How Much Should You Pay For a New Home?

Have you ever felt the pressure to become a homeowner? If so, you’re not alone. Even if you haven’t been encouraged into homeownership directly, you may have felt the pressure in subtle ways—from commercials, listening to friends talk about their mortgages, even from driving past those Open House signs on the weekend.

Owning a home with a white picket fence is part of the “American Dream,” after all. The idea that a home is a good financial investment is ingrained in our culture.

And hey, owning a home can be a good thing. But that isn’t always the case.

Sometimes, the pressure isn’t just to buy a home—it’s to buy a lot of home. It can be tempting to buy the most home that you can afford. But only using the maximum amount of mortgage approval offered by the bank as a barometer for knowing how much home you can afford might be more than you feel comfortable spending.

For instance, when reviewing W2 wage earners, banks use gross income. Try running your own numbers with your net take home pay to confirm the amount you are comfortable paying.

When you approach homeownership focusing on the size and amenities of the property rather than what you can realistically afford to pay each month, you may be putting yourself in a precarious financial position. A mortgage payment is one piece of your overall financial puzzle, and can be treated accordingly.

For those asking, “how much home can I afford?”, here are four tips to help determine whether your home works within your budget. This way, you can buy a house that helps you work towards your greater financial goals—and not the other way around.

1. Calculating Potential Housing Costs

A good next step is to list all potential housing costs, including your total down payment. You may want to make sure the list is exhaustive and includes property taxes, homeowner’s insurance, and any charge associated with your estimated mortgage interest rate, such as an origination fee, and other fees for taking out a loan, such as title insurance. It’s typically smart to be generous in your estimates so that you aren’t surprised by higher-than-expected costs.

Also, you may want to make a separate list of expected repairs and updates to potential properties in your budget—both upfront and ongoing. It may be tempting to leave this out of your initial budget, but it’s unlikely you’ll find a place that won’t require some changes and these estimates could play a factor in your decision.

Besides, you’ll want to make your new house a home, and there is nothing wrong with that so long as you’ve budgeted for the estimated expense. You may also want to include moving costs and the cost of furniture in your calculation.

Although these latter expenses aren’t part of your required monthly housing payments, they’re worthwhile to keep in mind.

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2. Determining What Is Paid Up Front

Now that you have an all-encompassing list of what you think a potential property might cost, both for a monthly payment and possible expenses, you can divvy up those costs into two categories: Upfront costs and monthly costs.

Upfront costs include things like the down payment on the home, and other fees such as closing costs and paying for home inspections. Monthly costs are your monthly mortgage payment which includes property taxes, and insurance(s) (if you’re paying monthly), plus other possible expenses you may pay down the line for furniture, repairs, renovations, etc.

You may also find it helpful to have a cash buffer as you go into homeownership, in expectation of the unexpected.

3. Looking at Monthly Costs in Terms of Your Budget

Now that you have an idea of what your monthly housing costs could be, you can begin to fit those into your overall budget. Does it work, leaving you with some room to breathe? Are you able to save for other financial goals, such as retirement? Have you considered ongoing home maintenance? You won’t want to max out your income with your home purchase. Overextending yourself in order to purchase a home is not recommended and worrying about money after you buy could take some joy out of your new nest.

4. Considering Unexpected Costs

Being a homeowner can be wonderful and rewarding, but it can also be expensive and exhausting. You may want to set proper expectations with yourself regarding not only how much homeownership will cost in terms of dollars, but also the cost in terms of dollars . Budget accordingly.

Next, you might want to consider what could happen in the event of a job layoff. Even great employees can lose their jobs, so have a plan in the event that this happens.

If you have no plan for how to make a mortgage payment in the event that you or your spouse loses work, you might not quite be ready for homeownership. You may want to build up your cash reserve before making the dive.

For instance, it’s recommended that you save three to six months’ worth of expenses in an emergency fund, in case of a job loss, health emergency, or other financially difficult events.

Choosing a Great Mortgage Fit

Once you’re equipped with an idea of what you would like to spend and how it fits into your budget, it’s time to shop for a home and apply for a mortgage that best suits your needs.

Throughout this process, you likely have done research on the typical costs involved in taking out a mortgage. You may have even received some quotes from lenders. Once you’ve run the numbers and feel confident about the result, you may be ready to do some serious shopping for mortgages.

When you are ready to choose a lender and type of loan program, you can request quotes in writing from lenders which will include the rate, term, costs and more.

The mortgage Annual Percentage Rate (APR) was established to help make comparison shopping between lenders easier for the consumer, but not all fees related to purchasing a home are included in the APR. Therefore, it’s helpful to request a loan estimate in order to review the breakdown of all the costs of taking out the loan.

You may also want to take into consideration the loan approval and closing timeline expectations in relation to your purchase contract deadlines and consider the customer service reviews of each lender.

Don’t forget to check online lenders like SoFi. SoFi provides home loan options with competitive rates, no hidden fees, and with as little as 10% down. Best of all, SoFi can help make the process easier with an online digital application and representatives available to answer questions each step of the way.

You’ve worked hard to make homeownership part of your financial plan—and SoFi wants to be there to help.

Checking your rates with SoFi takes two minutes and won’t affect your credit score. See what you qualify for today.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Home Equity Loans vs Personal Loans for Home Improvement

Maybe you’ve spent too much time watching HGTV and now have visions of turning your kitchen into a chef’s paradise. Or perhaps your master bath is just one shower away from disaster.

Either way, the home improvement bug has bitten you, and you’re in good company. According to HomeAdvisor, spending on home improvement projects increased by 17% in 2018 alone.

In 2018 on average, homeowners spent approximately $9,081 on home improvement, maintenance and home related emergencies for the year, which breaks down into the following categories:

•   $1,105 for maintenance
•   $416 for emergencies
•   $7,560 on home improvement.

Your home might be begging for some general updates and improvements, but not all of us have close to $10,000 stocked up in a savings account. For many people, that means borrowing money to pay for those home improvements. If you are trying to figure out how much it would cost to update your home, you can take a look at our Home Improvement Cost Calculator, which may help you calculate some estimates.

It’s not ideal to take out additional debt load, but instead of waiting for things to get worse to justify fixing them, one option may be to consider taking out a home improvement loan to update features, or improve your day to day comfort. However, just as no two homes are alike, not all home improvement loans are built the same.

So which home improvement loan is right for you? Many homeowners look to tap into the equity in their homes. But home equity loans (which can either be taken in a lump sum and offer both adjustable and fixed rate options or home equity lines of credit (HELOC) which are lines of credit a borrower can draw upon similar to a credit card, usually at an adjustable rate, with an open draw period in which the borrower can pay off and run up the line again over and over for generally a 10 year “draw” period. These home equity loans may not be possible or practical for some borrowers. In that case, some may consider using an unsecured personal loan.

Some of the factors you may consider when pondering between a home equity or personal loan include:

•   Size of the project. How big is the project or improvement you’re taking on?
•   Equity in your home. How much available equity do you have in order to qualify for the loan amount you need?
•   Timeline to obtain funds. How quickly do you need the money?
•   Timeline for payback. Depending upon the type, home equity loans can offer up to 30 year terms, personal loans up to 10 years
•   Open line of credit. Helocs can be paid off and left open for the revolving draw period of the loan (usually 10 years), personal loans are installment loans funded in a lump sum
•   Tax deductibility. Depending upon circumstances, home equity loans or lines of credit may be tax deductible

Read on to understand some differences between home equity or HELOCs and personal loans, and which option might be the right choice for you.

What Is a HELOC?

A HELOC, or home equity line of credit, allows you to pull a certain amount of equity out of your home. Depending on the amount of outstanding mortgages on the property, the market value of your home and the lenders loan criteria, you may qualify for different credit limits. A home equity loan or HELOC can be used to finance anything including things like large home renovations or higher education.

According to a study published by TransUnion in 2017, it is estimated that 10 million homeowners will open HELOCs from 2018 to 2022. In 2018, tappable equity in homes jumped 7%, to a total of $5.8 trillion , largely thanks to rising home prices across the country. This means that homeowners may find themselves with the ability to tap into more equity in their homes.

What Determines the Amount of a Personal Loan?

The approved amount for a personal loan isn’t tied to the value of your home. Typically, personal loans are unsecured, which means they aren’t secured by an asset, such as your home.

Instead, the interest rate and amount you qualify for will be determined largely based on your credit history, income, and employment. You can use a personal loan for a variety of personal reasons, including home projects.

In the second quarter of 2019, there were 38.4 million personal loan accounts in the U.S. According to Experian , personal loan debt is the “fastest-growing debt category” in the country with balances now totaling $305 billion. The average account balance is $16,259 and the average monthly payment is $360.

Exploring Some Advantages of Personal Loans over Home Equity Loans

While you can use a personal loan for a variety of personal reasons, there are a few reasons why a personal loan can have advantages over home equity loans (upfront lump sum) or HELOCs (open line of credit) when it comes to a renovation loan specifically.

1. Personal loans are typically faster and have fewer fees.

The application process for a personal loan is pretty straightforward. Your own financial profile and creditworthiness—e.g., your credit history and earning power—are often the main deciding factors for whether or not you’ll get a loan, for how much and at what terms.

If need more than you can be approved for on your own, you might consider adding a co-borrower. Some personal loans even boast no origination fees.

Home equity loans and HELOCs, on the other hand as secured lending products, are akin to applying for a mortgage loan (in fact, home equity loans are actually second mortgages on your home recorded in subordination with your first mortgage). How much you can borrow depends on several factors, including the determined market value of your home.

Typically, a HELOC will allow you to use up to 90% of the combined loan to value (CLTV) of your home. CLTV is calculated by adding the outstanding amount of the principal balance on your existing first mortgage and the proposed 2nd loan amount for the home equity loan, divided by the home valuation determined by the lender.

Because your 2nd loan amount is primarily determined based on the available equity you have (i.e. the difference between your home’s value and your outstanding mortgage(s), you may have to arrange–and pay for–a home valuation.

Home valuation types can vary depending upon many factors such as the homes combined-loan-to-value (CLTV) of your first mortgage and proposed second mortgage. For instance, if your CLTV is at 75% or lower, it’s likely the lender may only require a desktop valuation in which the computer will read recent like for like sales data.

If you feel the valuation came in low you may be able to request a full appraisal to get every aspect of your home upgrades in the valuation. Usually these full appraisals (interior and exterior) are assigned more frequently to CLTVs of 75% or higher. Full appraisal valuations can take time (which you might not have) and could cost you.

Generally, hiring a home appraiser could cost between $311-$404, but can sometimes fall slightly below or above that range. Depending upon things like the lender you choose (how many loans are they processing)? And other factors such as property location or complexity, it can take from 2 to 4 weeks to close on a HELOC.

If you need funding fast, a personal loan might be the right fit.

2. You get exactly how much you need.

When you borrow a personal loan, or any improvement loan funded in a lump sum, it’s helpful to know how much you will need, since overborrowing could mean paying more in interest than necessary.

For example at SoFi, you can borrow as little as $5,000 or as much as $100,000 (this amount may vary by state). In contrast, when borrowing a HELOC loan, some lenders have higher loan amount minimums. The minimum loan amount can vary from lender to lender or state to state, but generally the lowest amount you can borrow on a secured home equity loan or line of credit is $10,000 .

3. You can start renovating your new home right away.

With a home equity loan or HELOC, you can only borrow against the equity you have – which, if you are a new homeowner, and haven’t made a large down payment, available equity could be limited. You haven’t had enough time to chip away at your mortgage and the market hasn’t yet elevated your home’s price.

The average first-time homebuyer makes a 7% downpayment. With fewer homeowners putting 20% down payment on their home, if you are a first-time homebuyer, you may not have enough equity for a HELOC to make sense.

On the other hand, a personal loan lets you start home improvements regardless of how much equity you have.

4. Your home is not on the line.

With a home equity loan or HELOC, you use your home as collateral, which means an inability to repay could result in you going into default and your home going into foreclosure. While failing to pay your personal loan carries its own risks, it’s not tied to the roof over your head.

When Home Equity Loans Make Sense

Personal loans may not be right for every borrower looking for a home improvement loan. For example, if you have significant equity in your home and are looking to borrow a large amount, you might be able to save money with lower interest rates normally offered on a secured lien such as a home equity loan or HELOC, although the loan terms tend to be longer.

Additionally, if you take equity out on a line of credit, you can continue to draw on the HELOC during the draw period, unlike the single one time lump sum of a home equity loan or personal loan. You can think of it sort of like a credit card. You can borrow from your HELOC, start paying it back, and then borrow again on it, up to the limit. With HELOCs you pay on the amount you’ve withdrawn.

While you should try to budget accordingly for home improvement projects and updates, a HELOC might make sense for homeowners working on larger scale projects which may require variable draw amounts at different times.

If you’ve made a large down payment or owned your home for enough time to build up sufficient equity, and you’re looking to undertake large projects, a HELOC may be the right fit for your project.

Also, interest payments on home equity loans and lines of credit could be tax deductible under certain circumstances (when used for certain purposes)—that’s not the case with personal loans.

Personal Loans Can Make Sense For:

Sometimes a personal loan could be the best fit. Here are some instances when it may make sense to borrow an unsecured personal loan over a secured equity loan or HELOC.

•   Recent homebuyers. You don’t have enough equity in your home to pull from for a HELOC yet. The HELOC may also come with higher upfront costs (between 2% to 5% of the total line of credit), these fees are usually deducted from the line at loan closing. HELOCs with upfront fees vs no fees could carry different lender margins that affect the interest rate offered and things like early closure fees, so check the fee, margins and other terms when you shop and compare.

•   Smaller home improvement loans (e.g, bathroom or kitchen as opposed to full remodel). If you have a clear budget in mind for your project, and it’s on the smaller side, a personal loan might make sense.

•   Borrowers in stagnant home value markets. If your home value has barely budged since you moved in, you may not have much equity to draw on for a home equity loan.

•   Those who value ease and speed. The process of applying and securing a personal loan is often much faster, and easier, than securing a HELOC. You do have to provide information to the lender, but in most cases, it’s not nearly as involved as a HELOC approval process can be.

Additionally, you don’t have to wait around for the home valuation that can come with a HELOC.

•   Borrowers with great credit and cash flow. The higher your credit rating, the less of a perceived risk you are to lenders, having a history of managing your credit well could make it easier to get approved or to obtain better loan terms overall.

While home equity loans and lines of credit are considered a good source of home improvement money if you’ve built up equity in your home and can qualify, using a personal loan for home projects may be a better alternative if you’re a new homeowner and need to take care of a few updates or small projects to make your new home just right.

If you’ve decided that a personal loan could be the right move for you, SoFi’s personal loans are absolutely fee-free with no origination fees or prepayment penalties. Qualifying borrowers may be eligible to borrow up to $100,000.

The application can be completed easily online and you’ll have access to customer service 24/7 to help support you throughout the loan process.

Still deciding which home improvement you want to make? Use our Home Project Value Estimator to find out the approximate return value of your next home improvement project.

Learn more about personal loans from SoFi.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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How a Parent Plus Loan Can Lower the Cost of College

When children first learn to walk, their parents usually hold their hand until they get the hang of it.

When children learn to ride a bike, their parents often run alongside them holding on until they get control.

In the same way, when children go off to college, parents typically want to help with the costs. College is expensive, after all, and they don’t want their kids to be buried in student debt before they ever really get on their own two feet.

So many parents offer all the support they can—even if they have to borrow the money. Which is why the government created Parent PLUS Loans—federal student loans that are extended directly to biological or adoptive parents (and, in some cases, stepparents) of undergraduate students.

The loans, which allow parents to borrow up to the cost of attendance at their student’s school, minus any other forms of financial aid received by the student, are relatively easy to get. They do require a credit check, but many private lenders have stricter eligibility criteria.

Direct PLUS Loans for parents, commonly called Parent PLUS Loans, are popular. According to the National Student Loan Data System, as of the second quarter of 2019, at least 3.5 million borrowers currently owe a collective $93.9 billion in Parent PLUS Loans.

Unfortunately, that’s becoming a problem. The Brookings Institute reported at the end of 2018 (the most recent report from them on the topic) that repayment outcomes for parent borrowers appear to be getting worse as balances continue to increase.

“Many parents supporting college students are saddled with large debt burdens,” the report states, “ultimately repaying just enough to avoid default and sometimes owing significantly more than their initial balance.”

Well-intentioned borrowing can end up backfiring on parents, who could be making loan payments for years or even decades, depending on the student loan repayment plan they choose.

That might not seem like a big deal when the loan is new—especially if the parents are nowhere near retirement age. But as the payments drag on, long after those children are settled and doing fine—perhaps with families of their own—it might make sense to rethink the debt and how it should be repaid.

For some parents, that could mean refinancing the debt with a private lender, with the goal of getting lower monthly payment or a lower interest rate.

Some private lenders, like SoFi, allow the child to take out a refinanced loan to pay off the Parent PLUS loan. Or parents could set up an arrangement to have the child pay the Parent PLUS loan once they graduate from college.

Either way, Parent PLUS Loan refinancing is an option for getting that debt load under control. Here’s a guide to some key pros and cons and some steps to getting started:

1. So What Exactly Is Parent PLUS Loan Refinancing?

Parent PLUS Loans are federal loans offered to parents of undergraduate students. Refinancing these loans means consolidating them into one new loan from a private lender, ideally with a lower interest rate and/or better loan terms.

2. What Are the Benefits of Parent PLUS Loan Refinancing?

There are few reasons Parent PLUS Loan refinancing can make sense for a family. Moving to one manageable payment with a potentially lower interest rate might make it possible to pay off the loan faster and for less money overall.

Direct PLUS Loans typically have a higher interest rate than other federal student loans, and competitive private lenders (including SoFi) can potentially offer lower rates to qualifying borrowers.

3. Is There a Downside to Refinancing?

Yes. Federal Parent PLUS Loans come with certain borrower protections that private loans don’t offer. Payments can be deferred, and some or all of the debt may be discharged in the event of parental disability or bankruptcy or if the school closed.

(To make Parent PLUS Loans eligible for income-contingent repayment forgiveness—the only income-driven repayment plan Parent PLUS Loans are eligible for—the loans must be consolidated with a Direct Consolidation Loan—see the next topic.)

These federal benefits will be lost when refinancing to a private loan. However, some lenders offer their own benefits. For example, SoFi member benefits include unemployment protection for those who qualify, career services, networking opportunities, and a rate discount on additional SoFi loans.

4. What’s the Difference Between a Federal Consolidation Loan and Private Loan Refinancing?

A federal Direct Consolidation Loan allows borrowers to combine multiple federal education loans into one more manageable payment.

And it may give borrowers access to additional federal loan repayment plans (including the income-contingent repayment plan). But it’s generally aimed at lowering payments by lengthening the amount of time agreed upon to pay the loan—not by lowering the interest rate.

The new fixed interest rate on a Direct Consolidation Loan is the weighted average of the interest rates on the loans that are being consolidated, rounded up to the nearest eighth of a percent. Also, parents can’t put a federal consolidation loan in their child’s name or transfer their debt to their child. So it is not the same as refinancing a Parent PLUS Loan through a private lender.

5. What Should Families Consider Before Moving Forward With Parent PLUS Loan Refinancing?

When refinancing, the new interest rate and overall eligibility for the loan may be determined by a number of factors. A bumpy credit history can affect a person’s ability to refinance.

Refinancing can be an especially attractive option for those with a steady income and strong credit histories. A borrower’s debt-to-income ratio and ability to pay when making lending decisions are typically also factors, but every lender has different criteria—so shopping around to compare offers is wise.

6. How Can Parents Get a Refinanced Loan in Their Name?

Parents can research the best refinancing interest rates, loan terms, and other benefits online, then apply for a new loan.

If the application is accepted, parents can use it to pay off the Parent PLUS Loan, then begin making scheduled payments to the new lender. The child can make payments on it if they choose as well, but the loan will still be in the parents’ names.

7. Can Parents Use Parent PLUS Loan Refinancing to Transfer That Debt Into the Child’s Name?

The short answer is “no.” The longer answer is, “but there’s another option.”

There’s no federal repayment program that will allow you to transfer your Parent PLUS Loan to your child. If the child is offering (or, at least, willing) to take over the debt, however—and if they have the means to make the payments—refinancing with a private lender can make that possible. In this case, it’s the child, not the parent, who applies for the loan.

With a few private lenders (SoFi included), your child can take out a refinanced loan and use it to pay off their parents’ Parent PLUS Loan. Your child still has to qualify and provide additional documentation (check with each lender to understand what’s required). And just like any would-be borrower, a solid credit history and a secure income (among other factors) help determine the interest rate offered.

If the child’s refinanced loan application is accepted, they can take over their parent’s PLUS loan and start paying it off. If there are any bumps in the road for the child, such as limited work history or adverse credit, parents could agree to co-sign for the new refinanced loan.

It’s important to remember, though, that a co-signer is promising to pay off the debt if the borrower stops making payments. So, parents who co-sign are still on the hook if their child can’t come up with the money every month.

If that scenario has your head spinning, it’s understandable. Refinancing might not be right for every family. But if you’re one of the many Parent PLUS borrowers who ends up with more debt than expected, refinancing to a private loan could be an option worth considering.

Interested in refinancing your Parent PLUS Loan? SoFi offers competitive interest rates, member benefits, no fees, and a quick and easy online application process.


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IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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From One Child to Two: How to Financially Plan

From diapers and childcare to driving and college, the costs of raising children are immense. Cost is actually one of the main reasons more people are choosing not to have children, or to only have one. According to the USDA, the cost of raising a child up to the age of 18 is $233,610 . So, when you’re deciding whether you want to have more kids, figuring out whether or not you can afford it is usually a major factor.

But what, specifically, should you consider? You’ll need to make some estimates about the costs of raising your future child from birth through financial independence, which is (hopefully) when they graduate from college.

There are some obvious expenses, but don’t forget hidden costs such as increased property taxes and maintenance if you decide to move into a large home. Let’s go over a few of the largest expenses you’ll want to think about.

Do You Need More Space?

Housing-related costs are the largest expenses for most families. These include your rent, or mortgage, insurance, and property tax, as well as your utilities. In planning for Baby #2, ask yourself if you need more space to accommodate your growing family.

Remember, babies are small and don’t need a lot of their own space in the first year—so you may want to wait and see how it goes. It’s recommended that each person in a home have around 200 to 400 square feet of living space. If you have a family of four, ideally you would have about 2400 square feet of space, which is about the national average for home size.

Why so much space? Although children can share a room when they’re younger, they may not always get along and it’s important for them to feel that they have their own private space as they grow up.

Keep in mind, though, that a larger house also requires more heating and cooling, may have higher property taxes, and is generally more expensive to keep clean and maintain.

If staying in your current home isn’t an option, research the cost of moving to a bigger space and determine the impact it will have on your monthly spending before making any decisions.

How About Childcare?

For most dual-income families, childcare is the second largest expense after housing. Childcare costs can take up as much as 37% of a single parent’s income. In some states, the annual cost of childcare can be over $20,000 per year. The median national income for a married couple is about $87,000, and childcare can take up a large portion of that.

Shockingly, in every region of the U.S., childcare costs are about double the cost of one year’s tuition to an in-state public university. In some states, only around 5% of families can afford childcare.

Even if you or your partner are a stay-at-home parent, you may have your first child in preschool or want some childcare to maintain your sanity.
Look at data on the Economic Policy Institute to find average costs for your state, and read up on how to decide between childcare options.

Is paying for high quality childcare worth the cost? Studies say yes. As soon as children are born they begin learning and bonding with others. Putting them in the care of a trained professional can have a major impact on their development and success later in life.

Of course, keep in mind that these costs are temporary. Your kids will grow up and go to kindergarten before you know it—and, depending on the age difference between them, you may not have many years of paying for childcare for two.

What About Paying for College?

If you have two children under the age of three, the full cost (room, board, tuition, etc.) of a four-year public university education will be approximately $565,000 by the time they are in college. This assumes the costs of college grow 5% each year until they start school, which has been the trend.

This means that you need to be saving over $22,000 per year to fully pay for college by your kids’ respective freshman years, or $15,000 per year to cover all qualified expenses. Of course, you can take out loans and apply for financial aid or scholarships, but if you’re planning to pay for college, you should be aware of the magnitude of savings required.

A few ways you may want to consider when planning for college tuition payments are:

•   Starting a 529 Plan: Many families open a 529 Plan for their young child and put money into it over time to help pay for college. The money can be used tax free for qualifying education costs. Parents looking to invest their money for future education costs can try actively investing their money through SoFi. It is an easy, cost effective (commission free) way to get started investing in stocks and ETFs. SoFi also offers automated investing for those parents who want to take the hands-off approach to investing.

•   Applying for scholarships: There are many different scholarships students can apply for, even some through the universities themselves.

•   Filling out the FAFSA: The Free Application for Federal Student Aid determines if a student qualifies for financial aid rewards.

•   Applying for federal loans: Private education loans can come with stringent repayment requirements, so it’s smart to look into federal loans as well.

•   Income Share Agreements: With ISAs, students receive money to pay for college, and in return they agree to pay a portion of their future income back to the school. Unlike traditional loans, they pay zero interest.

It’s helpful to think about if you have room in your spending plan to save for college now or whether to wait until your children are out of daycare. For most parents, it makes sense from a cash flow perspective to wait until kindergarten to start saving for college.

What Else Do You Need to Buy?

Here’s some good news: Many families find that the costs of a second baby’s first few months are much lower than those of the first’s. After all, you probably already have most of the supplies you need.

Plus, you probably have a lot of new friends through playgroups or pre-school who may have already gone through Baby #2 phase and can give or loan you things you need.

Of course, you may need (or want) some new clothes and toys, or you may decide to redecorate your nursery all together.

If you’re a middle income family, you can expect to spend around $233,610 on your child from birth until age 18. Some of the estimated costs you can expect to have include:

•   Nursery Furniture: $130 to $4,000
•   Car Seat: $80 to $500
•   Stroller: $100 to $1,000
•   Diapers: $270 to $810 for the first year. Save money by buying and washing your own cloth diapers.
•   Formula / Food: $100 to $3500
•   Food for an older child: $2845 per kid per year
•   Medical Care: $1830 per kid per year
•   Clothing and accessories: To get as much clothing for free as you can, fill up your baby registry and ask friends and neighbors for their unneeded outfits.
•   Extracurricular Activities and Sports: $500-$1000 or more per year

To save, check out kids’ consignment shops. Some items have never been worn, and books and toys are available at steep discounts. Nextdoor and Craigslist are good resources to find baby gear at rock bottom prices or for free!

Also keep in mind the costs of labour and childbirth itself. If you need to do IVF (In Vitro Fertilization), that could cost you around $20,000, or surrogacy could cost $30,000. Not all health insurance covers all of your pregnancy and childbirth costs, so you may want to look into IVF loans as well.

The Hidden Cost of Children

In addition to the monetary expenses associated with having a second child, you will also be dedicating more of your free time, and potentially even your career. Although spending time with your children can be wonderful, you will have less time to see your friends, exercise, and even get work done.

Women spend around 2.5 hours each day on domestic and childcare responsibilities. Mothers are often pushed out of their jobs or choose to leave them in order to spend more time raising their children.

You’ll want to find out what maternity (and paternity) leave your company offers, and decide if you want to take additional, unpaid time off. Many more people are also choosing to be single parents, which means they have to put in more time and may only have a single income to draw from.

Start Planning Your Baby Budget Today

As you can see, having a second child can be costly, and it’s important to start planning and saving early. If you budget properly, you’ll save yourself a lot of stress later on, and be able to afford better education and lifestyle choices for you and your kids.

Whether you want to track your monthly expenses and stick to a budget, or you want to set up investment plans to grow your savings over time, the SoFi app is a great tool for parents. Using a SoFi Money® cash management account, you can track your spending to help better reach your short and long term goals.

With SoFi Invest®, you can buy stocks online and other assets. The Active Investing platform lets you select each stock you want to invest in, or you can use the Automated Investing platform and allow SoFi’s professional team to select groups of stocks for you to invest in. SoFi’s platform has zero fees, and you only need a small amount of money to get started using it.

If you need personalized financial advice, SoFi offers free consultation with their team of investment advisors.

Want help financially planning for your family? Set up a free appointment with a SoFi financial planner to help you navigate the joys—and financial implications—of parenthood.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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Should You Use Your Roth IRA to Buy Your First Home?

Update: The deadline for making IRA contributions for tax year 2020 has been extended to May 17, 2021.

If you are a young professional, you most likely have multiple savings goals, including retirement and buying your first home. Saving for both can be challenging while also covering your monthly expenses.

When you factor in things like student loan payments and any other debt, not to mention a bit of wiggle room to actually live your life, you might find yourself struggling to balance it all. You don’t want to spread yourself thin with all of the different payments, so it is a good idea to get an understanding of how much home you can afford. You can get a good idea of how much you can afford by using our home affordability calculator.

On one hand, if you start saving early for retirement, your money has more time to grow with compound interest. On the other hand, saving for a down payment on a home in today’s market can take years depending upon the purchase price and loan program you choose. According to research by Zillow, it takes about seven years for home buyers to save a 20% down payment for the median value of a home in the U.S.

While 20% down is often thought of as the golden rule for mortgage down payments, these days it’s not required. In 2018, the median down payment on a home was around 5%, according to HousingWire.

There’s one tool of many that can help you reach both your home and retirement goals without requiring you to plan your entire life out before you turn 30: A Roth IRA.

While you’ve probably been told that you should never tap into your retirement money, using cash from a Roth IRA to fast-track your dream of home ownership can be a worthy exception.

Here are a few reasons you may consider leveraging a Roth IRA to become a first-time homeowner without having to delay your retirement goals, and some tips on how to go about it.

The Low-Down on a Roth IRA

IRAs are designed to help you save for retirement. However, a Roth IRA is different from other retirement accounts, such as 401(k)s and traditional IRAs. The main distinction is that you contribute after-tax dollars to a Roth IRA because contributions are not tax deductible.

Since you already paid taxes on the money before putting it into the account, the distributions you take when you retire can be withdrawn tax-free.

Compare that to traditional IRAs where you reap the tax benefits at the time of contribution (they’re deducted from your income on your tax return). The money is taxed when it is withdrawn in retirement, which according to IRS rules is after age age 59 ½.

Under certain circumstances, distributions can also be withdrawn tax free before retirement from a Roth IRA. So long as the account has been open for at least five years distributions can be withdrawn tax free; in the case of disability, if the distribution is made to a beneficiary after the account holder’s death, or in the case that the withdrawal fulfills the requirements for the first time home buyer exception.

But here’s the real game-changer: Unlike a traditional IRA, you can withdraw the money you contributed to a Roth IRA at any time without penalty.

Things get a little more complicated when it comes to your investment earnings. In very specific instances—buying your first home, for one—you are allowed to withdraw up to $10,000 of investment earnings from a Roth IRA with no tax or penalty. The only stipulations are that you must have had the account open for five years, and that the withdrawal is for your very first home.

Traditional IRAs also qualify for the first time home buyer exception. While this exception allows first time home buyers to avoid the 10% penalty, the withdrawal would still be charged income tax. By comparison, if you wanted to withdraw money from your 401(k), you would likely pay taxes and a penalty. Whichever retirement account you decide to go with, SoFi is here to help. Start contributing to your account today by opening a online ira.

Crunching the Numbers

The best way to explain how this all works is by running the numbers. Let’s say you open a Roth IRA in 2019, contribute $6,000 per year (the current maximum contribution allowed) for five years, and hypothetically earn 7% per year on that money.

After three years, you would have made $30,000 in contributions and earned about $4,500 on your investment. If you continue to save $6,000 for two more years, your contributions would climb to $42,000 and the investment earnings would be around $9,900.

After five years, you can withdraw all of your contributions and up to $10,000 of your investment earnings—but you might not have earned that much yet.

Because this withdrawal benefit is available only once in a lifetime, ideally, you might want to time it so that you only tap into your Roth after you’ve earned the full amount allowable.

One other important thing to keep in mind: Roth IRAs have contribution limits based on your income. For example, if you are single and make less than $122,000 in 2019 , the maximum Roth IRA contribution is $6,000 , even if you participate in a retirement plan through your employer.

If you make more than that, the benefit begins to phase out. If you make more than $137,000 as a someone who is filing single, you’re not able to contribute to a Roth IRA.For more information about IRA accounts and contribution, check out SoFi’s IRA calculator.

To recap, you can withdraw from the investment earnings in your Roth IRA to buy a house if:

•   You are a first time home buyer.

•   It has been at least five years since you first contributed to your Roth IRA (the five year mark starts on January 1st of the year you made your first contribution.)

•   You only withdraw up to $10,000 within your lifetime (pre-retirement).

•   You use the funds to purchase, build, or rebuild a home.

•   You can also use the money to help fund the purchase of a home for your child, grandchild, or parent who qualifies as a first time home buyer.

•   The funds must be used within 120 days of withdrawal.

You can withdraw from the contributions you have made into your Roth IRA at any time, for any reason. There is no tax or penalty, and you can use the money however you like.

Qualifying as a First Time Home Buyer

Even if you have owned a home in the past, you may still be able to qualify as a first time home buyer and withdraw money from your Roth IRA.

According to the IRS, you qualify as a first time home buyer if “you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.”

So if the acquisition date (the date you enter into a contract to purchase a home or start building a home) is at least two years later than the last date you had any ownership interest in a primary residence home, you can qualify as a first time home buyer under this program.

Things to Consider Before Withdrawing from Your Roth IRA

Although using money from your Roth IRA may seem like an easy source to fund a down payment to purchase your first home, it might not be the right decision for everyone. Before you cash out your Roth IRA, think about how it might broadly impact your financial future.

Where Will Your Money Work the Hardest?

Figure out where your money will be working harder for you. Keep market conditions in mind and compare your mortgage interest rate to the expected long term return you would earn by keeping your money in your Roth IRA.

It can be difficult to predict the stock market, but in the past 90 years, the average rate of return for the S & P 500 has hovered around 7%, and that’s adjusted for inflation. When money is withdrawn from the Roth IRA, the potential for additional growth is eliminated, as is the opportunity to benefit from compounding interest.

The housing market is also subject to fluctuation. Consider things like the location and housing market where you plan to buy. In addition, it’s worth factoring in things like current mortgage rates. Another factor that could influence your decision—mortgage interest is generally tax deductible up to $750,000.

There are a lot of moving pieces to consider when determining whether or not to use your Roth IRA to fund a down payment on a house. Consulting with a financial advisor or other qualified professional could be helpful as you weigh your options.

What Mortgage Options Are Available?

Conventional wisdom suggests a 20% down payment when buying a house. And generally, a larger down payment can mean improved loan terms and lower monthly payments.

But if it requires tapping into your retirement fund you may want to think twice. Before committing to a mortgage, explore your options—some mortgages, such as Fannie Mae’s 97% program, offer as little as 3% for a down payment.

How Will Your Retirement Goals Be Impacted?

Everyone’s financial journey is different. Financial and retirement goals are deeply personal, as are the amount of money an individual is able to save each month. For most people, taking money out of a retirement account early will hinder their progress.

Plus withdrawing the money early means you’ll miss out on the tax free growth offered by a Roth IRA. These negative impacts would need to be weighed against any market appreciation you may gain through homeownership.

How Will Your Retirement Goals Be Impacted?

Everyone’s financial journey is different. Financial and retirement goals are deeply personal, as are the amount of money an individual is able to save each month. For most people, taking money out of a retirement account early will hinder their progress.

Plus withdrawing the money early means you’ll miss out on the tax free growth offered by a Roth IRA. These negative impacts would need to be weighed against any market appreciation you may gain through homeownership.

Making This Strategy Work for You

In a perfect scenario, you wouldn’t choose to become a homeowner at the expense of draining your retirement nest egg. Instead, explore other options such as opening a Roth IRA and treat it almost like a savings account, with the intention of using it for your first home purchase five years (or more) from now.

Unlike other investment accounts, your investment returns are tax free, and—contrary to other retirement products—you wouldn’t even be taxed when it comes time to withdraw, as long as all Roth IRA requirements are met.

Ideally, at the same time, you would continue to fund other retirement accounts, such as the one offered through your employer. Even though home ownership is your immediate goal, you’d likely be working toward other longer-term financial goals (like retirement) as well.

And what if you don’t end up buying a home, or you come up with another source of down payment? A Roth IRA is still a win, since you can leave that money be and let it continue to grow for your retirement.

There are a few other circumstances in which you can likely avoid penalties on a withdrawal. These include qualified higher education expenses, some medical costs, and other hardships. Be sure to consult with your tax professional to clarify any of these exceptions before you move forward.

It’s also worth noting that traditional IRAs also qualify for a first time home buyer exception. This exception allows for up to $10,000 to be withdrawn from the IRA before the age of 59 ½, to purchase a house as a first time home buyer and avoid penalties.

In this case, income tax will likely need to be paid but qualifying withdrawals won’t be subject to the additional 10% early withdrawal penalty.

For most young adults with other financial obligations and an early career-level salary, using a Roth IRA to help save for a down payment will require an examination of personal priorities.

Getting Professional Advice

Only you can determine if using money from your Roth IRA to purchase your first home is a trade-off you are willing to make. As you’re starting to make these large life decisions, it can be very useful to seek out tools and resources to help you through the process.

SoFi offers an integrated platform where you can invest toward your financial goals and get personalized advice from qualified professionals.

With SoFi Invest®, you can set up an IRA or another investment vehicle and choose between active or automated investing, depending on your personal preference and financial goals.

Schedule a complimentary consultation with a SoFi Financial Planner to discuss your goals and develop a plan to help you reach them.

Learn more about SoFi Invest now, and start online investing smartly.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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