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Do you receive a year-end bonus? Lucky you! While you may be tempted to go on a shopping spree or take your gang out to a great dinner, hold on a second. Yes, you can use some of that money for fun, but you might also want to put some of a year-end bonus toward your financial goals.

Smart bonus money moves may include paying down debt, helping to fund a short-term savings goal (such as a down payment on a house or establishing an emergency fund), as well as investing the money to potentially achieve long-term growth.

There’s no one right formula for spending (or not spending) a bonus, but here are some ideas for using your bonus — or any other infusion of cash — that can help improve your financial wellness today and tomorrow.

Allocating Some Money to Fun

You worked hard all year. So it’s totally understandable if you want to put some of your bonus money simply towards a few wants vs. just needs.

With any financial decision, it typically doesn’t have to be all or nothing, and that includes your work bonus. In fact, taking a balanced approach to your money might actually help you to maintain the stamina that financial goals often require.

Although the exact split is ultimately up to you, to avoid overspending, you might want to consider putting roughly 90% of your bonus towards your financial goals, and devoting about 10% to “fun money.”

If you’re getting a $5,000 bonus (after taxes), for example, that means you would have $500 to spend treating yourself. The other $4,500 would then go towards putting a big dent in your money goals.

💡 Quick Tip: Your money deserves a higher rate. You earned it! Consider opening a high-yield checking account online and earn 0.50% APY.

Chipping Away at Debt

If you have debt — whether from a student loan, car loan, or credit card debt — a bonus can be a great way to start whittling away at whatever balance you have to contend with, or even wiping it out completely.

Doing this can help you avoid throwing more money away just on interest charges, and if you manage to wipe out debt completely, you’ll have one less financial responsibility to stress about every month.

How much of your recent influx of cash should be directed toward debt reduction is entirely personal, and will depend on your situation. Some financial planners recommend that people with high-interest debt consider putting around half of their annual bonuses toward paying down that debt. But this decision will depend on your individual circumstances.

Since credit card debt typically costs the most in interest, that can be a great place to start. The average annual percentage rate (APR) for credit cards was 28.70% as of March 2025. So if your goal is to make your money work for you, it may be smart to minimize credit card balances or, even better, pay them off completely. It would be unreasonable to expect that you could out-invest what you are paying out in credit card interest.

Saving for a Short-Term Goal

If you haven’t yet started, or haven’t quite finished, creating an emergency fund, getting a bonus can be a great time to beef up that financial cushion.

While many people don’t like to think about the possibility of their car breaking down, a medical emergency, or job loss, should one of these unexpected events occur, it could quickly put you in a difficult financial situation. Without back-up, you might have to rely on credit cards or high-interset loans to get by.

How much to sock away for a rainy day is highly personal. But a common rule of thumb is to create an emergency fund that has enough money to cover at least three to six months of living expenses. You may need more or less, depending on your situation.

If you already have a decent cash cushion, you may next want to think about what large purchases you are hoping to make in the not-too-distant future, say, the next few months or years. This could be a down payment on a home, a renovation project, taking a special family vacation, buying a new car, or any financial step that requires a large infusion of cash. Then consider using at least some of your bonus check to jump start these savings goals, or add to previously established ones.

It’s a good idea to put money you are saving for a short-term goal (whether it’s a down payment or an emergency fund) in an account that is safe, earns interest, and will allow you to access it when you need it.

Some options include a savings account at a traditional bank, an online savings account, or a certificate of deposit (CD). Keep in mind, though, that with a CD, you typically need to leave the money untouched for a certain period of time.

💡 Quick Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

Invest for the Future

Bonus money can also help you start investing in longer-term goals, such as retirement or paying for a child’s education. Using bonus money to buy investments can help you build wealth over time.

For example, a lump sum of cash can work wonders in boosting your retirement savings. Even if you’re technically on track for retirement, adding more money to your individual retirement account (IRA) or 401(k) today can leave you with a larger income stream when you’re older. If you’re already contributing to these accounts, be aware that 401(k)s and IRAs come with annual contribution limits.

You can contribute to your retirement using your bonus in a couple of ways. Many companies will automatically deduct from your bonus for your 401(k) at the same rate as usual. You can also ask your company in advance if you can have a special withholding for your bonus. You may be able to fill out a form (or go onto the company portal) to designate up to 100% of your bonus to your 401(k).

If you can’t direct that money to your 401(k), and you’re eligible for an IRA, consider maxing that out instead. Either one can help get you closer to a great retirement — and may also help you save significantly on taxes in the short term.

People who have kids may want to consider putting some bonus money toward starting, or adding to, a college savings account, such as a 529 plan (which in some states can offer tax benefits).

For financial goals outside of retirement, you may want to look into opening a brokerage account. This is an investment account that allows you to buy and sell investments like stocks, bonds, and mutual funds. A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA, but is much more flexible in terms of when the money can be accessed.

How much of your bonus you should put towards long-term investments is an individual decision that will depend on your current financial circumstances.

Recommended: Investment Portfolio vs Savings Account

The Takeaway

No matter the size of your hard-earned bonus, it’s a good idea to think about how it can best serve you and your goals in both the short and long term. Some smart ways to use bonus money include getting ahead of high-interest debt, setting up or enlarging your emergency fund, saving up for a large purchase (such as a home), as well as beefing up retirement savings and other long-term investments. You can also mix and match smart spending, saving, and investing to fit your financial situation.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How much of your bonus should you spend?

A good rule of thumb is to spend no more than 10% to 25% of your bonus on discretionary items, like treating yourself or loved ones. Consider putting the rest towards financial goals such as saving, investing, or paying off debt. This balanced approach lets you enjoy the reward while also using it to build long-term security.

Should I use my bonus to pay off debt?

Yes, using your bonus to pay off high-interest debt (like credit cards) can be a smart financial move. It reduces the amount you’ll pay in interest over time and can have a positive impact on your credit profile. You might prioritize debts with the highest interest rates first. If your debt is management or low-interest, consider splitting your bonus between debt payments, savings, and investments. This approach helps reduce financial stress while also strengthening your overall financial health.

Are year-end bonuses taxed?

Yes, year-end bonuses are taxed as supplemental income by the internal revenue service (IRS). If your bonus is included in your regular pay, it will likely be subject to standard payroll withholding. If it’s issued as a standalone check, on the other hand, it may be subject to a flat federal withholding rate of 22%.

However your bonus is taxed, your total tax liability may change depending on your annual income and tax bracket, so you could owe more (or get a refund) at tax time.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

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 .

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SOBNK-Q225-033

Shrinking the square footage of the home you live in might not be the right fit for everyone, but it does offer economic, lifestyle, and emotional benefits for many people. Often, downsizing is more accurately described as “right-sizing.” The idea of a smaller home is that it helps people live more compactly and reduce the typical avalanche of stuff.

Undertaking a downsize isn’t about giving up everything, but instead deciding what’s really important and then finding ways to better incorporate those things into one’s lifestyle.

Read on to learn why less is more for the Americans who choose to downsize.

The Rise of Downsizing

Living minimally has always been a lifestyle choice, but in recent years, more and more people have opted to live with less. The minimalist lifestyle went mainstream with Marie Kondo’s The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing, which urges readers to get rid of items that don’t bring joy.

Downsizing as a trend goes hand in hand with minimalism, the urge to have fewer objects and live in a smaller space. It’s part of the cultural shift of valuing doing something over having something. Three-quarters of Americans value experiences more than things, one study showed.

That shift and home building data suggest that it’s not just empty-nesters looking to purchase a home with less square footage. The median home size buyers want has shrunk by 200 square feet in the last two decades, according to a 2024 National Association of Home Builders report.

The choice to downsize a house is personal, but it’s one that many homeowners are taking on.

Signs It’s Time to Downsize

No matter a person’s life stage, there are a few signs that may signal it’s time to downsize.

•   Housing expenses are too high. The traditional notion is that no more than 30% of a person’s gross income should be spent on housing costs. (The number has been debated, but the 50/30/20 rule has wide support: 50% of post-tax income goes to essential needs, including housing, 30% to discretionary spending, and 20% to savings.)

If the cost of the mortgage, upkeep, and additional home-related expenses far exceed a 30% of a person’s budget, it might be time to think about downsizing. This could apply to a retired couple now living on a fixed income or a first-time homebuyer who has a hard time paying the mortgage without roommates.

•   No ties to the location. Remote work is still common, and that could mean employees are no longer tied to their neighborhood, city, or state. Similarly, the kids might be out of school and parents no longer feel the need to stay in the school district. When a homeowner no longer feels committed to their property’s location, it might be time to consider downsizing.

•   A lifestyle change. It could stem from limited mobility or simply fewer people living in the house, but if rooms or even floors aren’t being used weekly, it could be time to try a smaller space.

•   Home equity could be used. Depending on the amount of equity a person has in their home and the value of the market, they could be sitting on a potentially huge payday. The proceeds from the sale of their home could be a significant down payment on a smaller property.

Recommended: Cost of Living by State

The Upside of Downsizing

Downsizing can sound restricting, but there’s a lot to benefit from.

•   Less upkeep. A smaller home means less upkeep overall. A bigger home requires more maintenance, cleaning, and possibly yard work.

•   More affordable. A smaller home may come with a smaller home mortgage loan or none at all. On top of that, the less space, the fewer things that can go wrong in the home. Additionally, a smaller space typically means lower heating and cooling bills.

•   A fresh locale. In general, smaller homes typically cost less, so that could create the opportunity to move into a small place in a more desirable or exciting neighborhood. It could cost more on average per square foot, but with less square footage overall, up and coming neighborhoods might be attainable.

•   Freed-up money. A smaller space with fewer expenses and less upkeep can translate to a bigger budget for travel and experiences.

Recommended: Refinance Your Mortgage and Save

The Downside of Downsizing

Downsizing has its perks, but there are a few potential drawbacks to the life choice as well.

•   Less space. A smaller footprint could mean sacrificing a guest room, having fewer bathrooms, or losing some garden space. Homeowners thinking about downsizing can be forced to make tough decisions about what truly matters to them in their day-to-day living space.

•   Cost of moving. Overall, downsizing is a more affordable lifestyle, but don’t discount the cost of selling a home and the costs of moving. Remember, when selling a home, real estate agent commissions and other fees can eat up to 10% of the sales price of the home. Selling should lead to a payday, but homeowners take on expenses when prepping their property for sale. Additionally, a full-service move can cost thousands, Move.org notes.

•   Stress of sorting through stuff. Moving consistently ranks as the most stressful event in life, ranked above divorce or a breakup. Downsizing can be particularly stressful because not everything can go with you. It could mean parting with keepsakes; paring down heaps of clothes, shoes, books, holiday decorations, and the list goes on; or deciding to go without some beloved items because they simply don’t suit a smaller home.

•   Staying minimalist-minded. Downsizing isn’t just a one-time choice; it’s the conscious decision to live with less. The initial work of downsizing is probably the biggest hurdle to overcome, but there’s the ongoing choice to live with less and resist buying and accumulating more stuff.

How to Downsize: Steps to Get Started

•   Explore alternative housing. Before diving headfirst into downsizing, it’s worth trying out a smaller way of life. That could mean renting a smaller home for a week or two in a new neighborhood. Downsizing can mean a lot of things, from a tiny house or a condo, or moving from a four-bedroom to a two-bedroom. Getting an idea of what downsizing will mean on a personal level begins with understanding how small you’ll go.

•   Start organizing. Sorting through all your worldly possessions and deciding what to get rid of can be exhausting. Getting the organizing process underway sooner rather than later can save downsizers time and energy. Starting to live with less can make the transition a little easier.

•   Research your property’s value. Knowing the value of your current property, as well as the equity you have, can help create a road map to more affordable living. With an idea of the market value and the proceeds, you’ll have a good idea what your down payment could be.

The Takeaway

If you’re asking yourself “Should I downsize my home?” know that downsizing comes with benefits including less stuff, lower costs, and minimized upkeep, freeing up time and money for other pursuits. Done right, downsizing can be a huge step toward making everything simpler, down to the mortgage process and loan.

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 are signs I should downsize my home?

The strongest sign that you may need to downsize your home is that your housing costs are pinching your monthly budget — including utility costs, which have risen for many people. It may also be time to downsize if you can’t keep up with maintenance on your larger home, whether keeping it clean and tidy or repairing what’s broken. If your house has gained value and you would enjoy a simpler life in a smaller space with money available for other things, such as travel, that is another strong signal that it’s time to move.

Is there a best age to downsize to a smaller home?

There is no one age that is best to downsize to a smaller home, but many people start to think about doing so in their 50s and 60s, after any children have left the home. Financial pressure, mobility challenges, and a desire for a simplified lifestyle are all important motivators. One thing to consider: If downsizing means moving to a different town or neighborhood, it’s smart to do so while you are still young enough to actively engage with your community and make new friends.

Is downsizing a home always cheaper?

Whether or not downsizing your home will actually reduce your costs will depend on the sale price of your larger home and the costs of your new space. It is likely to reduce your heating and cooling costs due to the smaller square footage. But if you sell your larger home and move to a smaller place in a more expensive area, you may find your costs remain the same or even increase.

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SOHL-Q225-055

Your credit score is one of the most influential measures that determine whether you’ll be approved for loans and credit cards. A number of factors go into calculating a credit score, including your history of on-time payments and how much debt you owe, as well as what types of credit you have and how long your credit history is.

Knowing what affects your credit score is the first step to ensuring your score stays high so you can qualify for financing opportunities when they arise. We’ll address all your questions about what affects your credit score, as well as how to keep track of it.

Why a Good Credit Score Is Important

In a nutshell, having a good credit score provides opportunities for you financially and can help you spend less overall on financing. If you want to buy a car, a good credit score can help you secure an auto loan at a low rate. Similarly, having good credit is key to opening a credit card.

Having a bad credit score — generally anything under 500 on the scale of poor to exceptional credit — can limit your financial opportunities. If you have bad credit, you may not qualify for loans that you apply for, or if you do, you may have higher interest rates. You also may not get approved for a credit card, unless it’s a secured card, which requires a deposit and has a low credit limit. A bad credit score could even hamper your job search, particularly if the job involves handling money.

The bottom line is that having bad credit hinders your ability to grow financially, so it’s important to do what you can to maintain a good credit score.

5 Factors That Influence Your Credit Score

The first step toward building your credit score is understanding what factors help to determine it. In general, these are the five credit score factors that shape your score:

Factor #1: Credit Utilization

When it comes to what affects your credit score, one of the most important factors is how much credit you have available versus how much debt you currently have. It’s called your credit utilization, and you can calculate this number by dividing your outstanding debts by your total credit available.

Let’s say you have three credit cards with a total credit limit of $30,000. You owe $3,000 in total. So your credit utilization would be:

3,000 / 30,000 = 0.10

Your credit utilization of 10% (you’re using 10% of your total available credit) is great, as lenders generally want to see a utilization rate below 30% to approve a loan application.

Factor #2: Payment History

You might not feel like an occasional late payment on a credit card is a big deal, but it can impact your credit score negatively. In fact, payment history accounts for 35% of your FICO® Score (the scoring system for the credit bureau Experian).

The easiest way to raise your credit score? Pay your bills on time. Many loans and credit cards will allow you to set up autopay, which is a foolproof way to make sure you never miss a payment. Tools like a money tracker app can also help you stay on top of bills, track spending, monitor your credit, and more.

Factor #3: Credit History Length

You’re not born with a credit history; it has to be built over time. Many college students start the journey by opening their first credit card account. This is a great place to start, though remember that good habits like paying on time and keeping your credit utilization rate down will help build good credit.

And lest you think if you want a new credit card you need to close an old one, you don’t. The longer you have relationships with credit companies, the better your credit.

Factor #4: Types of Credit

While this factor isn’t nearly as important as the others, the types of credit you have can impact your credit score. Having a nice mix of credit — such as credit cards, a home mortgage, and an auto loan — can contribute positively to your credit scores, though it isn’t required.

Recommended: Should I Sell My House Now or Wait?

Factor #5: Recent Applications

Whenever you apply for credit, whether that’s a car loan or a credit card, there is what’s called a “hard inquiry” on your credit report. If you make several applications within a few days or weeks of one another, it may be seen as derogatory on your report, and your credit score might dip a bit.

Consider your credit needs carefully and try to look for lenders that let you see if you prequalify, since that is considered a “soft inquiry” and won’t impact your credit the same way.

Remember, There Are 3 Main Credit Scores to Consider

While the factors above are what generally affect your credit score, you actually have three different credit scores, each of which may be calculated slightly differently. These three credit scores come from the following three personal credit bureaus that track your financial activity:

•   TransUnion

•   Experian

•   Equifax

Each bureau has its own credit scoring system that it uses to determine your score. Some loans and credit card companies report to one or two bureaus — or even all three — so it’s important to know that your activity may show up slightly differently depending on the reporting agency.

Recommended: What Is the Difference Between TransUnion and Equifax?

How to Track Your Credit Score

Now that you understand what affects your credit score, it’s your responsibility to stay on top of your score so you know when it changes. Each credit scoring bureau updates scores on a different schedule, but you can expect your credit score to update roughly every 30 to 45 days.

There are several places you can check your credit score. Some banks and credit card issuers offer the service free to customers. Additionally, you are entitled to free weekly credit reports from Equifax, Experian, and TransUnion via AnnualCreditReport.com.

Tracking your score is important even if you don’t plan to take out a loan or open a credit card any time soon. Make sure to regularly review your report to ensure there are no discrepancies, such as a late payment you know you didn’t make, or an open account you closed. If you see anything that is incorrect, contact the credit bureau immediately to get it resolved.

Recommended: How to Dispute a Credit Report and Win the Dispute Case

The Takeaway

Once you understand what affects your credit score, you have the power to improve your score by taking steps such as reducing your credit utilization and paying your bills on time. As you build your credit, you’ll be able to qualify for better loan offers and interest rates on credit cards, which can empower you to purchase what you need without high expense.

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.

Photo credit: iStock/oatawa

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

SORL-Q225-009

A townhouse is a multi-story home that’s owned by individuals and is attached to at least one other similar unit. This type of hybrid dwelling combines features of a single-family home with a condominium — having some of the benefits and challenges of each. It’s also sometimes called a townhome or a row home or row house.

Differences Between Townhomes and Condos

Differences between a detached home and a townhouse may be clearer than differences between a townhouse and a condo. After all, a home is a freestanding structure while a townhouse, like a condo, is part of a group of homes.

So, how is a townhouse different from a condo? Well, for one thing, although townhouses would share walls with units that are right next to theirs, there wouldn’t be a dwelling above them or below, as could be the case with a condo.

Typically, people who own a condo are responsible for the interior of their units, while funds that they pay into their homeowners’ association (HOA) are used to maintain shared areas and the outside of the building.

Townhouse owners, though, are usually responsible for maintaining the inside and outside alike, which is more like owning a freestanding house.

Because townhouse owners are usually responsible for more maintenance than condo owners, their HOA fees are often smaller and they typically have more freedom on how to renovate their dwellings. Neither of these is universally true, though, so it’s important to check the specifics of the property of interest.

Potential townhouse owners may be asking themselves, “Is buying a townhouse a good investment? What are the pros and cons?”

Let’s take a look at the pros and cons of buying a townhouse, along with insights into getting a mortgage loan.

Pros of Buying a Townhouse

Having control over the inside and outside of a townhouse might make buying one more appealing than purchasing a condominium. Townhome owners might appreciate how they have more ability to make decisions about their property.
Additional benefits of buying a townhouse include:

More Affordable

A townhouse can be an affordable option in communities with higher home prices, providing a space-savvy housing choice in places where available land can be scarce. Although townhouses may be more expensive than a condominium in a community of choice, they tend to be less expensive than a detached home.

Less Maintenance

Townhouses may be appealing to busy people; there’s no big yard that needs time and attention and, if owners travel for work and/or pleasure, security services that may be covered by HOA fees can help to protect the dwelling without any extra steps needed — and the townhouse complex may even be gated for added security.

Amenities

There may be great shared spaces and amenities for families to enjoy. These can include gyms and pools, and people who own units each have an ownership interest in these common-area benefits — which means they have a legal right to use them.

You Own the Land

Buyers of a townhouse will actually own the land where the building sits. In contrast, the condo owner would only own their unit, not any of the land. This means that someone owning a townhouse is typically less restricted on how the land could be used, perhaps being able to install a patio, for example.

Pay Less in Property Taxes

Owners of a townhouse usually pay less in property taxes when compared to a stand-alone home. This is typically true because of the smaller lot size.

Townhomes could be ideal for first-time homebuyers who are looking for a more affordable option in densely populated areas. It can also be a good choice for people who aren’t interested in doing much home maintenance.

Recommended: Track the Value of Your Home and Real Estate

Cons of Buying a Townhouse

Townhomes may not be ideal for everyone. If you don’t want to share walls with another family, for example, a townhouse may be eliminated.

Other potential downsides of buying a townhouse include:

Limited Lot Size

The limited lot sizes that make it easy to minimize maintenance also means that townhouse owners don’t have the benefits that come with a larger yard, whether that means hosting larger picnics, setting up a swing set for the kids, or creatively landscaping the space.

Less Privacy

Townhouses are less private than single-family homes. While there are no units above or below, as there would be with a condominium, walls are shared and backyards are fairly small. This may be problematic if young children living in the townhouse want to run around and play.

Potentially Many Stairs

Townhouses are built upward to maximize limited land, meaning a townhouse could be three or four stories with only a couple of rooms on each floor. This means stairs. Perhaps lots of stairs. If someone in the home has physical challenges or has recently had surgery — or just needs to carry a giant load of laundry down to the washer/dryer — navigating a townhouse can be difficult.

Less Appreciation

In general, the value of a townhouse does not appreciate as quickly as that of a single-family home. Because of this, it may not make sense to buy a townhouse if the idea is to invest in real estate, rather than simply having a desired place to live.

After reviewing the pros and cons, is buying a townhouse a good idea? Here’s one more consideration: financing the unit.

Financing a Townhouse

Seeking a mortgage loan for a townhouse is similar to getting one for a single-family home. That’s because, unlike a condo purchaser, the buyer of a townhouse also owns the land beneath the dwelling.

When buying a townhouse, lenders will typically want to see a buyer’s monthly income and outstanding debt to determine their debt-to-income ratio and see how much house they can afford. The lender will also check your credit score.

If the townhouse has HOA fees, those would be included in the mortgage calculations. Just as with a single-family home, it can make sense to get preapproved for a dollar amount before townhouse shopping.

The Takeaway

A townhouse can be a good solution for busy people who don’t have time to do lots of upkeep on their property. It’s also a popular choice for first-time homebuyers because of its relative affordability as compared to a freestanding house. Do you play an instrument, need a big yard, or crave solitude? An attached house with limited outdoor space might not be for you. Whatever home you choose, though, you will likely need a mortgage — and getting a loan for a townhouse is similar to getting a mortgage for a freestanding house.

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 you hear through the walls of a townhouse?

How much of your neighbors’ noise you can hear through the walls of a townhouse will depend on when and how the house was constructed. Older buildings may have thicker walls than newer homes. But either way, you get cozier with your neighbors when you share a wall. If you want total quiet, townhouse living probably isn’t for you.

Are townhouses hard to sell?

There’s no hard evidence that townhouses are hard to sell. In some communities, such as around large universities, townhouses move quickly as each wave of students and grads seek housing. And because townhouses are a good solution for first-time homebuyers, it’s generally true that as long as an area’s population has lots of new would-be homeowners, townhouses will move.

How is a townhouse different from a condo?

A townhouse will share at least one wall with a property next door. A condo could share walls but it may also have another unit below and above it. Both are fairly low-maintenance properties, but condo owners typically have to follow rules set by a homeowners association while townhouses aren’t always part of an HOA. But the biggest difference is in the ownership structure. Condo owners typically own their interior space. Townhome owners usually own the building and land beneath it.

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-Q225-054

Shopping for a car: fun, freeing, and full of fresh new smells. Shopping for a puppy: heartwarming and full of suspicious odors. Shopping for a mortgage: not particularly thrilling or fragrant but one of the most important decisions many consumers will make in a lifetime.

From assessing what they can afford to nailing down a mortgage type, researching the best rates, and ultimately securing a loan, homebuyers must take many steps when shopping for a home loan.

Here are a few tips and tricks on how to shop for a mortgage loan and what to expect along the way.

How to Shop for a Mortgage Lender

In order to obtain a home mortgage loan, a buyer first needs a lender. You might work directly with a financial institution, or you may find a mortgage through a mortgage broker (more on that later). Before you can research these options, you’ll need to have a sense of what you can afford to buy and borrow. Start by figuring out how much you might spend on a home and roughly what portion of that you will need to borrow.

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

Figuring Out What’s Financially Possible

Reviewing monthly spending and estimating how much they can afford is one way for mortgage shoppers to kick off the home-buying process.

A budget or worksheet can be particularly helpful in determining what’s possible, with line items for the mortgage payment, property taxes, insurance, utilities, maintenance, and funds to set aside for emergencies.

A mortgage calculator is useful for estimating the real cost of a home purchase, allowing consumers to plug in and play with the factors that influence a monthly mortgage payment:

•   Loan type

•   Mortgage principal

•   Mortgage interest rate

•   Down payment amount

•   Loan term

•   Estimated property tax

•   Private mortgage insurance, or PMI

•   Homeowners insurance

•   Homeowners association (HOA) fees

Most mortgage calculators allow homebuyers to enter their credit score for a more accurate estimate. Checking your current credit score can help you determine what type of loan you qualify for.

In many cases, a higher credit score can help buyers get a lower interest rate, while a lower credit score could mean higher interest rates or the need for a larger down payment.

Knowing this information can help consumers estimate what range of quotes to expect from mortgage lenders or brokers before they start shopping for a mortgage loan.

Recommended: First-Time Homebuyer Guide

Determining the Best Type of Mortgage

Another step to take when shopping for a mortgage is deciding which type of mortgage loan to apply for.

This process could require some diligent comparison shopping to consider the pros and cons of each option alongside financial and personal needs.

Fixed-Rate Mortgage

A conventional fixed-rate mortgage offers the same interest rate and monthly payment for the entire term of the loan — typically 15 or 30 years.

Adjustable-Rate Mortgage

ARMs generally offer lower interest rates than fixed-rate mortgages, but only for a certain time, such as five or 10 years. After that, the monthly payments will adjust to current interest rates.

No Down Payment Loans

A no down payment loan allows buyers to purchase a house with zero money down at closing, except for the standard closing costs.

Federal Housing Administration Loan

An FHA loan is a government-backed loan that allows qualified buyers to put down as little as 3.5% if they meet several FHA loan requirements, including the payment of mortgage insurance.

Veterans Affairs Loan

A VA loan is a government-backed loan that allows no down payment and no mortgage insurance. It is available to eligible veterans, service members, Reservists, National Guard members, and some surviving spouses. VA loan requirements are worth looking into for buyers who fall into one of these categories.

USDA Rural Development Loan

A USDA Rural Development loan is a government-backed loan for people in rural areas who are trying to become homeowners. As long as buyers’ debt loads don’t exceed their income by more than 41%, they may be able to enjoy a discounted mortgage interest rate and no down payment. (SoFI does not offer USDA loans, though it does offer FHA and VA loans.)

Researching Rates and Deals

Once mortgage shoppers have a better idea of their financial bandwidth and preferred mortgage type, they can begin researching the optimum rates and deals they can get on a home loan.

Mortgage lenders and brokers might offer different interest rates and fees to different consumers depending on the day, even when they have the same exact qualifications. That’s why it can be important not only to understand mortgage basics but to compare what an array of different types of mortgage lenders and brokers are able to quote in the loan estimate.

Bear in mind that mortgage lenders and brokers receive a profit from the loan issuance, so they might be motivated to get consumers to agree to loans with higher fees, interest rates, or origination points.

Shopping around for the best interest rates and deals is a proactive way for homebuyers to avoid more expensive loans and ensure they can strike a deal they’re comfortable with.

How to Shop for a Mortgage Without Hurting Your Credit

When a lender looks at your credit history and score—what is known as a “hard” inquiry—and generates a mortgage preapproval, your credit score typically takes a hit. As you shop for a mortgage, you’ll want to instead first ask for a prequalification, which requires only a “soft” credit pull and won’t negatively affect your rating. It’s important to understand mortgage prequalification vs preapproval as you move forward through the process, as there is a time for each step.

Mortgage Lender or Broker?

One decision to make when shopping for a mortgage lender is whether to work with a lender directly, or to go through a mortgage broker:

•   A direct lender is a financial institution that assesses whether a buyer qualifies for a loan and offers them the funds directly.

•   A mortgage broker is an intermediary between the buyer and financial institution who helps the buyer identify the best direct lender and compiles the information for the mortgage application.

  Long story short, mortgage brokers help homebuyers comparison shop by collecting multiple lender quotes and presenting them all at once. This can be helpful for buyers who don’t want to deal with contacting multiple lenders. That said, the broker typically takes a commission, covered by the buyer, based on the mortgage amount.

In the case of working with a direct lender, it can be a good idea for buyers to deal with a financial institution they already have a relationship with.

Questions to Ask When Considering a Lender or Broker

Sometimes a list of questions can be useful when considering whether a mortgage lender or broker is the right fit. Ask prospective lenders and brokers the following:

•   How is the broker getting paid? It’s fairly common for a mortgage broker to get paid a commission on closed transactions. Asking them whether the fee is embedded in the loan origination fee or how their compensation will be facilitated can help make these costs more transparent to the buyer.

•   Can the lender offer competitive interest rates? If so, how long can they lock them in? While mortgage rates tend to be standard across the industry, lender rates can fluctuate based on the buyer’s credit score and financial history. Once the rate is locked in, there’s a guarantee from the lender that they’ll stay the same for a specific period of time, regardless of industry-wide fluctuations. Finding out if the lender is willing to offer the best rate and lock it in for, say, 60 days can help buyers know that they’re covered until closing time.

•   What are the typical business hours? Whether you’re dealing with a broker or a lender, finding out their availability can be good to determine in advance, especially since many home showings and offers happen on weekends and could require a tight turnaround time.

•   Can they provide a breakdown based on different down payment amounts? It can be useful for buyers to see a wide range of cost comparisons when shopping for a loan. Can the lender provide multiple scenarios with different down payment amounts, interest rates, and fees so the buyer can have a knowledgeable conversation about their budget and what’s possible?

•   What’s the loan processing time? Asking about the anticipated turnaround time for processing the loan (usually around six weeks) can help determine whether the lender will be able to execute the purchase and sale agreement in time for closing.

•   What fees and closing costs can be expected? Inquiring about anticipated charges is an important way for buyers to ensure no surprises or hidden transaction fees down the line. From origination fees charged by the lender to cover the loan processing to closing costs such as home inspection and appraisal fees, HOA fees, or title service fees, a loan estimate can help lay out which charges can be negotiated and which ones are fixed.

Understanding Risks, Benefits of Loan Options

Depending on the loan type, Annual Percentage Rate (APR), whether the interest rate is adjustable or fixed, the down payment amount, and potential prepayment penalties or balloon payments, mortgages have many different benefits and risks.

Working with a lender to calculate how much monthly payments are estimated at the start of the loan, five years in, 10 years in, etc., can help make clear the risks and benefits of certain terms and conditions.

A mortgage worksheet is one way to help illuminate the potential upsides and downsides of a particular mortgage loan alongside the lender.

Negotiating the Best Mortgage Deals

After a suitable sampling of lenders have provided detailed mortgage loan quotes, consumers can compare costs and terms and negotiate the best deal. The mortgage worksheet can be helpful in this part of the process as well.

Being transparent about the fact that you’re shopping around for the best quote can incite lenders and brokers to compete with one another in offering the most favorable option.

Checking With Trusted Sources Before Signing

Once comparisons and negotiations whittle the list of quotes to a few, consumers might wish to consult with reliable sources such as a family member who has experience shopping for a mortgage, a housing counselor, or a real estate attorney to weigh in on the impending agreement. Review the loan documents with a trusted, well-informed source before signing anything.

Since getting a mortgage loan is often considered one of the most expensive commitments many consumers will make in their lifetime, there’s no harm in asking for a little help when making the decision.

Getting Mortgage Preapproval

Once you’ve chosen your mortgage provider, it’s time to consider getting preapproval. While being prequalified for a loan involves consumers submitting their financial information and receiving an estimate of what the lender could potentially offer, preapproval means the lender has conducted a full review of the consumer’s income and credit history and approved a specific loan amount for, typically, 60 to 90 days. This approval usually comes in the form of a letter.

Homebuyers can benefit from getting preapproved for a mortgage in many ways. Not only does it offer them the opportunity to discuss loan options in detail with the lender, but it also helps them understand the maximum amount they could borrow.

In some cases, sharing a preapproval letter with a home seller indicates serious intention to purchase a property. This can prove particularly helpful in competitive markets and bidding wars. Sellers will often go with a preapproved buyer over a prequalified buyer, since it may help the parties get to a closing more quickly.

Shopping for a Mortgage Lender Tips

In a competitive local housing market consumers may feel pressure to line up a mortgage quickly. But it pays to do your homework when shopping for a mortgage. Evaluate your own finances, know your credit score, and then make sure you are aware of the full range of options available to you. (Remember, first-time homebuyers may qualify for special programs.) Keep good records of competing offers from potential lenders or a mortgage broker. Never hesitate to ask about all costs or request clarification of any terms you don’t understand.

The Takeaway

How to shop for a mortgage? First, figure out how much you can comfortably afford and research loan types and interest rates, then compare what lenders offer. Finding the right loan is as important as choosing the right home.

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 to look for when shopping for mortgages?

You want to look for a good interest rate when shopping for a mortgage, but you also want to consider the term of the loan and fees that might affect its total cost. A loan with the lowest monthly payment initially may not always be the most affordable choice over the long haul.

Is it worth shopping around for mortgage rates?

A mortgage is one of the biggest financial decisions most consumers will make, so it’s definitely worthwhile to shop around for the best rates.

How to shop around for the best mortgage interest rate?

Shop for the best mortgage interest rate by checking with various lenders to see what rate you might qualify for based on your credit score and down payment amount. Or work with a mortgage broker who will do this research for a fee.

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-Q225-044