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If you’re shopping for a new home and traditional single-family houses are out of your price range or the mere idea of lawn mowing and tree trimming makes you sweat, a townhouse could be the answer. Many — but not all — buyers will find that townhouses rise to the occasion.

What Is a Townhouse?

Among the different home types, from condos to modular homes, are townhouses. But what is a townhouse, specifically? It’s a multi floor home with its own entrance that shares at least one wall (not floors or ceilings) with an adjacent townhouse. Townhomes may be part of a community of units with a uniform appearance, but that isn’t always the case.

Why Buy a Townhouse?

There are pros and cons of buying a townhouse, with benefits including the following:

•   Ownership

•   Affordability

•   Low maintenance

Here’s more about each benefit.

Ownership

It’s a bit tricky because some townhouses are sold as condos. If you buy a townhome as a condo, you will own just the inside of your unit. If you buy it as a townhouse, you’ll own the interior and exterior of the structure and the land under and sometimes around your property.

This means fewer restrictions on how you’d use your yard compared with a condo owner. Townhouse owners could, as just one example, have the right to grill in their private outdoor space.

Ownership of the structure and land also means that financing a townhouse is much less complicated than financing a condo. It’s basically the same as getting a mortgage for a detached single-family house.

Affordability

Townhouses are typically less expensive than detached single-family homes, which can be especially important in expensive cities and for first-time homebuyers. Townhouses can serve as space-efficient choices, too, in places where land is scarce.

Note that townhouses may be more expensive than a condo in the same community.

Low Maintenance

Yards are likely smaller and, if the townhouse is part of a homeowners association (HOA), you may benefit from its security protocols and maintenance of shared areas. In some cases, you can enjoy amenities like pools because of HOA membership.

Some home downsizers may appreciate the lack of interior and exterior sprawl to maintain.

Recommended: First-Time Homebuyer Guide

Disadvantages of Buying a Townhouse

Buying a townhome can also come with disadvantages, including:

•   HOA fees and restrictions

•   Lack of privacy

•   Stairs

Here’s more about each potential disadvantage.

HOA

If the townhouse is part of an HOA, there will be fees to cover shared services and spaces. Plus, HOA rules may limit how you can decorate your townhouse. Who is responsible for exterior repair costs can sometimes cause confusion. So be sure to find out the specifics of a townhome you’re interested in buying.

Lack of Privacy

Shared walls automatically mean less privacy than with a detached home, which can be especially problematic for families with young children. This can also be a consideration for young couples who may want to start a family or for other people for whom privacy is a plus.

Stairs

Because townhouses are multistory dwellings, residents will need to climb stairs, which can be challenging for those with temporary or permanent mobility issues. Plus, if someone is used to a larger yard, having a small lot with neighbors nearby can feel constraining.

How to Buy a Townhouse

When buying a townhome, there are several steps to take.

Find a Real Estate Agent

Very few buyers go it alone, so finding a real estate agent who is experienced in your geographical location can help you to make savvy choices. This agent can guide you through the process of finding the right townhouse and help negotiate the best deal for you.

Know the Market

An experienced real estate agent can look into comps, or recently sold townhomes in the area that are similar in size, condition, and features, and you can also use a real estate website to find asking prices of similar townhouses and other real estate in the area.

If more than one buyer is interested in the same townhouse, you’ll need to be clear in your mind about how much you’re willing to pay for the property and strategically make an offer without busting your budget.

Investigate the HOA Fees

If the townhouse is part of an HOA, you’ll want to know what the monthly fees will be and what they’ll cover.

You might ask when the HOA last raised the fee, by how much, and when any new increase might happen. Looking at the HOA’s budget and reserve study could also be a good idea. If the reserves are low, the community is at risk of needing a special assessment.

Shop for a Mortgage and Get Preapproved

If you’re shopping for a mortgage, you’ll benefit from looking at more than advertised interest rates. You can apply with more than one lender and then compare loan estimates.

You may want to compare the APR of different loans: The annual percentage rate reflects the interest rate, lender fees, discount points, and the loan term. If comparing, realize that escrow fees and mortgage insurance can skew the APR.

The loan estimate will also tell you what your monthly payment would be on your home mortgage. To get a sense of what a payment might be with different down payments, you can also use an online mortgage calculator.

By getting mortgage preapproval, you’ll know exactly how much of a townhouse you can afford to buy, which can give you the ability to bid on a property with confidence and compete with other buyers for a property of choice.

Order a Home Inspection

It’s a good idea to get the townhouse inspected inside and out. Also pay attention to how well neighbors are maintaining their properties.

The Takeaway

Buying a townhouse could be a good choice for first-time homebuyers, lawn-mower phobics, downsizers, and people priced out of the larger market. If you decide that buying a townhome is the right choice for you, you’ll probably need to apply for a mortgage.

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

Is it worth buying a townhouse?

Townhouses, in general, don’t appreciate in value as quickly as detached single-family homes. But the purchase price is often lower.

Is a townhome a good first home?

A townhouse can be a good first home because of the low maintenance, and amenities may be included. Plus, the price is right for many first-time homebuyers.

Why shouldn’t you buy a townhouse?

Disadvantages can include a lack of privacy and usually a small yard. If an HOA is in place, ongoing fees and rules are involved. Plus, the stairs that come with townhomes may be challenging for some people to navigate.

How do I choose a good townhouse?

When buying a townhome, make sure that it has the features you want and need in a neighborhood where you’d like to live at a price within your budget. If it’s part of an HOA, ensure that the fees are palatable and cover what you expect them to.

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Photo credit: iStock/cmart7327

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.

SOHL-Q224-1903460-V1

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Renting out a room in your house can be a good source of extra income but generally isn’t something you want to do on a whim. From legal and financial considerations to aesthetics, there are lots of things to think about before offering the space to a potential housemate.

Here are some things to consider before renting out a room in your house.

What Are Some Room Rental Options?

Renting out a room in your house doesn’t have to mean having one long-term renter, although that’s certainly one way to go. Here’s a look at a few different rental options.

Short-term Rental

One option you might consider is offering short-term rentals through a service such as Airbnb or Vrbo. This could be a good option if you live in an in-demand tourist area or have a home in an out-of-the-way locale that might attract someone looking for a place to relax and unwind. Some travelers prefer to stay somewhere that feels more like a home than a hotel.

Recommended: 25 Things to Know When Renting Out an Airbnb

Long-term Rental

Having a housemate who is planning to rent a room in your home for an extended period of time can be one way to have a steady income for that time period. It’s a good idea to have a formal rental agreement that clearly outlines expectations of both parties.

Furnished or Unfurnished Rental

Whether to offer a furnished or unfurnished space will probably be determined by the type of renter you’re looking for. If you live in a college town, prospective renters might not have any furnishings of their own, so will likely be looking for a furnished rental. As with a short-term rental mentioned above, a furnished rental will probably be a given. A potential long-term housemate, though, may have their own furnishings to bring to the space.

What Financial Considerations Are There?

For some people, the sole reason for renting a room in their house is to have some extra income. With income, though, generally come expenses.

Return on Investment

It’s not likely that a spare room is ready for a renter without some updating and perhaps even some repairs. Keeping a record of how much money you spend preparing the space will help you determine if you’re coming out ahead financially. It may take some time to recoup the money you spend before you make a profit. And it’s a good idea to have a record of any ongoing expenses you incur to make sure you’re charging enough rent to offset those costs.

Recommended: What Is Considered a Good Return on Investment?

Taxes

In most cases, there will be income tax implications, so it’s wise to treat renting a room in your house as a business of sorts. As such, it’s a good idea to consult a tax professional who can answer detailed questions about rental income.

The IRS considers rental of part of your property, such as a spare room, as taxable income. And, like some business expenses, there are expenses related to this type of rental that are tax deductible. Any deductions claimed must be directly related to the portion of the home that is used for rental purposes and is generally calculated as a percentage of the home’s total square footage.

Recommended: 25 Tax Deductions for Freelancers

Are There any Legal Considerations?

It’s wise to look at your state’s landlord-tenant laws as a first step. Some states are more landlord friendly, while other states have a wide range of protections for tenants, putting more limitations on landlords’ rights.

Even if you’re just renting out a room to an acquaintance, you’ll likely still be considered a landlord and must adhere to regulations that apply to your situation. The Fair Housing Act protects potential tenants from discrimination except in limited circumstances. Shared housing is one of those circumstances because the government concluded that sharing one’s personal space has “significant privacy and safety considerations” in a U.S. Court of Appeals ruling.

Neighborhood Restrictions

Aside from governmental legal considerations, it’s a good idea to check your apartment lease or your neighborhood or homeowner’s association, if you have one, as some homeowner’s associations may have regulations about leasing all or part of your home. If you’re renting a home or apartment, your lease may specify whether you’re allowed to sublease or if you’re restricted from doing so.

Your homeowner’s insurance policy may also include a clause related to leasing part of your home. Some companies may allow you to rent a room in your home without any change to your policy, while others may disallow it completely. There’s a chance you may see an increase in your premium, as well. To be on the safe side, it’s a good idea to let your insurance agent know of any change in your home’s occupancy.

Recommended: Condo vs Townhouse

Screening Tenants

Finding the right person to share your personal space may take some time. You likely have certain things you’re looking for in a potential renter along with other things that might be deal-breakers. Maybe you’re looking for a non-smoker who has a solid rental history. A rental application is one tool that can help you find a housemate that fits the bill.

You may want to run a credit check and a background check on any applicants who are truly interested in renting a room in your house. These checks generally have fees associated with them, and it’s a good idea to specify in the rental application who will be responsible for paying for credit and/or background check.

The applicant’s permission is required to run either of these checks and they are entitled to know if the results of either a credit or background check resulted in the denial of their rental application. It’s important to make sure you’re complying with fair housing laws when screening potential tenants and aren’t discriminating against certain applicants.

Rental Agreement

Having a formal, written lease in place will go a long way in protecting both you and your renter. A thorough agreement might include:

•   The leasing period — it’s typical for a lease to be for one year, but if you’re renting a room to college students, you may consider a shorter lease for the duration of the school year. This section might specifically note the move-in and move-out dates.

•   Rent amount — including the due date, how you would like to collect it, and any late fees you might charge.

•   Security deposit — the amount and conditions for returning or withholding it at the end of the lease.

•   Utility costs — are they included in the monthly rent or will the renter be responsible for paying their share of the total bills?

•   Shared spaces — expectations around common areas like the kitchen, living room, and bathroom.

•   Pets — are they allowed or not, as well as policies about pet messes and noise.

•   Cleaning and maintenance — will the renter be responsible for regular house cleaning, including private and common areas, and home maintenance, inside or out?

•   Parking — if there is a parking space available, is it included in the rent or is it a separate charge?

Covering a wide variety of things in a rental agreement can go a long way in avoiding misunderstanding and miscommunication between you and your tenant. Having an attorney review the agreement is a good way to make sure you’re not missing important elements. Lease agreements are legally binding contracts when signed by both parties.

It’s also a good idea to do a walk-through of the room with the tenant before signing the lease and again before they move out. Any damage can be documented (e.g., carpet stains, scratches on woodwork, torn window screen, among other things) so it’s clear that the tenant isn’t responsible for that damage. A final walk-through can be done before the tenant moves out, during which any additional damage can be documented and accounted for.

What Are the Costs of Renting a Room in Your House?

You may encounter costs preparing a room to be rented as well as ongoing expenses related to having another person living in the home.

Preparing the Room for Rental

Safety for you and your tenant are important concerns. You may want to make sure doors and window locks are in good working order. Your tenant will likely want their room to be private, so a keyed lock on their door can go a long way to easing any concerns they might have about living in someone else’s home. Providing a combination safe for the tenant’s valuables might be a nice gesture.

Installing locks on doors to any areas you don’t want your tenant to have access to is another layer of safety you may want to consider.

Fixing loose railings, sticking doors or windows, flooring trip hazards, and doing other home maintenance that could become safety issues is important in making your home and the individual room an attractive rental prospect for tenants.

You may want to make some cosmetic changes, too.

•   Painting the walls a neutral color may allow a prospective tenant to imagine their belongings in the room, instead of bright colors that might be a distraction to them. Using an easy-to-clean paint finish, like satin instead of flat, may also save you some effort after your tenant moves out.

•   If the room is carpeted, you might consider having the carpet cleaned, either professionally or using your own carpet cleaner. If the room is furnished with upholstered furniture, it can also be cleaned. Doing so will help the room look and smell fresh.

•   If you’re renting a furnished room, make sure the furnishings are clean and in good condition. Even used furniture can be presentable.

•   If the tenant will have a private bathroom space, the fixtures should be as modern as possible, but more importantly, clean and working. If the faucet drips, if the bathtub leaks, if the toilet runs — make the repairs before renting the room.

•   Is the bathroom a shared space? You might consider adding some baskets or other types of storage for the tenant’s personal hygiene products. Making a cabinet available for their own use would be nice if there is space to do so.

•   Cleaning, decluttering, and updating other shared spaces such as the living room and kitchen can make your home look more inviting, possibly increasing your chances of finding a renter.

•   You might consider adding some storage space for a tenant’s use. It could be as simple as a stand-alone cabinet or a designated area in a basement or garage. The rental agreement could specify what isn’t allowed to be stored (e.g., no hazardous chemicals) and how much storage space is allotted. A prospective tenant might feel more comfortable storing belongings if the space is able to be secured.

Recommended: 20 Renter-Friendly House Updates

Increased Utility Costs

An extra person living in the house will likely increase utility usage. Costs for gas, electric, water, sewer, and other utilities will probably be more than you typically pay without an extra person in the house. You may want to calculate your average utility costs over the past year to have an idea what an extra person’s use might add to those costs.

Some landlords include the cost of utilities in the cost of rent, while others might require the tenant to cover a percentage of each monthly utility bill. When renting out a room in your house, it may not be convenient to have separate utility connections for a renter.

Covering the Cost of Making Your Room Rental Ready

Depending on how much work needs to be done, getting a room in your house ready for someone to rent could be a few hundred dollars or a few thousand dollars. You may be able to keep costs down by doing some of the work yourself, but you might need to hire a professional contractor for some tasks you don’t have the skills to tackle or don’t feel comfortable doing on your own. It can help to think of this as an investment with a potential for a return in the form of rental income.

Taking some time to save money for the expense of getting a room in your house rental ready can be a smart choice. It can at least be one way to pay for some basic tasks, while considering other funding sources for more expensive repairs.

If you don’t have cash on hand, you could put all these expenses on one or more credit cards. But because credit cards carry such high interest rates, you might want to avoid racking up a credit card bill you can’t pay down any time soon.

Homeowners who have equity in their homes might consider taking out a home equity loan or home equity line of credit. These secured loans use your house as collateral. The application process can be lengthy and typically requires an appraisal of your home. Also, you risk losing your home if you don’t repay the loan.

Another option is to apply for a personal loan. Personal loans are typically unsecured loans, which means you don’t have to put up any collateral to qualify for them. Many personal loans also have fixed interest rates.

The Takeaway

From your personal comfort level for sharing your space with someone to financial and legal considerations, there are lots of things to consider before deciding to rent out a room in your house. You may need to complete some repairs to make the space safe for a tenant, and there may be some decor updating necessary to interest potential renters. However, you can likely more than make up for these upfront costs in rental income.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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.

SOPL-Q224-1908123-V1

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If you finance a home, the lender will have you sign either a deed of trust or a mortgage. A mortgage is an agreement between you and the lender, but a deed of trust adds a neutral third party that holds title to the real estate.

Many states allow either choice. Thanks to an easier foreclosure process, many lenders prefer a deed of trust to a mortgage, so it is important for borrowers to grasp the nuances of these documents.

Mortgage Loans 101

To understand the difference between a deed of trust and a mortgage, it helps to first know some mortgage basics. A mortgage is a loan that’s used to purchase a piece of real estate. First, the borrower applies for a loan from among the different mortgage types. Once approved, they sign a mortgage note, promising to pay the lender back over a specified time with agreed-upon terms. The real estate serves as collateral for the loan.

You may hear a mortgage note referred to as a promissory note. In any case, it’s a legally binding document.

Mortgage Transfer

A mortgage transfer takes place when a borrower assigns what is typically an assumable mortgage to another person. Most mortgage loans are non-transferable. That said, in the case of marital separation, divorce, death, or other unusual circumstance, a mortgage transfer is sometimes permitted.

FHA, VA, and USDA loans, insured by the government and issued by private lenders, are assumable if the buyer qualifies.

Mortgage Foreclosure

When a borrower defaults on making mortgage loan payments as agreed upon, the lender may start legal proceedings to take ownership of the property and resell it to recover funds owed to the financial institution.

A mortgage foreclosure can take place when a borrower doesn’t meet other terms of the agreement, but failing to make payments is the most common reason. A variety of mortgage relief programs help borrowers stave off foreclosure.

What Is a Deed of Trust?

Some states incorporate a deed of trust into their home loan process, while financial institutions in other states can choose to do so or not. A deed of trust is an agreement that’s signed at a home’s closing that states how a neutral third party — typically the title company — will hold legal title to the home until the borrower pays the loan off. (It is not the same thing as the deed to the house.)

Terms to know include the following:

•   Trustor: the borrower

•   Beneficiary: the financial institution loaning the money

•   Trustee: a third party that will legally hold the title until the loan is paid off

Deed of Trust Transfer

If the borrower pays off the mortgage loan, the third-party trustee dissolves the trust involved and transfers the title of the real estate to the borrower.

If the borrower sells the home before the balance owed is paid in full, the trustee takes the sales proceeds and pays the lender what is still owed and gives the borrower/trustor the rest of the money.

Deed of Trust Foreclosure

As with a mortgage, there are clauses in the deed of trust agreement that will trigger foreclosure proceedings. In this case, the trustee will sell the property and distribute the funds appropriately.

Similarities Between a Mortgage and a Deed of Trust

Both a mortgage and a deed of trust are used when someone buys a home and takes out a loan to complete the purchase. Under each structure, the lender has the option to foreclose on the home if terms and conditions agreed upon by the buyer are not met.

In states where either option is allowed, the lender will decide which one to use.

Key Differences Between a Mortgage and a Deed of Trust

Here’s the big one: ease of foreclosure by a private trust company when a deed of trust is in place. But let’s look at how all the differences line up, below.

	Mortgage	Deed of Trust
Number of parties	Two: borrower and lender	Three: trustor (borrower), beneficiary (lender), trustee
Transfers	Uncommon	Part of the transaction when loan is paid off
Foreclosure	Typically involves court	Typically handled outside court system, which is usually faster and less costly

How to Determine If You Have a Mortgage or a Deed of Trust

Although deed of trust versus mortgage differences may seem reasonably small, it can make sense to be clear about which one you have. Look at a mortgage statement to find your loan servicer and ask.

A longer route: Mortgages and deeds of trust are publicly filed documents, so you could seek out the local government agency that manages these kinds of records and get a copy.

The Takeaway

A deed of trust and a mortgage are the two main systems for securing home loans. One key difference is the presence of a neutral third party in deeds of trust. The trustee holds legal rights over the real estate securing the loan. It’s easy to get lost in the forest of mortgage matters. A mortgage help center can lend a hand.

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

Who can be listed on a deed of trust or mortgage?

On a deed of trust, all three parties are listed: the trustor (borrower), beneficiary (lender), and trustee (third party that holds the title until the loan is paid in full). With a mortgage, there is no third party involved.

How are mortgages and deeds of trust recorded in public records?

A deed of trust will be filed and recorded in public records in the county where the house exists. A similar process takes place for mortgage deed recordings. The recorded documents could be located at a county clerk’s office, a public recorder’s office, or an office of public records.

Is your title separate from deed of trust and mortgage?

Yes. A title is a concept rather than a physical document like a deed of trust or a mortgage note, and it refers to a person’s legal ownership of a home or other property. When a property is sold, the title is transferred from the current owner to the buyer.

Does a mortgage involve a trustee like a deed of trust?

No. Deeds of trust require a trustee, but a mortgage does not.

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Photo credit: iStock/zimmytws

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.

^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.

SOHL-Q224-1903200-V1

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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 home equity loans, which are used to tap the equity you’ve gained.

What Is a Mortgage?

Mortgages are 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 buy 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 14.7% in 2023, 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 interest 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.

•   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 Equity Loan?

A home equity loan is frequently known as a second 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.

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% 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. In the latter, your home equity is collateral, but 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 way to tap home equity is with a cash-out refinance, when you take out a new loan to pay off your old one and free up equity.

Similarities Between a Home Equity Loan and a Mortgage

When you apply for a mortgage as part of the homebuying 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.

Differences Between a Home Equity Loan and a Mortgage

A mortgage must be used to purchase a specific property. There are fewer limitations on the money received from a home equity loan.

Mortgage interest can be deducted if you itemize your 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.

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.

The Takeaway

Home equity loan vs. mortgage? One uses a home as collateral on a loan; the other gets a buyer into a home. If you’re looking for a home equity loan, a mortgage, or a refinance, it’s 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.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is a home loan the same as a mortgage?

Yes. “Home loan” is an umbrella term that covers a wide variety of mortgages, home equity loans, and home refinances.

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.

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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 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-Q224-1903077-V1

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When you want to sell your house quickly, you need to get it right the first time around. Those with more time to leave their home on the market can enjoy a period of trial and error, but if you’re looking for a quick payout, it’s smart to have a plan, and even a checklist in place. Here are 10 tips that can help increase the appeal of your home, impress buyers and help get your property sold in record time.

1. Clean and declutter

One of the first and most fundamental steps to complete if you want to sell your house fast is to clean and declutter your home. This sounds simple, but it can make a huge difference to prospective buyers. If necessary, you may want to rent a storage unit so you can set aside any belongings that you don’t absolutely need for a showing. A tidy home looks bigger and more appealing, so investing some time and money in a deep clean and even a home staging can help to ensure buyers get a great first impression.

2. Pick a selling strategy

Different buyers will have different needs. For instance, a first-time homebuyer might be ready to purchase, but may not know exactly what they want until they see it. That’s why it’s smart to make sure your selling strategy targets your ideal buyer so you can sell your home quickly. Here are three strategies to consider:

Sell FSBO

Selling your home yourself can be a great way to sell a house fast. The “For Sale By Owner” approach may require a little extra work on your part, but it also lets you avoid agent or broker fees, meaning you can sell the home at a lower price and keep the same profits.

Hire an agent

Of course, going it alone isn’t for everyone. If you don’t fully understand the ins and outs of the market, need a little assistance, or would just prefer for a professional to handle the heavy lifting, hiring a real estate agent may be the better route for you. You may incur some additional fees but having a professional on board can help give you some piece of mind during what can be a very complex and stressful process. An agent can also help you time your sales strategy and planning process if you’re buying and selling a house at the same time.

Try the unconventional

There isn’t any one right way to sell a home. These days, some people harness the power of social media to try to sell a home quickly. Others allow potential buyers to spend a night to see if they fall in love with the home. Virtual tours that allow buyers to “walk through” without ever setting foot in the home are now the norm.

3. Price to sell

A mortgage loan is a major expense so it’s often at the forefront of your potential buyers’ minds. That’s why you may want to think carefully when setting a price point for your home. Setting your sale price higher than other properties in your neighborhood could keep your home on the market longer than you’d like. Choosing to set your sale price lower than those in your neighborhood can help set you apart from the pack and may help speed up the selling process.

Set a timeline for a price reduction

It’s perfectly fine to dream big, but it’s smart to have a plan in place if no one bites at your initial price. Setting a date by which you’ll reduce the price can help to generate renewed interest in your property. Even a small price reduction can entice buyers to give your home a second look.

Consider sales incentives

You may also want to consider other sales incentives. Perhaps the buyer wants a new fence installed or an AC unit replaced. New carpentry and modern appliances can be highly appealing for buyers. Also, offering to partially or fully cover closing costs is another tactic that can entice potential buyers.

4. Handle any quick repairs

Speaking of incentives, it’s wise to make sure you do repairs before buyers see the home. Many of those small things we overlook while living in a house can be a big deal to buyers. Repair scratched floors and damaged walls, tighten up that leaky faucet and pull out the touch up paint. All of these quick repairs can make a huge difference in selling your home quickly.

Recommended: What Are the Most Common Home Repair Costs?

5. Pack up and hire a stager

First thing’s first: Most buyers consider how their own belongings will fit in your home as they walk through, and getting some of your things out of the way can aid in that visualization. If you think your belongings are outdated or detract from the overall appeal of the home, you can research home staging tips or even consider hiring a stager who will know exactly how to make your home look its absolute best. A well-staged home can sell more quickly.

6. Create curb appeal

Thinking about what people see when they first arrive at your house is a smart move when it comes to selling your home quickly. The front lawn, the door, or even a driveway can influence a buyer’s overall impressions. Drive past your home and look at it from a buyer’s perspective to see where your eyes land first. Whatever catches your eye is probably worth investing some time and money into. Also, mowing the lawn and power washing the front of your home can help make it look more inviting.

Recommended: 5 Curb Appeal Ideas for Your House

7. Hire a professional photographer

Pictures, virtual walk-throughs and social media are huge in real estate these days. And professional photographers make it all much more appealing. If you have stunning professional photographs to show prospective buyers, you’re likely to be more competitive when it comes to getting those buyers into your house.

8. Write a great listing description

A listing price and photographs are helpful, but you also need a listing description. Real estate agents are often great at this, but if you need to do it on your own, you may want to start by considering your home’s best features. Also it’s smart to consider keywords that might help your home rank higher. Since you’re trying to sell a house fast, it’s perfectly fine to convey that in the listing. It might also attract buyers who want to buy quickly.

Where to post your listing

Where to list your home for sale often depends on how you’re selling it. If you are selling on your own, you can use sites like Zillow to list the house yourself. If you are working with an agent, however, they will probably prefer to list the house for you on the local Multiple Listing Service (MLS). Of course you can always use your personal social accounts, email, or other means to advertise regardless of whether you have an agent or not.

9. Time your sale right

Timing can play a huge role in how quickly your home sells. However, this can vary widely depending on where you’re located. You may want to start by researching when homes sell best in your area and aim to hit that time frame if you can.

10. Be flexible with showings

Within your ideal time frame, you’ll probably want to be as flexible as possible. Homebuyers can be busy, and if you can accommodate them, they’ll be more likely to view your home. If you can’t, they may look elsewhere.

Hold an open house

An open house is an excellent way to let people see your house. The best part about open houses is that they’re very flexible. People can come and go as they please on their own schedules. Of course, things like cleaning, making repairs and staging will be extra important prior to an open house. If you have an interested buyer but have scheduled an open house, it’s OK to run the open house anyway. Even a home in contingency can still fall through; it doesn’t hurt to have backup offers or other interested buyers in waiting.

The Takeaway

Whether pricing your home below market rate or just adding a fresh coat of paint, when it comes to selling your home quickly there really are no guarantees. Doing your research and knowing your market are the best ways to position yourself for a sale, and incorporating these tips can help speed up that process.

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.

---

Photo credit: iStock/OlekStock

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.

SOHL-Q224-1903222-V1

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