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If you need a $1 million mortgage to buy a house in your area, you want to feel secure that you have the income needed to make your payments, which is about $300,000 per year. Financing a $1 million dollar mortgage means a monthly payment of around $9,000, assuming you have a mortgage interest rate of 7%. (This number includes an estimate by Fannie Mae for the principal amount, interest, taxes, insurance, and HOA fees.)

If your lender follows the conservative 28/36 rule where the maximum amount of household debt you can have is 36% of your gross pay, then the monthly mortgage payment ($9,000) needs to be 36% of your monthly income. $9,000 is 36% of a $25,000 monthly income, or $300,000 per year.

If you’re not quite there or wondering how this number changes with other debt and income levels, we have you covered. We’ll go through everything you need to know about the income you’ll need for a $1 million dollar mortgage.

Income Needed for a $1,000,000 Mortgage

The income you need for a $1,000,000 mortgage depends on how much debt you’re carrying and the amount of your down payment. These two factors affect your monthly payment, which in turn determines how much you’ll need to earn to qualify for the mortgage.

For example, as noted above, a $1,000,000 mortgage works out to about a $9,000 monthly payment including payment, interest, taxes, and insurance on a 7% annual percentage rate (APR). Without debt, you need to make about $300,000 per year to afford the payment.

How debt affects your $1 million mortgage: If you have $1,000 in additional debt you’re carrying each month, you’ll need more income to qualify for the loan.

$9,000 mortgage + $1,000 additional debts = $10,000 in total monthly debts
$10,000 is 36% of $27,778 per month, or $333,336 per year.

In other words, if you have $1,000 in debt and need to qualify for a $1,000,000 mortgage, you’ll need to earn $333,336 per year.

How a down payment affects a $1 million mortgage: A down payment also has an effect on the income you need for a $1 million dollar mortgage. If your down payment is only 10%, your mortgage amount increases because you’ll need to pay a mortgage insurance premium (MIP) on top of your monthly payment. For a mortgage of this size, your monthly payment increases $367 per month.

For the most accurate numbers, try using a mortgage calculator with taxes and insurance.

How Much Do You Need to Make to Get a $1 Million Mortgage

To get a $1 million dollar mortgage, the amount of income you would need is right around $300,000. To arrive at this number, we followed the 28/36 ratio, and assumed a 7% APR, which is close to market rates in 2024. With taxes, insurance, and PMI, your monthly payment will be close to $9,000. Assuming you have no debt, you would need to make $25,000 each month, or $300,000 each year to qualify for the monthly payment on a million-dollar home.

What Is a Good Debt-to-Income Ratio?

A good debt-to-income ratio is as low as you can get it. Lenders love seeing debt levels below 35%. If you have a minimal amount of debt (student loans, credit card debt, car loans, etc.) you may be able to qualify for a bigger loan or better rates. If you have a lot of debt, the amount of mortgage you’ll qualify for will be significantly less. Remember that if you aren’t happy with your mortgage rate you can always consider a mortgage refinance down the line.

What Determines How Much House You Can Afford?

A million-dollar mortgage seems like such a high mark, but if you’re in a high-cost-of-living area, it’s the norm. Qualifying for a mortgage that high involves a look at the following factors:

•   Income Lenders love seeing reliable income and employment history to ensure that you’ll pay the mortgage back.

•   Down payment A higher down payment enables you to look for a higher-priced home. A down payment of 20% or more also allows you to avoid mortgage insurance, which is a payment you’re required to make every month if you have less than 20% equity.

•   Credit history If your credit history is patchy, the lender may hesitate to lend you money, even if you can qualify with your income. A lower credit score means you’ll get a higher interest rate, which translates into a lower mortgage amount.

•   Debt level If your debt is too high, you may not qualify for a $1 million dollar mortgage. Lenders look for a debt-to-income (DTI) ratio of 45% at maximum (and usually lower).

You’ll also likely need a jumbo loan, also called a non-conforming loan, which usually has more stringent requirements.

It may be best to take a look at a mortgage calculator or talk to a lender to take your individual situation into account to get the most accurate number.

What Mortgage Lenders Look For

For the $1 million dollar mortgage, you’ll want to get your finances in tip top shape. Lenders look at a few factors to get you qualified for that price tag.

•   Cash reserves When you’re looking at a million-dollar mortgage with a jumbo loan, the lender is also going to want to see how much money you have in the bank. Cash reserves are more important for a million-dollar mortgage than they are for lower mortgages.

•   Strong credit Your credit score should be in the 700 range if you’re looking for a $1 million dollar mortgage.

•   Appropriate debt You should also have low levels of debt. As mentioned previously, an appropriate DTI ratio is less than 45%.

$1,000,000 Mortgage Breakdown Examples

To help illustrate the income needed for a $1 million mortgage, we’ve put together a few examples with different scenarios using a mortgage calculator. All assume a home purchase price of $1,250,000 and a down payment of 20%, or $250,000. Keep in mind the taxes and insurance numbers may not reflect your area as some states have a higher cost of living than others — and even within a given state, some places are more affordable.

30-Year Loan at 6% Fixed Interest Rate

Total Payment: $8,079
Principal and Interest: $5,996
Other Costs (homeowners insurance and property taxes): $2,083

15-Year Loan at 6% Fixed Interest Rate

Total Payment: $10,522
Principal and Interest: $8,439
Other Costs (homeowners insurance and property taxes): $2,083

30-Year Loan at 7% Fixed Interest Rate

Total Payment: $8,736
Principal and Interest: $6,653
Other Costs (homeowners insurance and property taxes): $2,083

15-Year Loan at 7% Fixed Interest Rate

Total Payment: $11,071
Principal and Interest: $8,988
Other Costs (homeowners insurance and property taxes): $2,083

Recommended: Home Loan Help Center

Pros and Cons of a $1,000,000 Mortgage

When comparing the different types of mortgage loans, there are some benefits and drawbacks to a higher-priced mortgage.

Pros

•   Able to purchase a nice home in most U.S. markets

•   Tax savings on mortgage interest up to the $750,000 mortgage limit

Cons

•   Harder to qualify for

•   May come with higher interest costs

•   High monthly payment

•   Cost of maintaining home may be steep

How Much Will You Need for a Down Payment?

In an ideal world, a 20% down payment on a mortgage loan allows you to get the most bang for your buck. You avoid PMI, which is very costly on a million-dollar home. With few exceptions, you’ll likely need at least 10% to qualify for a million-dollar mortgage.

Can You Buy a $1 Million Home With No Money Down?

There are very rare instances where you can buy a $1 million home with no money down. Some of these may include:

•   Your loan is privately funded

•   You qualify for a VA loan (from the U.S. Department of Veterans Affairs) and live in Hawaii (or another exceptionally high cost area)

Can You Buy a $1 Million Home With a Small Down Payment?

If you’re looking to buy a $1 million home with a small down payment, generally, you’re out of luck. Most lenders look for at least a 10% down payment (and usually more). But there are a few scenarios where it makes sense to look for a million-dollar home with a small down payment.

High-cost-of-living areas If you live in an area that’s defined by the FHFA (Federal Housing Finance Agency) as a high-cost area, you may be able to get a million-dollar mortgage with a small down payment if it falls under the conforming loan requirements.

One of these requirements is the loan limit amount. The FHFA sets the conforming loan limit for mortgages, which is the maximum loan amount it will guarantee. In high-cost-of-living areas, this amount is 150% of the conforming loan limit of $766,550, which works out to be $1,149,825.

So, even though the amount is over a million dollars, it’s still considered a conforming loan and will allow for conforming loan requirements, such as a 3% down payment.

VA Loan With a VA loan, you can qualify for a $0 down payment, and in high-cost-of-living areas, the loan limit may go up to $1,149,825.

Is a $1 Million Mortgage with No Down Payment a Good Idea?

As with all no-down-payment mortgages, your monthly payment will be higher — and the required mortgage insurance premium will drive it still higher. But even if you’re comfortable with those bigger numbers, it’s rare to find a lender that would be comfortable lending you a million dollars without a down payment. The exception? If you qualify for a VA loan and live in Hawaii, you might have a shot at a million-dollar mortgage with no down payment. If you’re wondering what size mortgage you can afford with the down payment amount you’ve set aside, consult a home affordability calculator.

Can’t Afford a $1 Million Mortgage?

If you can’t quite qualify for a $1 million mortgage, you can make plans to help you get there in the future. Here are a few tips to qualify for a mortgage.

Pay Off Debt

With less debt, you’ll qualify for a higher monthly mortgage payment. If you pay off a car and you no longer have a monthly payment of $500, for example, you may be able to qualify for a larger mortgage.

Look into First-Time Homebuyer Programs

First-time homebuyer programs can help with a range of tools, such as down payment assistance, lower interest rates, and lower housing prices. For example, in San Francisco, there are several options to help first-time homebuyers afford a home. If you qualify and if there is a property available, you can put your name in a lottery for a property to be sold below market value. These also may come with down payment assistance. There are also several programs that offer a loan up to $375,000 on properties in the city.

Most cities and states have some type of program to help first-time homebuyers. If you’re in a high-cost-of-living area and will have trouble qualifying for a million-dollar mortgage, a little research can help you find out what is available to get you into a home.

Cultivate Strong Credit

If credit history is your problem, it may take some time to build. Here are a few tips to help get you going.

•   Check your credit report. Pay attention to any negative marks and see if there are any errors that you can fix. Make sure your credit accounts are reported every month and call lenders if they haven’t been reported.

•   Consider opening a credit account. If you don’t have a credit account, take a look at secured credit cards or a credit-builder loan, which are easy to qualify for and can help you build up your credit in a hurry.

•   Automate your payments. Take the effort out of building your credit by setting your account to make a payment each month before the due date.

•   Ask for a credit limit increase. If you have a credit card, consider asking for a credit limit increase. The purpose of asking for a credit limit increase isn’t to use it, it’s to decrease the overall amount of your available credit that you are using.

Start Budgeting

Even on higher incomes, a budget can help you move toward your goal of saving for a down payment on a $1 million dollar mortgage. Put aside money every month or use your discretionary income to pay down debt.

Recommended: The Mortgage Preapproval Process

Alternatives to Conventional Mortgage Loans

If you’re looking for an alternative to a conventional mortgage, there are a handful of options to consider.

•   Private lending Private lenders can help accommodate unique needs for financing, such as a $1 million dollar mortgage. They usually charge higher interest rates, but have less stringent qualifications.

•   Seller financing Seller financing is where you make payments to the seller instead of a bank. There’s a legal contract involved that covers the purchase price, interest rate, term, home maintenance, and other details of the seller-financed mortgage.

•   Rent-to-own It may be possible to arrange for a rent-to-own deal with the seller. You’ll come up with the terms on your own, but the basic agreement allows you to rent the home for a period of time before purchasing it.

•   Borrow from your retirement account Though it’s not often recommended, it may be possible to borrow money from your retirement account for the purchase of a home. Be aware there are tax consequences and penalties if you aren’t able to repay the loan.

Mortgage Tips

At any income, you’ll want to choose the best mortgage possible. Here are a few tips to help you choose the right mortgage.

•   Shop around for a mortgage. You may have fewer options if your $1 million dollar mortgage doesn’t fall under conforming mortgage guidelines, but it’s still important to get firm quotes from multiple lenders.

•   Compare loan estimates. When you’re loan shopping, submit the same information to each lender and obtain a loan estimate. This standardized document can help you compare rates, fees, terms, and other details of the loan. You’ll be comparing “apples to apples” with the loan estimate.

•   Go with a reputable lender. You can check the lender’s rating on Trustpilot or the Better Business Bureau. Avoid a lender who misrepresents costs or wants to push you in the direction of one loan over another.

The Takeaway

Affording a $1 million mortgage does take a higher income. And even then, you’ll need to be prepared for stringent credit requirements, a substantial down payment requirement, and you’ll need to have cash reserves. There are very rare cases where you can get a $1 million mortgage with a low down payment, so you’ll want to plan to save for a down payment to make your house dreams a reality.

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.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How much is a $1 million mortgage over 10 years?

Assuming an interest rate of 7%, you would spend $1,393,301 to pay off a $1 million mortgage with a 10-year term.

What income should you have to buy a million-dollar home?

If you have no debt, a million-dollar home with a 7% interest rate and a 30-year term requires $240,000 to $300,000 in annual income. Exactly how much income you would need is determined in part by how large your down payment is and how much you need to borrow through a home mortgage loan.

How hard is it to get a million-dollar mortgage?

It is harder to get a million-dollar mortgage than a mortgage of a lower amount because you likely need to qualify for a jumbo loan, which requires a higher credit score, a larger down payment, and a large amount of cash reserves. These requirements are on top of the amount of income you need to qualify for a million-dollar mortgage.

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Photo credit: iStock/kupicoo

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 for more information.

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

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

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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An income of around $260,000 a year could allow you to afford a $900,000 mortgage, assuming you don’t have other significant debt, such as student loans. But a variety of factors determine how much house you can afford, including how much you have saved for a down payment and your credit history, to name two. The income needed for a $900K mortgage also comes down to the loan term, and interest rate.

Here’s a closer look at the variables that impact how much house you can afford.

Income Needed for a $900,000 Mortgage

How much income is needed for a $900K mortgage loan? Though mortgages don’t carry specific income requirements, you’ll need to show that you can afford closing costs (typically 2% to 6% of the home sale price), and the down payment.

Of course lenders also look at your income to assess if you can afford monthly mortgage payments over the life of the loan. Crunching the numbers with a home affordability calculator shows that the income needed for a home valued at $1,000,000 with a down payment of $100,000 is about $260,000. Note that multiple forms of income, such as dividends from investments, can count toward your gross income.

In many parts of the United States, a mortgage exceeding $766,550 is considered a jumbo loan. These larger mortgages typically have stricter lender requirements because they are nonconforming loans, meaning they’re not guaranteed by the government in the event of default.

So if you’re in the market for a $900,000 jumbo loan, you may need to put at least 10% down. Let’s suppose you qualify for a 30-year fixed rate mortgage with a 7% interest rate. Using a mortgage calculator, the monthly payment comes out to about $6,000 if you put 10%, or $100,000, toward a down payment on a property that costs $1,000,000.

Following the 28/36 rule, your home payments should be at or below 28% of your income. Total debt payments, including your mortgage payment, shouldn’t exceed 36% of your income. Using the example above, you’d need to earn $21,666 a month ($260,000 a year) to afford a $6,000 mortgage while still following the 28% guideline.

What Is a Good Debt-to-Income Ratio?

Your debt-to-income (DTI) ratio is calculated by dividing all your fixed monthly debts — like student loans or auto loans — by your gross monthly income. For a jumbo loan, a strong DTI ratio is essential to qualifying. Having a DTI ratio of 43% or less is recommended, though lenders may want to see a ratio as low as 36%.

What Determines How Much House You Can Afford?

A variety of factors determine how much house you can afford. So far, we’ve covered income, debt, and debt-to-income ratio. Additionally, your credit score and the amount you have saved for a down payment will impact your homebuying budget if financing a home purchase. If you have less saved for a down payment, you’ll need to demonstrate a strong credit history and that you can manage higher monthly payments.

Location plays a role in home affordability. A $900,000 mortgage goes a long way in the most affordable states. In pricier markets, a $900,000 mortgage can still open the door to homeownership, but with significantly less square footage.

Home affordability also varies between different types of mortgage loans. Certain government-backed loans let buyers put less money down, but this may mean being subject to private mortgage insurance.

Recommended: Cost of Living by State

What Mortgage Lenders Look For

What do you need to qualify for a $900,000 mortgage? Lenders look at a variety of factors when evaluating a borrower and setting the loan terms during the mortgage preapproval process. In terms of income, lenders prefer borrowers who have stable and predictable income. They’ll also consider your credit history, existing debt, down payment amount, and assets.

$900,000 Mortgage Breakdown Examples

A monthly payment on a $900K mortgage can vary widely depending on the type of mortgage and loan terms. Using a mortgage calculator with taxes and insurance included can give you a more exact estimate of your expected mortgage costs.

For example, suppose you secure a 30-year fixed-rate mortgage with a 6% interest rate. With a 10%, or $100,000, down payment, you’d have a total monthly payment (principal, interest, insurance, and taxes) of $6,604.

Increasing the down payment to 20% would cut the monthly payment to $6,000. Whereas a jump in interest to 6.5% would bump up the monthly payment to $6,264.

In the 20% down payment scenario, which has the lowest monthly payment, you’d need to earn $21,666 a month ($260,000 a year) to satisfy the 28/36 rule. Again, this assumes that you don’t have significant other debts to pay each month.

Pros and Cons of a $900,000 Mortgage

Financing a larger home purchase has its advantages and drawbacks. A $900K mortgage can mean more funds for renovations and other financial goals.

On the other hand, a jumbo loan or larger mortgage is usually tougher to qualify for. In the case of a jumbo loan, rates could be higher since this loan type isn’t guaranteed by Fannie Mae or Freddie Mac. And with a larger loan, you’ll see higher monthly payments and closing costs.

How Much Will You Need for a Down Payment?

Borrowers can expect to put 10% – 20% toward a down payment on a $900,000 mortgage. This amounts to $100,000 – $200,000, and doesn’t include closing costs. Certain government-backed loans can allow a smaller down payment, but borrowing $900,000 is only possible in designated high-cost areas.

Can You Buy a $900K Home With No Money Down?

You could buy a $900K home with no money down through a USDA loan or VA loan. However, getting a $900,000 USDA loan is only possible in a small selection of counties. The maximum amount for 2024 is $919,800 in designated high-cost areas.

Similarly, the limit on VA loans is below $900,000 in most U.S. counties. But some high-cost counties have maximum loan amounts of up to $1,149,825.

Can You Buy a $900K Home With a Small Down Payment?

If you don’t qualify for a USDA loan or VA loan, there are other options to consider. An FHA loan is a government-backed loan that only requires a down payment of 3.5% for borrowers with a credit score of 580 or higher. Unless you live in a high-cost area or purchase a multi-unit property, the FHA loan limit is capped below $900,000.

The limit for high-cost areas is $1,089,300 for a single-family home. Homebuyers in Alaska, Hawaii, Guam, and the U.S. Virgin Islands could go up to $1,633,950 with a FHA loan.

With a conventional, fixed-rate loan, certain borrowers can put as little as 3% – 5% down on a home purchase.

Is a $900K Mortgage with No Down Payment a Good Idea?

Buyers who lack savings but have steady income and strong credit might consider a mortgage with no down payment. Putting less down means borrowing more, and in turn, paying more interest over the life of the loan. You’ll also be starting out with zero home equity if you don’t put any money down. When you put less than 20% down, you’re typically also on the hook for paying private mortgage insurance.

Keep in mind that if your credit score and financial situation change after you purchase your home, you can always consider a mortgage refinance to land more favorable mortgage loan terms.

Can’t Afford a $900K Mortgage With No Down Payment?

If you can’t afford the higher monthly payments on a $900K mortgage with no down payment, there are steps you can take to improve your qualifications as a borrower.

Pay Off Debt

Tackling debt can improve your DTI ratio, effectively increasing your homebuying budget. Focusing on recurring debt that you can pay off in full in the near-term, such as credit cards or a personal loan, can deliver more immediate results.

Look into First-Time Homebuyer Programs

Are you a first-time homebuyer? If so, you could be eligible for down payment assistance to make homebuying more affordable. FHA loans allow qualified first time buyers to put just 3.5% down on a home. It’s also possible to finance your closing costs with an FHA loan.

Recommended: Finding Down Payment Assistance Programs

Cultivate Your Credit

Keeping your credit utilization — the percentage of credit you’re using on credit cards and other lines of credit — below 30%, if possible, can reflect well on your credit score. Payment history is also a significant component of your credit score. Ensure you’re making minimum monthly payments on any revolving credit every month.

Start Budgeting

After crunching the numbers on homebuying costs, setting up a budget can help you pay off debt or save up for a down payment. Budgeting is also a useful exercise for understanding how much you can reasonably afford in monthly mortgage payments.

Alternatives to Conventional Mortgage Loans

Homebuyers can consult a home loan help center to learn about other financing ideas, and may want to explore other means for buying a home besides conventional mortgages and government-backed loans.

•   Jumbo loans: Many lenders provide these mortgage loans, which exceed the maximum dollar limits set by the Federal Housing Finance Agency (FHFA).

•   Interest-only mortgages: Here, borrowers make smaller, interest-only monthly payments for a set period before having to cover principal and interest.

•   Balloon mortgage: Borrowers make low monthly payments for a short period of time before the entire loan balance comes due at the end of the term.

Mortgage Tips

A $900,000 mortgage is a big responsibility so before you wade into the mortgage market, make sure you understand some tips to qualify for a mortgage, such as understanding the difference between fixed-rate and adjustable-rate mortgages. Shop around and get prequalified with a number of different lenders to begin to understand what rates you might qualify for. These are just two of the many tips for shopping for mortgage rates.

The Takeaway

The income needed for a $900,000 mortgage depends on your personal finances and the type of home loan. Increasing your down payment, reducing recurring debt, and keeping up good credit habits could up your homebuying budget and help you land a lower interest rate.

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.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What income do you need for a $900,000 mortgage?

To afford a $900,000 mortgage, you’ll need to make $260,000 or more a year. Buyers with more money saved for a down payment could still qualify while earning less.

How much do I need to make for a $800K house?

You need to make at least $200,000 a year to comfortably afford a $800K house, assuming you don’t have significant recurring debt.

Can you buy a house with a $40K salary?

You can afford a house priced around $100,000 – $110,000 on a $40K salary. This assumes you have some money for a down payment and are not carrying significant debt, such as a student loan or auto loan.

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Photo credit: iStock/fizkes

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 for more information.

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

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

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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Thinking about refinancing your mortgage? Even in a tough interest rate environment, there are scenarios where refinancing makes sense. In each instance, you’ll want to do your research to ensure the changes to your mortgage meet your financial goals.

To help clarify your goals with refinancing your mortgage, we’ve compiled the following questions to ask when refinancing a mortgage. By the end of this article, you should have a good idea of what you’ll want to change with your mortgage to help meet your financial goals.

20 Questions to Ask When Refinancing a Mortgage

1. Should I switch lenders?

It’s possible another lender could offer you better rates and terms, but it’s a good idea to check with your current lender. Your current lender will want to keep your business and may have incentives to offer you. In any case, shopping around when you’re refinancing is a good idea, and will only count as a single inquiry on your credit if you can do it within 45 days.

2. Can I switch loan types?

Changing your loan type could be an advantageous move. If you have an FHA loan, for example, you’ll always be paying mortgage insurance. A mortgage refinance to a different loan type can eliminate the mortgage insurance payment and save you money.

You do have to counter that with the possibility that the interest rate may be higher than your current mortgage rate, offsetting the savings. Be sure to do the math to make sure it’s a smart move.

3. What’s my new interest rate?

Refinancing a mortgage loan means you’ll get a new interest rate, which could be higher or lower than your previous mortgage. You may have heard it only makes sense to refinance when interest rates are lower than what you currently have. In many cases, that’s true, but if you need a large sum from a cash-out refi, need to remove a borrower from the loan, or have another situation where refinancing is necessary, you’ll still want to shop around to get the best interest rate possible.

4. What is my interest rate type?

When you refinance, you’ll have the option to change your rate type. The choice is usually between adjustable-rate mortgages (ARM) and fixed-rate interest types. With an adjustable-rate mortgage, you may initially have a lower rate, but the rate can change with market conditions. A fixed-interest rate mortgage stays the same for the life of the loan.

5. What’s my new term length?

Refinancing a loan could bring a new term length. If you want to pay your mortgage off faster, a 15-year mortgage could work. If you need to keep your monthly payment low, you may want to opt for a 30-year mortgage. If you can manage a slightly higher monthly payment, the 15-year mortgage is a great way to save money long-term.

6. What’s the new payoff date?

Take a look at the proposed new payoff date. Where do you imagine yourself being in your life at that point? Are you comfortable if you have to stretch the payoff date further into the future? Or does a quicker payoff fit better with your future plans? Consider how much the change will cost and whether you’re willing to accept that.

7. Will I be paying mortgage insurance?

Mortgage insurance is one of the fees on your mortgage you should get rid of as soon as you can. It only serves the lender, and if you have 20% equity or more, you should be able to drop it (sometimes without a refinance, depending on your loan type). If you’re refinancing and don’t have 20% equity, you’ll get a new mortgage and still need to pay mortgage insurance.

8. What closing costs will I pay and how much will they be?

You might be wondering what the fees for refinancing will be, or even, “Can I refinance for free?” The best answer lies with your lender. When you’re comparison shopping, get a loan estimate, which will disclose the interest rate, monthly payment, closing costs, and estimated costs for taxes and insurance for your new loan.

There are lenders that offer no-closing-cost loans, usually in exchange for higher interest rates or by adding closing costs to the loan. Compare these expenses to closing costs to see which is a better deal.

9. What will my new payment be?

Your mortgage payment will likely change, sometimes significantly depending on the interest rate you qualify for and the term that you choose. To get a good estimate of how that could change, use a mortgage calculator.

10. Can I afford the new payment?

Evaluate how the new payment fits in your monthly budget. If it’s too affordable, you may want to consider a 15-year loan. If it’s too much of a stretch, consider whether you really want or need to make a change.

11. Will I save any money?

The only way to know if you’re going to save any money on a refinance (if that’s your goal) is to:

•   Calculate how much the mortgage is going to cost in total. The Consumer Financial Protection Bureau (CFPB) advises consumers to look at the cost savings of your monthly payment versus how much the loan will cost you in total. Even if you can get a lower interest rate and lower monthly payment, you could end up paying more for the mortgage if the mortgage term is longer.

•   Calculate your break-even point. You can do this by dividing the closing costs by the amount you’ll save every month. If your closing costs are $4,000, and you’ll save $200 every month, then your break even point is 20 months. If you plan to stay in the home at least 20 months, then the amount is probably worth it if the total cost is also acceptable to you.

12. Can I refinance if I have less than 20% equity?

You can refinance if you have less than 20% equity, though you’ll still need to find the right loan and the right lender. You’ll have fewer options, as most lenders do look for 20% equity for refinanced loans. You may want to consider other financing methods where you can get equity out without refinancing.

13. Can I refinance without a credit check?

There are programs that offer refinancing without a hard credit check in all loan types, including: conventional, FHA, USDA, and VA. Take a look at the chart below for details on programs, qualifications, and what limitations you may encounter:

Program name	Who and what qualifies?	Limitations
FHA Streamline	FHA-insured properties that are not delinquent	Cash out limited to $500, may have higher interest rate
Fannie Mae RefiNow	One-unit primary residences for borrowers at 100% or less of the area median income with up to 65% debt-to-income (DTI) ratio	Cash out limited to $250, fixed-rate loans only
Freddie Mac Refi Possible	One-unit primary residences for borrowers at 100% or less of the area median income with up to 65% DTI ratio	Cash out limited to $250, fixed-rate loans only
USDA Streamline Assist	USDA mortgages with no delinquent payments for 12 months prior	Income limits, must reduce the monthly amount by at least $50 to qualify
VA IRRRL	For existing VA loans that have been owner-occupied at one point	No cash out, cannot pay off a second mortgage, may pay closing costs

14. Can I refinance multiple times?

It is possible to refinance multiple times, provided the numbers work out. You’ll need to qualify with your income, debt-to-income (DTI) ratio, and credit score each time. Keep in mind that the cost of refinancing each time may not make sense, so be sure to work out the numbers and consult with your lender on a solution that works for you.

15. How do I prepare for a refinance?

The best way to prepare for a refinance is by getting your finances in order. Check your credit score, your home’s value, and pay off debt where you can. Your personal qualifications are the biggest factor in getting a refinance with the best rates and terms.

16. What’s the purpose for the refinance?

You may be considering a refinance for any number of reasons, including to secure a lower interest rate, consolidate your debts, to take a cosigner off the loan, to pay off the loan sooner, to get rid of mortgage insurance, to change loan types, or to change interest rate types. If you are refinancing to pay for major expenses, consider that a home equity line of credit (HELOC) may be another option.

Recommended: What Is a Home Equity Conversion Mortgage?

17. What are you sacrificing for this refinance?

Are you sacrificing a great interest rate so you can remodel the kitchen (and is that OK with you)? Are you pulling equity out of your home to give your monthly budget some breathing room? How much more will you pay over the life of the loan if you refinance? When you understand how amortization affects what you pay for the whole mortgage, it can help you make decisions that are better for your long-term financial health.

18. How does the refinance bring you closer to your financial goals?

A refinance should help you with your money or life. If there’s no benefit, you can walk away. If your goal is to separate your finances from a former partner, a refinance is essential to getting you closer to your goals. If your goal is to update your home, a refinance may be able to help you do that. Think about your goals, financial and otherwise.

19. Do I need cash out?

If you want cash refunded to you when you refinance with a new mortgage, you’ll want a type of loan called a “cash-out refinance.” You can use the cash to pay off debt, finish your basement, cover the costs of adoption, start a business, buy a boat, or nearly any other purpose you can think of. The CFPB does advise consumers to be judicious when taking cash out of their home equity.

20. Is this the right time to refinance?

There’s never going to be a perfect time to refinance, even when interest rates drop. But if your finances qualify you for a refinance and you’re ready to meet your next financial goal, then it might be a good time to refinance.

Why Asking These Questions Is Important

There are a lot of questions here, but if you’re clear on what you need and want, the refinance process will go more smoothly when you begin to work with your lender. You’ll be able to:

•   Understand what options are available to you

•   Grill your lender on important details

•   Comparison shop and get the best deal

•   Understand how a refinance will affect your finances

Deciding Whether to Refinance Your Mortgage

Refinancing your mortgage can be a great financial move, but it’s not right for everyone. Even after figuring out what you need and evaluating the options out there, you still might be worried about whether you’re making the right move or not.

That’s normal. A good lender can help answer any additional questions you have when refinancing your mortgage. They can help you see the different options available to you and what financial implications they may have.

Recommended: How to Get Equity Out of Your Home

The Takeaway

It can sometimes feel like there are as many reasons to refinance your mortgage as there are lenders willing to give you a loan. Asking yourself these questions can help you pinpoint whether a refinance is right for you, right now, given your specific financial and life circumstances.

SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.

A new mortgage refinance could be a game changer for your finances.

FAQ

What is not a good reason to refinance a mortgage?

An interest rate drop isn’t by itself a good reason to refinance a mortgage. Refinancing should help you meet your overall financial or life goals. It won’t make sense in every situation, so it’s important to evaluate how changes in your monthly payments, loan term, and overall amount paid (including closing costs) will affect your finances over the long term.

What is a good rule of thumb for mortgage refinancing?

If it helps you meet your financial goals, a refinance could make sense. You may need a cash-out refinance to pay for a new roof. Or you may want to refinance to a shorter term with a better interest rate so you can pay down the home faster. Those are examples of how refinances can improve your financial situation.

What should you look out for when refinancing a home?

When you’re refinancing a mortgage, ideally you want it to benefit you financially. Bear in mind that a new mortgage with a lower monthly payment could still cost you more over time if you extend the loan term.

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Photo credit: iStock/dusanpetkovic

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 for more information.

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

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

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

^²To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).

All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.

You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and loan amount. Minimum loan amount is $75,000. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria.

SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.

In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q224-1838737-V1

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Your home equity could be a powerful tool for helping you meet your financial goals. If you need to pay for an extensive renovation, fund adoption expenses, or supplement your retirement income, there are many ways you could extract equity from your home in order to better your life.

But how exactly do you get the equity out of your home? What are the best methods that are affordable and make sense for your situation? Whether you’re thinking of a cash-out refinance, a home equity loan, or another option, you’ll want to carefully evaluate the costs, risks, and impact on your financial situation.

We have you covered. We’ll go over how to get equity out of your home, the different methods for accessing the equity in your home, and the pros and cons of each.

What Is Home Equity?

Home equity is the amount of total ownership you have in your home over what you owe on your mortgage. It is the amount you would receive if you were to sell the home today.

Equity is best expressed mathematically. To calculate your home equity, subtract your outstanding mortgage amount from your home’s current market value:

Home’s value – your mortgage = equity

For example, if your home is worth $500,000 and your mortgage is $300,000, you would have $200,000 in equity ($500,000 – $300,000 = $200,000).

5 Ways to Take Equity From Your Home

If you’re ready to take the next step and seriously consider taking some equity out of your home, you have five main options, including: a home equity loan, home equity line of credit (HELOC), cash-out refinance, home sale, and equity-sharing arrangement.

Home Equity Loan

If you’re looking at pulling equity out without refinancing, a home equity loan or a HELOC is the move you’re going to want to make. A home equity loan offers a low interest rate because it uses your home’s equity to secure the loan. Because of the way it works, you may have access to a larger sum of money at a lower interest rate than you would if you used another source, such as a credit card.

Home equity loans disburse funds upfront. The loan would have a fixed interest rate and a set repayment plan. You’ll start repaying the loan from your first payment (vs just paying interest for some period of time).

The main negative with a home equity loan is that it uses your home as collateral. If you fail to make payments, the lender could start foreclosure proceedings against you. Another drawback is that if you don’t need all the money you’re borrowing at one time, you are getting it all nonetheless, as a lump sum, and you’ll be paying interest on that full amount.

HELOC

A HELOC is another type of home equity loan secured by your home’s equity, with the main difference being that the amount you borrow is more flexible. With a HELOC, you apply for a loan with a maximum amount. If approved, that maximum amount becomes like a credit limit. You borrow what you need when you need it, and when you repay what you have borrowed, the full credit limit becomes available to you once again.

One advantage of a HELOC is that you only need to make payments on what you’ve borrowed. This minimum payment is determined by your lender when you apply for the loan, but is usually a lower amount during the initial draw period.

Cash-Out Refinance

Another option for accessing your home’s equity is through a cash-out refinance. This is where you replace your existing mortgage with a new, bigger mortgage and take the difference in cash.

It works if interest rates are great and you have a significant amount of equity in your home. (Most lenders will only allow you to borrow up to 80% of your home’s equity, especially if you want a good rate.) As a quick example: If your home is worth $300,000, the lender may be able to loan out $240,000. If your existing mortgage is $200,000 and you get the full $240,000, then approximately $40,000 (less any closing costs) could be refunded to you.

Sale

When you sell your home, all of the equity that you have accumulated — less the costs associated with the sale — can be converted to cash. There is also the possibility for you to enter into a sale-leaseback arrangement. This is where you sell your home and then lease it back from the new owner. Just as with a sale, you gain access to almost all of the equity you’ve accumulated over the years. You also get to stay in your home, provided you find the lease agreement acceptable.

Equity Sharing Arrangement

With an equity sharing arrangement, the homeowner enters into an agreement with a company that provides some money to the homeowner in exchange for a percentage of the home’s appreciation. The company is essentially an investor that bets on the value of your home rising.

There typically isn’t a monthly payment. The investor gets their money back when you buy them out or sell the home.

The main thing to look out for with this option is how much the investor asks in return for the loan. The long-term costs for this option could potentially be significant — usually 10% equity or more.

Pros and Cons of Using Home Equity

After looking at all of your options for accessing the equity in your home, the pros and cons of the methods look like this:

Home Equity Loan
Pros	Cons
Access to large amounts of cash	Home is used as security on the loan
Low interest rates	Home equity lending takes time
Large, upfront sum	Longer loan terms could mean you’ll pay more
Fixed interest rate and repayment schedule	Not very flexible
HELOC
Pros	Cons
Access to large amounts of cash	Home is used as security on the loan
Low interest rates	Home equity lending takes time
Flexible loan amounts	Longer loan term could mean you’ll pay more
Flexible repayment	Adjustable interest rate
Cash-Out Refinance
Pros	Cons
One loan payment for home mortgage plus cash you are borrowing	Must pay closing costs for a new mortgage
Access a large amount of cash	May have a higher monthly payment
Could potentially get better loan terms	Potentially higher rates
Home Sale
Pros	Cons
Access 100% of your home’s equity	No longer own the home
No need to qualify for a new mortgage or home equity loan	Must pay selling costs
No home maintenance costs	May need to find additional housing
Equity Sharing
Pros	Cons
No monthly payment	You won’t realize all the equity gains of your home
Don’t need to pay back until you sell the home or buy the equity back	Equity sharing percentage could be quite large
May not need good credit to qualify	Need sufficient equity to qualify
Shared risk	Complex agreements

How to Get Equity Out of Your Home

If you’ve made up your mind to extract some equity from your home, the process looks something like this:

Determine how much equity you have in your home

To figure out how much equity is in your home, start with a good estimate of your home’s market value. A real estate agent or assessor can provide this for you. Online estimates can get close, but they won’t be as accurate. The more accurate (and unbiased) an estimate you can get, the better you’ll be able to gauge how much equity you have. Use the formula from above (home value – your mortgage = estimated equity).

Decide how to take equity out of your home

Examine the list above to determine which means of accessing the equity in your home feels right for you, whether it be a home equity loan, HELOC, home sale, or other method.

Shop around for a lender

If you elect to extract equity with a cash-out refi, HELOC, or home equity loan, you’ll need to look for a lender that offers competitive rates and terms for what you want. Comparison shopping is a good idea; keep in mind shopping around won’t count against your credit if you do it within a 45-day window.

Qualify for a loan

Once you’ve narrowed down your choice of lenders, submit a full application. Your lender will start reviewing your documents to verify income, employment, identity, and loan details. The lender will also check your credit score and debt level to ensure you qualify for the loan.

Get an appraisal

Your lender will order the appraisal for your loan, which is necessary to determine the exact value of the property and how much equity you have in the home. It’s pretty common to be able to get a desktop appraisal or use an automated valuation model (AVM) to determine the value for a home equity loan or HELOC. (An appraisal will also likely be needed if you sell your home or enter into an equity-sharing arrangement.)

Close on the loan

After an underwriter has reviewed your file, the lender will send loan documents for you to review and sign. If there are any closing costs, you may be directed to bring funds to closing.

Receive funds

Money from the loan will be deposited into an account of your choosing.

Which Method of Getting Equity Out of Your Home Is Best for You?

The best method for taking equity out of your home depends on your goals. Do you need the largest amount of money while maintaining ownership of the home? Perhaps a cash-out refinance is for you. Do you like the idea of having a flexible line of credit that you can use when you need it? A HELOC might suit your needs. Do you want to access 100% of your equity and not be responsible for the costs of homeownership anymore? Then perhaps selling your home is the answer.

If it fits with your life plans, then it will make the best sense financially, even if there’s another method that may offer a lower interest rate.

The Takeaway

When you’re planning to get equity out of your home, the most important thing to take into consideration is how you’re going to use it. Since taking equity out of your home usually means you’ll be paying on the loan longer, you’ll want to carefully consider which method helps you meet your financial goals.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 95% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

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

FAQ

Is it a good idea to take equity out of your house?

Taking equity out of your home typically means you’ll take longer to repay the loan (though not always — it depends on the terms and rates of your loan). Even if you get a lower interest rate and lower monthly payment, a longer loan term could mean that you’ll pay more for your mortgage because of the added years you’ll have on the mortgage.

How do you pull equity out of your home?

To pull equity out of your home, you’ll need to get in contact with a lender that offers financial tools that can grant you access to your equity. These may include home equity loans, HELOCs, or cash-out refinances. You may also consider selling your home or getting into an agreement with an equity-sharing company.

What is the best way to release equity from a house?

The best way to pull equity from your house is the one that helps you meet your financial goals. If you need to remodel your home and you know exactly how much it is going to cost, a home equity loan may work best. But if you want simplified finances, a single payment from a cash-out refi could be the answer.

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Photo credit: iStock/Korrawin

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

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.

^²To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).

All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.

You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and loan amount. Minimum loan amount is $75,000. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria.

SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.

In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q224-1839265-V1

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A home is a place to live, but it is also a significant asset that often increases in value over time. Until a sale or an inheritance, this value typically remains unrealized. However, a Home Equity Conversion Mortgage (HECM) is a tool that can help unlock some of a home’s equity for those who are experiencing unforeseen expenses or want financial flexibility in retirement.

What are home equity conversion mortgages, and how do they operate? We’ll delve into the complexities of HECMs in this article, going over their advantages, requirements for qualifying, available repayment plans, and any drawbacks.

What Is an HECM?

Knowing how to safely utilize home equity can be a game-changer in an environment where traditional retirement funding may not be sufficient and the cost of living is rising. With the help of HECMs, homeowners 62 years of age and over have a way to turn a portion of their equity into cash without having to worry about making monthly mortgage payments or refinancing.

A Home Equity Conversion Mortgage is a specific kind of home loan that allows homeowners 62 years of age and over to access a portion of their home equity. The loan is insured by the Federal Housing Administration (FHA). With an HECM, the lender pays the borrower instead of the borrower making monthly payments to the lender as is the case with standard home loans. These funds may be obtained in the form of a line of credit, monthly installments, a lump sum, or in any combination of these. One of the key characteristics of a HECM is that repayment is usually postponed until the borrower either stops using the house as their principal residence or defaults on other loan responsibilities, like upkeep, property taxes, and insurance.

How HECMs Work

With HECMs, qualified homeowners 62 years of age and over can convert a part of their home equity into cash without having to sell their house or pay a monthly mortgage. A homeowner who obtains this type of home equity loan has the choice of receiving money in one of several ways: as a lump sum, as monthly installments, as a line of credit, or as a mix of these. A number of variables, including the borrower’s age, the home’s appraised value, and the current interest rate, affect how much money is available through a HECM.

Borrowers are still liable for upkeep, property taxes, homeowners insurance, and any relevant homeowners association dues, and they must continue residing in the home. Usually, the borrower must make loan repayments when they sell their house or move out permanently. If the owner dies, his or her heirs are responsible for repaying the remaining loan total, which includes all accumulated interest and fees. (The funds to repay the total might be recouped through the sale of the house.) With the help of this financial tool, retirees can access their home equity and keep ownership and occupation of their residence, giving them more financial stability and freedom in their later years.

Home Equity Conversion Mortgage Requirements

There are several requirements to quality for an HECM:

Age

To qualify for a Home Equity Conversion Mortgage, applicants must be aged 62 or older.

Homeownership

Homeownership is a prerequisite for obtaining an HECM, and the property must be the borrower’s primary residence.

Equity

Sufficient equity in the property is required for eligibility. Typically the borrower must have at least 50% ownership.

Financial Assessment

Lenders perform a rigorous financial review before approving a HECM to make sure borrowers can afford regular costs like property taxes and insurance. Although there are no stringent income or credit restrictions for HECMs, borrowers still need to show that they can afford their debts.

Property Type

The eligibility for a Home Equity Conversion Mortgage depends on the property type. It must be a single-family home, a two-to-four-unit dwelling with one unit occupied by the borrower, or a HUD-approved condominium or manufactured home meeting FHA requirements.

Repayment

Repayment of an HECM typically occurs when the borrower sells the home, moves out permanently, or passes away, at which point the loan balance, including accrued interest and fees, is repaid either through the sale of the home or by the borrower’s heirs.

Compliance

Compliance with all FHA guidelines and requirements throughout the life of the loan is essential for borrowers of a Home Equity Conversion Mortgage.

Pros and Cons of HECMs

While there are many benefits to an HECM, there are also some downsides to be aware of.

Pros of HECM

•   Financial flexibility: Retirees who qualify for HECMs can use their home equity as a source of additional income without having to pay a monthly mortgage.

•   Retain homeownership: During the loan period, borrowers may continue living in their house and retain ownership.

•   Delayed repayment: To provide borrowers and their family peace of mind, loan repayment is normally postponed until the borrower sells the house, moves out permanently, or passes away.

•   Flexible payment options: To accommodate different financial needs and preferences, HECMs offer a range of payment options, such as lump sum payments, monthly installments, a line of credit, or a mix of these.

•   FHA insurance: The FHA insures HECMs, providing lenders and borrowers with extra security against possible losses.

•   Non-recourse loan: Since HECMs are non-recourse loans, as long as the property is sold to pay off the debt, borrowers or their heirs are not liable for any shortfall in the event that the loan total exceeds the value of the home upon repayment.

Cons of HECM

•   Accrued interest: As interest is applied to the loan balance over time, it may decrease the amount of equity that is available to borrowers or their heirs when the loan is repaid.

•   Costs up front: The money obtained from the loan may be reduced by upfront expenses associated with HECMs, such as mortgage insurance premiums, origination, closing, and servicing fees.

•   Impact on inheritance: Using an HECM to access home equity may cause the borrower’s estate to lose value, which may have an impact on the inheritance that heirs get.

•   Strict property restrictions: Eligibility is restricted to specific types of properties, which may prevent some borrowers from using this financial instrument.

•   Effect on government benefits: One may not be able to obtain means-tested government benefits like Medicaid or Supplemental Security Income (SSI) if they get funds from an HECM.

•   Potential default: Should the borrower or their heirs neglect to fulfill the loan obligations — which include upkeep of the property, payment of taxes, and maintenance of insurance coverage — they run the risk of going into default and losing the house.

Home Equity Conversion Mortgage vs Reverse Mortgage

Although they are sometimes used interchangeably, reverse mortgages and home equity conversion mortgages differ in a few important ways. Both let homeowners 62 and older access their home equity without having to pay a monthly mortgage. A mortgage with particular standards and protections that is guaranteed by the Federal Housing Administration is known as an HECM. Conversely, private lenders may provide reverse mortgages, which may have different terms and qualifying requirements. Here’s a quick look at the differences:

Feature	HECM	Reverse Mortgage
Insurer	FHA	Private lenders
Eligibility Requirements	Strict FHA guidelines	Lender-specific criteria
Costs	FHA mortgage insurance premiums, fees	Vary by lender/td>
Repayment	Deferred until borrower moves	Varies (e.g., lump sum, monthly payments)
Property Requirements	FHA-approved properties	Vary by lender
Government Benefits Impact	DPotential impact	Potential impact

Each type of mortgage has benefits and drawbacks. HECMs have upfront charges and property restrictions, but they also provide government insurance, more stringent qualifying requirements, and protection against default. Private lender reverse mortgages could be more flexible and have fewer initial expenses, but there might be risks and alternative terms for the borrower. Before making a choice, homeowners should carefully weigh their options and speak with a financial advisor.

Alternatives to HECMs

There are other options to take into consideration. One option is a cash-out refinance, in which homeowners can obtain cash for the difference when they refinance their current mortgage for a bigger sum than what they presently owe. Another choice is a home equity line of credit (HELOC) or a home equity loan; these enable homeowners to take out a loan with fixed or variable interest rates and repayment conditions based on the equity in their house.

A homeowner who wants financial freedom, without the hassles of an HECM or reverse mortgage, can look into alternative retirement income options like investments or annuities or downsize to a smaller, more inexpensive house. Before choosing one of these options, homeowners should carefully weigh their options, taking into account things like fees, payback terms, eligibility restrictions, and long-term financial objectives. Speaking with a financial advisor can also offer insightful advice on how to choose which course of action is appropriate for one’s particular circumstances.

Home Loan Rates

A number of economic factors, such as market demand, monetary policy decisions, and inflation, affect home loan rates. Mortgage lenders typically modify their rates in response to changes in the overall interest rate environment. With a fixed interest rate that stays the same for the duration of the loan, fixed-rate mortgages give borrowers stability and predictable monthly payments.

Adjustable-rate mortgages (ARMs), on the other hand, start off with lower rates and come with the ability to change them at any time depending on the state of the market. This could result in changes to the monthly payment amount. Individual mortgage rates are also influenced by loan terms, credit score, and size of down payment; consumers with higher credit scores typically obtain lower rates. It is possible for borrowers to obtain reasonable rates that are customized to their financial situation by staying up to date with market developments and looking into choices with various lenders.

The Takeaway

A homeowner age 62 or over who wishes to stay in their house but also wants to unlock some of the equity in the property to cover expenses may find a Home Equity Conversion Mortgage is worth a look. But an HECM isn’t the only option, so weigh the pros and cons and consider a home equity loan or line of credit as well.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 95% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

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

FAQ

What is the downside of an HECM loan?

The drawbacks of an HECM loan are the possibility of accumulated interest, upfront expenses such mortgage insurance premiums and taxes, and potential effects on the borrower’s eligibility for government benefits or on the value of their estate.

What is the difference between an HECM mortgage and a reverse mortgage?

An HECM mortgage is a subset of a reverse mortgage that is insured by the FHA, providing specific protections. Reverse mortgages can be offered by private lenders and may have different terms and eligibility criteria.

What is the homeowner requirement to qualify for a home equity conversion mortgage?

To qualify for a Home Equity Conversion Mortgage, the homeowner must be aged 62 or older and have sufficient equity in the property, which must serve as their primary residence.

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Photo credit: iStock/monkeybusinessimages

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

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^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

^²To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).

All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.

You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and loan amount. Minimum loan amount is $75,000. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria.

SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.

In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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