Home Equity Conversion Mortgage (HECM) vs Reverse Mortgage

A reverse mortgage is a popular way for retirees to supplement their retirement income. A home equity conversion mortgage (HECM) is the Federal Housing Administration’s reverse mortgage program, which allows borrowers to withdraw some of the equity in their home. It has stricter eligibility requirements than other reverse mortgages, but it is also the only reverse mortgage insured by the U.S. Government.

Here’s a look at the unique aspects of an HECM compared to a traditional reverse mortgage, the pros and cons, and the all-important fees that come with reverse mortgage financing arrangements.

Note: SoFi does not offer home equity conversion mortgages (HECM) at this time. However, SoFi does offer home equity loan options.

What Is a Reverse Mortgage?

A reverse mortgage loan is a way to obtain financing using your home as security. In most cases, the home must be your primary residence. You, as the borrower, receive either a lump sum or an amount each month. You accrue interest and pay fees based on the amount you receive, and the amount you owe the lender increases over time. As your loan balance increases, your home equity decreases. You pay back the loan when you sell the house, permanently move away, or pass away.

When someone with a reverse mortgage dies, the heir who has inherited the house settles the loan balance, either by repaying the outstanding loan amount, selling the home and keeping any remaining proceeds after settling the loan, or signing over the deed to the lender.

What Is an HECM?

A home equity conversion mortgage (HECM) is one type of reverse mortgage. It is the most popular type of reverse mortgage, but it is only available to people aged 62 and older. This is the only reverse mortgage insured by the U.S. Government and is only available through a lender approved by the Federal Housing Administration (FHA). (It’s not to be confused with an HECM for purchase, which allows homebuyers aged 62 and older to purchase a home with the loan proceeds from a reverse mortgage.)


💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

Key Similarities

HECMs and other types of reverse mortgages share similarities. One is that they are a popular way for seniors to supplement their income if they have significant equity in their home. Another is that borrowers remain responsible for paying the property taxes and homeowners insurance for the life of the loan.

Key Differences

There are always reverse mortgages pros and cons. But there are also key differences when you examine an HECM vs. a reverse mortgage.

•   Age of borrowers: A reverse mortgage is an option for anyone aged 55 or older. An HECM is only available to those aged 62 or older.

•   Payout options: Reverse mortgages typically only offer a lump-sum payout. An HECM has more options, such as a lump sum, monthly payouts, or a credit line.

•   Stricter eligibility requirements: The HECM property must be a primary residence, the homeowner must have a certain amount of equity, and the homeowner must have the ability to pay property taxes and homeowners insurance.

•   FHA-insured: The HECM is the only reverse mortgage insured by the U.S. federal government and is only available through an FHA-approved lender.

•   Mortgage insurance: This may not be required for a proprietary mortgage, but it is for an HECM.

•   Lending limits: For an HECM the lending limit is $1,209,750 for 2025. Lending limits may be higher for other reverse mortgages.

Pros of an HECM

The main advantages of an HECM are that monthly payments are not required because the loan is paid back when the home is sold. Also, lenders do not set a minimum credit score to qualify. The table below lists the pros of an HECM.

Pros of an HECM

No required monthly payment Borrowers can pay down the principal each month, pay just interest, or pay nothing at all until the home is sold.
No minimum credit score Lenders do not look for a minimum credit score, but they may do a credit check to look for federal tax liens or loan delinquencies.
FHA-insured The FHA protects you if your mortgage is more than your home’s value.
No spending restrictions You can spend the money from an HECM on whatever you like.
No income taxes The money from an HECM is not subject to income tax.
Guaranteed income As long as you stay in your home, you are guaranteed the income from an HECM.
Home ownership When it is time to sell your home, any remaining equity after paying off the mortgage belongs to you or your heirs.

Cons of an HECM

In the HECM vs. reverse mortgage equation, the cons of an HECM are mostly related to the strict eligibility requirements listed in the table below.

Cons of an HECM

Age requirements You must be at least 62 years of age. This applies to your spouse also if you are applying together.
Home maintenance You must live in the home as your primary residence and maintain it appropriately.
Free of debt payments You must be free of debt payments and up-to-date on your insurance and property taxes.
Scams are rife Some HECMs are scams. It’s wise to consult a financial advisor before signing anything so that you understand the terms and consequences of the loan.
Potential loss of aid The IRS does not consider an HECM as income, so you do not have to pay taxes on the financing. However, the money may affect any Supplemental Security Income or Medicaid you may be eligible for.

Comparing Costs and Scenarios

A reverse mortgage does not require a monthly payment, but you will pay origination, servicing, and third-party fees, property taxes, and insurance. These fees are paid back when you sell your home, move, or pass away.

The amount that you can borrow through a reverse mortgage will be less than the full value of your home to cover the cost of insurance and origination fees. Also, the younger you are the less you can borrow because you are expected to live longer, giving the loan more time to grow before the debt is paid. If you’re thinking about a reverse mortgage, it might be wise to also look at a home equity line of credit (HELOC), which is another way to borrow based on the equity you have in your home. HECM vs. HELOC is worth considering as there are costs and benefits in each case.

Insurance Premiums

For an HECM, you will likely pay a mortgage insurance premium (MIP) at closing and an annual MIP for the life of the loan. The MIP charge at closing is based on the home’s appraised value or the HECM loan limit, whichever is less. Insurance fees are typically 2% of your home’s appraised value upfront, and then you will be charged an additional 0.5% of the total loan value annually. There will also be an origination fee of around 3% of the loan value.

The HECM loan limit is $1,209,750 for 2025.

Origination Fee

Your lender will charge an origination fee for processing your HECM loan. According to the U.S. Department of Housing and Urban Development (HUD), the lender can charge 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000 or $2,500, whichever is the greater amount. However, the lender cannot charge more than $6,000.

Here are a few scenarios for an HECM loan with different home values and the associated costs. Note that not all lenders charge the maximum fee, so it pays to shop around.

1.    Home value: $100,000

The home’s value is less than $125,000 so the lender will charge $2,500.

2.    Home value: $175,000

Since the home is valued at more than $125,000 but less than $200,000, the lender will charge a maximum of 2% of the home’s value, or $3,500.

3.    Home value: $350,000

Since the home is valued at greater than $200,000, the lender may charge up to 2% ($4,000) plus 1% for the remaining $150,000 ($1,500), for a total of $5,500.

Servicing Fee

The servicing fee covers the cost of calculating and sending statements and making sure taxes and insurance premiums are up to date. If the interest rate is fixed or annually adjusted, the monthly fee may be around $30. If the interest rate is adjusted monthly, the fee might be slightly higher and around $35. At closing, the lender may set aside the servicing fee and add the cost to your loan balance each month.

Third-Party Fees

Third-party fees are closing costs and include survey and appraisal fees, title and title insurance fees, and credit checks. These are likely to be in the range of $1,000 to $2,000.

Interest Rates for HECMs

Reverse mortgage interest rates are another factor to consider. It’s not easy to find the interest rates for HECMs. However, you can find recent average rates on the HUD website. The interest rate will vary between private and HECM loans, but the latter tend to have lower interest rates because they are backed by the FHA.

Fixed vs. Adjustable Interest Rate

Most lenders offer monthly adjustable interest rates. The lender calculates an adjustable HECM by including an index and setting a margin. The margin does not change after the loan is originated, but the index fluctuates according to the market. Reverse mortgage borrowers can’t typically predict how much interest they will ultimately pay because the term of the loan is uncertain and interest continues to mount over the life of the loan. How much interest will ultimately accrue is somewhat uncertain for both variable and fixed rate reverse mortgages, so it is wise to discuss the pros and cons with a lender and with a financial advisor as well.


💡 Quick Tip: A home equity line of credit brokered by SoFi gives you the flexibility to spend what you need when you need it — you only pay interest on the amount that you spend. And the interest rate is lower than most credit cards.

The Takeaway

An HECM is a type of reverse mortgage. It has stricter eligibility requirements compared to other reverse mortgages. To qualify for an HECM, you must be aged 62 or older and should be relatively free of debt.

There are benefits to an HECM. For example, it is FHA-insured and you don’t have to pay tax on the payouts. However, an HECM may affect your eligibility for Supplemental Security Income or Medicaid. Also, the lending limits are lower for an HECM. Seekers of a reverse mortgage or an HECM should be careful not to fall victim to a scam and a fraudulent loan — do your research carefully and only work with a lender that has a good reputation. Consider asking a trusted financial advisor for a recommendation.

FAQ

Is an HECM the same as a reverse mortgage?

An HECM is a type of reverse mortgage. However, it is only available to people aged 62 and older. An HECM is insured by the U.S. federal government and is only available through a Federal Housing Administration (FHA)-approved lender.

What are the main differences between an HECM vs. reverse mortgage?

The main differences between an HECM and a reverse mortgage are that an HECM is only available to those aged 62 or older. An HECM is also FHA-insured. The payout options are often more flexible for an HECM, whereas a private reverse mortgage might only offer a lump sum payout.

Are the qualifications the same for an HECM and reverse mortgage?

No. For an HECM, you must be 62 years old or older, whereas other reverse mortgages are available to those 55 and over. For an HECM, the property must be your primary residence, and the equity requirements might be higher for an HECM than a private reverse mortgage. Also, the lender will want to see that you can pay property taxes and homeowners insurance.


Photo credit: iStock/LordHenriVoton

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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.


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10 Strategies for Building Credit Over Time

Broadly speaking, the best way to build credit is actually quite straightforward: Be the kind of borrower you’d want to lend to. While that might sound simple, it isn’t always second nature to know exactly how to go about doing that. For instance, you might know it’s critical to make payments on time, but you might not be aware that it’s important to keep your unused credit cards open.

If you’re setting out on your journey toward building credit, here’s a rundown on how to build credit, with 10 strategies you can stick to.

Strategies for Building Credit

1. Acquire Credit

Perhaps the first crucial step in how to build credit is to acquire credit accounts. For someone who does not have a credit history of their own, getting a co-signer or becoming an authorized user on an established cardholder’s account can help you get started. You might also consider a secured credit card or applying for a credit card designed specifically for students. Or you can look into a credit-builder loan.

In the long run, however, you’ll be in a much stronger position if you can borrow in your name alone. Establishing credit of your own can make it easier to borrow in the future for such things as an auto loan, a personal loan, or even a mortgage.

2. Pay Bills Consistently and On Time

Timely payments are crucial, and making at least the minimum payment each month on a revolving credit line can make a positive impact on your credit score.

That’s because payment history makes a bigger impact on a person’s credit score than anything else. A borrower’s credit score summarizes their health and strength as a borrower, and payment history makes up 35% of that score on a credit rating scale. So the most important rule of credit is this: Don’t miss payments.

Many lenders will actually allow you to customize due dates so they line up with pay dates, and most let you set up automatic payments from a checking or savings account. Take the time to find what works for you to make your payments in a timely fashion.

Recommended: When Are Credit Card Payments Due?

3. Manage Your Credit Utilization Rate

The further away a person is from hitting their credit limit, the healthier their credit score will be, in most circumstances. A borrower’s debt-to-credit ratio, also known as the credit utilization rate, should ideally be no more than 30%. Higher utilization rates can negatively affect a person’s credit score.

Paying revolving credit lines in full each month can have a positive impact on your credit score because doing so essentially lowers your credit utilization rate. Additionally, keeping tabs on your credit utilization rate before continuing to swipe is key to using a credit card wisely.

4. Keep Unused Credit Cards Open

Lenders want to see accounts maintained in good standing for a long time. As such, a credit history looks better when it has a solid number of accounts in good standing that have been open for a while. When debt accounts are closed, that history ends, and eventually closed accounts drop off your credit report entirely.

To keep this from happening, avoid closing old credit cards, even if you’re not using them anymore. You might consider using these accounts to automate a few bills, like car insurance or a monthly subscription account, to avoid account closure due to inactivity.

5. Diversify Your Credit Mix

Having a diverse mix of credit products can also have a positive impact on a person’s credit, accounting for 10% of a credit score calculation.

Opening at least one credit card is a good step for most borrowers. Using a personal loan to finance a large purchase with a relatively low interest rate, and paying off that personal loan on time, can also have a positive impact on a person’s credit. Student loan refinancing can be another way to diversify your credit mix, while potentially lowering your interest rate.

However, while having a mix of credit can help your standing as a borrower, it’s not a good idea to open a line of credit that’s not needed just to increase your mix of credit types. Instead, stick to applying only for credit you actually need and that you’re confident you can afford to pay off.

6. Check Your Credit Report

It’s recommended to check your credit reports from the three major credit bureaus at least once a year. Doing a regular review of your reports is a good way to monitor your overall credit health and understand the impacts of different activities. It’s also important to make sure that everything listed in your credit report is accurate, and to flag any errors or fraudulent activity.

Where Can You Track Your Credit Score?

You can get a free copy of your credit report every 12 months from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Request your copy online by visiting AnnualCreditReport.com. Note that you can also request a copy anytime you experience an adverse action based on your credit report (like being denied for a loan), among other circumstances.

Checking your credit score is even easier. While it’s not included in your credit report, you can get your current score from your credit card company, financial institution, or on a loan statement. Another option is to use a free credit score service or site. If you’re tracking changes to your credit score, it’s helpful to know how often your credit score updates and then check in accordingly.

7. Limit Credit Applications

When making major life changes, like starting a job, getting married, or having children, sometimes multiple lines of credit might be helpful to get through it all. Financial institutions understand that, but they also know that, historically, people who borrow a lot of money at once from multiple sources tend to have more difficulty paying them back. Spreading out credit applications over time whenever possible typically has a lower impact on an overall credit score.

Recommended: What Is the Average Credit Card Limit?

8. Avoid Overspending

Perhaps one of the most effective ways to ensure you keep building your credit in the right direction is to only spend what you can afford to pay off. This will help you more easily maintain a lower credit utilization rate, and it can prevent you from racking up a balance and falling into a debt spiral.

Plus, if you pay off your balance in full each month, as opposed to only making the minimum payment, you can avoid incurring interest charges. This is a perk that’s foundational to what a credit card is.

9. Get Credit For Other Bills You Pay

If you’re early in your credit building journey, it can help to get credit for other payments you’re making on time, such as your rent payment, utility bills, or even streaming services fees. For instance, Experian Boost adds on-time payments in other accounts to your Experian credit report. There are also a plethora of rent-reporting services out there that will report your timely rent payments to the credit bureaus.

10. Pay Off Any Existing Debt

Another important strategy toward building credit is to pay down any debt you may currently have. Especially important when it comes to the time it takes to repair credit, saying goodbye to existing debt allows you to lower your credit utilization rate, which in turn builds your credit score. There are a number of tactics out there for paying off debt, from a debt consolidation loan to a balance transfer credit card.

What Is a “Good” Credit Score?

A “good” credit score is considered within the range of 670 to 739 under the FICO Score, the credit scoring model most commonly used by lenders. “Very good” is considered anywhere from 740 to 799, while “exceptional” is 800 and above.

Keep in mind, however, that these exact credit score ranges can vary a bit from model to model. For instance, in the VantageScore® range, a score of 661 to 780 is considered “good.” In general though, anything in the upper 600s is generally within the range of a “good” credit score.

How Long Does it Take to Build Your Credit Score?

According to Experian, one of the three major credit bureaus, it generally takes around three to six months of data to generate an initial credit score.

Credit card issuers typically don’t report account activity until the end of the first billing cycle, so it’s worth waiting a month or two before you check in on the status of your score. If you’re anxious to ensure your activity counts, it’s also a good idea to check with your issuer to make sure they report to the credit bureaus.

What Can You Do with “Good” Credit?

The importance of having good credit can’t be overstated. By building credit, you’ll have easier access to borrowing opportunities in the future, whether that’s an auto loan for a new car or a mortgage for a new home. A better credit score also allows you to secure better terms, such as lower interest rates and a higher borrowing capacity.

The Takeaway

As you can see, there are a number of ways to build credit. First and foremost, you’ll want to make sure you’re following the tenets of responsible credit usage, as these are arguably the best ways to build credit. From there, you can consider additional credit building strategies, such as ensuring that your on-time rent and utility payments count.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How long does it take to build credit?

Once you open your first credit account, it generally takes around three to six months to start building a credit score.

How do I establish credit with no credit history?

There are several ways to establish credit if you have no credit history. Some strategies to explore include becoming an authorized user on a friend or family member’s credit card account, applying for a secured credit card, applying for a retail card, taking out a credit-builder loan, and reporting your on-time rent and utility payments to the credit bureaus.

How can I improve my credit as quickly as possible?

Though it takes time to repair or build credit, there are some steps you can take. For starters, work on paying down credit cards with high balances. And be sure to pay your bills on time, every time. If you’re having trouble keeping track of due dates, consider setting up autopay or calendar reminders for yourself.


Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .


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.

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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What Are Sinking Fund Categories?

What Are Sinking Fund Categories?

Sinking funds are tools that people or businesses can use to set aside money for a planned expense. For instance, you may know that you want to take a vacation next year, so you may start putting cash in an envelope in order to save up for that vacation. That, in effect, is a sinking fund.

Sinking fund categories, as such, depend on the expenses relevant to each individual. They can include auto repairs, health care costs, gifts, insurance payments, vacation funds, and more.

You can think of sinking funds as a way of “sinking” your money into an account for later use. It’s basically a savings strategy. We’ll get into it more below.

General Definition of Sinking Funds

The term “sinking fund” has its roots in the world of corporate finance, but mostly refers to the way that an individual would utilize them: for setting aside money or various types of income for a future expense.

Sinking funds are smaller offshoots of an overall budget. Putting together a sinking fund entails stashing money in reserve for the future, knowing what that money will eventually be spent on.

For instance, some people like to pay their car insurance in six-month installments. They may sock money away each month in anticipation of the next six-month installment payment, so that they’re not hit with a big expense all at once.

Their car insurance sinking fund contains the money they need, so they don’t have to scramble to cover the cost every six months.

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Examples of Sinking Funds Categories

When it comes to sinking funds categories, there are no hard and fast rules. Different individuals have different financial needs and planned expenditures. As such, their sinking funds categories are going to vary. That said, some common sinking fund categories are applicable to most individuals. Here are some examples:

•   Vacations

•   Gifts and holiday-related expenses

•   A new vehicle or regular maintenance and insurance costs

•   A home purchase or home maintenance expense

•   Medical and dental costs

•   Childcare costs

•   Tuition expenses

•   Pet expenses, such as veterinarian visits

A sinking fund can be helpful in saving for just about anything.

Recommended: How to Set Your Financial Goals

Sinking Fund Category Calculations

Setting up a sinking fund is easy enough: You can stuff cash under your mattress or use a savings vehicle like a savings account. The difficulty for most of us comes in regularly contributing to it. But the trickiest part may be figuring out how much you should be contributing.

A budget planner app can come in handy, as you’ll be able to see how much money you have to dole out to your sinking fund categories after your monthly expenses have been taken care of.

Similarly, if you stick to a certain budget type — such as the 50/30/20 rule — that may help determine what you can contribute.

To calculate how much you can contribute to a sinking fund, first you’ll need to decide which sinking funds are the most important. Another consideration is which fund will need to be utilized first — perhaps you have an auto insurance payment coming up before a vacation. Priorities and timing both affect your sinking fund calculations.

In corporate finance, there is an actual sinking fund formula that helps a company figure out how much it needs to put away to pay off a long-term debt in a lump sum, while paying minimum amounts in the meantime. This can apply to individuals, too.

The formula looks at the amount of money already accumulated, multiplies it by any applicable interest, then divides it by the time period remaining on the loan. Using this calculation can tell you the monthly amount needed to be contributed to a sinking fund to reach a debt-payoff goal.

For individuals, however, it can be as simple as looking at your monthly income and dividing extra cash accordingly into your sinking fund categories.

Types of Sinking Funds

How do you save up a sinking fund? There are a few savings vehicles you can utilize.

The most obvious, and probably the simplest, is to keep the sinking fund in cash, and store it somewhere safe. Of course, that money won’t be earning any interest, and will likely lose value on an annual basis due to inflation, but it’s one way to do it.

Perhaps the best and safest option is to open up individual savings accounts at your financial institution for each of your sinking fund categories. This beats cash because your sinking fund is protected (and insured up to $250,000 by the FDIC), and you will earn a little interest on it, too.

Recommended: Money Market Account vs Savings Account

Best Time to Take Advantage of Sinking Funds Categories

Sinking funds are all about using time to your advantage, by saving up for a planned or known expense well ahead of time. As such, the best time to take advantage of them is when that expense finally does arrive, be it a pricey vacation, a new car, or sending a child to college.

There may be times or periods during the year when it’s more advantageous to save than others. For instance, most people experience a financial crunch during the holiday season — there are gifts to buy, parties to attend, and other demands on your income. So that may not be the best time to “sink” money into a fund.

Instead, think about when you may have some extra money, such as when you get a tax refund or receive a cash gift for your birthday. Those are the times when you may want to add something to your sinking funds.

The Takeaway

Sinking funds are designated cash reserves for future expenses. Using a sinking fund means that you’re stashing money away for an upcoming, known expense, and relieving some of the financial pressure of that expense ahead of time.
Sinking fund categories can vary, depending on your individual situation. Corporations and businesses also use sinking funds.

Sinking funds are a way to get ahead of your planned expenses, and give yourself some financial wiggle room. A money tracker app can help you do the same.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

What to put in sinking funds?

You’ll put cash in a sinking fund — cash to use on an upcoming expense at a later time. What that expense is (i.e., a sinking fund’s category) will vary depending on your specific financial needs.

What is a sinking fund leasehold?

A sinking fund leasehold contains funds for repairs or renovations to a rental property. The leaseholder or landlord sets aside a small percentage of the rental money collected every month to build up the fund.

What is the difference between a reserve fund and a sinking fund?

The two are more or less the same. The big difference is that a sinking fund’s contents are designated for a specific purpose or expense, whereas a reserve fund contains funds used for general future expenses.


Photo credit: iStock/Delmaine Donson

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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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How to Get Equity Out of Your Home Without Refinancing

If you’re like many Americans, your home is the single most valuable asset in your portfolio. That six-figure investment doesn’t just keep a roof over your head — it can provide a source of wealth and stability for years, and potentially generations, to come.

But sometimes, you need access to that wealth now — preferably in the form of cold, hard cash. And while refinancing can be one way to access your home’s value, you may not want to change your interest rate or other mortgage terms. Fortunately, there are ways to take equity out of your house without refinancing — though many of them do come with their own costs and risks. Below, we’ll dive into all the details so you can make an informed decision.

Can You Pull Equity Out of Your Home Without Refinancing?

The short answer: Yes, there are ways to get equity out of your home without refinancing (though cash-out refinancing is also a way to do so). From home equity loans to a home equity line of credit (HELOC) and reverse mortgages, there are a lot of ways to turn your home’s value into cash money — though they all come with their own pros and cons to consider. Let’s take a closer look.

Ways to Get Equity Out of Your Home Without Refinancing

Here are five ways to get equity out of your home without refinancing.

1. Home Equity Loan

A home equity loan is, as its name suggests, a loan that draws from the value of your home equity — which is the amount of your home’s value that you actually own (i.e., what you have paid back to your mortgage lender). You can take out a home equity loan without refinancing, and if you’ve been building equity for a while, doing so can be a relatively low-cost way to access a large lump sum of money in one fell swoop.

A home equity loan is sometimes known as a “second mortgage,” since it’s secured by the same asset as your original mortgage — your home. And just like your mortgage (and many other types of loans), a home equity loan is usually repaid in regular, fixed installments over a predetermined period of time, or term. This might be 10 or 20 years long.

Of course, home equity loans do come with drawbacks to consider. For one thing, your home will be at risk of foreclosure if you fail to repay the “second” mortgage, just as it is with the first. And although interest rates may be relatively low, closing costs apply, which can amount to thousands of dollars.

2. Home Equity Line of Credit (HELOC)

A home equity line of credit, or HELOC, works in a similar way to a home equity loan — but instead of a lump sum payment, you’ll get access to a flexible line of credit based on your home equity, which you can tap into as needed. You can think of it a little bit like a credit card, except your “credit limit” will be based on the equity you’ve built in your home.

HELOCs may be offered at a fixed or variable interest rate and usually consist of a draw period followed by a repayment period — so you’ll have a certain amount of time to draw from the HELOC and then a certain amount of time to pay it back. Most HELOCs allow borrowers to take out up to 80% or even 85% of their home’s value, minus whatever they owe on their mortgage — in other words, up to 80% of their home equity. Keep in mind that HELOCs may also be subject to origination fees and other upfront costs that can increase their overall expense.

3. Reverse Mortgage

A reverse mortgage is similar to a home equity line of credit. One type, a Home Equity Conversion Mortgage (HECM), is backed by the Federal Housing Administration (FHA) and is specifically for homeowners age 62 and over. Rather than making regular monthly repayments on the loan, the total doesn’t come due until you no longer live in the home.

Since interest and fees are added each month, the loan total goes up over time, while your home equity in turn goes down — and if you (and any coborrowers) die, the reverse mortgage is due immediately. Thus, this option might not be the right choice for those hoping to leave their home to their surviving family members. If the idea of an HECM appeals to you, you can meet with an HECM counselor to learn more.

Home Equity Investment

Otherwise known as Home Equity Agreements (HEAs), a home equity investment allows an investor to essentially buy some of your home’s future equity. This gives you access to cash up front without requiring you to pay back a loan over time — which many would call a win-win situation. Of course, in the long run, if your home appreciates substantially in value, you may end up paying a high rate of return to the investing company — and having less of your home’s value to create long-standing wealth for you and your family. Furthermore, not everyone can qualify for this relatively new financial arrangement.

Personal Loan

You might already know about personal loans — which, yes, can be taken out even by non-homeowners. But if you do own your home, you may be able to put down the deed as collateral, which could reduce the cost of the loan (since a secured loan is less risky to lenders) while also offering you the flexibility to use the borrowed money in just about any way you want.

Pros and Cons of Refinancing to Pull Out Home Equity

Of course, even with all the options described above, refinancing is still an option for those hoping to pull equity out of their homes. Here are some of the drawbacks and benefits of refinancing to pull out home equity, at a glance.

Refinancing Pros

Refinancing Cons

Access to a large lump sum of money You’ll owe closing costs
Potentially lower interest rate than credit cards or unsecured loans If the market is less favorable than when you took out your original home loan, your overall interest rate may be higher
Possible tax deductions if you use the money to make eligible home improvements Your overall owed amount will be higher and unless you choose a very short loan term, you could be paying down the loan for decades to come

When Is It Worth Refinancing?

If your financial situation and market conditions have changed such that you’d likely qualify for a lower overall interest rate and better loan terms, refinancing a mortgage may be worthwhile — and if you need short-term cash, a cash-out refinance might be an option worth considering. That’s especially true if you plan to use the money for home improvements, in which case you may qualify for additional tax deductions.

The Takeaway

While cash-out refinancing offers a readily available way for many homeowners to access their home’s equity value as cash, there are plenty of other options worth considering. A home equity line of credit (HELOC), secured personal loan, and even a reverse mortgage can all help homeowners put some extra money in their pockets — so long as they know the potential drawbacks of each method.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Is it possible to withdraw home equity without refinancing?

Yes! There are many ways to take equity out of your home without refinancing. Some of the most popular options include home equity loans, home equity lines of credit (HELOCs), and reverse mortgages. It’s important to understand that each of these options comes with its own costs and associated risks, however.

What is the best way to take equity out of your home without refinancing?

There’s no one easy answer to this question, because the “best” way depends on your personal financial situation and how much cash you need access to. That said, Home Equity Lines of Credit (HELOCs) offer unparalleled flexibility when it comes to the amount you withdraw, which could save you from paying back money you didn’t need to borrow in the first place. Personal loans secured with your home’s deed may also be a relatively inexpensive and very flexible option.

Is taking equity out of your house a good idea?

Like any debt, taking equity out of your home could be a good decision or a bad one, depending on what you’re planning to use the funds for and how that action will shape your future finances. For instance, if you plan to use your home equity loan to make home improvements that might increase the property’s value substantially, doing so might be a smart investment. On the other hand, taking out a reverse mortgage — which will decrease your home’s equity over time — to go on a lavish vacation might be less advisable.


Photo credit: iStock/boggy22

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


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



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

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


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.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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

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


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Reverse Mortgage Interest Rates: What Are They?

A reverse mortgage allows older homeowners to tap into a portion of their home equity as cash — either a lump-sum payment, monthly payments, or a line of credit. As with any mortgage, the lender charges interest — and reverse mortgage interest rates tend to be higher than those on a typical home loan. There are also fees involved.

Most lenders offer a reverse mortgage only to those age 62 or older, although a few companies permit those 55 and over to obtain one. This type of mortgage can be useful for retired seniors who need additional income to cover rising medical costs, home renovations, debt consolidation, and general living expenses. But what is the interest rate on a reverse mortgage? We’ll explore current rates and how they work below.

Comparing Current Interest Rates for Reverse Mortgages

Reverse mortgage rates can be either fixed or adjustable, and available rates change frequently. The table below shows reverse mortgage interest rates for the most common type of reverse mortgage — a home equity conversion mortgage (HECM) — as of June 7, 2024. During that week, the average rate on a 30-year fixed rate home loan was 6.95%.

HECM Fixed Rate

HECM Adjustable Rate

Current interest rates 7.560% to 7.930% 6.950% to 7.700%
Annual percentage rate (APR) 9.080% to 9.502% N/A
Margin N/A 1.750 to 2.500
Lending Limit $1,209,750 $1,209,750

Sources: All Reverse Mortgage, Inc. and MLS Reverse Mortgage

The margin is the number of percentage points added to the interest rate by the lender to set the interest rate you will pay on an adjustable-rate mortgage after the initial rate period ends. The margin is set and shouldn’t change after closing.

What Is a Reverse Mortgage?

To understand whether a reverse mortgage, with its higher interest rate, is right for you, it helps to understand how exactly reverse mortgages work. A reverse mortgage is a type of loan available specifically to homeowners (usually those 62 or older) who have built up significant equity in their property. They can access that equity as a lump sum, monthly payments, or line of credit and use it for various purposes, like funding expenses in retirement, renovating their home, or paying down debt. For older Americans, it’s an alternative to another type of loan, such as a home equity line of credit or a personal loan.

Reverse mortgages have several fees, including mortgage insurance premiums, an origination fee, a servicing fee, third-party charges (appraisal, title search, etc.), and of course interest.

Recommended: Can a Reverse Mortgage Take Your Home?

Types of Reverse Mortgages

There are two main types of reverse mortgages: federally overseen HECMs and proprietary reverse mortgages. Most homeowners will get an HECM when applying for a reverse mortgage.

Home Equity Conversion Mortgage (HECM)

An HECM is a reverse mortgage that is governed by the Department of Housing and Urban Development (HUD). These reverse mortgages are only available through private lenders approved by the Federal Housing Administration (FHA). Borrowers must go through counseling before getting approved for the loan; the HECM counselor will discuss eligibility, risks, and how the reverse mortgage works. HECMs have a borrowing limit. For 2025, it is capped at $1,209,750.

Proprietary Reverse Mortgage

If your home appraisal exceeds the HUD limit for HECMs, you’re not out of luck. Instead, you can look for a proprietary reverse mortgage. However, you can generally only get a proprietary reverse mortgage as a lump sum. In addition, loan costs are usually higher — as are the interest rates. And because proprietary mortgages aren’t federally insured, lenders typically limit loan amounts to a smaller percentage of the value of your property.

Recommended: Reverse Mortgage vs. HECM

How Reverse Mortgages Work

To get an HECM reverse mortgage, you must:

•   Be 62 or older

•   Have significant equity in your home (or have paid it off completely)

•   Go through formal counseling

•   Use the home in question as a primary residence (or live in one of the units if it’s a multi-unit home)

•   Have no delinquent federal debt

And as with a typical mortgage, lenders will also review your credit history, income, assets, and other financial information to determine if you qualify for the loan. The amount the lender gives you depends on the value of your home (and the equity you’ve built), your age, loan fees and interest, and how you choose to receive the money.

Unlike a traditional mortgage, borrowers don’t make payments each month. Instead, the full loan balance is due when you sell the home, move out, or pass away. (If there is more than one person on the loan, the balance is due when the last person passes away.) After the last person on the reverse mortgage dies, the estate must settle the balance due — meaning it’s possible you may not leave behind any inheritance to your loved ones.

Because you still own the home when you have a reverse mortgage, you’re responsible for paying property taxes and insurance and keeping up with maintenance. If you don’t keep up with these costs, the lender can use the loan funds to pay them or require you to repay your reverse mortgage in full.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


Rate Types for Reverse Mortgages

How does interest work on a reverse mortgage? That depends on the type of rate you go with. You can either get a reverse mortgage with a fixed rate or an adjustable rate.

Fixed Rate

A fixed-rate reverse mortgage is one in which the interest rate stays constant over the life of the loan. This can make it easier to estimate how much the loan balance will grow over time, but lenders typically require you to take the payment as a lump sum when you go this route.

Adjustable Rate

Also known as a variable-rate reverse mortgage, an adjustable-rate reverse mortgage usually starts with a lower interest rate to attract borrowers, but these can change over time based on the state of the market. Rates are tied to a specific index; as that index increases or decreases, so too does the interest rate.

Recommended: HECM for Purchase Program

Factors Impacting Reverse Mortgage Rates

Several factors can impact the interest rate of a reverse mortgage, including:

•   Current market rates

•   The value (and location) of the home

•   Your age

•   How you choose to access the funds

•   The market (if adjustable rate)

The Takeaway

Reverse mortgages are one way for older Americans to tap into the equity they’ve built in their homes, but there are some risks with going this route. That’s why counseling is required before getting a reverse mortgage. Costs can also be high for reverse mortgages, largely due to their interest rates. If you explore a reverse mortgage but decide it’s not for you, you can consider alternatives, such as a home equity line of credit.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Are reverse mortgage rates higher than regular mortgages?

Reverse mortgage rates tend to be higher than regular mortgages, but a number of factors can impact the rate you get. Rates are more comparable to home equity loans and home equity lines of credit.

Can I negotiate a lower reverse mortgage rate?

You can always try to negotiate your reverse mortgage interest rate before signing. However, understand that the lender can back out until closing, just like you.

When do reverse mortgage rates adjust?

Reverse mortgage rates adjust when the index they’re tied to goes up or down. This only applies to adjustable-rate reverse mortgages. Fixed-rate reverse mortgages are constant for the duration of the loan.


Photo credit: iStock/andreswd

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


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



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

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


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.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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

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

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