxes, but it’s a good idea to verify that the appropriate amount is going to escrow from each mortgage payment.

What if I can’t make a biweekly payment occasionally?

Missing a biweekly payment or any mortgage payment could involve late fees and harm your credit score. To avoid these risks, reach out to your lender as soon as possible to discuss options.

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Photo credit: iStock/anchiy

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

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

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

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


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

SOHL-Q125-060

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Homeowners have multiple options to save money on mortgage interest. A mortgage offset account can reduce the home loan balance that borrowers pay interest on. The amount of the loan that is “offset” depends on the type of offset account and the total funds set aside in the account.

Here’s what you need to know about this mortgage savings strategy. We’ll cover what are offset accounts, and how offset accounts work with your home loan. You’ll also learn the benefits of using an offset account, and get wise to what to consider before opening an offset home loan account. (Note: Offset accounts are uncommon in the U.S., and SoFi does not offer this account option. These accounts are more common in the United Kingdom and Australia.)

Types of Offset Accounts for Home Loans

A mortgage offset account is like a normal savings account, but the funds that you keep in it are used to “offset” what you owe on your home loan. So the balance in your offset account is subtracted from your outstanding home loan balance when the interest you owe on your loan is calculated. You can add funds to an offset account and withdraw them when needed — so, for example, an offset account could be a good place to park your rainy-day savings.

How the lender applies the offset account against the mortgage depends on the type of offset account. Options can vary by lender, but there are two main types of offset accounts: full and partial.

Full Offset Accounts

As its name suggests, a full offset account applies the entire balance in the account against the mortgage balance. (Unsure how your mortgage balance is computed? Read up on the mortgage basics.)

For example, a borrower with a $350,000 mortgage and $30,000 in a full offset account would only pay mortgage interest on $320,000. In other words, you pay interest on the difference between the two account totals. This can add up to considerable savings over the life of the home loan.

Partial Offset Accounts

Meanwhile, money in a partial offset account does not provide a one-for-one offset against an outstanding mortgage, Instead, the mortgage balance is offset by a set portion of the funds in the account, such as 50%.

Using the same example of a $350,000 mortgage, the borrower would pay interest on $335,000 if the partial offset account was set at 50%.

Recommended: What Is a Good Mortgage Interest Rate Right Now?

How Offset Accounts Work with Your Home Loan

So, what is a mortgage offset account in practice and how does it work?

An offset account is linked to a mortgage — usually under the same lender. It functions like a checking account or savings account in that you can withdraw funds from an ATM and typically pay for transactions using a debit card that is linked to the account. However, these accounts typically don’t earn interest like a high-yield savings account.

As the balance in the mortgage offset account fluctuates from month to month, so does the amount of interest charged on the remaining mortgage principal — the amount you initially borrowed. This can translate to differences in the total mortgage payment due each month. To see how much you might save in interest, you can plug different mortgage principal amounts into a mortgage calculator.

Generally, you can add and withdraw funds from an offset account as desired, meaning this money can be used for other financial goals like saving for a vacation or a new car purchase. Borrowers might consider setting up a direct deposit to their offset account to maintain a higher balance.

Benefits of Using an Offset Account for Your Mortgage

Using a mortgage offset account can deliver a number of benefits for borrowers. Here’s a closer look at some of the key advantages.

Interest Savings on Your Home Loan

The money in an offset account effectively lowers the mortgage balance, meaning you pay less in interest. This is true for each monthly payment, as well as over the life of the mortgage.

Say you have a $300,000 fixed-rate mortgage with a 30-year term and 6.00% interest rate. By making monthly payments in full without additional payments to pay off your mortgage early, you’d be charged approximately $347,515 in interest.

In this same scenario, starting with a full offset account with a $1,000 balance that you add $250 to monthly could shorten the loan term by five years and one month. Increasing monthly contributions to $500 would shave 7.5 years off the mortgage term.

Flexible Access to Funds

Another benefit of an offset account is that your money can be used for other purposes as needed.

This gives the borrowers plenty of flexibility to use this money for other financial goals. For example, it could serve as an emergency fund to be prepared for unexpected costs. Additionally, other long-term savings goals can be managed in an offset account to maximize mortgage interest savings.

Recommended: First-Time Homebuyer Guide

Potential Tax Efficiency

Homeowners can deduct interest payments on home loan products, such as FHA loans and HELOCs (home equity lines of credit). While an offset account reduces the amount of interest paid on a mortgage, this reduced interest is still tax deductible.

Generally, offset accounts do not earn interest like a savings account, which is considered taxable income. Furthermore, the interest savings on your mortgage from an offset account are not taxable. Thus, an offset home loan account can offer savings without increasing a borrower’s tax liability.

Considerations Before Opening an Offset Account for a Home Loan

Offset accounts vary by lender and there are some potential tradeoffs to factor into your decision-making before moving forward, especially because offset accounts aren’t the only way to reduce the interest you pay (you could, for example, consider a mortgage refinance). Below are a few things to keep in mind when considering an offset account.

Fees and Charges

It’s possible that an offset account may carry fees for withdrawing funds, which could diminish the value if you intend to use the money in your offset account for other purposes. In any case, it’s important to fully understand the lender’s terms and conditions to weigh the potential savings vs. added costs.

Minimum Balance Requirements

When you open an offset account, you may be required to maintain a minimum balance. While the intent of an offset account is to increasingly add funds to reduce interest payments, it’s worth noting if a lender requires this and whether the minimum balance could be an issue.

Eligibility for Offset Accounts with Home Loans

You may need to make a higher down payment of 20% or more to get an offset mortgage account. Meanwhile, conventional mortgage loans may require as little as 3-5% toward a down payment, with the lowest down payment amounts allowed for eligible first-time buyers. And as noted above, it can be difficult to find a lender that offers offset accounts for home loans.

The Takeaway

An offset account can help borrowers reduce the interest paid on their mortgage while keeping funds accessible for other financial goals. If a lender offers offset accounts, thoroughly explore what is an offset account with the lender, and take note of any fees and minimum balance requirements to determine whether you can expect to save money by using one.
Otherwise, consider other ways to lower the interest rate on your home loan, perhaps including a refinance or even paying off your mortgage early.

FAQ

What is the primary purpose of an offset account for home loans?

An offset account for home loans is meant to reduce interest on a home loan and pay off the loan sooner. They usually can be used for making other transactions, too, similar to a checking account.

Can I access the funds in my offset account while paying my mortgage?

Borrowers can typically access the money in an offset account, assuming they maintain the minimum balance requirement, if applicable. Note that withdrawing funds can reduce how much you might save in interest.

Are there tax benefits to using an offset account with a home loan?

An offset account usually doesn’t accrue interest, meaning it doesn’t create any taxable income. The amount you might save in interest is also not considered taxable.

Do all home loans qualify for an offset account?

Not every home loan qualifies for an offset account. It’s essential to check with your lender to determine your options.

Are there any drawbacks to using an offset account for a mortgage?

Potential drawbacks to using an offset account for a mortgage include account fees, transaction charges, and minimum balance requirements. It’s also possible that you could achieve greater savings via other mortgage repayment strategies, such as biweekly payments.

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Photo credit: iStock/nortonrsx

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

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

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

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


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

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

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Refinancing replaces your current mortgage with a new one. That’s something you might consider if you’d like to get a lower interest rate or different repayment terms. Having an open home equity line of credit (HELOC) can add a wrinkle to the refinancing process.

Here’s some comforting news for those who are wondering, If I refi my home, can I keep my HELOC? Yes, if your lender agrees to subordinate the line of credit. What, exactly, does that mean? Read on for what you need to know about refinancing with HELOC debt (or refinancing with an open line of credit).

Understanding Refinancing and HELOCs

Refinancing replaces your existing mortgage with a new home loan. You may refinance with your current lender or a different one. It’s a fairly straightforward process if you have just one mortgage to refinance. You compare mortgage rates from different lenders, go through the mortgage preapproval process, and apply for a loan. The lender appraises your home’s value and checks your credit to determine whether to approve you.

Do you have to pay off a HELOC if you refinance? Not necessarily. Whether you get to keep your HELOC after refinancing depends largely on the lender.

If you need an in-depth HELOC definition or want to better understand how this type of credit line works, read our detailed HELOC loan guide.

Impact of Refinancing on an Existing HELOC

Refinancing with HELOC debt opens up some different possibilities for how your line of credit is handled. It helps to understand what could happen before applying for a mortgage refinance loan.

Subordination of the HELOC

Subordination refers to the way debts are ranked in order of priority for payoff, from highest to lowest.1 When you get a loan to buy a home, the home secures the property. This creates a lien, which allows the lender to make a legal claim to the property if you don’t repay what you owe. This mortgage is a first or senior lien. A HELOC, on the other hand, is a secondary or junior lien.2,3

Here’s what that means in simple terms. If you refinance your home, your first mortgage takes precedence for payoff. Once that loan is paid off with the proceeds from the new loan, your HELOC moves into the first loan position.

If you were to sell the home or fall into foreclosure, the HELOC would take priority for repayment which poses a risk to the lender who provides your new mortgage. If there isn’t enough money from the sale or auction of the home to cover the refinanced mortgage debt, the lender could take a financial hit.

Paying Off the HELOC

You could pay off your HELOC in full prior to refinancing, either with cash on hand or money from the refinance loan. Once you pay your line of credit off, your lender may close the account. If you’d still like to have access to a credit line for emergencies or other purposes, you’d need to apply for a new HELOC.

Whether that makes sense can hinge on how much equity you have in the home and what you’ll pay for a new HELOC in interest and fees. If you’re refinancing your first mortgage because rates dropped, for instance, you may be able to qualify for a low rate on a new home equity line of credit.

Closing the HELOC

HELOC rules prevent lenders from closing your account as long as you continue making payments. So you wouldn’t be able to shut your line of credit down without paying the balance off first.4

If you’re refinancing your HELOC debt into the new mortgage (borrowing enough to cover what you owe on your home plus what you owe on your HELOC), the new loan would pay off the balance on your line of credit and close the account. Once your HELOC is closed you wouldn’t be able to make additional withdrawals from your credit line.

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

Options to Retain Your HELOC During Refinancing

Keeping your HELOC when refinancing may take a little effort on your part. Here’s how to navigate this part of the refinance process.

Requesting Subordination from Your HELOC Lender

A subordination agreement is a legally binding agreement specifying that your HELOC will take a second lien position when you refinance. If you have a HELOC with one lender and plan to refinance with another, all the lenders involved in the transaction would need to agree to subordination.

You can reach out to your lender directly to ask if subordination is an option. If so, you’ll need to complete whatever paperwork the lenders require. A lender may have a standard subordination form you’ll need to fill out.5

Subordination allows you to keep your HELOC open after refinancing. You may, however, have to pay a fee to the lender to get them to agree to subordination of your line of credit.

Refinancing with the Same Lender

If you plan to refinance with the same lender that you have your HELOC with, it may be easier to have your subordination request granted. Keep in mind that:

•   New draws from your HELOC may be temporarily prohibited until refinancing is complete

•   Your new loan may come with a higher interest rate if the lender is concerned about your risk profile

•   A higher rate on your refinance loan could result in a higher monthly payment

If you’re considering this option, talk to your lender about how refinancing with a HELOC would work and the ways it might impact your new loan.

Refinancing Without Paying Off the HELOC

Subordination allows you to refinance your first mortgage without having to pay off your HELOC or close your HELOC account. The main consideration is whether you’ll be able to afford the monthly payments on your HELOC and your new mortgage payment.

Running the numbers is relatively easy if both your refinance loan and your HELOC have a fixed rate. It’s a little more challenging if you have a variable-rate HELOC.

With a variable-rate HELOC, your rate is tied to an index or benchmark rate, like the prime rate. If the benchmark rate goes up or down, your rate — and your payments — can move the same way.6

Pros and Cons of Keeping Your HELOC When Refinancing

Keeping your HELOC open when refinancing has pros and cons. Weighing both sides can help you decide if it’s right for you.

Advantages

Here are some of the benefits to keeping your line of credit open when you refinance.

•   HELOCs offer flexible access to credit when you need it, whether it’s for an emergency or a large purchase.

•   You pay interest only on the portion of the credit line you use, so you can control your costs to a degree.

•   Keeping your HELOC open means you don’t have to apply for a new one (and get another ding on your credit).

Disadvantages

When is keeping your HELOC open after a refi not the best move? Here are the downsides.

•   Subordinating your HELOC could mean paying a higher interest rate on your refinance loan, which can add to your cost of borrowing.

•   You risk losing the home if your refinance and HELOC payments become unaffordable.

•   An open HELOC could be a temptation to spend unnecessarily, leading to more debt and more interest that you’ll have to repay.

Recommended: How Often Can You Refinance Your Home?

Steps to Refinance Your Home While Retaining Your HELOC

Refinancing with a HELOC takes some planning and it helps to understand what you can expect. Here’s an overview of how refinancing with a HELOC typically works.

Assess Your Financial Situation

Your credit and finances carry weight in refinancing, as lenders want to see that you have a good credit history and reliable income. Before you start shopping for a lender, take time to:

•   Check your credit reports and scores

•   Review your monthly budget and income, including how much of your pay currently goes to debt repayment

•   Consider the long-term and how your income or expenses might change over time

•   Use a refinance calculator to estimate the monthly payments on a new loan

If you’re still in the draw period of your HELOC, you might be making minimum or interest-only payments. Once repayment begins, your principal plus interest payments could be much higher. Thinking ahead can increase the odds of being able to manage your HELOC and refinance loan payments.

Communicate with Both Lenders

Communication can make refinancing with a HELOC a much smoother process. If you plan to refinance with a lender that’s different from the one you have your HELOC with, you’ll need to talk to both of them about subordination.

This is an opportunity to explain why you want to keep your HELOC open and ask questions about the subordination process. Ultimately, it’s the HELOC lender that must agree to remain in the second lien position. Be prepared to explain the terms of the refinance loan to the HELOC lender and the HELOC terms to your refinance lender.

Understand Subordination Agreements

Subordination agreements may not be lengthy; they just need to include the key details of the transaction and the signatures of the parties involved. However, it’s still important to review the agreement carefully so you know what you’re agreeing to.

The agreement should include:

•   Names of the subordinating and refinance lenders

•   Your name

•   The date each mortgage was taken out

•   An acknowledgment by the HELOC lender that the HELOC will stay in the second lien position

If you’re having trouble decoding your subordination agreement, don’t hesitate to ask the lender to explain it in more detail.

Prepare Necessary Documentation

Your lender should handle preparation of the subordination agreement. You may need to provide the HELOC lender with documentation for the refinance loan, showing how much you plan to borrow.

For the refinance itself, your lender may ask for:

•   Recent pay stubs

•   Bank and/or investment account statements

•   Tax returns

•   A profit and loss statement if you’re self-employed

You’ll need to go through a hard credit check and get an appraisal of the home. The refinance lender may schedule an in-person, drive-by, or virtual appraisal. Once approved, you’ll just need to review and sign the closing paperwork and pay closing costs. Those are the basic steps for how to refinance a home loan, with or without a HELOC.

The Takeaway

Refinancing with a HELOC makes things a little more complicated, but it’s possible to keep your line of credit through a process called subordination. You’ll have to communicate both with your new mortgage company as well as with the lender who gave you the HELOC. Alternatively, it may be possible to pay off your HELOC with your new mortgage, or pay it off with funds from other sources before you undertake a refi.

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 from SoFi, brokered through Spring EQ.

FAQ

Is it possible to refinance both my primary mortgage and HELOC simultaneously?

It’s possible to refinance a primary mortgage and HELOC at the same time using a cash-out refinance. You’d get a new mortgage loan and pull your equity out in cash, then use that money to pay off the HELOC. You’d then have one mortgage payment to make going forward.

Will my HELOC lender agree to subordinate their lien during refinancing?

The answer to this question depends on the lender. Subordination moves the HELOC into a junior lien position, but that’s where HELOCs ordinarily go when you have a primary mortgage. Talking to your lender can give you an idea of whether subordination is something they’ll agree to.

How does the combined loan-to-value ratio impact refinancing with an existing HELOC?

Combined loan-to-value (CLTV) measures all of the outstanding mortgage debt you have against your home’s value. If your CLTV ratio is too high, that could affect your ability to qualify for a refinance loan. The lender may limit the amount you can borrow or deny you altogether.

Are there additional costs associated with subordinating a HELOC during refinancing?

Lenders may assess a fee to enter into a subordination agreement. The fee may be lower or higher, depending on the lender. Talking to your HELOC lender is the best way to find out whether subordination is allowed and if so, what fees you might pay.

Can I draw from my HELOC during the refinancing process?

Your lender may limit new draws while you’re in the middle of refinancing. Once the refinance is complete and the subordination agreement has been signed, you should be able to resume withdrawing from your credit line.

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Photo credit: iStock/ljubaphoto

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

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

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

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


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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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.

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