Pros and Cons of Biweekly Mortgage Payments

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.

Key Points

•   Biweekly mortgage payments can save thousands in interest and build home equity faster.

•   Biweekly payments can sometimes have setup fees or lead to a prepayment penalty.

•   Borrowers with high mortgage interest rates benefit most.

•   An alternative to biweekly payments is increasing monthly payments or making lump-sum payments.

•   Biweekly mortgage payments add the equivalent of an extra monthly payment annually.

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.


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.

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What Is a Mortgage Offset Account?

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.)

Key Points

•   An offset account reduces mortgage interest by offsetting the principal amount owed.

•   Funds in the account can fluctuate, affecting monthly interest charges.

•   Money in the account remains accessible for other uses.

•   Having an offset account may affect the amount of mortgage interest that can be deducted on taxes.

•   Offset accounts are more common outside the U.S.

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.


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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If I Refinance My Home, Can I Keep My HELOC?

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).

Key Points

•   When refinancing, a subordination agreement makes it possible for a homeowner to refinance with a HELOC.

•   Subordination maintains the HELOC in a junior lien position, keeping it open.

•   Retaining a HELOC may lead to a higher interest rate and monthly payment on the new mortgage.

•   Advantages include flexible credit access and avoiding reapplication; disadvantages involve higher interest rates and increased debt risk.

•   Steps to navigate refinancing with a HELOC include financial assessment, using a refinance calculator, and securing a subordination agreement.

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.


About the author

Rebecca Lake

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.



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.

SOHL-Q125-056

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What Is a Draw Period on a HELOC?

A home equity line of credit or HELOC is a revolving credit line secured by your home. HELOCs have two phases: a draw period and a repayment period.

Your HELOC draw period is the window of time in which you can access your credit line before you must begin repaying what you have borrowed. A typical HELOC draw period is five years, though yours may be shorter or longer, depending on the terms of your borrowing agreement.

Here’s a closer look at how a home equity line of credit draw period works.

Key Points

•   A HELOC is a revolving line of credit secured by your home.

•   During your HELOC draw period, you can use your credit line to consolidate debt, pay for home repairs, or fund other financial goals.

•   Interest may accrue during the draw period and your lender may expect you to make interest-only or minimum monthly payments.

•   Once the draw period ends, you can’t make further withdrawals from your credit line.

•   You can pay a HELOC off during the draw period but your lender may assess a prepayment penalty or early termination fee.

Understanding the Draw Period


What is a HELOC draw period? Simply put, it’s when you’re allowed to access your credit line. During the draw period, you can spend up to your credit limit and make payments to reduce the outstanding balance. That’s similar to how a credit card works.

Your choice of lender can influence how long your HELOC draw period lasts. Some lenders offer HELOCs with a five-year draw period; others extend it up to 10 years. Comparing HELOC options can help you decide which line of credit best suits your needs. Examine mortgage rates and consider getting preapproved for a HELOC to see what you might qualify for. Look for HELOC lenders that offer mortgage preapproval with no impact on your credit.

Recommended: HELOC Definition

How the Draw Period Works


The draw period on a home equity line gives you freedom and flexibility to spend, up to your credit limit. There are a few key details to know, however, about how a HELOC draw period works.

Accessing Funds


HELOC lenders can offer multiple ways to access funds during the draw period. Your options might include:

Paper checks

•   An ATM card or debit card

•   ACH transfers to a linked bank account

•   In-person cash withdrawals (if you opened your HELOC at a local bank)

Your HELOC lender should provide monthly statements showing your transaction activity, including how withdrawals were made, the amount, and the date. Keeping track of draws can help you calculate what your repayment installments may be later on.

Payment Structure


Your lender may require monthly payments during your HELOC draw period. The payment may be a set minimum dollar amount, or a payment equivalent to the interest only.

HELOCs typically accrue interest daily. Here’s how to find your daily interest accrual.

•   Divide your annual percentage rate (APR) by 365 (number of days in the year)

•   Multiply the result by your balance to find your daily interest accrual

For example, say you owe $50,000 to a HELOC at an annual APR of 5.00%. If you plug in the numbers, the math looks like this:

0.05/365 = 0.0001369863 x $50,000 = $6.85

Note that some lenders might use 360 instead of 365 to find your daily interest rate. That number assumes that every month has 30 days.

Your loan agreement should specify whether you’re required to make interest-only payments or a flat minimum payment. Keep in mind that if you can pay more than the minimum due, that’s usually a good idea. The bigger dent you can make in your balance during the draw period, the less you’ll have to repay later.

Have questions about home equity lines work in general? Explore our in-depth HELOC loan guide.

Interest Rates


HELOCs may have fixed or variable rates. A fixed interest rate stays the same for the life of the loan; variable rates, meanwhile, can increase or decrease over time based on changes to an underlying index or benchmark rate.

Variable-rate HELOCs can use the prime rate, LIBOR, or Treasury bill rate as their index rate. The prime rate is common, as it represents the rate at which banks lend to their most creditworthy customers. Lenders may charge a prime rate + a margin rate to set your HELOC rate.

Recommended: Understanding the Mortgage APR

Transitioning from Draw to Repayment Period


If you’re asking what is the draw period on a HELOC, it’s also important to ask what comes after. As you get closer to the end of your draw period, you’ll need to begin preparing for the repayment phase.

End of Draw Period


The end of your HELOC draw period is determined by the lender at the outset. Again, you may have five years, 10 years, or somewhere in between to spend with your credit line. Once the draw period ends, you can’t make any more withdrawals.

Your loan agreement should specify the end date of your draw period and when you’re expected to make your first regular monthly payment.

Can you extend a HELOC draw period? Maybe. Your lender might offer the option to renew your draw period so you have more time to access your credit line. You might pay a fee for the convenience.

The other option would be to refinance your HELOC into a new HELOC. That would give you a new draw period, followed by a new repayment term.

Repayment Terms


HELOC repayment may last anywhere from 10 to 30 years — it depends on the terms of your loan agreement. During the repayment period, you’ll make payments to the principal (meaning the amount you originally borrowed) and the interest.

HELOC repayment is amortized the same as other home loans, such as FHA loans or VA loans. Your lender should give you an amortization schedule showing how many payments you’ll make total and how much of each payment goes to principal vs. interest.

Can you pay off a HELOC during the draw period? Yes, if your lender allows you to do so. Be aware, however, that your lender might assess a prepayment penalty for an early HELOC payoff. Prepayment penalties allow lenders to recoup some of the interest they lose out on collecting when a borrower pays a loan off early.6

Impact on Monthly Payments


How much will you have to pay monthly to your home equity line of credit? It’s an important question to ask when planning your budget once the draw period ends.

Your HELOC payment amount is determined by:

•   Your principal balance

•   Interest rate and fees

•   Repayment term

If you have a fixed-rate HELOC, your monthly payments will be the same for the entirety of your repayment term. If you took out a variable-rate HELOC, your payments could change over time if your rate rises or falls.

Strategies During the Draw Period


Your HELOC draw period is for spending, but there are some things you can do to minimize what you’ll have to repay later. Here are a few tips for managing your home equity line of credit during the draw period and beyond.

Making Principal Payments


You may be obligated to make minimum or interest-only payments during the draw period, but consider whether you could make payments to the principal as well. For example, you might:

•   Apply your tax refund to the principal

•   Use a year-end bonus to wipe out some of the balance

•   Make biweekly payments or micropayments toward the principal

•   Double up on your regular monthly payments

Reducing your principal balance can shrink the amount of interest that accrues. And it can lower your monthly payments once you enter the repayment period.

Monitoring Interest Rates


If you have a variable-rate HELOC, it’s a good idea to keep an eye on interest rates. If you anticipate a rate hike sometime in the future, you may want to explore HELOC refinancing options.

Refinancing a variable-rate HELOC into a fixed-rate line of credit can offer some predictability with monthly payments. You don’t have to worry about your rate — and your payment — going up over time. You could also consider using a fixed-rate personal loan to pay off your HELOC debt. The advantage of this approach is that personal loans aren’t tied to your home. So if you lose your job or get sick and can’t work, you don’t have to worry about losing your home if you fall behind on the loan payments.

Monitoring Interest Rates


If you have a variable-rate HELOC, it’s a good idea to keep an eye on interest rates. If you anticipate a rate hike sometime in the future, you may want to explore HELOC refinancing options.

Refinancing a variable-rate HELOC into a fixed-rate line of credit can offer some predictability with monthly payments. You don’t have to worry about your rate — and your payment — going up over time. You could also consider using a fixed-rate personal loan to pay off your HELOC debt. The advantage of this approach is that personal loans aren’t tied to your home. So if you lose your job or get sick and can’t work, you don’t have to worry about losing your home if you fall behind on the loan payments.

Planning for Repayment


Your regular monthly HELOC payments may be significantly higher than your minimum or interest-only payments. So it makes sense to look at your budget to make sure you can afford what you’ll be expected to pay.

A HELOC repayment calculator is a helpful tool for estimating monthly payments and the total interest paid. You can just plug in your HELOC balance, rate, and repayment term to see how your payments might add up.

The Takeaway


What is a draw period on a HELOC? It’s your window to spend before repayment begins. The tips we’ve shared here can help you make the most of your draw period. If you’re still in the “shopping for a HELOC” phase, do your research: Look at different lenders’ interest rates, find out what is a HELOC draw period at various lenders, and inquire about prepayment policies and annual fees to find a lender whose offerings fit your needs.

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

Can I make principal payments during the draw period?

Yes, you should be able to make principal payments during the draw period if your lender allows it. You can review your loan agreement or contact your lender to ask if principal payments are allowed and how to make them. Paying down the principal during the draw period can reduce what you have to repay later and potentially save you money on interest.

What happens if I don’t use my HELOC during the draw period?

One of the great things about a HELOC is that you only pay interest on the amount of your credit line you use. If you don’t use your HELOC during the draw period, there would be nothing to repay with interest later. You may still be responsible for paying annual maintenance fees or other fees associated with your line of credit.

Are there fees associated with the draw period of a HELOC?

HELOCs can come with a variety of fees, including annual or membership fees. If your lender charges an annual fee, you’ll pay it yearly during the draw period and the repayment period. The same goes for membership fees, which should all be explained in your loan agreement.7

How does the draw period affect my credit score?

HELOCs can affect your credit scores in the draw period in two key ways: payment history and credit utilization. Making the required monthly payments on time and keeping your HELOC balance low, relative to your overall credit limit, are the simplest ways to keep your credit score in good standing. Once you enter the repayment period, you’ll just want to continue making monthly payments on time.8

Can the draw period be extended?

Your HELOC lender may allow you to extend your draw period by renewing your line of credit. You may pay a fee to do so. If your lender doesn’t offer renewal, you might look into refinancing your line of credit into a new HELOC with a new draw period.


About the author

Rebecca Lake

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.



Photo credit: iStock/milorad kravic

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.

SOHL-Q125-055

Read more

What Happens to a HELOC When You Sell Your House?

Home equity loans and lines of credit (HELOCs) can put cash in your hands to fund home improvements, debt consolidation, or other financial goals. But if you have a HELOC, what happens if you sell your house?

The good news is that you won’t carry the debt with you. Balances owed to HELOCs are paid off using proceeds from the sale. (The same is true of selling a house with a home equity loan.) This is a requirement before the property can change hands.

Understanding HELOCs and Home Sales


Can I sell my house if I have a HELOC? Absolutely, though it’s important to understand how having a HELOC to repay affects the sale process and the amount of profit you get to walk away with.

Here’s a simple HELOC definition: A HELOC is a revolving line of credit secured by your home. When a home is sold, any debts attached to the property, including all mortgages, must be cleared so the new owner can take possession. That applies to your primary mortgage as well as any HELOCs or home equity loans you owe.

HELOCs and home equity loans are junior liens. A lien is a legal claim against a piece of property that protects a lender or creditor’s interest in it. Junior liens are subordinate to senior liens, which in the case of a home would be your primary mortgage — assuming you still have one. Liens, whether senior or junior, must be cleared before a piece of property can be sold.

In other words, you can’t take your HELOC with you. Once the HELOC is paid off after you sell, you won’t have access to your line of credit any longer.

Recommended: HELOC Loan Guide

Settlement of HELOC Upon Sale

HELOC debts must be settled when you sell the home; you can’t take your line of credit with you. Settlement means the debt is paid or cleared and is no longer attached to the property. Here’s what happens to a HELOC when you sell your house.

Paying Off the HELOC Balance

Who handles the repayment of a HELOC balance when a home is sold? Typically that responsibility falls to the title company. Title companies conduct title searches when a home is sold to ensure that there are no outstanding liens on the property. They also offer title insurance to buyers.

HELOC payoff happens during the closing process.

•   The title company requests a payoff amount from the HELOC lender.

•   Funds to buy the home are sent to an escrow account that’s controlled by the title company.

•   The title company uses funds from the escrow account to pay off the HELOC lender, along with your primary home loan.

•   All remaining funds are forwarded to the seller.

Can you pay off a HELOC prior to closing? Certainly, though you’d need to come up with the money to do so out-of-pocket. If you don’t have cash on hand to settle the debt, you’ll need to use the proceeds from the sale.

Once a HELOC is paid off, you can check state or county property records where you live to make sure the lien was released. Lien release means the debt is cleared from the home.

Closing the HELOC Account


After a HELOC is paid off, you’ll need to make sure the line of credit is closed, since this may not happen automatically. Your lender might require documentation to close your HELOC, including:

•   Closing documents showing proof of sale

•   Payment receipts from the title company showing the HELOC was paid off

•   Authorization from you to close your credit line

In turn, you should get a statement in writing from your lender attesting to the HELOC’s closure. It’s also wise to follow up with a check of your credit reports to make sure your line of credit is listed as closed and paid in full or paid as agreed.

Impact on Sale Proceeds


Selling a house with a home equity loan or HELOC shrinks the amount of profit you get to keep. The share of proceeds you keep depends on how much you owe on the home, including the first mortgage and HELOC, and the sale price.

Deduction of HELOC Balance from Sale Proceeds


When a home is sold with a HELOC, it’s usually the title company that handles repayment of the debt. The upside is that you don’t have to worry about calculating how much you’ll need to pay to settle the HELOC or arrange for payment to be sent to the lender.

Instead, the money comes right off the top. So, for example, say you sell your home for $500,000. You owe $250,000 on your first mortgage and $50,000 to a HELOC. After you deduct $300,000 for the combined mortgage debt, you’d be left with $200,000.

Potential for Remaining Equity


Selling a home with a HELOC assumes that your home’s value has increased since you bought it. If your home value climbed substantially, it’s possible that you could still have a decent amount of equity in the home even if you sell it with a mortgage and a HELOC in place. You may find it helpful to calculate your total equity before making a move to sell a home with a HELOC. You just need to know what you owe on the home in combined mortgage debt and your home’s approximate value.

A home equity calculator can help with this step. You can then decide what you’d like to do with the proceeds from the sale, once your HELOC is paid off. For example, you might apply it as a down payment on the next home you buy.

When you’re ready to buy your next home, you can research what’s required for mortgage preapproval and shop around to find the best mortgage rates. Some options, like FHA loans, allow for a smaller down payment.

Considerations for Underwater HELOCs


Being underwater in a home means you owe more than it’s worth. So, what happens to a HELOC when you sell upside down? And can you sell in that scenario? The answer is yes, but being underwater can add a wrinkle to the process.

Insufficient Sale Proceeds to Cover HELOC


Your first mortgage takes priority for payoff when you sell a home. Any proceeds go to that loan first, before money is directed toward HELOC debt. If the sale proceeds aren’t enough to cover your first mortgage and HELOC, you end up in a negative equity scenario.

That means you’ll need to make up the difference in cash for the sale to go through. You may need to pull money from savings, liquidate some of your investments, or borrow from your retirement account to cover the gap. If you can’t or don’t want to do any of those things, you’ll have to look at other ways to deal with negative equity.

Options for Addressing Shortfalls


There are a few routes you might pursue to deal with a shortfall when selling a home with a HELOC. The possibilities include:

•   Delay the sale. You might decide to push the sale back to allow your home’s value to rise or to pay down some of the HELOC balance. Whether that’s feasible for you can depend on your reasons for selling. A HELOC repayment calculator can help you see how you will progress if you start making steady payments to chip away at what you owe.

•   Short sale. A short sale is an agreement between you and the lender to let you sell the house for less than what you owe. If you have a HELOC and a mortgage, both lenders would have to agree to a short sale.

•   Pay off the HELOC with another loan. While not ideal, you might consider getting a personal loan or line of credit to pay off your HELOC. This only moves debt around; it doesn’t reduce what you owe. But it can clear the lien on the home associated with the HELOC so the sale can go through.

Prepayment Penalties and Fees


Before you move to pay off a HELOC, whether to sell your home or for any other reason, read the fine print. Specifically, it’s important to check for prepayment penalties and other fees the lender might impose.

Early Termination Fees


When you get a HELOC, it comes with a set repayment term. For example, you might have five years in which to access your credit line and then 15 years after that to pay back what you borrowed.

Lenders may impose an early termination fee or prepayment penalty if you pay a HELOC off early. These fees are designed to help the lender recoup some of the interest they won’t get to collect as a result of you paying off your HELOC ahead of schedule.

If you owe a prepayment penalty, that money will be deducted from the sale proceeds when your HELOC is paid off. Understanding when this fee applies, if your lender charges one, and how much you’ll pay can help you calculate your net profit from the sale.

Reviewing HELOC Terms


Ideally, you scrutinized the terms of your HELOC agreement before you ever signed on the dotted line. But if you didn’t read through it that closely, or you did but now you’ve forgotten what it says, it’s time for a thorough review.

•   Go through your HELOC terms line by line to understand:

•   How long the repayment term lasts

•   If and when a prepayment penalty or early termination fee applies

•   How the fee is calculated, if applicable

•   When the fee is avoidable

•   Any other fees you might pay to close out a HELOC early

If there’s something in your agreement you don’t understand, don’t hesitate to ask the lender for clarification. The home selling process is hectic enough, and the last thing you need is to be blindsided by surprise fees.

Recommended: What Is a Home Equity Loan?

Steps to Manage Your HELOC Before Selling


If you’re ready to sell your home, it’s important to include HELOC planning on your to-do list. There are two critical steps to tackle before you head to the closing table.

Obtaining a Payoff Statement


A payoff statement offers a detailed breakdown of how much you’ll need to pay to close out a HELOC, including the principal, interest, and fees. You can request a payoff statement from your HELOC lender, though keep in mind the numbers may change slightly as your closing date approaches.

You can use the amount on your payoff statement to estimate how much will be left from the sale proceeds after your first mortgage and HELOC debt are paid. If you have an online account that you use to manage your HELOC, you may be able to log in and request an accurate payoff amount. Otherwise, you’ll need to reach out to the lender directly.

Planning for Closing Costs


Both sellers and buyers have closing costs they’re responsible for paying. The amount you have to pay can depend on the details of the transaction and where you live. Typical seller closing costs can range from 8% to 10% of the home’s sale price.

These costs are most often paid from the sale proceeds. So you’ll need to factor that into your calculations when estimating your profit.

Going back to the previous example of a $500,000 home sale, your closing costs could add up to between $40,000 and $50,000. If you deduct that from your estimated $200,000 in profit, you’d actually walk away with $150,000 to $160,000 instead.

The Takeaway


Understanding what happens to a HELOC when you sell your house can help you navigate the process with as few headaches as possible. And if you own a home but haven’t tapped into your equity yet, knowing what to expect can help you understand whether the time is right for a HELOC based on when you might want to sell.

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

Will I owe money if my home sells for less than the HELOC balance?

If you’re upside down on your home when you sell with a HELOC, you’ll have to make up the difference to pay the line of credit off. If you can’t do that, you may need to delay the sale, arrange a short sale with the lender, or get a personal loan to pay the HELOC in full.

Are there fees associated with closing a HELOC when selling my house?

HELOC lenders may charge early termination fees or prepayment penalties if you pay your line of credit off ahead of schedule. If you owe this fee, it’s deducted from the sale proceeds, along with the amount needed to pay off the HELOC.

How does selling my home affect my credit score if I have a HELOC?

A paid-off HELOC can help your credit score since it shows you can handle debt responsibly. That impact, however, may be counterbalanced by the effects of applying for a new mortgage loan if you’re buying another home.

Can I transfer my HELOC to a new property after selling?

HELOCs are secured by your home so if you’re selling, the line of credit doesn’t transfer with you. If you’re interested in getting another HELOC, you’ll have to apply for a new one once you buy another home.

What happens if I don’t pay off my HELOC before selling my house?

If you don’t pay your HELOC off yourself before selling, then the HELOC balance is deducted from your sale proceeds. The title company handles repayment of HELOC debt for you from your sale proceeds, then passes on the remaining funds from the sale to you at closing.


About the author

Rebecca Lake

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.



Photo credit: iStock/Ridofranz

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.

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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