A Guide to Reverse Mortgage Pros and Cons

A Guide to Reverse Mortgage Pros and Cons

If you’re at or nearing retirement age and looking for a way to generate cash flow, a reverse mortgage can seem like a great idea — especially given all the star-studded ads for them floating around prime-time TV.

And in some cases, a reverse mortgage can be a helpful financial tool to turn much of your home equity into spendable cash, but there are downsides to consider, too.

In this article, we’ll walk through the pros and cons a homeowner would be smart to weigh in order to make an informed decision about the most popular kind of reverse mortgage: the federally insured home equity conversion mortgage (HECM).

Reverse Mortgages 101

Here are the basics of how reverse mortgages work.

A reverse mortgage is a loan offered to people who are 62 or older and own their principal residence outright or have paid off a significant amount of their mortgage. You usually need to have at least 50% equity in your home, and typically can borrow up to 80% of the equity, based on the home’s appraised value.

The lender uses your home as collateral in order to offer you the loan, although you retain the title. The loan and interest do not have to be repaid until the last surviving borrower moves out permanently or dies. A nonborrowing spouse may be able to remain in the home after the borrower moves into a health care facility for more than 12 consecutive months or dies.

Fees and interest on the loan mean that over time, the loan balance increases and home equity decreases.

Pros of Reverse Mortgages

A reverse mortgage offers seniors the opportunity to turn what may be their largest asset — their home — into spendable cash. There are a variety of ways in which this can be attractive.

Securing Retirement

Many seniors find themselves with a decent amount of their net worth rolled up in their home but without many income streams. A reverse mortgage is a relatively accessible way to cover living expenses in retirement.

Paying Off the Existing Home Loan

While you have to have some of your home loan paid down in order to qualify for a reverse mortgage, any remaining mortgage balance is paid off with reverse mortgage proceeds.

No Need to Move

Those who take out reverse mortgages are allowed to remain in their homes and keep the title to their home the entire time. For established seniors who aren’t eager to pick up and move somewhere new — or downsize — to lower expenses, this feature can be a godsend.

No Tax Liability

While most forms of retirement funding, like money from a traditional 401(k) or IRA, are considered income by the IRS, and are thus taxable, money you receive from a reverse mortgage is considered a loan advance, which means it’s not.

Heirs Have Options

Heirs can sell the home, buy the home, or turn the home over to the lender. If they choose to keep the home, under HECM rules, they will have to either repay the full loan balance or 95% of the home’s appraised value, whichever is less.

Thanks to FHA backing, if the home ends up being worth less than the remaining balance, heirs are not required to pay back the difference, though they’d lose the house unless they chose to pay off the reverse mortgage or refinance the home.

Cons of Reverse Mortgages

As attractive as all of that may sound, reverse mortgages carry risks — some of which are pretty serious.

Heirs Could Inherit a Loss

While heirs may not be forced to pay the shortfall of an upside-down reverse mortgage, inheriting a home in that scenario could come as an unpleasant surprise. Keeping a home in the family is an accessible way to build generational wealth and ensure that heirs have a home base for the future, so the potential for them to lose — or have to refinance — the house can be painful.

Losing Your Home to Foreclosure

Unfortunately, losing your house with a reverse mortgage is a possibility. You’ll still be required to pay property taxes, any HOA fees, homeowners insurance, and for all repairs, along with your regular living expenses, and if you can’t, even with the reverse mortgage proceeds, the house can go into foreclosure.

Reverse Mortgages Are Complicated

As you probably realize this far into an article explaining the pros and cons of reverse mortgages, these loans aren’t exactly simple — and even if you understand the basics, there may be caveats or exceptions written into the documentation.

Before applying for an HECM, you must meet with a counselor from a HUD-approved housing counseling agency. The counselor is required to explain the loan’s costs and options to an HECM, such as nonprofit programs, or a single-purpose reverse mortgage (whose proceeds fund a single, lender-approved purpose) or proprietary reverse mortgages (private loans, whose proceeds can be used for any purpose).

Impacts on Other Retirement Benefits

Although your reverse mortgage “income” stream isn’t taxable, it may affect Medicaid or Supplemental Security Income benefits, because those are needs-based programs. (Proceeds do not affect Social Security or Medicare, non-means-tested programs.)

Costs of Reverse Mortgages

Like just about every other loan product out there, reverse mortgages come at a cost. You’ll pay:

•   A lender origination fee

•   Closing costs

•   An initial and annual mortgage insurance premium charged by your lender and paid to the FHA, guaranteeing that you will receive your expected loan advances.

These can be rolled into the loan, but doing so will lower the amount of money you’ll get in the reverse mortgage.

Reverse Mortgage Requirements

Not everyone is eligible to take out a reverse mortgage. While specific requirements vary by lender, generally speaking, you must meet the following:

•   You must be 62 or older

•   You must own your home outright (or have paid down a considerable amount of your primary mortgage)

•   You must stay current on property expenses such as property taxes and homeowners insurance

•   You must pass eligibility screening, including a credit check and other financial qualifications

Is a Reverse Mortgage Right for You?

While everyone interested in a reverse mortgage needs to weigh the pros and cons for themselves, there are some instances when this type of loan might work well for you:

•   The value of your home has increased significantly over time. If you’ve built a lot of equity in your home, you probably have more wiggle room than others to take out a reverse mortgage and still have some equity left over for heirs.

•   You don’t plan to move. With the costs associated with initiating a reverse mortgage, it probably doesn’t make sense to take one out if you plan to leave your home in the next few years.

•   You’re able to comfortably afford the rest of your required living expenses. As discussed, if you fall delinquent on your homeowners insurance, flood insurance, HOA fees, or property taxes, you could lose your home to foreclosure under a reverse mortgage.

There are options to consider. They include a cash-out refinance, home equity loan, home equity line of credit, and downsizing to pocket cash.

The Takeaway

A reverse mortgage may be a way to turn your home equity into spendable cash if you’re a qualified senior, but there are important risks to consider before taking one out.

Reverse mortgages are just one of many different mortgage types out there — all of which can be useful under the right circumstances.

SoFi offers a range of tools for both potential and current homeowners, including a mortgage calculator tool and a home loan help center with details on everything from basic real estate terminology to housing market trends by city.

Additionally, check out the mortgage loan options through SoFi, including a cash-out refinance and a home equity loan. Please note, not all loan programs are available in all states.

It’s easy to find your rate and explore the options.

Photo credit: iStock/Prostock-Studio


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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

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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Personal Loans, Mortgages, and How They Can Interact

Personal Loans, Mortgages, and How They Can Interact

If you’re planning to apply for a mortgage in the near future, but also thinking about taking out a personal loan for another purpose, there are things to know about how personal loans and mortgages interact with one another and if a personal loan will impact your finances in a positive or negative way.

So, what are personal loans? Simply put, personal loans are borrowed funds that can be used to pay for things like a wedding, vacation, home repair or improvement, or a medical bill for you or a pet.

Can Personal Loans Affect Mortgage Applications?

When you apply for a mortgage, the lender looks at your full financial picture. That picture includes your credit history, credit score, and any other debt you might have. If you have a personal loan, the lender will look at the amount of the loan in relation to your income and other debt, and if you’ve made regular, on-time payments.

Perhaps you’re buying land with a personal loan and now are ready to build, but need to take out a mortgage loan to do so. It may have been necessary to have a loan for the land purchase, but there are benefits and risks of personal loans and they may have an impact on a home mortgage loan.

Negative Effects

As the lender looks at an applicant’s mortgage application, they’ll take note of any missed payments on personal loans. Missed or late payments on other debts, including personal loans, may negatively impact your ability to be approved for a mortgage with a favorable interest rate and terms.

A lender will also examine your debt-to-income ratio (DTI). If your debts from personal loans are high in relation to your income, and the lender believes it’s too big of a risk to loan you money for a mortgage, then getting a personal loan could affect your chances of getting a mortgage.

Positive Effects

If you have a personal loan that is a reasonable amount within your DTI, your personal loan payment history shows that you regularly pay on time, and you’re consistently paying down your debts, the lender could see that as a positive indicator that you’d likely be a low-risk investment.

How Personal Loans Can Affect Getting a Mortgage

Your personal loan history and the amount of money you owe in personal loan debt can have an affect on your ability to get a mortgage. Here’s how they play a part:

Credit Score

It’s possible to use a personal loan to increase your credit score if it’s a new component in your credit mix. A higher credit score could help you get a lower interest rate when you apply for a home mortgage. Your credit score is one indication to the lender of how likely you are to be able to repay the loan. Having too many outstanding personal loans and a high DTI can have a negative impact on your credit score.

Recommended: Typical Personal Loan Requirements Needed for Approval

Payment History

If you make regular, on-time payments on a personal loan, it could increase your credit score, which could have a positive impact when applying for a mortgage.

Not making regular, on-time payments on your personal loan might lower your credit score, leaving you with higher-rate interest rate options on a mortgage. When you have a large personal loan, paying it down with regular payments is a good way to show lenders that you’re a good candidate for a mortgage.

Debt-to-Income Ratio

Your DTI tells lenders how much of your monthly income is being used to pay your debts. In general, lenders prefer to see less than about 30% of an applicant’s income going toward debt payments each month. Paying down debts can improve your DTI to a more creditworthy percentage for lenders to consider when assessing your mortgage loan application.

Recommended: The SoFi Guide to First-Time Home Buying

What a Debt-to-Income Ratio Is and Why it Matters

Before you fill out a mortgage application, it may be a good idea to verify your DTI. If the percentage is already nearing the 30% level, it might be wise to postpone taking on any new debt, including a personal loan. More debt will likely increase your DTI, and the lender may consider you a higher-risk borrower if they don’t think that you have enough income left to pay your mortgage.

If you do take out a personal loan before applying for a mortgage, spacing out the two applications could be a good maneuver. Because taking on new debt might lower your credit score temporarily, if you take on that new debt too close to when you plan to apply for a mortgage, a lower credit score might mean a higher mortgage interest rate.

Making regular payments on personal and student loan debt and paying down medical bills are some ways to lower your DTI. If you’re planning to co-borrow a mortgage, you might consider working together to lower debts or find ways to increase your income, if possible, before you apply for a home loan.

Tips To Help Your Mortgage Application

There are some tips you may want to consider when learning what is needed to buy a house, how to expedite the application process, and make the path to your goal — getting a mortgage — just a little smoother.

•   Reviewing your credit report and correcting any errors or any discrepancies.

•   Improving your credit score by paying down debt balances.

•   Making sure your financial records are accurate so you’re prepared when looking at your financial history with a lender.

•   Gathering required mortgage application paperwork such as recent pay stubs, tax returns, bank statements, debts statements, and other records that your mortgage lender may request.

•   Familiarizing yourself with terminology you might see on the mortgage application, making it easier to understand everything before signing the loan agreement.

•   Understanding what you can afford by meeting with a loan officer to learn more about home mortgage products and services offered so you have a better understanding of what’s available.

•   Knowing your credit score so you’ll know what interest rates and terms might generally be available to applicants with a score similar to yours.

•   Researching and comparing lenders and their products, rates, and terms before deciding who you’ll work with.

•   Locking in your interest rate when you get an offer that works for your financial situation. Interest rates fluctuate regularly and locking in your rate guarantees you’ll have that rate at closing, no matter what the market rate is at that time.

•   Be prepared to be patient, but ready to act fast. Loan processing can take a few weeks, and you might be asked to submit additional paperwork with little notice. Once your loan is cleared to close, you will have a day or two to approve the paperwork. Then, you and your real estate team can set up the closing on your home.

Recommended: 5 Tips for Finding a Mortgage Lender

The Takeaway

If you’re wondering, “Will a personal loan affect my mortgage application,” the answer is yes, but whether it affects it positively or negatively depends on how you manage the debt. In general, consistent and timely payments will have a positive effect, and inconsistent and late payments will have a negative effect. If you look like a low-risk borrower on your mortgage application because you’ve been responsible for past and current debt, a lender may be more likely to approve your loan.

If you’re looking for a personal loan with competitive rates and terms to fit a variety of budgets, there might be a SoFi Personal Loan option that works for you. There are no fees with an unsecured personal loan from SoFi, and you can check your personal loan rate in just one minute.

Check your personal loan rate at SoFi


Photo credit: iStock/kate_sept2004

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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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HUD Home Need-to-Knows

HUD Home Need-to-Knows

When it comes to buying a home, you want to cast a wide net. A HUD home could be the answer for handy buyers who want a good deal.

Owner-occupants get first dibs, after which bidding opens to investors.

What Is the Department of Housing and Urban Development?

HUD was created in 1965 as part of President Lyndon B. Johnson’s war on poverty. Its current stated mission is “to create strong, sustainable, inclusive communities and quality affordable homes for all.”

HUD oversees mortgage insurance programs for lower- and moderate-income families; public housing, rental subsidy and voucher programs; and many others.

What Are HUD Homes?

The one- to four-unit residential properties that HUD sells come into HUD’s possession as a result of defaults on mortgages insured by the Federal Housing Administration (FHA), which is part of HUD. HUD pays the lender what is owed and then sells the properties to the public to make up the deficit from the foreclosure.

You can look at available properties at the HUD Home Store but must have a HUD-approved real estate broker or agent submit a bid for you.

Who Can Qualify for a HUD Home?

If you have the cash or can qualify for a loan, you may buy a HUD home.

Following the priority bidding period for owner-occupants, HUD-approved nonprofit organizations, and government entities, unsold properties are available to all buyers, including investors.

If you will be an owner-occupant, you must plan to live there for at least a year and can’t have purchased another HUD home within the last two years.

If you will need an FHA loan or other mortgage, expect to pass income and credit hurdles.

If you are buying as an investor, you’ll need to wait 30 days before bidding on a single-family HUD home listed as “insured” or “insured with escrow,” up from 15 days as of March 1, 2022. Homes with those designations are eligible for FHA-insured financing, meaning they may only need cosmetic repairs or nonstructural repairs of up to $10,000.

If the home is listed as “uninsured,” buyers cannot get a typical FHA loan, but they may be able to use an FHA 203k loan — a program that allows buyers to make repairs after closing and finance the cost into their loan.

HUD Assistance Programs

HUD sweetens the pot to help make the dream of buying a home come true.

With the Dollar Homes program, low- or moderate-income families can purchase a HUD-owned home for $1. The Dollar Homes are single-family homes that have been in foreclosure and the FHA has been unable to sell for six months. The vacant homes have a market value of $25,000 or less.

The Good Neighbor Next Door Program rewards law enforcement officers, K-12 teachers, firefighters, and emergency medical technicians with a 50% discount on the list price of the home. It must be the homebuyer’s principal residence for three years.

HUD requires that you sign a second mortgage and note for the discount amount. No interest or payments are required on this “silent second,” provided that you fulfill the three-year occupancy requirement.

The Nonprofit Program makes it possible for community and religious nonprofit organizations to buy HUD homes for 30% off so they can spruce them up and resell them to first-time homebuyers and low-income families.

The best $100 you spend could be on a down payment for a HUD home. The HUD $100 Down Program is ideal for owner-occupant buyers who don’t have the money for the usual 3.5% required down payment.

Buying a HUD Home

Buying a home is a big deal, especially if you’re a first-time homebuyer. How to buy a HUD home, though? Know that buying a HUD home is different from purchasing other properties. For one thing, it has to be sold at auction. If you get the winning bid, HUD contacts your agent and gives you a settlement date, often about 30 to 60 days to close.

Do keep in mind that with HUD, you get what you get. These homes are sold as is. At least go in with your eyes wide open about what you’re purchasing.

Finding HUD Homes

HUD homes exist in their own universe. You can’t find them just anywhere like other homes. You can find them on the agency’s website, the HUD Home Store, and in links to listings of homes being sold by other federal agencies.

Financing

You can finance a HUD home like any other home, though the lender will need to be HUD-approved. You may want to start by finding down payment assistance programs. Also search for options like an FHA loan, which may be easier to obtain if you have credit issues, costs may be lower, and a lower down payment may be required than elsewhere. You might want to look into FHA 203k loans as well.

If you’re a veteran, a current member of the armed forces, or the spouse of a service member, consider looking into VA loans that might offer you better terms than other loans.

Getting pre-approved for a loan is a good practice generally and particularly when you’re going after a HUD home. You’ll want to be ready to pounce if you get the green light on the home you’ve got your heart set on.

This home loan help center answers a lot of questions about homeownership.

Benefits

With real estate markets heated, you can take some comfort in that if you’re looking to purchase a home for your use and not as an investment, you will be in line ahead of investors for the first 30 days the house is available.

Another plus is that the home was foreclosed, so HUD is happy to get it off its hands, which means pricing may be to your liking; it may be a bit or a lot lower than you might expect.

It’s good news, too, that with HUD you may get perks like assistance with closing costs. HUD may spend up to 5% of the home purchase price to pay for closing costs.

When it comes to the down payment, you might be eligible for the $100 Down Program or other incentives.

Downsides

As much as there is to like about buying a HUD home, there are some key considerations. Make no assumptions that you are in fact getting a deal. Put your investigator’s hat on and find out what similar homes are selling for in the neighborhood where the house is located.

You’ll need to keep in mind that, particularly with a HUD house, it’s not just the price of the home but how much money you may need to put in for repairs or renovations.

It’s a good idea to get that home inspection and make sure your real estate agent gives you an out in the offer letter, in case the inspected house looks like more trouble than it’s worth.

Also, decide if having to use a real estate agent who’s approved by HUD is a problem for you. Maybe you had in mind to work with your best friend’s agent. Think about whether you’re okay with the restrictions. As the owner-occupant, you need to live there for at least a year (three for the Good Neighbor program), and you can’t purchase another HUD home for at least the next two years.

HUD Homes vs Conventional Homes

HUD Home Pros

HUD Home Cons

Low down payment Home is sold “as is”
Help with closing costs Must use HUD-approved real estate agent or broker
Home may be priced below market value Limited supply, sold at auction
Conventional Home Pros

Conventional Home Cons

Wide market, lots of choices House may be priced higher
Use any real estate agent Closing costs may be higher
Qualify for a range of mortgages Down payment may be higher

The Takeaway

Whether you’re buying a HUD home for your own use or as an investment, getting financing lined up is essential. Getting pre-qualified and then pre-approved for a home loan lay the groundwork.

SoFi offers fixed-rate mortgages and investment loans with attractive rates and terms. Qualified first-time buyers can put just 3% down.

Check SoFi’s mortgage rates today.

Photo credit: iStock/CatLane


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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

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.
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.
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A Guide to Mortgage Points

A Guide to Mortgage Points

If you’re shopping for a home loan, you may be wondering if using mortgage points to “buy down” your interest rate is a good move for you.

The answer is … it’s complicated.

Whether you’re buying or refinancing your home, purchasing mortgage points from your lender can lower your monthly payment and reduce the overall amount of interest you’ll pay on your loan. And that’s certainly an appealing prospect.

But it’s important to understand how points work — how much they can cost and how much they might save you over the life of your loan — before you decide to hand over that extra cash up front at your closing.

What Are Mortgage Points?

Mortgage points, also known as discount points, may be used by a borrower to prepay some of the interest on a home loan in exchange for a lower mortgage rate. The borrower pays more up front (the points are paid as a fee at closing) but can end up saving money over time because the interest rate is then reduced for the life of the loan.

How Do Mortgage Points Work?

Lenders typically base their interest rate offers on several factors, including a borrower’s credit profile and current market rates. But once you receive that initial offer, your lender also may give you the opportunity to buy down your rate through the use of mortgage points. (If the lender doesn’t bring it up, you can ask.)

Every point purchased reduces the interest rate a borrower pays by a predetermined percentage, which can vary from one lender to the next. But let’s say your lender offers you an initial rate of 3.25% and provides a 0.25% rate reduction if you purchase one discount point. If you decide to buy the point, your rate would then be 3%.

Each point you buy typically costs 1% of the amount you’re borrowing, and that money is due up front. So, for example, if your loan is for $200,000, a point will cost $2,000 at closing. If that seems too steep, you may be able to purchase a fraction of a point. A half-point in this scenario would cost $1,000, or three-quarters of a point would be $1,500.

How Do Points Affect Your Mortgage?

Here’s a hypothetical example to illustrate how buying one point could reduce the cost of a 30-year, fixed-rate $200,000 mortgage. (This is a bare-bones example, so the payment amount includes principal and interest only.)

Discount points purchased None 1 point ($2,000)
Loan principal $200,000 $200,000
Interest rate 3.25% 3%
Monthly payment $870 $843
Total interest paid $113,348 $103,555
Total saved over life of the loan None $9,793

Keep in mind that the borrower in this scenario would have to stay with the loan for the entire 30-year term to get the full savings — and that can be rare these days. The average home tenure in early 2021 was eight years, according to ATTOM Data Solutions.

That’s why it’s important to factor in your “break-even point” — when the savings from the lower mortgage cost offset what you paid for the discount points — before you make your decision.

What Is the Break-Even Point?

Paying points on a mortgage can lower your monthly payment and save you thousands of dollars — if you keep the same loan long enough to recover the money you paid up front. If you plan to move or refinance before you reach and pass that threshold, paying points may not make sense.

To calculate the approximate point at which you would get back what you spent on prepaid interest, you can divide the amount you paid for any points by the amount you’ll save each month on your payment.

For example, if you purchased one point for $2,000 at closing, and you’ll save $27 each month on your payment by going from a 3.25% interest rate to 3%, you can expect to break even in 74 months — or about six years. If you plan to stay in your home much longer than that, buying down your rate could be worth considering.

Can You Buy Points for an ARM?

You can buy points if you decide to go with an adjustable-rate mortgage (ARM) instead of a fixed-rate mortgage.

But it may not be worth it if the points apply only to the ARM’s initial interest rate, which typically lasts for three, five, seven, or maybe ten years. If the rate goes up after that and you decide to refinance, you could lose out on the savings you hoped to get when you paid for the points.

Recommended: How an Interest Only Mortgage Works

Are Mortgage Points Tax Deductible?

Discount points, which are considered prepaid interest, may be deducted as home mortgage interest if you itemize deductions on Schedule A of your Form 1040. But the amount you’ll be able to deduct may be limited.

If your home acquisition debt (the amount of the mortgage you took out to buy your home) exceeds
the limit
for your filing status, you may not be able to deduct all of the mortgage interest and points. And unless you meet several IRS requirements, you might not be allowed to deduct the points in full in the year you paid them. Instead, points that don’t meet the IRS requirements may be deducted proportionately each year over the life of the loan.

It’s important to note that only discount points, which represent prepaid interest, are tax deductible. “Origination points,” which also may be referred to as mortgage points, are not tax deductible. These points, which you’ll also pay at closing, refer to the various fees lenders may charge in preparing your mortgage (such as processing, underwriting, administration, or document preparation costs).

Your accountant or tax preparer should be able to answer your questions if you aren’t clear about the amount you can deduct on your annual return.

Is There a Limit on the Points You Can Buy?

The maximum number of points you can purchase to reduce your interest rate may differ based on factors like the financial institution, type of loan you choose, or how much you need to borrow.

According to a survey of lenders performed weekly by Freddie Mac, the average number of points reported on 30-year, fixed-rate conventional loans in 2021 was 0.7.

Benefits and Risks of Mortgage Points

Here are some things to consider when you’re deciding if buying points makes financial sense for you.

How Long Do You Plan to Stay in the Home?

If you run the numbers and think you’ll keep your loan past your break-even point, it could be worth paying extra up front. But if it’s a starter home, or you expect to relocate for your career, buying points may not be prudent.

Do You Have Plenty of Money Saved?

Homeownership can be expensive. Are you certain you have enough saved to make a decent down payment, pay for points as well as other closing costs, and still have funds in reserve for the inevitable expenses related to homeownership? If not, you may want to reconsider the benefits of buying down your interest rate.

Did the Seller Agree to Pay Some Closing Costs?

If the seller agreed to pay some or all of your closing costs, you may be able to negotiate discount points as part of that offer. And you still may be able to deduct the cost of the points on your tax return.

Do You Plan to Make Extra Payments?

Paying for points could be a smart strategy if you expect to hold on to the same loan for a long time. However, if your goal is to pay off your mortgage early — perhaps by paying more toward the loan principal whenever possible — points may not offer the savings you expected.

Would the Money Be Better Spent on Your Down Payment?

If you have plenty of money saved and you’re trying to decide between increasing your down payment or buying points, you may want to run the numbers to determine which choice will give you a better return on your investment.

If your time horizon is short, you may save more by making a bigger down payment. If you plan to stick around for several years at least, you may choose to put your money toward discount points.

Remember, depending on the type of loan you have, if you make a down payment that’s less than 20%, your lender probably will require that you purchase private mortgage insurance. PMI could add about 0.3% to 1.5% to the cost of your mortgage. And you’ll likely have to pay it every year until your equity in the home reaches 20%.

Pros and Cons of Mortgage Points

Pros

Cons

You can lower your monthly mortgage payment High up-front costs can make closing even more expensive
You may be able to save on interest over the life of your loan Could deplete cash needed for furniture, renovations, moving, etc.
Discount points may be tax deductible for those who itemize Could lose money if you sell or refinance before breaking even

Ready to Go Rate Shopping?

Make sure when you shop rates, you’re comparing apples to apples. Some lenders may offer an interest rate that appears lower than others but has a fraction of a point or a point tied to it. If two lenders are offering a 3% interest rate on a 30-year, fixed-rate loan, but one is charging a point to get that rate and one isn’t, the one that isn’t charging the point is offering you a more affordable deal.

Be cautious when comparing mortgage rates: If it isn’t clear how much you’ll pay to borrow, you can ask a loan officer to walk you through your loan estimate and/or to calculate your costs based on different time frames.

Lenders are required to disclose information about their products in a way that allows borrowers to make meaningful comparisons.

The Takeaway

What’s the point of mortgage points? They allow homebuyers to reduce their loan’s interest rate by paying some of the interest up front. Buying discount points can save you money on interest over time, but only if you keep the loan long enough to recover the upfront cost.

You can use a mortgage calculator to see how buying points might affect your interest rate, monthly payment, and overall savings.

And if you have more mortgage questions, you can get plenty of useful homebuying information at SoFi’s help center for home loans.

Check out SoFi’s home loan rates and refinancing options today.


Photo credit: iStock/Prostock-Studio

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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

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.
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.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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What Are Mortgagors, What Do They Do, and How Do They Differ From Mortgagees?

What Are Mortgagors, What Do They Do, and How Do They Differ From Mortgagees?

When it comes to financial matters, half the battle is understanding the jargon. When you wade through the weeds, though, you’ll likely discover that you may not have heard of a particular term, but it’s just another word for something you are familiar with, like mortgagors, who are home loan borrowers.

The mortgage universe can be a bit complex. It’s helpful to understand the basics of mortgages.

What Is a Mortgagor?

It’s not every day that you see the term “mortgagor.” It doesn’t roll off the tongue easily, and you might think perhaps it’s misspelled. But alas, mortgagor is just another word for someone who is borrowing money from a mortgage lender (the mortgagee) to purchase real estate.

The Function of a Mortgagor

The mortgagor makes monthly payments to the mortgagee as specified in the loan agreement. The terms of a mortgage can vary widely. For example, depending on the applicant’s credit history, the interest rate may be higher or lower than the average.

A mortgagor may choose from different types of mortgage loans that most commonly have a fixed interest rate and a term of 30 years, though many lenders also offer loan lengths of 20, 15, or 10 years. A fixed-rate mortgage has an interest rate that remains the same during the life of the loan. A variable-rate mortgage is one in which the interest rate moves up and down with the market.

The bottom line: Mortgagors must pay back the loan in a timely fashion. If not, mortgagees can force foreclosure of the home or other real estate — the collateral for the loan.

How a Mortgagor Gets a Mortgage Loan

A mortgagor applies to a mortgagee for a mortgage. Conventional mortgage loans are originated by private lenders like banks, credit unions, and mortgage companies. Certain private lenders also originate FHA, VA, and USDA loans; those loans are insured by the Federal Housing Administration, Department of Veterans Affairs, and U.S. Department of Agriculture. Government-backed loans are often easier to qualify for and may have more lenient terms and lower interest rates.

No matter what kind of mortgage loan you seek, expect to jump through many hoops and produce much documentation to prove you are creditworthy and have the means to pay back what you borrow.

Anticipate a hard credit inquiry into your credit scores and credit history.

Understand what makes up your credit scores. Important factors include your credit history, how long you’ve had your lines of credit open, your payment history, and debt-to-income ratio, which is the total amount of your monthly debt payments divided by your gross monthly income. If your debt-to-income ratio is high, that may be a no-go in the eyes of a lender, who may see you as tapped out with no real wiggle room to take on a mortgage.

You take on a mortgage loan minus any money you put forth as a down payment. While you may be able to get an FHA loan with 3.5% down, or a VA loan with no down payment at all, a typical down payment is around 12% of the value of the loan.

Contractual Obligations of Mortgagors

A deal is a deal is a legally binding deal. Once the ink dries on that mortgage, you’re locked into your commitment to pay as you said you would. If you veer off course, you’re at risk of losing the home, as there is a lien on the real property as collateral for the loan.

At the very least, late or missed payments will cause your credit score to dip, which could be problematic the next time you need to show your credit score, be it for a car loan or maybe even a potential employer.

Equity of Redemption

If this phrase sounds important, it is. You’ll be thankful for it if you have gotten behind on your mortgage. Equity of redemption, also called right of redemption, will give you a chance to get caught up and keep your home before a foreclosure sale.

When you miss payments, one or more mortgagees can start the foreclosure process. They can take back the house and sell it at auction to pay off the debts. If they’ve begun this, you may be able to redeem the mortgage using equity of redemption.

Understand that you’ll need to come up with the money to pay off the principal, interest, and expenses under equity of redemption. Realistically, if you’re in financial trouble, a funding source to pay off the loan is unlikely.

Some states have a law that gives mortgagors the right to redeem the home for a period of time after the foreclosure sale. With the statutory right of redemption, usually the borrower must pay the bid price, plus interest and fees, to the buyer of the property at the foreclosure sale.

Rights of Mortgagors

While it doesn’t have to be a battle royal, when it comes to mortgagee vs. mortgagor, the mortgagee holds the keys to the kingdom. The lender put up the money, and if the borrower can’t make the mortgage payments, the lender has the right to take the house.

That’s not to say you are without a few good things in your back pocket, like the aforementioned rights of redemption. You can also ask that your mortgage be transferred to a third party, but only if the mortgagee is not in possession of the property.

Mortgagors vs Mortgagees

To lessen any confusion, here’s a quick look at who does what.

Mortgagor

Mortgagee

Makes monthly payments Sets loan terms, including length of loan, payment due dates, and interest rate
Meet all terms of the mortgage Receives payments
When the loan is paid in full, gets the deed Can seize property if mortgagor stops paying
Must communicate the terms of the mortgage clearly

Thinking About Buying a House?

If you’ve been dreaming of taking the homeownership plunge, you might want to start with this home loan help center.

And do some crunches with a mortgage calculator to see how much you could save on your mortgage with different down payments.

Then, when you’re ready to search for financing, look into a home mortgage loan with SoFi. SoFi’s fixed-rate home loans come with competitive rates, and qualified first-time homebuyers can put just 3% down.

Check your rate without affecting your credit score.*


Photo credit: iStock/fizkes

*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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

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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