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Did you know you can use a home loan for renovations? Renovation home loans cover the cost of purchasing and renovating a home. If you’re familiar with construction loans, renovation loans are similar. Also called “one-close” loans or renovation mortgages, renovation loans can offer buyers simplified financing for transforming a fixer-upper into an attractive, modernized home.

We’ll explain how to add renovation costs to your home loan, and other ways you might want to use extra funds.

What Is a Renovation Home Loan?

A renovation home loan combines the cost of a home purchase and money for renovations in one mortgage. There’s only one closing and one loan when buying a new home or refinancing an existing home. The lender has oversight of the renovation funds, including the budget, vetting of the contractor, and disbursement of funds for renovation work as it is completed.

The borrower, their property, and their lender must all meet criteria set out by the remodel home loan program to qualify, which can present a challenge. Qualifying lenders in particular can be hard to find. That’s because most lenders must maintain a custodial account for the renovations over the course of an entire year, which requires extra work and resources. However, if you can find a lender that can handle the process, renovation loans can be a convenient way to improve a promising fixer-upper.

Types of Home Loans That Can Include Renovations

Most mortgages will not include renovations in the loan amount. Renovation mortgages are niche products serviced by a fraction of lenders. Buyers and properties must also meet certain requirements, which we’ll outline below.

There are several different types of home loans you can apply for that are eligible for adding renovation costs to the mortgage.

1. FHA 203K

An FHA 203(k) is a mortgage serviced by the Federal Housing Authority in which the cost of repairs is combined with the mortgage amount. It’s different from a traditional FHA loan that does not include improvement expenses, but qualifications (credit score, down payment, etc.) are very similar.

Interest rates and terms are also similar to what you see in a standard FHA loan. However, you can expect additional lender fees to cover the extra oversight needed on a renovation loan.

The amount you can borrow is equal to either the value of the property plus the cost of renovations or 110% of the projected value of the property after rehabilitation. Borrowers must use an FHA-approved lender for this type of mortgage.

Eligible properties must be one to four units. Repairs can include those that enhance the property’s appearance and function, the elimination of health and safety hazards, landscape work, roofing, accessibility improvements, energy conservation, and more. A limited 203(k) is also available for repairs costing $35,000 or less.

2. Fannie Mae HomeStyle

The Homestyle Renovation loan from Fannie Mae takes into account the value of the property after renovations are complete. The amount of allowable renovation money can equal 75% of the value of the property after renovations are complete.

In the world of home loans, the loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed. Many lenders limit your LTV to 80% to 85%.

A HomeStyle loan allows an LTV of up to 97%. This means it’s possible to put as little as 3% down. Some investment properties are also eligible for this type of loan. Renovations are eligible as long as they are permanently affixed to the property. Work must be completed within 15 months from the closing date of the loan.

3. Freddie Mac CHOICERenovation

The Freddie Mac CHOICERenovation program is virtually identical to the Fannie Mae HomeStyle program. This renovation loan is for buyers who want a loan with more flexibility than an FHA renovation loan.

Like HomeStyle, renovations that are permanently affixed to the property are eligible in one- to four-unit residences, one-unit investment properties, second homes, and manufactured homes. The maximum allowable renovation amount is 75% of the “as-completed” appraised value of the home — meaning the appraised value of the home before renovations but accounting for all planned changes. The maximum loan-to-value (LTV) ratio is 95% (97% for HomePossible or HomeOne loans).

The Freddie Mac CHOICEReno eXPress Mortgage is an extension of the CHOICERenovation mortgage. The CHOICEReno eXPress mortgage is a streamlined mortgage for smaller-scale home renovations. Renovation amounts are limited to 10% or 15% of the “as-completed” appraised value of the home. Borrowers need to work with an approved lender to apply for one of these programs.

4. USDA Purchase with Rehabilitation and Repair Loan

A USDA Purchase with Rehabilitation and Repair Loan assists moderate- to very-low-income households in rural areas with repairs and improvements to their homes. Buyers can secure 100% financing with this loan.

For very low-income borrowers, there’s a separate loan you can qualify for with a subsidized, fixed interest rate set at 1% with a 20-year term. This makes borrowing incredibly affordable.

To apply, you must have a household income that qualifies as low to moderate in your county per USDA standards. The property must be your primary residence (no investments), and rehab funds cannot be used for luxury items, such as outdoor kitchens and fireplaces, swimming pools and hot tubs, and income-producing features. Manufactured homes, condos, and homes built within the last year are not eligible.

5. VA Alteration and Repair Loan

The VA allows qualified service members to bundle repairs and alterations with the purchase of a home. As with all VA loans, 100% financing is available on these low-interest loans.

Alterations must be those “ordinarily found” in comparable homes. Renovations are also required to bring the property up to the VA’s minimum property standards.

The loan amount can include the “as completed” value of the home as determined by a VA appraiser. Leftover money from the home loan after renovations are complete is applied to the principal.

Home Style Quiz

Other Options for Financing Home Renovations

While a renovation home loan is a great way to finance a renovation, it’s not your only option for borrowing money for home improvements. Nor is it the most flexible. Alternative loans — such as cash-out refis, home renovation personal loans, and home equity loans -– have a lot more flexibility.

Cash-out Refinance

A cash-out refinance is where you replace your old mortgage with a new mortgage, and the equity (here, the “cash”) is refunded to the homeowner. You will have closing costs with a new mortgage, but you won’t have separate financing costs for the money you’re using for renovations.

Personal Loan

Personal loans are often used for a home remodel or renovation. Because the funds are not secured by your property, you’ll likely have to pay a higher interest rate. The bright side of funding this way means you won’t lose your home if you stop paying back the loan.

This type of loan comes with a shorter repayment period, higher monthly payment, and lower loan amount. You can find these loans through banks, credit unions, and online lenders.

Home Equity Loan

A home equity loan is a secured loan that uses your home as collateral. That means the lender can foreclose on the home if you stop paying the loan, and so interest rates are typically lower. A home equity loan also comes with a longer repayment period than a personal loan.

Home Equity Line of Credit (HELOC)

A HELOC is a line of credit that lets homeowners borrow money as needed, up to a predetermined limit. As the balance is paid back, homeowners can then borrow up to the limit again through the draw period, typically 10 years. The interest rate is usually variable, and the borrower pays interest only on the amount of credit they actually use.

After the draw period ends, borrowers can continue to repay the balance, typically over 20 years, or refinance to a new loan.

Recommended: A Personal Line of Credit vs. a HELOC

Private Loan

A private loan is a loan made without a financial institution. Loans made from a family member, friend, or peer-to-peer source are considered private loans. Qualification requirements will depend on the individual or group lending the money. There are some serious drawbacks to obtaining funding from a private source, but these loans can help some borrowers in buying a home.

Government or Nonprofit Program

It is possible to finance the cost of remodeling with the help of government programs. Federal programs like HUD have financing options for renovations, as do some state and local government agencies.

Recommended: What Is HUD?

The Takeaway

Homeowners have a lot of options for financing renovations, especially in an era when home equity is higher than ever before. Renovation home loans allow borrowers to purchase and renovate a property with one loan, but that’s not the only way you can remodel a fixer-upper. Some alternatives to renovation home loans include home equity loans, HELOCs, and personal loans.

A HELOC allows owners to pull from their property’s equity continually over time. A HELOC brokered by SoFi allows homeowners to access up to 95% of their home’s equity, or $500,000, and offers lower interest rates than personal loans. Borrow what you need to finance home improvements or consolidate debt.

Learn more about turning your home equity into cash with a HELOC brokered by SoFi.

FAQ

How do renovation mortgages work?

Home renovation loans are known for combining the cost of financing a renovation or remodel with the cost of purchasing the home into a single-closing transaction. Lenders calculate the amount to be borrowed based on the value of the home after renovations are complete.

Can you include renovation costs in a mortgage?

A home loan can include renovations, but you must work with your lender to be approved for specific renovation loan programs.

Can you add renovation costs to your mortgage?

You cannot add renovation costs to an existing mortgage, but you can refinance your mortgage with a new “renovation mortgage.” However, you will need to choose a specialized home loan product. You can also apply for a renovation home loan when you make a new purchase.

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Photo credit: iStock/Hispanolistic

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

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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You can’t be lily-livered to want to build a houseboat, a self-propelled boat with a cabin. It will take a lot of time and more than a few doubloons.

Houseboat kits are a thing, and an alternative to building your own boat is buying a used houseboat and modifying it.

This piece will help you navigate how to build a houseboat and more.

First Off, Can You Build a Houseboat Yourself?

As long as you have the time and money, which can mean securing financing, yes, you can build your own houseboat.

Small houseboats may only have one or two rooms in their cabins, with people using them to fish or enjoy time on a river. Larger ones may be used somewhat like a summer home, with several rooms included. Houseboats of just about any size have a sort of porch on the ends, perhaps covered with awnings.

Although they have this in common with another type of house, the floating home, which is permanently moored, houseboats are designed for quick connection and disconnection with a marina’s electrical, water, and sewer services.

Typical Costs of Building a Houseboat

How much does it cost to build a houseboat? Well, as is the case with the cost to build a house, it depends. Costs will vary based on the size of the boat, the materials used, fixtures included, and so forth.

A small basic houseboat may cost from $2,000 to $5,000 to build, while a somewhat larger one can range from $10,000 to $35,000. (That said, there are luxury houseboats worth millions, so the sky’s the limit if the budget permits!)

How Long Will It Take to Build a Houseboat?

The time investment will depend on the size of the boat, the materials used, your level of building experience, how much help you have — and perhaps even the weather. One estimate suggests that building your own houseboat will take 600 hours.

Pros and Cons of Building a Houseboat from Scratch

Pros

•   When you build something yourself vs. finding a contractor, you can save on labor costs.

•   You can pick the design you’d like and, when possible, make customized choices.

•   You can benefit from the satisfaction of DIY.

Cons

•   This can be a big job.

•   If this is the first time you’ll build a houseboat, there can be a learning curve.

•   You’ll need to ensure that you have space to build, ideally near water.

How to Build a Houseboat

Steps include the following:

•   Find a spacious location to build

•   Request approval to build

•   Design your own houseboat

•   Build or buy a hull

•   Purchase materials

•   Start building

•   Install plumbing and electrical

Here’s more information about each step.

Find a Spacious Location to Build

Even a small houseboat can take space in which to build, so make sure you have enough room for the boat and for any workers.

Plus, consider how, once the boat is constructed, you’ll get it to the waterfront. Where do you plan to dock the houseboat? Is there sufficient building space near the dock to solve two problems at once?

Request Approval to Build

The U.S. Coast Guard’s Boating Safety Division provides information about relevant federal laws and regulations, Coast Guard directives, state boating laws, and more. Be sure to follow those while also checking in with your city and county government agencies to dot your local I’s and cross your T’s.

Design Your Houseboat

Determine the design. Check local associations, Google “houseboat plans,” and/or ask the owners of a houseboat what they recommend.

Plans are pretty affordable and can save you plenty of hassle, so pick the one that fits your budget and dovetails with your vision.

Build or Buy a Hull

The hull is the heart of the houseboat’s design and engineering ability. The quality and appropriateness of the hull determine how well it floats and how stable and durable the boat will be.

As you seek out building plans for the houseboat, examine what’s involved in building the hull and then make your decision from there. The hull may be a V-bottom, a flat bottom, multihull, or pontoon style, the most popular for a houseboat.

Pontoon boats can be spacious, which can provide a smooth, comfortable ride. They can be easy to maintain and can be a good choice for family use.

On the other hand, pontoon boats aren’t built for speed or easy maneuverability. They typically come with an outboard engine, and it can be hard to find another kind.

Purchase Materials

Just as you wouldn’t want to run out of egg whites when preparing a soufflé, you won’t want to run out of important building materials for your houseboat.

A personal loan could come in handy. You might be able to borrow up to $100,000.

Another possibility, for some homeowners, is a home equity line of credit (HELOC) or home equity loan. The interest rate will be lower than that of unsecured loans.

Make a list, check it twice, and then make sure you buy the right quality and quantity. Buying parts bit by bit can be more expensive, create more stress, and delay the project.

Start Building

This is what you’ve been waiting for, right? Now is the time to take the materials you’ve purchased and, by following the plans you’ve chosen, actually build your houseboat. Perhaps you’ll need to reach out for help, or maybe you’ve got this all by yourself. Either can work!

Install Plumbing and Electrical

With a houseboat, you can navigate the waters rather than being moored in place. Electrical wiring and plumbing will allow you to have access to electricity and use toilets. Waste will go into a holding tank that, when you get to a marina, can be removed by attaching your electrically powered pump to the marina’s system.

Are Houseboats Cheaper Than Houses?

Because houseboats range from a few thousand dollars to over $1 million, the answer is that some, but certainly not all of them, are cheaper than a house.

Expenses will continue to flow after the build. Most houseboat owners will pay mooring fees, liveaboard fees, insurance, and pump-out fees. But they may catch a tax break: A boat can be a main or second home, allowing owners the mortgage interest deduction if they itemize.

Can You Get a Houseboat Prefab Kit?

You can! It may make sense to explore those options to see if one fits your needs and budget — and compare that to the cost of building your houseboat from scratch.

Other Ways of Getting a Houseboat Other Than Building From Scratch

Here are two methods:

•   Buy an old houseboat and renovate it

•   Buy a new houseboat

Buy an Old Houseboat and Renovate It

You can save money by buying a used houseboat, especially if you have the know-how to make any necessary repairs and modify it. Or, depending on what needs to be done, you might still come out ahead financially if you buy an old houseboat and have an expert renovate the vessel.

Buy a New Houseboat

Just as when you buy a car, truck, or RV, when you buy new, you can benefit from the warranty and enjoy your new houseboat without worrying about what parts have worn down.

The Takeaway

How to build a houseboat? You could try building one from scratch or using a prefab kit, or you could buy a used houseboat and renovate it. What’s most important is choosing what fits your budget and enhances your lifestyle.
How to launch your houseboat plans? One way is with a SoFi Personal Loan of $5,000 to $100,000.

Another is a HELOC brokered by SoFi that has a lower interest rate than unsecured loans.

Access up to 95%, or $500,000, of your home equity to build or buy a houseboat.

FAQ

Can you live permanently on a houseboat?

Yes. Some marinas allow full-time liveaboards. Otherwise, check with your state’s anchoring regulations to see how long you can remain in a certain spot with the houseboat and what you’d be required to do.

Do houseboats retain their value?

Boats in general decrease in value, especially during the first couple of years and then gradually after that. That said, pontoon houseboats can last for decades. So when looking at what you’d invest and then dividing that cost by 30, 40, or even 50 years of potential use, you may consider this a good investment even without lots of resale value.

How long do houseboats last?

Pontoon boats are known to last so long that people use them their entire lives. The average lifespan is 30 to 40 years, with some lasting 50 years or longer.

Can you get a loan to finance a houseboat?

Although it may be challenging to find a loan program specifically for houseboats, you can contact banks, credit unions, and online lenders to see if their boat financing program includes houseboats. Or, if buying one, check with the dealer.

Other options include a HELOC, home equity loan, or personal loan to pay for your houseboat.

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Photo credit: iStock/Cucurudza

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

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

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

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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If you’re looking at lower-cost housing options, buying a manufactured home may have come up on your radar. Buying a new manufactured home or an existing one could be a good way to get into a home more quickly and at a lower cost than a site-built home.

Manufactured homes shed their mobile home and trailer rep in 1976. Since then, manufacturers have touted their quick turnaround times and high-quality materials.

If you’ve ever wondered how to buy a manufactured home, what financing options are available, and whether the titling of a home as real property or personal property makes a difference, read on.

What Is a Manufactured Home?

A manufactured home is built in a factory on a permanent steel chassis.

They often come in one, two, or three sections: single-, double-, or triple-wide. They must be able to fit on the highways, so the sections are limited to 16-foot widths in every state except Texas, which allows 2 extra feet.

Manufactured homes are not modular homes; nor are they considered mobile homes anymore. Manufactured homes are built entirely in a factory, whereas the components of a modular home are taken to the land and put together on-site. The two types of housing also follow different building codes.

Mobile homes are considered those built before June 15, 1976. After that date, manufactured homes were required to follow the HUD code, which covers manufactured home construction and safety standards. A manufactured home will have a “HUD tag,” a red metal certification label, on the exterior.

Why Should You Buy a Manufactured Home?

Manufactured homes are less expensive than site-built homes or modular homes, which must meet the same state and local building codes that stick-built homes do.

The average sale price of new manufactured homes nationwide was $86,500 for a single-wide and $158,800 for a double-wide as of August 2022, according to the Census Bureau’s Manufactured Housing Survey.

They have quicker build times than site-built homes, too.

Manufactured homes sold as part of a land package may hold their value much like a standard home, depending on upkeep and the local real estate market.

Speaking of land, if you’re a homebuyer and plan to lease the lot under you, beware of rising lot rents. Then again, if you’re looking for investment property, the ability to raise the lot rent could be a big draw.

Process of Buying a Manufactured Home

Buying a manufactured home is different from buying a site-built home. There are a lot of variables that you’ll need to know about.

Getting Financing for a Manufactured Home

Financing a manufactured home generally depends on whether the home will be attached to the land (real property) or consists of just the home (personal property, or chattel).

Financing Just the Home

It is possible to finance the manufactured home apart from the land. In this case, you’ll need to get a personal loan, a chattel mortgage, or dealer financing.

Another option is a government-insured home loan like an FHA Title I loan (which has loan limits) from an approved lender.

Financing the Home and Land

If you’re buying a manufactured home that’s permanently attached to a foundation on its own land, some lenders will finance the purchase with a conventional home loan.

An FHA Title I loan can also be used for just a developed lot or for a home-lot combo. FHA Title II loans are for buying a manufactured home and land whose price is above the Title I loan amount. Title II loans adhere to FHA loan limits, which are based on a percentage of the Federal Housing Finance Agency’s national conforming loan limits for conventional loans.

VA loans are available to eligible borrowers to buy a manufactured home that is permanently attached to the land.

And an option for low- to moderate-income buyers is a USDA loan if the home is in a USDA-eligible rural area.

Recommended: What Is a Chattel Mortgage?

Searching for a Manufactured Home

In your search for a manufactured home, you’ll want to consider:

Manufacturer. Many companies build and sell manufactured homes. Keep your search broad at first, and ask friends and family for referrals. You may also want to keep a spreadsheet comparing the prices, incentives, and inclusions each company provides. Be mindful, however, that while some manufacturers are able to provide comprehensive services, the quality of their homes may be lower than that of another manufacturer who does not provide every service.

Model and layout. Tour models and figure out what you really need. Are there enough bedrooms? Do you prefer a separate kitchen and living room, or is an open layout more your style? Is there enough storage?

Customization. There are a lot of options when it comes to selecting custom design elements. Would you like patio doors? A fireplace? Separate vanities? The manufactured home builder will have a list of upgrades that you’re able to select from.

Exterior additions. When your home is placed, some exterior elements can make it feel like a site-built home. Porches, garages, and decks are a few examples.

Site. Do some research on what it takes to place a manufactured home on a lot. Do you want a lot in the country with a view? Are you able to pay for the cost to bring utilities to raw land? Would you prefer to lease land? Where you want to place your home will help you select the right one.

Buying Land for a Manufactured Home

Buying land comes in three forms:

•   Cash. You can buy land with any savings you have on hand.

•   Land loan. It is possible to finance land separately from your home, which is also the case with some tiny houses. You’ll have closing costs on both loans if you choose to finance separately.

•   Home and land. The easiest route is a manufactured home-and-land loan. Getting loan approval before searching for land or a manufactured home will allow you to see exactly how much you qualify for.

Site Prep

After buying land, it will need to be prepared for your manufactured home. This may include:

•   Soil condition tests

•   Making a plan for where the manufactured home is to sit

•   Clearing the area

•   Grading for proper drainage

•   Checking the holding capacity for ground anchors

•   Sewer or septic tank

•   Well or water connection

•   Driveway

Recommended: Typical Personal Loan Requirements

Delivery and Installation of Your Manufactured Home

After your land has been prepared and the home has been built, it can be transported to the site and installed. Your manufacturer will likely coordinate delivery and may be able to help you find contractors to install the manufactured home.

Getting Insurance

Homeowners insurance for manufactured homes usually covers the structure, personal belongings, and any other structures on the property. Some insurers require that a manufactured home be placed on a concrete or block foundation.

The coverage might also include liability insurance, which helps protect your finances if you’re responsible for damage or injury to someone else. A standard policy may not cover earthquakes or floods.

To figure out how much homeowners insurance you need, start by getting enough dwelling coverage to fully replace your home if it needed to be rebuilt. The replacement cost may be higher or lower than the home’s value.

Cost of a Manufactured Home

The cost of a manufactured home will vary by size, quality, customizations, and manufacturer. Not including the cost of acquiring and developing land, a new model may range from $86,500 to over $200,000.

There’s that mention of land again. As the Consumer Financial Protection Bureau says, “Manufactured housing is the largest source of unsubsidized affordable housing in the United States, but financing a manufactured home can be costly, especially for borrowers who do not own the underlying land.”

To ease the housing shortage, the Biden administration’s “Housing Supply Action Plan” aims to deploy new financing mechanisms for manufactured homes and accessory dwelling units (ADUs). The plan also prodded the Department of Transportation to modify its grant programs to favor cities that adopt zoning rules allowing dense housing and transit-oriented development.

The Takeaway

Buying a manufactured home is usually more affordable than a site-built or modular home, but it’s helpful to understand all the financing angles and the long-term stability that owning the land underneath you can bring.

3 Home Loan Tips

1. Traditionally, mortgage lenders like to see a 20% down payment. But some lenders, such as SoFi, allow mortgages with as little as 3% down for qualifying first-time homebuyers.
2. When building a house or buying a nontraditional home (such as a houseboat), you likely won’t be able to get a mortgage. One financing option to consider is a personal loan, which can be faster and easier to secure than a construction loan.
3. Thinking of using a mortgage broker? That person will try to help you save money by finding the best loan offers you are eligible for. But if you deal directly with a mortgage lender, you won’t have to pay a mortgage broker’s commission, which is usually based on the mortgage amount.

Worried about rising mortgage rates? With SoFi, you can lock in today’s rates for 90 days while you look for a new home.

FAQ

How long do most manufactured homes last?

Manufactured homes that are regularly maintained can last for 30 to 55 years, according to HUD.

How do I pay for a manufactured home?

Financing a manufactured home largely depends on whether the home is permanently attached to the land or not. A home that is not may be financed with a personal loan, one kind of FHA loan, a chattel mortgage, or a dealer loan.

How do I cut down on costs for a manufactured home?

The cost of a manufactured home itself could be relatively low. The biggest expenses you’ll likely encounter will be purchasing land and preparing it. If you can find a lot that already has utilities, it may help.

How is a converted shipping container classified?

Shipping containers that are converted into housing units can be accepted as manufactured homes if they are provided with a permanent chassis, are transported to the site on their own running gear, and otherwise comply with the HUD code for manufactured homes.

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Photo credit: iStock/Marje

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

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

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

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A home equity loan is a way to finance a large purchase, complete home renovations, or consolidate high-interest debt by tapping into the equity of your home. Your home secures the loan, and funds are disbursed all at once.

With your home as collateral, lenders have reason to believe you’ll make on-time, full payments, so they offer a lower interest rate than they would on most unsecured loans. Failing to make the monthly payments could result in foreclosure, however.

Yet for borrowers who are confident they can make the payments, a home equity loan is one of the most affordable financing options on the market. Keep reading to learn more about home equity loans and whether or not one makes sense for you.

What Is a Home Equity Loan?

A home equity loan is typically a fixed-rate loan secured by a home in exchange for a lower interest rate.

Repayment terms are typically between five and 30 years.

How Do Home Equity Loans Work?

First, you’ll need to have sufficient home equity, which is the difference between the market value and what you owe. You may have built home equity by paying down your mortgage and by seeing your home appreciate.

You’ll go through an application process, and the lender will likely order a home appraisal to ensure that there’s enough value there to lend against.

You’ll have a lot more paperwork than some other loans and will sign mortgage lien documents that give the lender the right to start proceedings should you fail to make payments.

After closing on the loan, you’ll receive all funds upfront. Repayment starts shortly after.

Homebuyers also occasionally use a home equity loan to avoid PMI on a new home. An 80/10/10 piggyback mortgage, for example, consists of a conventional home loan, a second mortgage like a home equity loan, and a 10% down payment. Such buyers are able to put less than 20% down and avoid paying private mortgage insurance.

Types of Home Equity Loans

When you’re looking to use the equity in your home, there are two types of home equity loans to choose from — a home equity loan and a home equity line of credit (HELOC) — and a cash-out refinance.

•   Home equity loan: The loan is disbursed in one lump sum and paid back over time. The interest rate is typically fixed.

•   HELOC: With a home equity line of credit, money can be taken out as you need it, up to the limit you were approved for. HELOCs have a draw period, often 10 years, when you might pay only interest on money borrowed, followed by a repayment period, when principal and interest payments begin. The interest rate is usually variable.

•   Cash-out refinance: A third way of freeing up equity is cash-out refinancing. This means taking out a new mortgage at a lower rate that will pay off your current mortgage and give you a lump sum.

Home Equity Loan Requirements

Home equity loans are contingent on:

•   The amount of home equity a homeowner has

•   Income

•   Credit history

•   Debt-to-income ratio

How to Calculate Your Home Equity

Home equity requires basic math: Subtract the amount you owe from the market value of your home. If your home is worth $500,000 and you owe $350,000, you have $150,000 in equity.

You usually will not get a loan for the total amount of home equity you have, however. When it comes to how much home equity you can tap, many lenders allow a maximum of 85%, although some allow less, and some, more.

Another way of saying that: Your loan-to-value ratio shouldn’t exceed 85% in many cases.

If you’re taking out a second mortgage like a home equity loan or HELOC, your first mortgage and the equity loan compared with your home value is what is called the combined loan-to-value (CLTV) ratio.

Most lenders will require a CLTV of 85% or less to obtain a home equity loan, although some will allow you to borrow 100% of your home’s value.

combined loan balance ÷ appraised home value = CLTV

Example of a Home Equity Loan Payment

One thing that attracts a lot of borrowers to a home equity loan is the long repayment period, which is also why most homebuyers choose a mortgage term of 30 years.

A longer repayment period can make your monthly payment more manageable. For example, if you were to get a $75,000 home equity loan with a repayment period of 20 years, your monthly payment at 8% interest would be $627.33. If you had to repay that same amount in five years, your payment would be $1,520.73.

Here’s a chart comparing examples of monthly payments with different terms:

Loan amount	Interest rate	Term	Monthly Payment
$75,000	8%	5 years	$1,520.73
$75,000	8%	10 years	$909.96
$75,000	8%	20 years	$627.33

A lot of variables will affect the rate you pay, such as your credit score and how much home equity you have. Also, keep in mind that the longer the loan term, the more interest you’ll pay, despite the more affordable monthly payment.

Difference Between Home Equity Loans and HELOCs

Home equity loans and HELOCs both use your home as collateral on a loan. How they differ is in how you receive and repay the money.

Home equity loan	HELOC
Lump sum loan	Money as you need it
Start repaying immediately	Pay only on the amount you borrowed
Usually a fixed interest rate	Often a variable interest rate
Installment loan	Credit line

Advantages and Drawbacks of Home Equity Loans

Home equity loans have some advantages, but be sure to consider the drawbacks as well.

Advantages	Drawbacks
Large amounts of money can be borrowed	Home is collateral
Low interest rate	Repayment begins immediately
Flexible use	Loan amount is set, so if you need more money, you will need to apply for another loan

Home Equity Loan Quiz

What Can You Use a Home Equity Loan For?

The great thing about a home equity loan is the wide range of things you can use it for. Once the funds flow to your bank account, they’re yours to use for almost any purpose. Some common uses of home equity are:

•   Home renovations

•   Education

•   Medical expenses

•   Consolidation of high-interest revolving debt

•   Recreational vehicles

•   Vacations

•   Weddings

•   Purchase of an investment property

•   Building an ADU

•   Money in retirement

While you can pay for college tuition with a home equity loan, it might be better to find a student loan for that expense. And vacation expenses and wedding costs might be better addressed by saving and planning than by dipping into home equity.

Why? Because other loan types don’t put your home at risk if you’re unable to pay.

How to Apply for a Home Equity Loan

Step One: Assess your situation. Do you have enough equity to make this happen? How much do you need? Would you prefer a home equity loan or a HELOC? Do you have at least a “good” FICO® score?

If you have an idea of what type of loan you want, how much you want to borrow, and how much equity is available to tap, you’ll be able to shop for what you need.

Step Two: Ask multiple lenders for loan estimates. Getting loan estimates from different lenders can help you find the best terms and rates. Compare the APR of one 20-year loan to another, and so on. The APR will include the loan’s interest rate and any points and fees. Some lenders offer to waive or reduce closing costs on the loan.

All hard credit inquiries made within 14 to 45 days will be counted as one.

Step Three: Find a fitting loan and apply. Submit information about your income, current mortgage, insurance, and other details the lender requests. The lender may require an appraisal of your home.

Step Four: Close on your loan. If everything checks out — including your income, credit history on your credit reports, and home value — you may reach the closing table for your home equity loan. The Federal Trade Commission recommends reading the closing documents carefully and negotiating changes or walking away if something doesn’t look as it should.

Step Five: Receive your funds. Funds are disbursed around three business days after closing on the loan. You’ll receive the amount you were approved for.

Step Six: Begin repaying your loan. On a home equity loan when the funds are disbursed upfront and your interest rate is locked, the first payment will be due around 30 days after you close on the loan.

Is It a Good Idea to Take Out a Home Equity Loan?

Taking out a home equity loan is one of the least expensive ways to finance a large purchase. Because your home is used as collateral, lending institutions are willing to offer a relatively low interest rate on the borrowed amount.

For people who want borrowing flexibility and aren’t sure of the exact amount they will need, a HELOC might be a better option.

While a lower interest rate is great, you should always keep in mind that your home is at risk with a home equity loan. If you’re confident you can make the payments and have a need for a large sum, this may be a financing solution you’ll want to look into.

The Takeaway

With a relatively low rate and a repayment period that can be long, a home equity loan is an attractive way to finance a large purchase or consolidate high-interest debt. A home equity line of credit is a good alternative, and more flexible.

SoFi brokers a HELOC that lets homeowners tap up to 95%, or $500,000, of their home equity.

Need cash? Get a big sum, and then some, with a HELOC through SoFi.

FAQ

How much can you borrow with a home equity loan?

Most lenders limit the amount to 85% of your home equity, though that is not always the case. The loan amount also depends on your income, debt, and creditworthiness.

Can you have multiple home equity loans at the same time?

Yes, but you’ll want to consider all your options before getting another loan that puts your home at risk.

Are home equity loans tax deductible?

Interest on home equity loans is tax deductible if the money is used to buy, build, or substantially improve the home that secures the loan.

Are there costs to getting a home equity loan?

Closing costs for a home equity loan are typically 2% to 5%, but some lenders don’t charge any closing costs.

How do you pay back a home equity loan?

Repayment begins shortly after the funds are disbursed, and monthly payments are made until the loan term ends.

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Photo credit: iStock/VioletaStoimenova

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

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

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

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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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If you’re thinking about tapping the equity in your home, you’re looking at either a home equity loan or a home equity line of credit, better known as a HELOC. Both may allow you to borrow a large sum at a relatively low interest rate and with lower fees than a mortgage refinance.

Either a home equity loan or a HELOC is a second mortgage, so you’re betting the house: Your home can be foreclosed on if you cannot make payments. But for homeowners who have a secure income, good credit, and a substantial amount of equity, either one can be an excellent way to fund big expenses like renovations and debt consolidation.

When looking at a HELOC vs. a home equity loan side by side, there are differences that mean one type of loan may make more sense than the other to you. Let’s take a deep dive into the two to help you decide.

What’s the Difference Between a HELOC and Home Equity Loan?

A HELOC is a revolving line of credit. You can take out money as you need it, up to your approved limit, during the draw period. You may be able to make interest-only payments on the amount you withdraw during that time, typically 10 years.

After the draw period comes the repayment period, usually 20 years, when you must repay any principal balance with interest.

Most HELOCs have a variable interest rate. Some have a low introductory rate, and some require minimum withdrawal amounts.

A home equity loan is another type of second mortgage that uses your home as collateral, but in this case, the funds are disbursed all at once and repayment starts immediately. It is usually a fixed-rate loan of five to 30 years, and monthly payments remain the same until the loan is paid off.

The main differences between the two are how the money is disbursed, how it is repaid, and how the interest rate works.

Key Differences

	HELOC	Home equity loan
APR	Typically variable	Typically fixed
Repayment	Repay only the amount borrowed, and may have the option to pay interest only in the draw period	Repayment starts immediately at a set monthly payment
When are funds disbursed?	Funds are disbursed as you need them	Funds are disbursed all at once
Loan type	Revolving line of credit	Installment loan

Comparing HELOCs and Home Equity Loans

Homeowners usually will need to have 15% to 20% equity in their home — the home’s market value minus what is owed — to apply for a home equity line of credit or home equity loan.

If you do, then how much home equity can you tap? Most lenders will require your combined loan-to-value ratio — combined loan balance / appraised home value — to be 85% or less, although some will allow you to borrow 100% of your home’s value.

Here’s what to look for when comparing a HELOC with a home equity loan.

Interest Rate

The interest rate for a home equity loan is typically fixed, while the interest rate for a HELOC is usually variable.

HELOC rates tend to be a little higher than home equity loan rates (but keep in mind that you may pay interest only on what you borrow from the credit line). The exception is a low teaser rate that may be offered for six months to a year before converting to a variable rate.

Keep in mind that Federal Reserve decisions affect the rates for both products. The prime rate, the rate given to low-risk borrowers for prime loans, is based on the federal funds rate set by the Fed.

Even as home equity loan rates rise, though, the rate for these secured loans will be lower than that of almost all unsecured personal loans and credit cards.

Recommended: What to Learn From Historical Mortgage Rate Fluctuations

Costs

Closing costs are essentially the same for a HELOC and a home equity loan — 2% to 5% of the total loan amount — but many lenders offer to reduce or waive them.

Lenders may have already baked their costs into your rate quote.

You’ll want to shop for the best deal, comparing rates, upfront costs, closing costs, and fees. Bear in mind that advertised rates are often reserved for well-qualified borrowers, so read the fine print.

Requirements

To qualify for a HELOC or home equity loan, lenders will look at your employment and credit history, income, and the appraised value of your home. In other words, you must:

•   Have enough equity in your home

•   Have enough income to cover the monthly payment on the home equity loan

•   Have a good credit score (typically 680 or over, though many lenders prefer 700-plus)

•   Have a debt-to-income ratio of 36% to 50%

Repayment

When it comes to repayment, HELOCs and home equity loans are very different.

With a home equity loan, the entire loan amount is deposited into your account at once. This also means you’ll start paying on the loan immediately.

With a HELOC, you use funds as you need them, up to the limit, during the draw period. Your payment may be just the interest charge for the amount borrowed. The revolving credit line means you can withdraw money, repay it, and repeat before the repayment period, when the draw period ends and principal and interest payments begin.

Money Disbursement

Funds for a home equity loan are disbursed immediately. Sums from a HELOC are withdrawn as needed.

Payments

Payments on a home equity loan begin immediately. Payments on a HELOC aren’t required until you start borrowing money from your credit line.

HELOC vs Home Equity Loan: Pros and Cons

HELOC Pros and Cons

Pros:

•   Access 85% of your home equity and sometimes more

•   Flexible use

•   Only borrow what you need

•   Lower interest rate than most unsecured loans or credit cards

•   Some have low introductory APR offers

•   Loan interest may be tax deductible if the borrowed money was used to buy, build, or substantially improve your primary home (also true of home equity loans)

Cons:

•   May have a slightly higher interest rate than a home equity loan

•   Variable interest rate means your rate and monthly payment can change throughout the repayment period

•   Home is at risk of foreclosure if you’re unable to make payments

•   The repayment period could bring sticker shock

•   Paying off a loan balance early could trigger a prepayment penalty, and closing a credit line within a predetermined period — usually three years — could negate the waiving of closing costs

•   In a small number of cases, a balloon payment could be required at the end of the draw period
May include annual or inactivity fees

Home Equity Loan Pros and Cons

Pros:

•   Access 85% of your home equity and sometimes more

•   Funds disbursed at once

•   Fixed interest rate

•   Predictable monthly payments

•   Lower interest rate than unsecured loans

Cons:

•   Home is at risk of foreclosure if you’re unable to make payments

•   No flexibility in the amount of money you get

•   Limited to fixed installment payments

Which Is Better, HELOC or Home Equity Loan?

The better loan is the one that fits your life circumstances. A home equity line or loan can be used to buy a second home or investment property, pay medical bills, pay off higher-interest credit card debt, fund home improvements, and pay for other big-ticket items.

When a HELOC Is a Better Fit

HELOCs are more flexible than home equity loans. If you’re unsure how much money you need, don’t need to borrow immediately, or want flexible repayment options, you might want to think about applying for a HELOC over a home equity loan.

When a Home Equity Loan Is a Better Fit

A home equity loan is great for people who know how much they need to borrow and want the regularity of an installment loan with a fixed interest rate and fixed payments.

The Takeaway

Deciding on a home equity loan vs. a HELOC can depend on what you’re planning to use the money for. If you need a certain amount of money all at once, a home equity loan may be a good fit. If you want the flexibility to take out money as you need it, a HELOC may work better.

A HELOC brokered by SoFi may be just the right thing, right now for your situation. Access up to 95%, or $500,000, of your home equity for almost any need.

Say hello to a HELOC and start funding your dreams.

FAQ

Which is faster, a HELOC or home equity loan?

They’re tied, on average. It could take two to six weeks to get a HELOC or home equity loan.

HELOC or home equity loan for an investment property?

Investors may like the flexibility of a HELOC. A lump-sum home equity loan, however, could also be advantageous for renovating or buying properties.

HELOC or home equity loan for a home remodel?

If you know exactly how much you’re going to be spending on a home remodel and you’d like predictable payments, you can use a home equity loan. If you want more flexibility or are less certain about your costs, you may like the flexibility of a HELOC.

Can you have both a HELOC and home equity loan?

It is rare to have both a HELOC and a home equity loan. One would be a second mortgage and the other would be a third mortgage. Few banks are willing to lend money on a third mortgage, and for any that do, the interest rate would be high.

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Photo credit: iStock/Hispanolistic

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

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

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

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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