SoFi

If you’re thinking about accessing some of the equity in your home, but you’re a little confused about the mix of terms used to describe this type of borrowing, you’re not alone.

Understanding the subtle differences in how these borrowing options work (a home equity loan vs. a second mortgage vs. a HELOC, for example) can be challenging. But the more you know, the more equipped you can be to make the best choice for your needs.

In this guide, we’ll break down what the different terms mean, some of the pros and cons of each type of financing, and factors that might influence which option you choose.

Key Differences Between Second Mortgages and Home Equity Loans

Ready to have the fog lifted a bit? Let’s start by defining the term “second mortgage,” and discuss how it relates to the term “home equity loan.”

A second mortgage is pretty much just what it sounds like: You’re adding a second mortgage loan to your existing primary mortgage, and your home is the collateral for both loans. The first mortgage is secured by your home, and the second mortgage is secured by the equity you’ve managed to build up in that home.

You see where this is going, right? A home equity loan is a type of second mortgage. But — plot twist! — all second mortgages aren’t necessarily home equity loans. Another type of financing you’ve likely heard of, a home equity line of credit (HELOC), is also considered a type of second mortgage. (A third and less common second mortgage: Some homebuyers, including those with FHA loans, may get a second mortgage when they initially buy their home, as a way of helping to make the down payment.)

So there are two basic types of second mortgages: home equity loans and HELOCs. And there are some important differences between these two options.

Loan Structure

•   A second mortgage that is a home equity loan is considered a “closed-end” loan, which means the borrower receives a lump-sum payment upfront and repays that amount over time. When you pay down the balance — even if you pay off the loan early — you can’t re-borrow, or “draw” from the same loan again. If you need more money, you have to take out a new loan. (You can get an idea of how much you might be able to borrow with a home equity loan calculator.)

•   A HELOC, on the other hand, is an “open-end” line of credit. You can take out cash as you need it, up to the credit limit, and as you repay your outstanding balance, the amount of available credit is replenished, much like a credit card. You can borrow against it again and again, if you need to, throughout your draw period (which is typically 10 years). Usually, you’re only required to make minimum or interest-only payments during this time. Then, when the draw period ends, the repayment period begins.

Interest Rates

•   A second mortgage that’s a home equity loan will typically have a fixed interest rate that’s higher than the mortgage rate for your primary home loan but lower than the rate you’d likely get with an unsecured loan, like a personal loan.

•   A HELOC is also secured with your home, so the interest rate will likely be lower than if you used a credit card. But like a credit card, a HELOC often comes with a variable interest rate, which means the rate can change over time. (There may be an initial fixed rate for an introductory period before the variable rate kicks in.) Much in the way that mortgage rates drive costs on a variable-rate mortgage, if interest rates rise during the variable-rate period, so do the costs associated with your HELOC. This can affect the monthly payments and the total interest paid over the life of the line of credit.

Repayment Terms

•   Home equity loans usually have fixed monthly payments that are made over a predetermined loan term that could range from five to 30 years.

•   A HELOC repayment term, which starts after the draw period is over, generally lasts 10 to 20 years. During this time the interest rate may fluctuate, which means monthly payments may be less predictable. If interest rates rise, your payments could be higher than you expected; if they drop, your payments could be lower. (You can use a HELOC repayment calculator to estimate what your payments might be.)

Pros and Cons of Second Mortgages

As with most types of financing, the different types of home equity loans have pros and cons to consider.

Advantages

•   Because the loan or line of credit is secured with your home as collateral, you can expect your interest rate to be lower than the rate for an unsecured loan or line of credit, like a personal loan or credit card.

•   If your second mortgage is a HELOC, you can decide how much to withdraw (up to your credit limit) and when to withdraw it, and you’ll only pay interest on what you’ve borrowed. The money in the account will be there if you need it at any time during the draw period, but you’ll have some flexibility in how you use it.

•   Unlike many other types of loans (auto loans, first mortgages, student loans), you can use the funds from your HELOC or home equity loan for just about anything you want.

•   The interest you pay may be tax deductible, if you use the money for qualifying home improvements. You’ll want to talk to a tax advisor about this deduction.

Disadvantages

•   Securing your second mortgage with your home as collateral can put you at risk of foreclosure if you default on your payments.

•   If your home’s value declines, you could end up owing more than your home is worth. And if you have a HELOC, your lender may decide to freeze or reduce your line of credit.

•   Closing costs for second mortgages are generally lower than for primary mortgages, but you can still expect to pay some fees when you close on your loan or line of credit.

•   You will likely have to repay your home equity loan or HELOC if you sell your home.

Recommended: HELOC Loan Guide

Pros and Cons of Home Equity Loans

Both HELOCS and home equity loans are a type of a second mortgage, and they have some similar traits and some that differ. Here are some pros and cons that are specific to home equity loans.

Advantages

•   Because you get your money upfront with a home equity loan, it can be a useful way to pay for a large one-time expense, such as a home renovation, or for debt consolidation.

•   Home equity loans typically come with a fixed interest rate and a predictable fixed monthly payment, which can make it easier to budget for and plan around.

Disadvantages

•   With a home equity loan, you’ll immediately start paying interest on the full amount of the loan each month, even if you haven’t used the money.

•   If you don’t know exactly how much you’ll need for a home renovation, medical procedure, etc., you could under-borrow, and you might have to get another loan to finish the work. (With a HELOC, you can keep borrowing and repaying for several years without getting additional approvals or filing new paperwork.)

Recommended: Mortgage Preapproval

Choosing Between a HELOC and a Home Equity Loan

Because there are pros and cons to both second mortgage options, it may be difficult to choose between a home equity loan vs. a HELOC. Here are some points to consider:

Assessing Your Financial Needs

How do you plan to use the funds from your second mortgage? As you weigh a HELOC vs. second mortgage in the form of a home equity loan, consider this:

•   If your goal is to make a large one-time purchase, a home equity loan — which comes in a lump-sum payment — may be the better choice.

•   If you like the idea of having more flexibility in how much you borrow and when you borrow it, a line of credit — which you can use and pay back and use again — might be the right option.

Evaluating Interest Rates and Terms

Which terms better suit your purposes (and personality)? When thinking about using a HELOC second mortgage vs. a home equity loan consider this:

•   A home equity loan has a fixed interest rate and a traditional loan structure with more predictable monthly payments.

•   A HELOC usually has a variable interest rate, which can fluctuate over time. During the first years that you have the line of credit, the “draw period,” you may only have to make minimum or interest-only payments. But when you enter the repayment period, if interest rates have increased, your payments may be higher than you anticipated.

Considering Tax Implications

The interest on both a HELOC and a home equity line of credit may be tax deductible, but only if you use the funds “to buy, build, or substantially improve the residence” you used to secure the loan. (Note that this IRS rule expires at the end of 2025. If it isn’t renewed by Congress, the interest from either type of second mortgage may be deductible in the future — with some limitations — regardless of how the homeowner uses the money.)

The Takeaway

Both home equity loans and home equity lines of credit (HELOCs) are a type of second mortgage. And though they share some similarities, there are also some differences that are important to consider when you’re trying to decide which option is better for your needs.
While both home equity loans and HELOCs allow you to tap into your home’s equity if you need money, a HELOC offers the option to draw only what you require and to pay as you go. This can make it an option worth considering if you’re not sure how much money you need upfront for a project or purchase, or if you want to have a backup plan to cover unexpected costs as they come up. It can also keep your costs down in the first years that you have the HELOC.

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.

FAQ

Are interest rates typically higher for second mortgages or home equity loans?

The interest for a second mortgage — whether it is a home equity loan or a HELOC — is typically lower than what you might find with an unsecured loan. The interest rate on any mortgage can depend on several factors, including the borrower’s creditworthiness and loan-to-value ratio, and the prime rate. But second mortgages often have a higher interest rate than primary mortgages.

Can I use funds from a second mortgage or home equity loan for any purpose?

Yes, you can use the money from a second mortgage for just about any purpose.

How does the repayment term differ between a second mortgage and a home equity loan?

A home equity loan is a type of second mortgage. It usually has a fixed repayment schedule for the life of the loan, and repayment begins as soon as you receive the lump-sum loan. Another type of second mortgage, a home equity line of credit (HELOC) has two phases of payments: There is a draw period, during which payments are typically interest-only, and a repayment period when you repay all that you’ve borrowed, plus interest.

What are the risks associated with taking out a second mortgage or home equity loan?

Securing a loan or a line of credit with your home as collateral can put you at risk of foreclosure if you default on your payments. Also, if your home value declines, you could end up owing more than your home is worth.

How does my credit score affect eligibility for a second mortgage or home equity loan?

The higher your credit score, the more likely you are to be approved for a second mortgage. Your credit score also can affect the interest rate and borrowing terms you are offered.

Can I borrow against my home equity if my house is paid off?

Yes. If you have good credit and meet other eligibility requirements, you should be able to use the equity in a paid-off home to get either a HELOC or a home equity loan. (It wouldn’t be referred to as a “second mortgage” in this situation, however.)

Photo credit: iStock/VioletaStoimenova

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.

SOHL-Q125-069

Most physicians can expect to earn a good living once they complete their education and training. But by the time they graduate and start their first job, many new doctors are also likely to find themselves deep in student loan debt.

That debt may make it difficult for physicians to qualify for a conventional home mortgage — even though they have a promising financial future. That’s where home loans for doctors come in. Some lenders offer special mortgages called physician loans or doctor mortgage loans. These loans have terms designed to meet the unique needs of newcomers to this profession. Note: SoFi does not offer physician mortgages, but it does offer home mortgage loans with a low down payment for first-time homebuyers.

Read on for a look at how physician mortgages work, some pros and cons, and what it can take to qualify.

What Are Physician Mortgage Loans?

Physician mortgage loans are private mortgages designed specifically to meet the needs of doctors, dentists, medical residents, and fellows. The terms and benefits of these home loans for medical doctors can vary from one lender to the next. But they generally offer more generous terms and/or looser qualifying requirements than conventional home loans. This can make borrowing easier for physicians who have a high income potential but may be struggling with student loan debt or haven’t been able to set aside enough for a down payment.

How Physician Mortgage Loans Differ from Traditional Loans

Doctor loans are a type of nonconforming loan, which means they aren’t backed by the federal government like FHA loans, and they aren’t bound by the same Fannie Mae and Freddie Mac standards as conventional loans. Here are a few important differences you can expect to find with this type of mortgage vs. a conventional loan:

Recommended: Different Types of Mortgage Loans

Low or No Down Payment

Most lenders require at least a 3% to 5% down payment for a conventional mortgage, with the lowest rates typically available to first-time homebuyers. Lenders who offer physician mortgages may not require any money down. (Or the down payment amount required may be very low.)

No Private Mortgage Insurance (PMI)

With a conventional loan, private mortgage insurance, which is meant to protect the lender in case of a default, is usually added to borrowers’ monthly payments until they reach 20% equity in their home. Though PMI rates vary, they typically range from 0.50% to 2% of the loan amount. But doctor loans don’t require PMI, even though the borrower may not make any down payment.

Flexible Debt-to-Income (DTI) Ratio Requirements

As part of their underwriting, lenders typically calculate a borrower’s DTI ratio (all monthly debt payments ÷ gross monthly income = DTI). For conventional mortgages, they usually require a DTI ratio below 45%, although some require the DTI to be below 36%. But lenders who provide physician loans may look at a borrower’s student loans (which they expect to be high) as separate from other debt and not include them in the DTI, or they may include the student loans but set a higher DTI limit.

You may want to keep in mind, though, that just because you can get a loan with a higher DTI ratio doesn’t mean you should. A home affordability calculator can help you see what might fit into your budget and a mortgage calculator can show you what your monthly payments would look like at different interest rates.

It might also be helpful to talk to a financial advisor about how much house you can really afford, and what the costs of homeownership could mean for your overall financial well-being.

Looser Employment and Salary Requirements

Proving that you have stable employment as well as an adequate income is usually part of qualifying for a conventional loan. (Lenders generally like to see at least two years of work history.) Employment requirements may vary with a doctor loan, but lenders who offer these types of mortgages typically understand that a new doctor could be working as an intern, resident, or fellow, and may not be earning as much starting out as they will take home even just a few years into their career. (Borrowers still can expect to provide paperwork that documents their salary and employment, however, along with their medical license.)

Recommended: Understanding Mortgage Basics

Benefits of Physician Mortgage Loans

If you’re eager to get into your own home once you wrap up medical school, a physician home loan may make that possible — and less expensive. Avoiding PMI on a new home could save you hundreds or even thousands of dollars a year, for example. And if you don’t have to make a down payment, you can use that money for other expenses.

Lenders also may offer higher loan amounts with a physician loan than with other loan types. And though some lenders offer doctor loans with fixed rates, most come with variable interest rates, so you can expect to start out with a lower, more affordable interest rate when you begin making payments. (That means you’ll have an adjustable rate after a fixed introductory period, so your monthly payments could change. But if the rate becomes unmanageable down the road, you can look at refinancing to a conventional loan with a more competitive mortgage rate.)

How to Qualify for a Physician Mortgage Loan

Though the underwriting requirements may be more relaxed for doctor loans, you should be prepared to provide the following:

•   Proof of identity (this might include your driver’s license, Social Security number, or other documentation)

•   Proof of employment and income (you may be able to use an employment contract if you don’t yet have a W-2, pay stubs, or similar documents)

•   Documentation of assets and debts

•   A contract for your home purchase, including the purchase price

•   Information about the type of home you’re purchasing (condo, single-family home, etc.)

•   Proof of a medical degree (M.D., D.O., D.D.S., etc.) that meets the lender’s requirements

Other parts of the mortgage process — from determining what you can afford to choosing mortgage terms to closing on the deal — will likely be similar to what you’d expect if you were applying for just about any type of loan.

The Takeaway

If you’re finally starting your career as a doctor and you’re wondering if student debt or minimal savings could keep you from reaching the goal of home ownership — despite your income potential — a physician home loan may be an option worth researching.

Because these special loans typically don’t require a down payment or private mortgage insurance payments, and the eligibility requirements are often less strict than for conventional loans, doctors may not have to wait until they’re on firmer financial footing to purchase a home.

Of course, you’ll want to compare all the pros and cons of a physician mortgage — or any home loan. Buying a home is a big decision, and you’ll likely want to balance your eagerness to reach this milestone with your ability to keep pace with your mortgage payments and your debt payments, as well as other expenses.

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.

FAQ

What credit score do I need to get a physician mortgage loan?

A credit score of at least 700 or 720 may be required to get a physician loan, although some lenders may accept a lower credit score. Each lender has its own criteria.

Are physician mortgage loans available for residents and fellows?

Employment requirements may vary, but lenders who offer these types of loans typically understand that a new doctor could be working as an intern, resident, or fellow.

How do interest rates compare for physician mortgage loans vs. conventional loans?

Doctor’s mortgage loans generally come with a variable interest rate. After a fixed introductory period, your payments could go up or down, depending on several factors. With conventional mortgages, you may have a wider range of interest rate types to choose from.

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.

SOHL-Q125-061

If you own a home, a home equity line of credit (HELOC) lets you tap into your home equity to finance renovations or other expenses. Before borrowing against your home equity, it’s worth asking, how does a HELOC affect credit scores?

Taking out a new credit account has an impact on your credit score. But how a home equity line of credit affects credit scores depends on multiple factors, including your payment history and existing credit.

Here’s a look at how a HELOC could affect your credit score across the entire lifespan of the line of credit, from filing your application to closing a HELOC account — plus tips to maintain your credit score.

Understanding HELOCs and Credit Scores

First, let’s start with a HELOC definition. A HELOC, or home equity line of credit, is a revolving line of credit that typically allows homeowners to borrow up to 90% of their home’s value, minus the outstanding mortgage principal. Borrowers can draw against their approved credit line as needed until the end of the draw period, which is usually 5 or 10 years, before having to repay the balance over another 10 to 25 years. That’s HELOCs explained, in a nutshell.

Meanwhile, your credit score is calculated based on how you manage debt payments, also known as credit. A variety of factors affect your credit score, including payment history, credit utilization, length of credit history, credit mix, and applications for new credit. Your credit score appears as a three-digit number. Credit score ranges run from 300 to 850, with scores of 670 or higher being considered good to excellent.

Impact of Applying for a HELOC on Your Credit

So how does a HELOC impact credit scores? Similar to other types of credit, applying for a HELOC involves a credit check, which is added to your credit report.

Hard Inquiries

When you apply for a HELOC, lenders will run a credit check to assess your creditworthiness. This involves requesting to review your credit report, which is known as a hard inquiry.

A record of any hard inquiry, sometimes referred to as a hard pull, is registered on the credit report. Having one hard inquiry could lower your FICO® Score by up to five points, but only for one year.

To avoid multiple hard credit pulls, you can check to see if lenders offer HELOC prequalification with a soft credit pull instead.

New Credit Accounts

Applying for a HELOC means opening a new credit account. This could decrease the average age of your credit accounts and ding your credit score by a few points.

Effects of Using a HELOC on Your Credit

Once you’ve been approved for a HELOC, how you begin using funds and managing payments can affect your credit. Let’s explore what goes into these HELOC credit score impacts.

Credit Utilization Ratio

Your credit utilization ratio is a calculation of how much of your credit you’re using. In other words, it’s the percentage of your credit limit you’re using on all your revolving credit accounts, such as credit cards, combined.

So does a HELOC affect your credit score and credit utilization ratio? While HELOCs operate like a revolving line of credit, they’re secured by a property. This means that it isn’t included in your credit utilization ratio as part of your FICO score.

Using funding from a HELOC to pay off high-interest debt like credit cards could lower your credit utilization ratio and boost your credit score. Maintaining a credit utilization ratio below 30% is recommended to qualify for financing or get mortgage preapproval.

Payment History

Payment history is the largest component of a credit score. Making consistent, on-time payments each month on a HELOC could help build your credit score over time. On the flip side, failing to stay current on payments could hurt your credit score and ultimately put your property at risk.

HELOCs are typically structured to have higher monthly payments after the draw period ends. Once the repayment period begins, you won’t have the ability to continue drawing funds. You can use a HELOC repayment calculator to see what your monthly payment would be based on how much you owe on a HELOC, your repayment term, and interest rate.

Credit Mix

Your credit mix refers to the number and types of credit accounts you have, including student loans, home loans, credit cards, and car loans. Demonstrating your ability to manage different types of debts can benefit your credit score.

Taking out a HELOC could improve your credit mix (and credit score) if you don’t have other types of revolving credit, especially for borrowers without much credit history.

Bottom line: The HELOC–credit score connection can be significant.

Recommended: FHA Loans

Closing a HELOC and Its Credit Implications

Paying off and closing a HELOC can have impacts on your credit. (Paying the balance off on a HELOC removes the lender’s lien on your home.) Here are some potential credit implications to consider when closing a HELOC.

Account Age

If you’ve been making payments on a HELOC for several years, closing the account could potentially lower the average age of your accounts. How much this impacts your credit score will depend on the age of your other accounts.

But if the account is in good standing with no late payments, it can still factor into your credit history for several years after closure.

Credit Availability

Closing a HELOC won’t affect your credit utilization for your FICO score. But if you don’t have other revolving lines of credit, it could reduce your credit mix, potentially putting a small dent in your credit score.

Strategies to Minimize Negative Credit Impact

Applying for a HELOC — or opening any new credit account — can initially lower your credit score by a few points. But there are several ways to reduce further damage to your credit score.

Timely Payments

As a reminder, your payment history is the largest component that goes into calculating your credit score. Continually making on-time payments each month can build up your credit. Conversely, paying less than the minimum or missing a monthly payment could harm your credit score.

Note that the interest on monthly payments could be eligible for a tax deduction, like mortgage interest, if used to make substantial improvements on your home. You’ll want to discuss this with your tax advisor.

Managing Credit Utilization

As you manage monthly HELOC payments, keep an eye on the balances for other revolving lines of credit, such as credit cards. Again, keeping a credit utilization ratio below 30% is considered beneficial for your credit score.

Monitoring Credit Reports

Periodically checking your credit report can help detect any instances of fraud or payment errors and inform strategies to improve your credit score. Requesting a credit report is free, and it’s a good idea to do so before applying for a new loan or credit card to understand how lenders will evaluate you as a borrower.

Recommended: Mortgage Rates

The Takeaway

How does a home equity line of credit affect credit scores? Applying for a HELOC involves a hard credit check, which can have some impact on your credit. However, making timely payments, keeping a strong credit mix, and maintaining a low credit utilization ratio can mitigate these effects and strengthen your credit over time.

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.

FAQ

Does opening a HELOC significantly lower my credit score?

Opening a HELOC typically involves a hard credit check which can lower your credit score by several points. Whether this is significant will depend on what score you start with — if your credit score is teetering near an important benchmark, such as the 669-670 dividing line between “fair” and “good” credit, it may be an important effect. The hard credit check can stay on your credit report for 12 to 24 months.

How does a HELOC affect my credit utilization ratio?

A HELOC typically does not affect your credit utilization ratio, as it’s secured with a property as collateral versus other revolving lines of credit, such as credit cards, which are unsecured.

Will closing a HELOC improve my credit score?

Closing a HELOC can have a negative effect on your credit score by reducing your credit mix and age of accounts. However, if you made on-time payments over the life of the loan, that will be reflected on your credit history for several years.

Can a HELOC help diversify my credit mix?

Yes, a HELOC can help diversify your credit mix and show lenders that you’re a responsible borrower. If you have installment credit like a mortgage, student loans, or personal loans, taking out a HELOC would provide a form of revolving credit to your credit mix.

How can I use a HELOC responsibly to maintain a good credit score?

Paying off higher-interest debt, such as personal loans or credit cards, and funding home improvements that may make it possible for you to deduct the interest paid on a HELOC, are examples of how to responsibly use a HELOC. Making monthly payments on time and in full is essential to safeguarding your credit score when taking out a HELOC.

Photo credit: iStock/kate_sept2004

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.

SOHL-Q125-057

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

It isn’t.

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

What Is a Mortgage Transfer?

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

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

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

Recommended: Mortgage Basics

How a Mortgage Transfer Works

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

Getting Your Lender’s Approval

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

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

Filing the Proper Paperwork

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

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

Keeping the Loan in Good Standing

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

Paying the Appropriate Taxes

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

When Can You Transfer a Mortgage?

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

Transferring a Mortgage to Another Person

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

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

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

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

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

Mortgage Transfer vs. Refinancing

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

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

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

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

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

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

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

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

Benefits and Drawbacks of Transferring a Mortgage

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

Benefits

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

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

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

Drawbacks

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

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

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

The Takeaway

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

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

FAQ

Are there fees associated with transferring a mortgage?

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

What documents are needed for a mortgage transfer?

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

How does a mortgage transfer affect interest rates?

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

Photo credit: iStock/Delmaine Donson

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

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

SOHL-Q125-062

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

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

Understanding Biweekly Mortgage Payments

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

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

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

Recommended: Mortgage Repayment Calculator

Pros of Biweekly Mortgage Payments

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

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

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

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

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

Cons of Biweekly Mortgage Payments

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

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

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

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

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

Recommended: Home Equity Line of Credit

How to Calculate Potential Savings

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

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

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

With monthly mortgage payments:

•   Monthly payment: $1,516

•   Total annual payment: $18,912

•   Loan term: 30 years

•   Total interest paid: $306,106

With biweekly mortgage payments:

•   Biweekly payment: $758

•   Total annual payment: $19,708

•   Loan term: 24 years

•   Total interest paid: $235,609

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

Who Benefits Most from Biweekly Payments?

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

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

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

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

Implementing Biweekly Payments

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

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

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

Alternatives to Biweekly Mortgage Payments

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

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

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

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

The Takeaway

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

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

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.

SOHL-Q125-060