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You’ll likely hear the terms home loan and mortgage used interchangeably, but the phrase “home loan” is an umbrella term that covers a variety of mortgages, home refinances, and home equity loans.

It’s helpful to understand the difference between a typical mortgage, used to buy a home, and the larger universe of home loans, which are sometimes used to tap the equity you’ve gained.

What Is a Mortgage?

Let’s get this straight: Mortgages are home loans, used when buying a home or other real estate. When you take out a mortgage, your lender is loaning you the money you need to purchase a home in exchange for charging you interest. You’ll repay the loan and interest in monthly installments.

Mortgages are secured loans, meaning the property is used as collateral. If you fail to make mortgage payments, your lender can foreclose on the home to recoup its money.

In order to take out a mortgage, you’ll typically need to make a down payment equal to a percentage of the purchase price. Your down payment is the portion of the cost of the home that you aren’t financing and provides immediate equity in the property.

Buyers may put down 20% on conventional mortgages to avoid private mortgage insurance (PMI), but many buyers put down much less. In fact, the median down payment for all homebuyers was 18% in 2024, according to a National Association of Realtors® report. A mortgage calculator can help you determine what effect the size of your down payment will have on your monthly payments.

When shopping for a home, you can seek mortgage preapproval. After investigating your financial history, your lender will provide you with a letter stating how much money you can likely borrow and at what mortgage rate.

Types of Mortgages

There are several types of mortgages available. Mortgage insurance, in the form of PMI or mortgage insurance premiums (MIP), may be part of the deal. It’s good to understand PMI vs MIP.

•   Conventional mortgages are funded by private lenders like banks and credit unions. They are not backed by a government agency. You’ll typically need to pay PMI if you don’t make a 20% down payment; mortgage insurance is canceled when 22% equity is reached. Conventional conforming loans adhere to lending limits set each year by the Federal Housing Finance Agency.

•   Jumbo loans are mortgages that exceed the lending limits set for conventional loans. So a jumbo loan is a “nonconforming” loan. Conventional lenders issue jumbo loans, and the U.S. Department of Veterans Affairs guarantees a VA jumbo loan, possibly with no down payment.

•   FHA loans are made by private lenders and guaranteed by the Federal Housing Administration. You may qualify to make a down payment of as little as 3.5%. Upfront and annual MIPs are required, usually for the life of the loan.

•   USDA loans are backed by the U.S. Department of Agriculture and help low- to moderate-income households buy property in designated rural and suburban areas. No down payment is required. An upfront and annual guarantee fee are required. (Note: SoFi does not offer USDA loans at this time, but we do offer FHA and VA loans.)

•   VA loans are designed for active-duty and veteran military service members and some surviving spouses. VA loans don’t require a minimum down payment in most cases. There’s no MIP; there is a one-time funding fee.

What Is a Home Loan?

If a friend tells you they have a home loan, there’s a very good chance they are talking about the mortgage they used to purchase their home. But there is also a chance that they are referring to a home equity loan. As you ponder what is a mortgage vs. a home loan, it helps to get to know the home loans that aren’t purchase mortgages.

Types of Home Loans

A home equity loan is technically a second mortgage — assuming a homeowner is still paying their first mortgage. Home equity loans allow homeowners to borrow against the portion of their home they own outright. As with typical mortgages, home equity loans are secured using the home as collateral. But if an owner falls into foreclosure, in the home loan vs mortgage loan equation, the mortgage lender would be paid from the proceeds of the sale before the home equity loan lender.

The amount you’re able to borrow will be determined by a few factors, including your credit history and how much equity you’ve built — in other words, the current value of your house less any outstanding debt. The borrower may pay closing costs based on the loan amount.

It’s common for lenders to allow you to borrow up to 80%-85% of the equity you’ve established. The loan arrives in a lump sum. You repay the home equity loan with interest over a set period of time. If you miss payments, your lender can foreclose on the house.

A home equity loan is not to be confused with a home equity line of credit, or HELOC. A HELOC is also a second mortgage; your home equity is collateral. But it functions somewhat like a credit card. Rather than receiving a lump sum, you have a revolving line of credit and can borrow and repay the debt repeatedly as needed during a given time period — typically a decade.)

Another form of home loan is a cash-out refinance. In this case, a homeowner takes out a new loan to pay off their old one, but they also borrow a lump sum at the same time. What they can borrow is based on — you guessed it — their home equity.

Similarities Between a Home Equity Loan and a Mortgage

When you apply for a mortgage as part of the home-buying process, or when you seek a home equity loan as a homeowner, lenders will look into your financial history to help them establish terms and the interest rate for the loan. For example, they will examine your credit reports, often awarding more favorable terms and interest rates to those with higher scores. Mortgages and home equity loans are both secured loans. Both types of loan also usually involve an appraisal of the property that will secure the loan.

Differences Between a Home Equity Loan and a Mortgage

A mortgage must be used to purchase a specific property — or in some cases to purchase the property and make necessary renovations. There are fewer limitations on the money received from a home equity loan. Some borrowers use funds from a home equity loan or cash-out refi for renovations. Others use the money to pay off higher interest debt or send a child to college.

Mortgage interest can often be deducted if homeowners itemize their deductions. However, you can only deduct interest on a home equity loan if you use the loan to buy, build, or substantially improve your main or second home. So if you want to buy a boat, that deduction won’t hold water. Consult a tax advisor before you count on any type of deduction.

When You Should Consider a Mortgage

If you don’t have the cash to buy a home outright, you will have to finance the purchase with a mortgage. However, there are some considerations you may want to take into account. For example, the larger your down payment, the more equity you will have in your home and the smaller your monthly mortgage payments will be.

Because you have more equity in the home, the lender will see you as less risky. As a result, larger down payments also tend to translate into lower interest rates. So, consider putting down as much as you can afford to.

Also, even if you have the cash to pay for a home in full, you may consider a mortgage anyway. You may not want to tie up cash that could be used for other purposes, such as in an emergency. You may be able to invest that money and earn a return that’s higher than the interest rate you’d pay on the loan.

When You Should Consider a Home Loan

Many people choose to take out home equity loans to make home improvements. That can increase the value of your home, putting you ahead if you ever choose to sell.

You may also consider a home equity loan when consolidating other debt, including high-interest credit card debt. The average interest rate for a home equity loan remains significantly lower than the average credit card rate. As a result, it can make financial sense to pay off the more expensive debt with a new, cheaper loan.

There are times when a HELOC is preferable to a home loan: If you need funds but don’t need a huge sum all at once, or if you aren’t sure exactly how much you might need, you can borrow in increments with a HELOC and only pay interest on the portion of the credit line that you are actively using.

The Takeaway

A mortgage is one type of home loan, but it’s not the only type. There are other ways to borrow money using a home as collateral. A mortgage gets you into a new home, but a home equity loan or HELOC could help you fund a new kitchen or cover another big expense. Whether you’re looking for a mortgage, another type of loan, or a refinance, it’s always a good idea to compare rates and terms.

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

FAQ

Why is a home loan called a mortgage?

“Mortgage” comes from the old French mort gage, meaning a death pledge — a morbid origin for the pledge you make to a lender to pay back the money you borrow.

Is a mortgage cheaper than a home loan?

Mortgages are a type of home loan. Your interest rate will depend on the type and size of your loan, your down payment, and your financial history, such as your credit score.

Can I use a home loan for reasons other than buying a home?

There are some circumstances when a home loan can be used for a reason other than making a purchase. Certain mortgages allow you to buy a home and make renovations to the property. And if you borrow based on your home equity — via a home equity loan, home equity line of credit, or cash-out refinance — you can use the funds for whatever purpose you wish.

Do home loans have lower interest rates than mortgages?

A mortgage is a type of home loan, but there are also other loans, such as home equity loans, that allow you to borrow against the equity you have built up in your home and that use your home as collateral. These loans often have a lower interest rate than an unsecured loan, such as a personal loan, but they typically still have a higher interest rate than a purchase loan. Exactly how rates compare will depend on how much you borrow, your credit score, and other factors.

Are there tax benefits for home loans vs. mortgages?

The potential tax benefits of a mortgage or other type of home loan such as a home equity loan are essentially the same. In 2025, the mortgage interest deduction allows taxpayers who itemize to count interest they pay on a loan related to building, purchasing, or improving a primary home against their taxable income, lowering the taxes they owe. The tax deduction also applies to mortgage interest paid on a residence. Consult a tax advisor to learn how this deduction might apply in your specific situation.

Can I refinance a home loan into a mortgage or vice versa?

A mortgage is a type of home loan, so homeowners who refinance a mortgage typically emerge from the process with a new mortgage. Those who undertake a cash-out refinance get a new mortgage that pays off their first loan and leaves them with a lump sum of cash to use as they wish, such as on a renovation project.

Photo credit: iStock/Brandon Ruckman

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

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

SOHL-Q225-012

Unless you’ve slept through the last couple of years, you probably know that the housing market has heated up. Purchasing a home in a competitive real estate market can seem intimidating. It can mean touring more homes than usual, putting in multiple offers, and making concessions that you might not undertake if the market were softer. But with patience and some smart strategies, you can succeed.

Here’s how home shoppers can navigate a hot market and snag a great place to live.

What Exactly Is a Hot Market?

To put it in its simplest terms, a “hot” market is one when real estate inventory is low and demand is high, meaning many other buyers are looking to purchase a home as well.

It can often mean that homes enter the market and stay only briefly before selling at or above asking price. In general, if homes remain for sale for four to six months, it’s a balanced market of buyers and sellers.

However, if homes are selling faster than that, say in mere days or weeks, it’s typically considered a hot — or seller’s — market. If homes are sitting for longer than that, it’s regarded as a buyer’s market.

A hot market may sound tough to enter, but there are a few ways buyers can stand out from the pack and, with luck, win over a seller. (Hint: Start the process of getting approved for your home loan so you’re prepared to make an offer when the time comes.)

Hot House Market Buying Tips

1. Hiring an Agent Who Can Take the Heat

Hot market or not, a great agent can make all the difference in the home-buying process. An agent can help a buyer navigate choppy waters and will be the person buyers can turn to with questions about the market, the homes they are looking at, and much more.

A buyer’s agent is legally bound to help the buyer. A good agent will know what to look for in a home, may be able to recommend new neighborhoods buyers haven’t thought of, and can steer shoppers to good deals and away from bad ones.

2. Listing Musts and Wants

In a hot market, buyers may need to be more flexible about their ideal home and location. Before looking at homes, it might be wise to create a list of “must-haves” vs. “nice to have” items on your home-buying wish list.

If buyers know they can’t live without at least two bedrooms and two bathrooms, they should put that on their “must have” list. If they would like to have an in-home office but don’t need it, they can add that to the “nice to have” list.

It will probably help buyers to go through every item — garage, square footage, yard space, fireplace, schools — and draw their line in the sand. If a home doesn’t have everything on their “must” list, they can move on quickly. But if a property meets all the “musts,” perhaps it can have the “nice to have” items later via renovations.

Recommended: First-Time Homebuyer Guide

3. Adding Sweeteners to an Offer

In a hot market, adding a few perks to a home offer can further tempt the seller because every little bit helps when there is the potential for multiple offers.

For example, sellers eager to move on could be enticed to go with buyers who can act quickly. To offer a quick close, buyers can ask their real estate agent to find out the standard closing time for the home and add to their offer that they are willing to close faster.

4. Offering All Cash

This most certainly isn’t an option for everyone, but if a buyer can offer all cash for a home, this may be the thing that tips the odds in their favor of winning a bid.

Sellers typically prefer all-cash offers because they present fewer hurdles than buyers who are going with a lender.

“Cash is king,” maybe you’ve heard. With a cash offer, there is no waiting for preapprovals or approvals.

5. Waiving Contingencies

Looking to stand out further? Buyers could try waiving mortgage contingencies where they can.

There are lower risk contingencies people can waive, such as homeowner association contingencies, but there are also higher risk ones for buyers that could convince a seller to choose their offer.

For example, buyers can waive their right to an inspection. This means they will not require a professional inspector to check over the home for potential repairs. By waiving this contingency, though, buyers will be purchasing a home with many unknowns and taking on the full risk of a property that may need hidden and pricey home repairs.

Before waiving any contingency, it’s a good idea for buyers to have a long talk with their agent to ensure they are still protecting their rights and feel comfortable with any consequences.

Recommended: How to Rent in a Hot Housing Market

6. Giving It a “Best and Final” Offer

In a hot market, odds are buyers won’t win with any bids that are under asking price. If the house is right when it comes time for the best and final offer, buyers may want to consider trying to give it their all. That would mean coming in at asking price and often going over.

This is an important consideration when looking at homes in a hot market. Buyers may want to look at homes under their very top budget so they have room to negotiate up to, or over, asking.

As with contingencies, buyers should never go into a price range they are uncomfortable with or cannot afford in the long run. (Want to see how much a home could cost over the lifetime of a loan? Check out an online mortgage calculator to get an idea.)

7. Writing an Epic Letter

There is one more way to try to win a seller over (perhaps in a bidding war): by pulling on their heartstrings.

When putting in an offer, many real estate agents advise their clients to write a short letter to the seller on why they want to purchase the home.

Remember, selling a home can be emotional, and letting go of all the memories built in the space can be hard on the seller. But if they know that the next person to live in the home will love it as much as they do, they may be more willing to part with the property.

Buyers might want to express what they love about the home and how they plan to continue making happy memories there. As a bonus, buyers can try including a picture of their family with the letter so the seller thinks of them as people rather than just an offer.

8. Not Getting Discouraged

In a hot market, it’s important to stay patient. Going through the process could mean putting in multiple offers on multiple properties and losing out more than once.

Prepare Your Finances for a Hot Market

Before putting in an offer on a home in a hot market, buyers will want to have all their fiscal ducks in a row. That could mean shopping for the lender that’s right for them and/or getting a preapproval letter from a mortgage lender to show they are serious buyers who have their financing lined up.

Different lenders will likely offer different rates, terms, and perks, which buyers can weigh to decide which mortgage lender is right for them.

The Takeaway

With some preparation, buyers can effectively compete in a hot real estate market. Having a trusted real estate agent, knowing what you absolutely must have in a home, and preparing your mortgage loan funding in advance can all help buyers compete for and win their dream home. You’ll want to find a mortgage with competitive rates, flexible terms, and low down payments.

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

FAQ

What does a buyer do if a seller submits a counteroffer?

If a home seller responds to a would-be buyer’s offer with a counteroffer, the buyer’s first step is to make sure they understand what the seller wants. It isn’t always more money. Sometimes a seller wants the buyer to make a larger deposit or agree to a later closing date. It’s also possible the seller wants the buyer to agree to waive contingencies, such as the right to a home inspection. Read the counteroffer carefully and consult with a trusted real estate agent and/or real estate lawyer to decide if you can agree to the terms.

Can I make an offer below the asking price in a hot market?

It is possible to make an offer below the seller’s asking price in a hot market, but you should be willing to lose the home to another bidder. One thing that will help your low bid: if your offer is all cash, or if you agree to waive contingencies, such as the right to a home inspection.

What’s the best way to submit an offer in a hot market?

When submitting an offer on a home in a hot market, it’s best to accompany your offer with a genuine and heartfelt offer letter. Compliment the property, especially any personal touches in the decor or style of the home that you noticed on your tour. Try to make a connection with the seller — for example, perhaps they raised children in the home and you hope to raise kids there. Thank the seller for considering your offer. Ask your real estate agent to review the letter before it is sent with your offer.

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

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

SOHL-Q225-050

A promissory note is a written agreement between a borrower and a lender to formalize the lending of money.

Through this legal agreement, both the borrower and the lender consent to clearly defined repayment terms. Promissory notes can be used for a variety of purposes, including personal and commercial transactions.

Here’s a guide to common types of promissory notes, how to create one, and when they may be a good option for borrowing or lending money.

What Is a Promissory Note?

Put simply, a promissory note is a written promise to pay someone a certain amount by a specified time. The type of promissory note and agreement between the issuer and payee dictate the payment schedule and amount. If the borrower is a business, the issuer may wish to see its pro forma income statement when setting up a repayment schedule.

Similar to loans, promissory notes may be secured or unsecured. Unsecured notes are issued based on the borrower’s ability to repay, whereas secured notes use collateral such as real estate or a vehicle.

A promissory note may be issued by a financial institution, but this financing is commonly provided by individuals or businesses, too. Essentially, promissory notes allow anyone to act as a lender, which can be useful for creating legal documentation of a lending agreement between family members and friends.

Core Components

Promissory notes generally include the principal amount, interest rate, date and place of issuance, and signatures from the lender and borrower. There may also be provisions for late fees and recourse if a borrower defaults.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

Types of Promissory Notes

There are several types of promissory notes. Usually, the nature of the loan determines the appropriate type. Let’s take a closer look at some of the most common varieties.

Line of Credit Promissory Note

Borrowers can withdraw any portion of funds from a line of credit, up to the established maximum loan amount. Once the money is taken out, the borrower is liable for repaying the lender.

A promissory note can be used to guarantee that the borrower repays money withdrawn from the line of credit. The promissory note can specify the interest rate, repayment schedule, and whether the line of credit is secured or unsecured.

Investment Promissory Note

Businesses looking to access capital can sell promissory notes to investors instead of taking out a conventional business loan or a line of credit. As with a conventional loan, however, the company will typically be expected to show the lender its balance sheet indicating that it is solvent.

Through an investment promissory note, businesses receive capital from investors in exchange for fixed repayments. In the event a business is unable to repay, the investors may acquire the company.

Generally, investment promissory notes are sold at a discount to account for the impact of inflation on future payments. Promissory notes may be sold publicly in some cases but are most often purchased by corporate entities and experienced investors with high net worth who can handle the greater level of risk.

Real Estate Promissory Note

Promissory notes can be used in mortgages and other real estate purchases. In practice, borrowers use a home or other property as collateral for a real estate promissory note.

While promissory notes can accompany a mortgage, they are in fact different. The note provides legal documentation of the borrower’s promise to repay the loan, whereas the mortgage outlines the lender’s recourse for foreclosure in case the borrower cannot pay. Qualifying for a mortgage may also require a loan contract and more detailed financial information.

Real estate promissory notes can be used outside a mortgage. For example, two individuals could create such an agreement. Although the lender may not have the power of foreclosure, they can secure the agreement with the authority to place a lien on the property if a borrower defaults. A property lien creates a public record of a borrower’s unpaid debt.

Keep in mind that real estate promissory notes can be traded through brokerages without the borrower’s consent.

Recommended: A Guide to What Mortgage Notes Are and What They Do

Student Loan Promissory Note

College students will likely be required to sign a promissory note for both private and federal student loans.

For private lenders, each student loan may carry its own promissory note, as terms can vary. Anyone taking out federal student loans must sign a Master Promissory Note to promise repayment of loans, fees, and interest to the U.S. Department of Education. The MPN can cover multiple loans within a 10-year time frame for authorized schools.

Recommended: Understanding Your Student Loan Promissory Note

Vehicle Promissory Note

A vehicle promissory note creates a binding document that promises a borrower will pay a lender for a car or other type of vehicle. This agreement can be between two individuals or a borrower and a conventional lender, such as a bank.

Aside from repayment terms and conditions, it’s important to include the vehicle’s make, model, year, body, and VIN in a promissory note.

Personal Loan Promissory Note

It’s not uncommon to sign a promissory note when acquiring a personal loan from a traditional lender.

A promissory note can also be used for a personal loan between friends and family. Formalizing the loan amount and repayment terms through a promissory note can help avoid disagreement and protect both parties down the line. Compared with typical personal loan requirements, a promissory note can be a more flexible financing option.

Having financial information like credit score and proof of income at the ready can streamline getting approved for a personal loan.

💡 Quick Tip: With fixed interest rates on loans from $5K to $100K, a SoFi personal loan for credit card consolidation can substantially lower your payments.

Promissory Note Repayment Options

Besides type, promissory notes can differ by repayment method. Borrowers can expect to repay money and interest through one of the following options:

•  Lump sum: This requires the entire amount to be repaid in a one-time payment on a specific date. Lump-sum payments are more common with small loans.

•  Due on demand: The borrower must repay the loan upon the lender’s request. Due on demand payment is used frequently for promissory notes between friends and family members. Any promissory note without written payment terms is considered due on demand.

•  Installment: Installment payments follow a specified schedule (monthly, for instance) to pay back a loan over a longer period of time. Usually payments are structured as equal amounts and include interest.

•  With (or without) interest: A promissory note can define the interest rate and any related contingencies.

In some cases, a promissory note may employ a combination of repayment options. For example, a vehicle promissory note may include an upfront lump sum followed by installment payments.

Structured Repayment Strategies

Here are some effects of the various repayment plans to consider.

•  Amortized payments: The borrower makes equal payments each month, paying down principal and interest together. The plus: The consistency makes it easy to plan and budget. The minus: The monthly installments may be costly.

•  Equal monthly payments and a final balloon payment: Installments are likely smaller than with full amortization, because the borrower pays less toward principal; the balloon payment resolves that at the end. Upside: Lower monthly payments preserve more cash on hand for other needs. Downside: If the borrower plans to refinance the loan before the balloon’s due date, they run the risk that interest rates may go up.

•  Interest-only payments and a final balloon payment: With monthly payments applied only to interest, the borrower owes the entire principal until the final balloon payment. Pro: This method allows for the lowest monthly payments. Con: The borrower pays more interest because they have possession of the full principal throughout the term of the loan.

•  Single payment of principal and interest: This is the lump sum method, where everything is paid back on the specified date. For the most part, only friends and family members will accept this arrangement. Good news: Borrowers need not pay anything toward the loan each month (though escrowing money would be wise). Bad news: If the business cycle is in a contraction phase when the note comes due, repayment of a large sum all at once could be very tough.

Legal Implications of Repayment

Signing a promissory note makes the borrower legally liable for the loan according to the terms of the note. In many states, defaulting on a promissory note that’s part of a mortgage contract could allow the lender to foreclose on the house and then sue the borrower personally for any deficiency.

What Does a Promissory Note Look Like?

There are different laws in every state regarding promissory notes. One common feature of promissory notes is that they must be written. A verbal agreement between two parties will not qualify as a promissory note or carry the same legal enforceability.

Standard Template

Promissory notes must include language outlining an agreement and unconditional promise for the borrower to repay the loan. Additionally, the repayment must be money, rather than labor, professional services, or other capital.

Other details and elements generally needed in a promissory note include the following:

•  Amount or principal: How much was borrowed and is to be repaid

•  Payor: The party promising to repay the debt

•  Payee: The party lending the money

•  Interest rate: States how much interest is charged and how it is calculated

•  Start date: The date the promissory note becomes effective and funding is released to the payor

•  Maturity date: When the interest and principal must be repaid in full

Without these elements, lenders may have trouble enforcing the promissory note.

Risks and Protections

Like any loan contract, a promissory note involves financial risk to both borrower and lender.

Unsecured promissory notes will likely entail a higher interest rate than secured ones. A higher interest rate makes paying off a loan more expensive, increasing the possibility of default.

Promissory notes secured with collateral tend to have lower rates, but borrowers who can’t pay the debt risk having their collateral seized.

Depending on due diligence, providing capital based on a promissory note may expose the lender to some financial risk if the borrower is untrustworthy. As noted, having collateral helps mitigate that risk.

As for protection, a promissory note safeguards the lender by recording the terms of the loan in a valid and enforceable contract. It protects the borrower by providing documentation of the loan in case of an audit.

Both parties should make sure the note follows state or federal laws governing loans or investments to ensure additional safety.

The Takeaway

Promissory notes create a binding promise to repay borrowed money. This financial agreement can be used when borrowing money from individuals, financial institutions, or both. To be valid, the note must contain all the important details about the principal, the loan term, the interest rate, and must be signed by both parties to the agreement.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What makes a promissory note legally binding?

A promissory note is legally binding if it includes the date of the loan, the dollar amount being borrowed, the signatures of both the lender and the borrower, the rate of interest, any collateral involved, the start date, and the repayment time frame. The note must also comply with any applicable state laws.

How is a promissory note different from a loan agreement?

A loan agreement is more comprehensive than a promissory note, with specific terms and defined rules and restrictions. Promissory notes usually suffice for loans from one person to another. If a business is involved or the loan amount is large, a loan agreement is more appropriate.

Can a promissory note be transferred?

Yes, it is possible to transfer ownership of the promissory note. If the borrower defaults, for example, the lender may sell or transfer the note to a debt collector. Or, if the lender needs to raise cash, they can negotiate with a buyer and sell the note.

What happens if someone defaults on a promissory note?

If a borrower defaults, the lender usually sends them a demand letter. If the borrower still does not pay, the lender can hire a collections lawyer to sue and get restitution through a court judgment. The lender may also have the right to seize any collateral and sell it at auction.

How long is a promissory note valid?

Depending on your state, the statute of limitations for promissory notes can range from three to 15 years.

Photo credit: iStock/fizkes

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SOSMB-Q225-002

When you purchase a home, you must pay closing costs, which are the fees the lender charges to recoup loan processing costs. These can add up to a hefty sum, typically 3% to 6% of your mortgage amount.

Typically, you can take out a personal loan to cover those closing costs and help you across the finish line of a property purchase. You can often tap other funding sources as well. Take a closer look at the pros and cons of using a personal loan for closing costs, plus the alternatives, so you can decide what’s best for your needs.

What Are Closing Costs?

Closing costs are processing fees that you pay to your lender, either as the buyer or seller in a real estate transaction:

•   Buyers: Buyers typically pay between 3% and 6% of the total loan amount in closing costs. Buyers must pay this amount out of pocket, so it’s important for them to have a plan for how they’ll access the money before they get to the closing table.

•   Sellers: If sellers contribute to closing costs (say, to negotiate a home sale), those fees usually get taken out from the sale proceeds.

Here’s an example: If you plan to buy a home with a $300,000 loan, as the buyer, you’ll need to bring between $9,000 and $18,000 to the closing table. If you were the seller, you’d see that amount taken out of the costs you’d pocket from the sale.

Fees Associated with Closing Costs

Closing cost fees may include:

•   Application fee: Lenders sometimes charge a one-time fee for borrowers to submit a loan application.

•   Credit report fee: A credit report or credit check fee covers the cost to dig into your credit report, which shows your credit history. Your lender uses the information it uncovers to decide whether to approve your loan and how much they’ll lend you.

•   Origination fee: You pay this fee to the lender to process the loan application.

•   Appraisal fee: A fee paid to a professional to appraise the home based on an evaluation to determine its fair market value.

•   Title search: A title search looks into public records to determine who actually owns the property and who has liens on the property (for example, an unpaid contractor’s lien for work done on the home).

•   Title insurance: Title insurance protects you from financial loss and legal expenses in case the home has a bad title.

•   Underwriting fee: Underwriting is the process of reviewing your finances to determine the risk of offering you a mortgage, and the fees cover this process.

•   Property survey fee: Property survey fees cover the cost of checking the boundaries and easements of a property. This process shows exactly where the property’s perimeter is and what the property includes.

•   Attorney fee: You will probably need to hire a lawyer to review the terms in your purchase contract and handle your closing.

•   Discount points: Discount points are a way to balance your upfront costs and your monthly payment. If you use points to pay more upfront, you’ll likely have a lower interest rate, meaning that you could pay less monthly and over your loan term.

•   Homeowners insurance premiums: Homeowners insurance provides financial protection if your home undergoes a disaster or accident. You must typically show your lender that you have paid homeowners insurance.

•   Mortgage insurance: If you have a down payment of less than 20%, you will often have to pay mortgage insurance, a fee per month that protects your lender if you were to default. You’ll also have to pay a version of mortgage insurance on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans. You may have to pay these insurance fees with your closing costs in addition to your monthly payments, particularly for the FHA and USDA loans.

•   Property tax: Homeowners pay property tax to state, county, and local authorities for schools, roads, and other municipal services. You may have to pay a portion of your property tax at closing.

•   Homeowners association (HOA) fees: If you plan to move to a neighborhood that has an HOA, or an organization that makes and enforces rules for a neighborhood, you may owe HOA fees at closing. The seller may pay these on a prorated basis.

•   Per-diem interest: Per-diem interest refers to the interest a lender charges for the days between a closing date and the first day of your billing period.

•   Transfer tax: State or local governments often charge real estate transfer taxes, meaning that they charge when properties transfer ownership.

•   Recording fee: State and local governments charge recording fees to legally record your deed, mortgage, and other home loan documents.

Note that this isn’t an exhaustive list of closing costs — you may be on the hook for other fees as well.

Can You Use a Personal Loan for Closing Costs?

First, it’s important to understand how a personal loan works. It is usually funded by a bank, credit union, or online lender. You can typically use the money however you want — there aren’t as many restrictions on personal loans compared to, say, student loans. After you receive a personal loan, you pay it back with regular, fixed payments (with interest) over a specified term.

As mentioned above, you can use the cash as you see fit. So, yes, you can use a personal loan for closing costs. However, you can’t use it for a down payment, and you must tell your lender that you’ll go this route and borrow to pay the closing costs. The lender will include it in your debt-to-income (DTI) ratio, which is the amount of debt you have relative to your income.

Applying for a personal loan can involve prequalifying with several lenders and comparing them, gathering required documents (ID, proof of address and income, Social Security number, and education history), filling out the loan application, and receiving your funds after approval. You may be able to get a personal loan in one to three days.

As you shop around for funds, you’ll likely want to consider what credit score you need for a personal loan at a given interest rate. Also consider the length of the loan term; this can typically range from one to seven years.

Recommended: Guide to Personal Loans

Pros of Taking Out a Personal Loan for Closing Costs

Here are some of the key benefits of taking out a personal loan for closing costs.

•   Collateral not required: Personal loans are often unsecured loans, meaning that you don’t have to put an asset up in order to receive the loan. Therefore, if you fail to repay the loan, your lender will not claim the asset to repay your debts.

•   Quick approval: It usually doesn’t take long to get a personal loan once you’ve been approved. After you submit your application and materials, it might take just a day to get the personal loan, though it could take longer.

•   Flexible repayment options: You can tap into flexible repayment plans, including no prepayment penalty, meaning that the lender won’t penalize you for paying off the loan early.

Cons of Taking Out a Personal Loan for Closing Costs

Next, consider the downsides of using a personal loan to cover closing costs.

•   DTI increase: Lenders will look at your overall debt under a microscope, so taking on a personal loan may factor into your overall debt. It may signal to the lender that you aren’t in a good financial position since an additional loan could raise your DTI ratio. It might keep you from being approved for a mortgage or could result in a higher mortgage interest rate.

•   Additional loan payment: You might find it tricky to repay a personal loan in addition to a mortgage payment. Consider whether you can comfortably make both payments every month.

•   High interest rates: There is the potential for high interest rates if you have poor credit. This can make it more challenging to afford a personal loan.

Recommended: Personal Loan Requirements

Alternatives to a Personal Loan for Closing Costs

You may have options vs. getting a personal loan for closing costs. Consider how else you might handle those fees.

•   Roll them into your mortgage: You may be able to add your closing costs to your mortgage, but this means you’ll increase the principal balance of your loan. This will increase both the principal and the interest you’ll pay over your loan term and also translates to higher monthly payments.

•   Ask for a waiver: Your lender may be willing to waive certain fees. For example, they may reduce certain processing fees. There’s no guarantee, but it can be worth asking. That might help you out with your final closing cost amount.

•   Ask the seller to pay: As mentioned previously, sellers may pay for some of the closing costs if they’re eager to ensure that the property sale doesn’t fall through.

•   Tap into assistance programs: Many state and local governments offer down payment and closing cost assistance programs for moderate- to low-income home buyers. Look into your state’s housing finance agency, your city or county website, the U.S. Department of Housing and Urban Development (HUD), or check with your lender to learn more about your options.

•   Use gift money: Do you have a generous grandparent or parent who wants to help you cover your closing costs? Your state may have rules and regulations attached with gift money (especially ensuring that it’s an actual gift). Check with your lender to learn more.

The Takeaway

You can typically use a personal loan to pay for closing costs, the fees that can cost 3% to 6% of your home loan amount when you purchase a property. While this can be a convenient source of funding that is typically unsecured (meaning no collateral is required), it can raise your DTI and add to your monthly financial burden. It’s wise to carefully consider all the pros and cons, as well as alternative funding sources, when deciding whether to use a personal loan for closing costs.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is it smart to finance closing costs?

Whether it’s smart to finance closing costs depends on your personal situation. For example, for some people who can handle the additional monthly payment, it may be a convenient move. On the other hand, getting a personal loan may increase your DTI, so your mortgage lender might charge you a higher interest rate or deny you the loan altogether.

Can I put closing costs on a credit card?

While you’ll usually use a cashier’s check, certified check, or wire transfer to pay for closing costs, you can put some closing costs on a credit card, such as attorney, appraisal, and survey fees. Check with your lender to learn more about which fees you can put on a credit card. (Also note that using your credit card in this way can raise your credit utilization rate and potentially lower your credit score.)

What is not an acceptable source of funds for closing?

Closing costs are typically paid by a cashier’s or certified check or by wire transfer. Funds for these could be acquired by such sources as a government program or a personal loan. Less frequently, credit cards, debit cards, and personal checks may be accepted for some closing costs.

About the author

Melissa Brock

Melissa Brock is a higher education and personal finance expert with more than a decade of experience writing online content. She spent 12 years in college admission prior to switching to full-time freelance writing and editing. Read full bio.

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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.

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Making monthly mortgage payments can feel like chipping away at an iceberg, especially in the beginning. Savvy homeowners take heart that each payment earns them a little more ownership in their property. But do you know exactly how much ownership, commonly called “equity,” you currently have? Understanding how to calculate home equity can help you feel a growing sense of satisfaction as you make those mortgage payments.

Simply put, home equity is the difference between the value of a property and the outstanding balance of all mortgages, liens, and other debt on the property. Read on to determine how to calculate equity in your home, what you can do to increase your equity, and how you can leverage that equity to make it work harder for you.

Calculating Your Home Equity in 3 Steps

As noted above, home equity is the difference between your home’s current value and the outstanding balance of your mortgage and other debt on the property. It’s a simple equation:

1. Find Your Home’s Value

To estimate your home value, you can use the purchase price of your home, but that doesn’t account for any appreciation in value. You can build equity in your home by paying down your mortgage, but also by making renovations. Or it may build naturally over time as home values in your area increase.

For a precise calculation of your home equity, you’ll need to know your home’s current value with appreciation. You can get an estimate of your home’s value with an online property tracking tool. These calculators approximate the appreciation of your home by comparing it with similar properties in the area. While helpful, these tools can’t provide an exact measure.

To determine your real-time home value, you’ll need to request an official appraisal. You might do this through a mortgage lender if you are thinking about borrowing with your home as collateral. The lender will order an inspection and evaluation of what your home is worth in the current market. The appraiser may ask you for documentation of any work you’ve done on your home to come to a more exact figure.

2. Determine How Much Is Left on Your Mortgage

Calculating home equity also involves knowing what you owe on your current home mortgage loan. You can find your mortgage payoff amount (which is different from your balance) on your lender’s online portal. Add to that the outstanding amount you owe on any second mortgages, liens (for unpaid taxes or child support, for example), home equity lines of credit, and any other loans that use your home for collateral. The sum of these items is your home debt, the last figure in the equity equation.

3. Subtract Remaining Debt from Your Home’s Value

The final step is to subtract your home debt from your home value. The result is how much equity you have. To convert this dollar amount to a percentage of home equity, divide it by the estimated value of your home.

Using the Loan-to-Value Ratio to Represent Home Equity

The loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed — it’s like the opposite of equity. You can calculate your LTV by dividing your outstanding home debt, discussed above, by your home’s appraised value:

For example, if your home is worth $375,000, and you still owe $200,000, your LTV is 53%. (200,000 ÷ 375,000 = .53) This means you still owe 53% of the equity in your home. Subtract 53 from 100 to see how much equity you have built in your home: Your available equity is 47%.

Why LTV Ratio Matters for Borrowing and Refinancing

Knowing your LTV ratio is important because lenders set maximum LTVs, typically 80%, for home equity loans. This means homeowners cannot borrow — through a mortgage and loans secured by the home — more than 80% of their home’s value.

Examples of Home Equity Calculations After 1, 3, 5, 10 Years

The table below shows how much equity a fictional homeowner accumulates over the first 10 years of their mortgage. Your initial home equity is determined by your down payment. The average down payment among American homebuyers is currently 14.5%. This table assumes an initial home value of $300,000 and a down payment of 20%, with annual appreciation of 10%, a mortgage APR of 7.50%, and a monthly payment of $1,678.11. The LTV is rounded to the nearest whole percentage. (The actual annual appreciation for American homes over the last 10 years on average was 7.4%.)

Recommended: How Much Will a $300,000 Mortgage Cost You?

What Is a Good Amount of Home Equity?

Common wisdom says that it’s smart to keep at least 20% equity in your home. This is why many lenders limit your LTV to 80%. To borrow against your home, then, you’ll typically need more than 20% equity. (That’s also why lenders usually require private mortgage insurance when a homebuyer doesn’t put down a 20% deposit on a home before purchasing.)

Fortunately, that’s not a problem for most homeowners. Research firm Black Knight estimated that as of 2023, Americans have $195,000 of “accessible” home equity on average, over and above the recommended 20%. This is mostly due to rising home values.

Recommended: How Home Ownership Can Help Build Generational Wealth

How Much Home Equity Can You Take Out?

The amount of equity you can take out depends on the lender and the type of loan. However, most lenders will allow you to borrow 80%-85% of your home’s appraised value. The other 15%-20% remains as a kind of financial cushion.

A homeowner who doesn’t want to take out a home equity loan but needs cash might consider a Home Equity Line of Credit (HELOC). A HELOC allows owners to pull from their property’s equity continually over time. Borrowers can take only what they need at the moment. HELOCs use the home as collateral, which might not appeal to all borrowers. Some lenders allow HELOC borrowers to borrow slightly more against their home’s value, up to 90%.

Homeowners looking to fund renovations often explore home equity loans or HELOCs to access funds at more competitive rates than they would get with a home improvement loan, allowing for flexible financing of their projects.

Pros of Borrowing from Home Equity

As noted above, homeowners often find borrowing against their home equity to be an attractive way to obtain funds for a large expense such as home improvement or a child’s college education. Home equity loans and HELOCs often have lower interest rates than unsecured loans, such as personal loans or credit cards.

Cons of Borrowing from Home Equity

Of course, the most obvious downside of borrowing using your house as collateral is that if you fall behind on your payments, you risk losing your home. Another factor to consider: Adding a large home equity loan to your credit report can reduce your credit score by increasing your credit utilization.

The Takeaway

Calculating home equity involves subtracting your mortgage payoff balance (found on your lender’s website) from your home’s current value. To get the most accurate idea of your home’s market value, you’ll need an appraisal, which can cost $300-$450. Knowing how to calculate equity in your home can be a first step in determining how to use that equity to fund renovations or another important expense.

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

FAQ

Can you access home equity without refinancing?

You don’t have to refinance to tap into your home equity — you can apply for a home equity line of credit (HELOC) or a home equity loan. A HELOC provides a flexible credit line that you can borrow against as you need it, usually with a variable interest rate. A home equity loan provides a lump sum with a fixed interest rate, perfect for big, one-time expenses.

Does home equity increase automatically as property value rises?

Your equity rises as the value of your home increases, provided you don’t borrow additional funds using your home as collateral.

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

Whether it’s smart to take equity out of your home with a home equity loan or a cash-out refinance depends on how you use the funds and how diligent you are about repaying what you borrow. For example, some homeowners use a home equity loan or home equity line of credit to fund renovations that increase their property’s value. Others use an equity-based loan to pay off higher-interest debt. Both of these can be a good move, provided you continue to make timely payments on the loan.

Do I need to put 20% down as a down payment?

A 20% down payment isn’t essential for a home purchase. For qualified first-time homebuyers, especially, down payments can start as low as 3% to 5%. The larger your down payment, the lower your monthly mortgage payments, however. And if you put down 20% you do avoid having to pay for private mortgage insurance (PMI). But if you can’t hit the 20% mark, homeownership is still within reach.

Is home equity a hedge against inflation?

Owning real estate can be an inflation hedge, as property values and rental income generally tend to increase with inflation (though not in every local market). But owning a home also involves work, and homes aren’t always easy to sell quickly. Putting money into a real estate investment trust (REIT) can offer exposure to real estate without the need to own a physical property.

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

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.

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