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You’ve saved for a down payment, and you’re ready to cover closing costs. But do you have enough cash and assets to cover your mortgage reserves?

Lenders sometimes require that homebuyers have mortgage reserves in order for the loan to be approved at application and then funded on the day of closing. But what are mortgage reserves, and how much might you need to have set aside? Below, we’ll review what assets qualify as mortgage reserves and when you might need them.

What Are Mortgage Reserves?

Mortgage reserves are the cash and other assets that homebuyers can access in the event they need help covering their mortgage payments for a set number of months. Such reserves are a kind of fail-safe in the event a buyer is laid off or otherwise loses a revenue stream.

In some cases, lenders require you to prove you have such reserves before funding your home mortgage loan. Requirements can range from as little as one month of reserves (i.e., all your mandatory housing costs for a month) to six months or more.

Luckily for homebuyers, lenders consider more than just the money in your checking and savings accounts as mortgage reserves. Money and assets that can be classified as mortgage reserves include:

•   Money in a deposit account (not only checking and savings, but also money market accounts and certificates of deposit)

•   Stocks and bonds

•   Trust accounts

•   Cash value in a life insurance policy

•   Vested retirement funds, such as money in 401(k)s and IRAs

Keep in mind that money in your savings account that you’ll use for the down payment and closing costs does not count toward your mortgage reserves. Mortgage reserves are money and assets that you will have access to after closing.

Still crunching the numbers on your dream home? Use our mortgage calculator to understand just how much you might spend.

Recommended: What Is a Bank Reserve?

Do All Types of Mortgages Require a Reserve?

Not every borrower will need mortgage reserves when buying a home. Requirements depend on the type of mortgage you’re applying for, as well as your overall financial picture (credit score, debt-to-income ratio, and size of your down payment, for instance).

The table below breaks down potential mortgage reserve requirements by loan type:

Why do these requirements vary? Lenders may have different rules depending on whether a government agency is guaranteeing the loan, or whether the home will be your primary residence or if it’s an investment property.

Lenders may also have stricter mortgage reserve requirements if you’re making a small down payment, you have a high debt-to-income ratio, or if your credit score is too low (typically anything below a 700 credit score can warrant larger reserves if the borrower is making a down payment of less than 20 percent).

Recommended: Tips to Qualify for a Mortgage

Tips for Building Your Mortgage Reserves

Saving up for a down payment can be challenging on its own, but cobbling together enough cash reserves for a mortgage loan can make it even tougher. Here are some tips for building your home loan reserves:

Decrease Spending

Take a good, hard look at your budget to figure out how to stop spending money that you could be saving. Common culprits include dining out, streaming services, cups of coffee on your way to work, and memberships and subscriptions. Determine what you can cut out of your life — just for now — to reduce your monthly spending.

You may also be able to lower your utility bills by making some simple, eco-friendly updates in your current home. Also consider carpooling or using public transportation to reduce fuel costs, and raise your deductible on your car insurance to get a lower monthly premium. Finally, clip coupons and look for deals when shopping for groceries.

Use a Certificate of Deposit

If you know you’ll be buying a home within a few years, store some savings in a certificate of deposit (CD). Though the money is less liquid than funds in a savings account, it still counts toward your mortgage reserves and a CD may offer a higher interest rate, so your money will grow faster.

Set Aside a Chunk of Your Income

When you get each paycheck, intentionally move some into a high-yield savings account that’s earmarked for your mortgage reserves. (You can also do this when saving for the down payment for your home.)

Automatically setting aside some of your income for a specific purpose can make it a lot easier to resist the temptation to spend it on other things, like clothes and vacations.

Take Up a Side Gig

If you’ve cut all the expenses you can and you’re still coming up short, think about how you can earn more money. You can always ask for a raise at work, but you may have more luck taking on a side hustle to earn extra income. That doesn’t always mean getting a second job — there are passive income ways to build wealth.

Boost Your Retirement Contributions

Mortgage reserves don’t have to be money in your bank account. Retirement contributions to IRAs and 401(k)s (if vested) also count toward your reserves, and these may grow faster than money in a high-yield savings account, depending on how the market is doing.

Even better, if your employer matches contributions to a 401(k), that’s an easy way to quickly increase your mortgage reserves. And it’s free money!

What Happens If You Don’t Meet the Mortgage Reserve Requirements?

Mortgage reserve requirements are called that for a reason: They’re required. Just like the down payment and closing costs, if your lender asks for mortgage reserves, you will absolutely need them in order to have your mortgage loan funded. You’ll be asked to note these assets on a mortgage application.

If the lender discovers prior to the closing that you don’t have the reserve for the mortgage, it can back out.

The Takeaway

Mortgage reserves are cash and assets you can use to cover your housing costs for a set number of months if something happens and you suddenly can’t afford your mortgage. Depending on your credit score, down payment, the type of property you’re purchasing, and the type of mortgage loan you’re looking for, you may need to have mortgage reserves set aside in order to get approved for a home loan.

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

FAQ

What is the difference between cash reserves and mortgage reserves?

Mortgage reserves are a type of cash reserves. Cash reserves broadly refers to money set aside for short-term needs and emergencies, like sudden job loss; cash reserves can get you through a certain number of months’ worth of expenses. Mortgage reserves are money and assets put aside specifically to cover housing costs for a set number of months and may be required for some home loans.

Mortgage reserves are specifically money set aside to cover housing costs for a set number of months and may be required for some home loans.

Can I use retirement savings as mortgage reserves?

Retirement savings can count toward your mortgage reserves. If you’re using 401(k) funds in the total calculation, they must be vested.

How long do I need to maintain mortgage reserves?

Lenders may require mortgage reserves as a condition of giving you a mortgage. Usually, they can’t ensure that you keep that money on hand after the closing. However, it’s a good idea to have mortgage reserves available if you need them, especially since assets like retirement accounts qualify;

Can I use gift funds for mortgage reserves?

You can use gift funds for mortgage reserves for an FHA loan, as well as certain other loans with some restrictions. Gift funds refers to money or assets donated to a homebuyer, usually from a loved one, without the expectation of repayment.

Photo credit: iStock/FilippoBacci

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

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

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

SOHL-Q325-037

Many homebuyers swimming in the pool of new mortgage terminology may wonder how mortgage principal differs from their mortgage payment. Simply put, your mortgage principal is the amount of money you borrowed from your mortgage lender.

Knowing what your mortgage principal is and how you can pay it off more quickly than the average homeowner could save you a lot of money over the life of the loan. Here’s what you need to know about paying off the principal on a mortgage.

Mortgage Principal Definition

Mortgage principal is the original amount that you borrowed to pay for your home. It is not the amount you paid for your home; nor is it the amount of your monthly mortgage payment.

Each month when you make a payment on your mortgage loan, a portion goes toward the original amount you borrowed, a portion goes toward the interest payment, and some goes into your escrow account, if you have one, to pay for taxes and insurance.

Your mortgage principal balance will change over the life of your loan as you pay it down with your monthly mortgage payment, as well as any extra payments. This changing balance may be called your outstanding mortgage principal. (While there is a difference between outstanding mortgage principal vs. mortgage principal balance, the terms are often used interchangeably.) Your equity will increase while you’re paying down the principal on your mortgage.

Mortgage Principal vs Mortgage Interest

Your mortgage payment consists of both mortgage principal and interest. Mortgage principal is the amount you borrowed. Mortgage interest is the lending charge you pay for borrowing the mortgage principal. Both are included in your monthly mortgage payment, and your mortgage statement will likely include a breakdown of how much of your monthly mortgage payment goes to mortgage principal vs. interest.

When you start paying down principal, as the mortgage amortization schedule will show you, most of your payment at this point will go toward interest rather than principal. Later on in the life of your loan, you’ll be paying more mortgage principal vs. interest.

Hover your cursor over the amortization chart of this mortgage calculator to get an idea of how a given loan might be amortized over time if no extra payments were made.

Mortgage Principal vs Total Monthly Payment

Your total monthly payment is divided into parts by your mortgage servicer and sent to the correct entities. It includes principal plus interest, and often other components.

Fees and Expenses Included in the Monthly Payment

Your monthly payment isn’t typically just made up of principal and interest. Most borrowers are also paying installments toward property taxes and homeowners insurance each month, and some pay mortgage insurance, too. In the industry, this is often referred to as PITI, for principal, interest, taxes, and insurance.

A mortgage statement will break all of this down and show any late fees.

Escrow for Taxes and Insurance

Among the many mortgage questions you might have for a lender, one should be whether you’ll need an escrow account for taxes and insurance or whether you can pay those expenses in lump sums on your own when they’re due. Many lenders prefer to take on the responsibility for your taxes and insurance in order to protect their investment, but they will charge you for those costs in your mortgage payments and hold that money in an escrow account until needed.

Conventional mortgages typically require an escrow account if you borrow more than 80% of the property’s value. In the world of government home loans, FHA and USDA loans need an escrow account, and lenders usually want one for VA-backed loans. If you live in a flood zone and are required to have flood insurance, an escrow account may be mandatory.

Private Mortgage Insurance (PMI)

When you get a conventional loan and put down less than 20% of the home’s value, your lender will require you to pay private mortgage insurance (PMI).It will probably want to handle this through an escrow account also, to avoid the possibility of your making late payments.

Benefits of Paying Additional Principal on Mortgage

Making extra payments toward principal will allow you to pay off your mortgage early and will decrease your interest costs, sometimes by an astounding amount.

If you make extra payments, you may want to let your mortgage servicer know that you want the funds to be applied to principal instead of the next month’s payment.

Could you face a prepayment penalty? Conforming mortgages signed on or after January 10, 2014, cannot carry one. Nor can FHA, USDA, or VA loans. If you’re not sure whether your mortgage has a prepayment penalty, check your loan documents or call your lender or mortgage servicer.

Reducing Interest Over Time

If you make additional payments toward your principal, you will decrease the amount of money that you’re being charged interest on, as your principal balance drops. This means that in the long run, you would end up paying less interest than if you simply made your payments as scheduled.

Shortening the Loan Term

It can be helpful – and motivating – to keep an eye on how your mortgage payments are impacting your principal balance and how much of them is going to interest. There are a couple of easy ways to do this.

Amortization Schedules

An amortization schedule can be a big help in understanding your mortgage payments and how you’re paying down principal on your mortgage. Essentially, it’s a chart that lists each planned payment for the entirety of your mortgage, detailing how much of each will go to principal and how much to interest. You’ll also see how much principal you still owe after each payment.

To get a full amortization schedule for the life of your loan, you may need to sign on to your account online or contact your lender and request the schedule.

Mortgage Statements

The easiest way to keep track of how much you’re currently paying on your mortgage principal and interest is to look at your mortgage statements every month. The mortgage servicer will send you a statement with the amount you owe and how much it will reduce your principal each month. You may also see the breakdown for your previous payment and/or for the year to date, as well as your total outstanding mortgage principal. If you have an online account, you can usually see the numbers there.

How to Pay Down Mortgage Principal Balance

Paying off the mortgage principal is done by making extra payments. Because the amortization schedule is set by the lender, a high percentage of your monthly payment goes toward interest in the early years of your loan.

When you make extra payments or increase the amount you pay each month (even by just a little bit), you’ll start to pay down the principal instead of paying the lender interest.

It pays to thoroughly understand the different types of mortgages that are out there.

Biweekly Payment Strategy

One tactic homeowners use is biweekly payments. Traditionally, you pay your mortgage once a month. But if you pay it every two weeks – which often aligns with pay schedules – you’ll be making an extra payment every year. That may not sound like much, but it can let you finish your loan term up to six or more years early.

Applying Windfalls Toward Principal

A relatively painless way to prepay principal is to apply any “extra” money you get – like a work bonus or an unexpected bequest – toward your principal. If you have a solid emergency fund in place and no higher-interest debts to pay off, this could be a good place to put your money.

The Takeaway

Knowing exactly how mortgage principal, interest, and amortization schedules work can be a powerful tool that can help you pay off your mortgage principal faster and save you a lot of money on interest in the 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.

FAQ

What is the mortgage principal amount?

The mortgage principal is the amount you borrow from a mortgage lender and must pay back. It is not the same as your mortgage payment. Your mortgage payment will include both principal and interest, as well as any escrow payments you need to make.

How do you pay off your mortgage principal?

You can pay off your mortgage principal early by paying more than your mortgage payment. Since your mortgage payment is made up of principal and interest, any extra that you pay can be taken directly off the principal – just make sure that your lender knows you want the extra funds applied there. If you never make extra payments, you’ll take the full loan term to pay off your mortgage.

Is it advisable to pay extra principal on a mortgage?

Paying extra on the principal will allow you to build equity, pay off the mortgage faster, and lower your costs on interest. Whether you can fit it in your budget or if you believe there is a better use for your money depends on your personal situation.

What is the difference between mortgage principal and interest?

Mortgage principal is the amount you borrow from a lender; interest is the amount the lender charges you for borrowing the principal.

Can the mortgage principal be reduced?

When you make extra payments or pay a lump sum to your lender, you can specify that those funds should be applied to your mortgage principal. This will reduce your principal and your interest payments.

Does your monthly principal payment change?

Yes. Since loans are typically amortized, at the beginning of the loan term, most of your monthly payment will be applied toward your interest charges. Over time, that balance will shift as you pay down your mortgage, and principal will be most of each payment that you make closer to the end of your loan. Your decreasing principal amount is sometimes called your outstanding mortgage principal vs. mortgage principal balance.

Photo credit: iStock/PeopleImages

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

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

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

SOHL-Q325-035

What happens when you pay off your mortgage? You may have some paperwork and account switching (such as property taxes) to take care of. And you may look forward to greater cash flow.

But is paying off a mortgage always the right move? In some cases, a person who is about to pay off a mortgage may want to consider a couple of options that might make more sense for their particular financial situation.

Learn more about the payoff path and alternatives here.

Should I Pay Off My Mortgage Early?

Paying off your mortgage is a fantastic milestone to reach, but it’s not without trade-offs. Here are a few considerations to help you make the best decision for your situation.

Pros of Paying Off Mortgage Early

The upsides of paying off your mortgage early may seem obvious. You won’t need to make that monthly payment any longer, which can free up cash. You’ll save much of the interest you would have paid over the life of your home loan. And you’ll be reducing the amount of money you’ll need during your retirement, which is good planning. Plus, with no mortgage, you’ll be minimizing your risk of foreclosure.

Cons of Paying Off Mortgage Early

There are potential negatives, as well. If you’re making extra payments, you may miss out on investment opportunities and alternative uses for your money, and after you pay off your mortgage, much of your cash will be tied up in your home equity. Additionally, if you’re paying the loan off early, there may be prepayment penalties, depending on the terms of your mortgage. And once you’ve paid off your mortgage, you won’t be able to deduct your mortgage insurance from your taxes, if you’re someone who took advantage of that option.

💡 Quick Tip: Thinking of using a mortgage broker? That person will try to help you save money by finding the best loan offers you are eligible for. But if you deal directly with an online mortgage lender, you won’t have to pay a mortgage broker’s commission, which is usually based on the mortgage amount.

What Happens After You Pay Off Your Mortgage?

Here’s how mortgage payoff works:

•   To find out the amount you need to pay off your mortgage, the first thing you need to do is request a mortgage payoff letter. If you pay the amount on your last statement, you won’t have the right amount. A mortgage payoff letter will include the appropriate fees and the amount of interest through the day you’re planning to pay the loan off.

•   Know that the payoff letter is only good for a set amount of time, and make sure to get your payment in on time.

•   Follow the instructions you’re given about where and how to submit the payment.

•   Once you’ve sent the payoff amount, your mortgage lender is responsible for sending you and the county recorder documentation to release the mortgage and lien on your home.

•   You should be sent any funds remaining in escrow.

•   You will want to contact your insurance company about this change if you paid your lender for your homeowners insurance along with your mortgage payment and have the bills switched over to you directly.

•   If your property taxes were paid as part of your mortgage payment, you will want to contact your local tax authority about shifting those bills to you as well.

What Documents Do You Get After Paying Off a Mortgage?

After paying off your mortgage, you should receive (or have access to) documents proving you paid off the mortgage and no longer have a lien attached to your home.

Mortgage Payoff Statement

As noted earlier, when you’re thinking about paying off your mortgage, you can request a payoff letter that will detail the exact amount you need to pay off your mortgage, what it covers, and when it’s due. If you decide to follow through, your lender may send you a payoff statement showing that your loan has been paid in full.

As further evidence that your mortgage has been satisfied, you may receive your canceled promissory note. This is your promise to pay your mortgage, and you signed it when you closed on your home. Now that your mortgage has been satisfied, you may receive this document back with a “canceled” or “paid in full” marked on it, though it’s also possible you may have to call and request the document.

Satisfaction of Mortgage or Release of Lien

This is an official, signed document that your lender will prepare to confirm that you have fulfilled the conditions of the mortgage and the lender no longer has any claim to the property. Typically, this document will be filed with the county recorder (or other applicable recording agency) by the lender. It details the mortgage and states that the mortgage has been satisfied and the lien released. Ideally, you should receive notification from the filing authority once the document has been filed. Having this document on file can help expedite things if you later want to sell your home, for example.

What Should You Do After Paying Off Your Mortgage?

After you pay off your mortgage, you’ll need to take care of a few housekeeping items, as mentioned earlier.

Update Your Records and Insurance

You may be wondering what do you pay after your mortgage is paid off? Now that you have full title to your home, you’ll need to take on a few responsibilities your lender may have handled. Your lender will send you any remaining funds from your escrow account. But you’ll need to take care of the items funded through your escrow account, usually your taxes and homeowners insurance. Contact your tax authority to make sure you’ll get its messages going forward, and reach out to your insurance company to let it know of the change as well.

Plan for Ongoing Property Expenses

Without that escrow account, you’ll need to start budgeting for ongoing property expenses, including your property taxes and homeowners insurance. Fortunately, those costs will probably be far lower than the mortgage premiums you’ve been paying, so just be sure you budget in advance to cover them. As for other ongoing costs, like maintenance and utilities, you’ve likely been paying those while you’ve had your mortgage, but now you may want to budget for larger projects or additions to your home. It’s wise to make plans for that freed-up cash, whether it’s paying off other debts, shoring up your emergency fund, adding to your retirement fund, or building a garage. Cash you don’t make plans for has a way of slipping away.

Recommended: 2025 Home Loan Help Center

Is Prepaying a Good Idea?

Generally, paying off your mortgage early is a great idea. It reduces the principal, which in turn reduces the amount you’ll pay in interest over the life of your loan. Still, there are reasons that some homeowners consider not paying their mortgage off early.

Most lenders do not charge a prepayment penalty, but home loans signed before January 10, 2014, may include one. Some conventional mortgage loans (especially nonconforming loans) signed on or after that date may have a prepayment penalty that applies within the first three years of repayment. (The different types of mortgage loans include conforming and nonconforming conventional mortgages.)

The best way to find out if prepayment is subject to a penalty is to call your mortgage servicer. The terms of your mortgage paperwork should also outline whether or not you have a prepayment penalty.

Should You Refinance Instead?

Another option you might consider is refinancing your mortgage. There are several reasons you may want to refinance instead of paying off your mortgage.

Lower monthly payment. Getting a lower rate or different loan term may lower your monthly payment without requiring as much cash as a payoff. Be sure to check out current rates, and use a mortgage calculator to find out what a possible new payment would be.

Shorter mortgage term. Refinancing a 30-year mortgage to, say, a 15-year mortgage can keep you close to paying off your mortgage while also providing financial flexibility. Note that your monthly payments may increase, though you’ll likely save money in interest over the long term.

Spare cash. Whatever your need is — home renovations, college funding, paying off higher-interest debt — a cash-out refinance might be an option.

💡 Quick Tip: Compared to credit cards and other unsecured loans, you can usually get a lower interest rate with a cash-out refinance loan.

The Takeaway

What happens when you pay off your mortgage? After doing a jig in the living room, you’ll need to take care of a few housekeeping tasks and make plans for the extra money.

An alternative to consider: Would a refinance to a shorter term make more sense, or pulling cash out with a cash-out refi? It can be wise to review all your options as you move toward taking this major financial step.

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

FAQ

Is paying off your mortgage a good idea?

The answer depends on your individual situation. If you have the money and you’d love to shed that monthly obligation for good, paying off a mortgage can be a good idea. But if you’re worried about funding your retirement or losing opportunities to invest, paying off your mortgage may not be a good idea for you.

What do you do after you pay off your mortgage?

Ensure that you have received your canceled promissory note, and update your property tax and insurance billers on where to bill you. And remember what you do need to pay after your mortgage is paid off: Since you no longer will have a mortgage servicing company, you must pay your insurance and property taxes yourself.

Is it better to pay off a mortgage before you retire?

Paying off a mortgage could give you more money to work with in retirement. But if your retirement accounts need a boost, most financial experts contend that allocating money there is a better idea than paying off your mortgage. Paying off a mortgage when you have low cash reserves can also put you at risk.

Does paying off your mortgage early affect your credit score?

Surprisingly, paying off your mortgage early won’t affect your credit score much. Your credit score has already taken into account the years of full, on-time payments you made each month.

What documents prove your mortgage is paid off?

When you’ve paid off your mortgage, your lender will send you a number of documents indicating that your mortgage is paid off. These may include a mortgage statement showing your obligations were paid in full and/or a canceled promissory note. Additionally, the lender should have filed a satisfaction of mortgage or release of lien with your county recorder’s office. While you should keep all documentation pertaining to your mortgage payoff, if you haven’t, you may be able to request a copy from your county recorder.

Photo credit: iStock/katleho Seisa

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

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

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

SOHL-Q325-027

You may have heard that you should spend three months’ salary on an engagement ring. But that rule of thumb is now considered pretty outdated.

Instead, it can be a good idea to consider your particular financial and personal situation when calculating how much to spend. As a point of comparison, the average cost of an engagement ring is currently $5,200, according to the wedding website The Knot.

What follows are some guidelines that can help you figure out how much you should spend on an engagement ring, along with options for covering the cost.

The Average Cost of an Engagement Ring

According to The Knot’s 2024 data, the average cost of an engagement ring is around $5,200.

While that number may represent the average, the amount couples actually spend on a ring varies widely. In The Knot’s study, roughly one-third of respondents spent less than $3,000.

Why do rings vary so much in price? The cost of an engagement ring depends on a number of factors, including the size and quality of the stone, where the gem was sourced, how the gem is set, and the type of metal chosen (such as yellow gold, white gold, or platinum). There may also be markups that come along with a luxury brand name.

Diamond engagement rings, sourced from a mine, tend to be the most expensive choice. But there are many other, less costly options, such as lab-grown diamonds, moissanite (a lab-grown gem that looks like a diamond), and semi-precious gemstones (such as tourmaline, morganite, and aquamarine).

Whether you’re in the market for a large, eye-catching dazzler or a more dainty design, the good news is that these days there are ways to accomplish almost any look for a range of price points.

Recommended: How to Plan a Wedding

How to Pay for an Engagement Ring

While paying in cash can be the simplest (and often the cheapest) option, it may not be feasible for all couples. Below are some other payment options that you may want to consider, along with their pros, cons, and potential costs.

Financing an Engagement Ring Through Your Jeweler

Many jewelers offer financing options, but just because you’re buying from a jeweler does not mean you have to use the financing they offer. It can be a good idea to take note of the following:

•   Promotional offers Some jewelers offer a 0% introductory interest rate during a set period of time. But after that period of time, interest rates may be very high.

•   Down payment requirements Some jewelers may require a certain percentage down payment prior to financing.

Financing through a jeweler directly may make sense if you’re confident you can pay back the loan prior to the end of the promotional period. As with any loan, it’s likely that there will be a credit check prior to being approved for financing.

Buying an Engagement Ring With a Credit Card

Putting a large purchase like an engagement ring on your credit card can be a simple solution at the moment, but it may become a financial headache in the future. Here are some things you may want to consider before getting out the plastic.

•   Interest rate If you put the engagement ring on a card with a relatively high interest rate and don’t pay it off right away, the ring will end up becoming significantly more expensive over time. Also, keep in mind that many credit cards have a variable interest rate, which means the interest rate at the time of purchase could go up.

•   Credit-utilization ratio A large purchase like an engagement ring can mean using a significant percentage of credit available on your card. Having a high credit-utilization ratio may negatively affect your credit score.

•   Rewards and protections Some buyers like putting large purchases on credit cards because of the consumer protections offered by the card. They also may want to take advantage of the rewards offered by the credit card company. Those rewards, however, may only be worth it if you can pay the amount back in full at the end of the billing cycle or during a 0% interest promo rate.

Using a Personal Loan to Finance an Engagement Ring

A personal loan is another avenue for engagement ring funding. A personal loan from a bank, credit union, or online lender may have a lower interest rate than a jeweler financing program. Personal loans also typically have significantly lower interest rates than credit cards.

A personal loan also works differently than jeweler financing and credit cards. With a personal loan, you’ll get the money in your bank account and can then pay the jeweler as though you were paying in cash. You then pay back the loan (plus interest) in monthly amounts set out in the loan agreement. One option to consider: You might fold the ring’s cost in other upcoming expenses as part of a wedding loan.

Here are some things you may want to consider before using a personal loan to pay for an engagement ring.

•   Interest rate In many cases, a personal loan interest rate is fixed, meaning it doesn’t change after the agreement has been signed. This means that you know exactly how much you will need to pay back for the length of the loan.

•   Loan terms You may have an option to pick the length of the loan. Shorter loans may mean you’re paying less interest over time but have larger monthly payments. Conversely, a longer term loan may lower your monthly payment but have you paying more interest over the life of the loan.

•   Loan costs There may be fees associated with the loan, including an origination fee when the loan begins and a prepayment penalty if you pay off the loan before the end of the agreed-upon term.

•   “What if” scenarios Some lenders provide temporary deferment for people facing financial hardship, such as a job loss.

Recommended: Typical Personal Loan Requirements

The Takeaway

Spending three months’ salary for an engagement ring is a long-standing tradition, but these days there is no one-size-fits-all formula. While couples currently spend an average of $5,200 for a ring, ultimately, the amount paid is a personal decision and will depend on your income, debt, expenses, savings, and preference.
If paying for an engagement ring upfront in cash isn’t feasible, you may want to look into different financing options such as financing by your jeweler or a personal loan.

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

FAQ

How much should you spend on an engagement ring?

There’s no rule about how much to spend on an engagement ring. The old “three months’ worth of salary” guideline is outdated. How much to spend is a personal decision, though it’s worth noting that the average amount is currently $5,200.

How much should I spend on an engagement ring if I earn $100,000?

If you follow the old rule of spending three months’ worth of income, that would mean a $25,000 budget for a ring. But this has largely fallen by the wayside, with couples deciding the amount that best serves their big-picture financial needs and their budget. Currently, the average paid for an engagement ring is $5,200.

Is $5,000 enough to spend on an engagement ring?

There’s really no specific amount that’s enough or not enough to spend on an engagement ring. While the average spent on a ring is currently $5,2000, one survey found that most respondents spent between $2,500 to $5,000. Some couples will spend still less, while others might decide to go much higher. Take time to figure out your budget.

Photo credit: iStock/ljubaphoto

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

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If you’re getting divorced, you are likely going through a major upheaval on many fronts, including your financial life. You may wonder (and worry) about how your debt will be managed. For instance, will you wind up responsible for what your soon-to-be former spouse owes?

The answer will depend on when those debts were incurred (i.e., before or after you got married), the nature of the debt, as well as what state you live in. Here’s what you need to know about how debt is split in a divorce.

Community Property vs Common Law Property Rules

How assets and debt are divided in divorce largely depends on whether you live in a community property state or a common law state. These legal frameworks determine whether debts incurred during marriage are considered jointly owned or individually held.

Community Property States

In community property states most debts (and assets) acquired during the marriage are considered jointly owned, regardless of whose name is on the account. That means both spouses are typically equally responsible for all debts incurred during the marriage, even if one spouse did not contribute the debt.

For example, if one spouse racks up $20,000 in credit card debt during the marriage — even if it’s only in their name — both partners may be held equally liable in a community property state. Debts taken on before the marriage or after separation are typically treated as separate liabilities, but timing and documentation are critical.

These rules generally apply unless both spouses agree to a different arrangement or the court finds a compelling reason to divide up debts in a different way.

Community property states include:

•   Arizona

•   California

•   Idaho

•   Louisiana

•   Nevada

•   New Mexico

•   Texas

•   Washington

•   Wisconsin

Alaska, Florida, Kentucky, Tennessee, and South Dakota allow couples to opt into a community property system if they choose.

Common Law States

Most U.S. states follow common law property rules. In these states, debt responsibility is determined by whose name is on the account or who signed for the loan. If a debt is only in your spouse’s name and you didn’t cosign, you’re usually not liable for it.

However, there are some exceptions. Even in common law states, courts can assign debt responsibility based on broader concepts of fairness, especially if the debt benefited both spouses or was used to support the family.


💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner

End of Debt Accrual

One crucial consideration is when debt accumulation legally stops. In most cases, the date of separation — either physical or legal — acts as the cutoff point for joint debt responsibility. Any debt incurred after this date is typically considered separate, assuming proper documentation is in place.

That said, the rules may vary by state. In some jurisdictions, debts continue to be shared until the divorce is finalized. It’s vital to document your separation and keep clear financial records from that point forward.

Recommended: How to Pay for a Divorce

How Is Debt Split in a Divorce?

How debt is divided in divorce can also vary depending on the type of debt. Here’s how common types of debt are typically handled:

Credit Card Debt

Credit card debt can be particularly tricky, especially if the couple used joint cards or shared authorized access. In community property states, credit card debt accrued during the marriage is generally shared, no matter whose name is on the card.

In common law states, the person whose name is on the account is typically responsible. However, if both spouses benefitted from the purchases — say, for groceries or vacation expenses — the court may still assign partial responsibility to both parties.

To protect yourself, consider paying off joint cards before divorce or freezing them during proceedings to prevent additional charges.

Mortgage Debt

Mortgages are often the largest debt shared by divorcing couples. If both names are on the loan and the deed, then both individuals are legally responsible for the payments — even if you separate or divorce.

There are several ways to handle mortgage debt in a divorce:

•   One spouse refinances the mortgage in their name and buys out the other’s share.

•   The couple sells the home and splits the proceeds (or losses).

•   Both parties agree to continue joint ownership for a set period (e.g., until the children move out), with clear terms for payment responsibility.

Whatever option you choose, you’ll want to make sure it is legally documented in the divorce agreement to avoid future disputes.

Student Loan Debt

Student loans are typically considered separate debt if incurred before marriage. If one of you takes out student loans during marriage and you live in a common law property state, those loans typically stay with the borrower.

If you live in a community property state, student loans taken out during the marriage generally become a shared responsibility. One exception: Federal student loans are generally kept with the spouse who took them out, even if it was after marriage.

If you cosigned your spouse’s student loans at any time — whether they’re federal, private, or refinanced student loans — you are legally liable to repay those loans if your spouse can’t, even after divorce.

Auto Loan Debt

If a car loan is in both names, both parties are generally liable, even if only one person drives the car and that person keeps the car after divorce. Ideally, the person who keeps the car assumes the loan or refinances it in their name.

If the loan is only in one name but the other spouse uses the vehicle, it’s essential to clarify in the divorce decree (the document that finalizes the divorce) who will take responsibility for the car and the loan moving forward.

Medical Debt

In community property states, medical debt incurred during the marriage is typically considered joint debt, even if it only involves one spouse. If you live in a common law state, you are typically not responsible for your spouse’s medical debt unless you co-signed on the debt. However, there are exceptions, such as the medical debt that benefited the family.

If one spouse accrued medical debt before getting married, or if the medical bills came after the divorce, that debt typically stays with that person.

Additional Considerations

Here are some other factors that can impact how debt is split in a divorce.

Prenuptial or Postnuptial Agreements

If you and your spouse signed a prenup or postnup that includes provisions for handling debt, those terms generally take precedence over state law.

These legal agreements can specify who is responsible for certain debts and can significantly simplify divorce proceedings, provided they’re properly drafted and enforceable under state law.

Hiring an Attorney

Dividing debt in a divorce can get complicated quickly. Hiring a qualified divorce attorney can help ensure that your rights are protected and that you fully understand the consequences of your decisions.

An attorney can also help mediate disputes, especially when emotions are running high, and prevent you from agreeing to terms that may haunt you later.

Managing Debt After a Divorce

Once the divorce is finalized, the financial journey isn’t over. Managing debt responsibly in the aftermath is essential for rebuilding credit and regaining financial independence.

Negotiating a Fair Debt Settlement

Ideally, you’ll want to negotiate a debt settlement with your ex-spouse as part of the divorce agreement. This might involve trading one type of asset for another or agreeing to pay off certain debts in exchange for other concessions.

It’s important to be clear about which debts are being assumed by each party and make sure the settlement is reflected in the legal documents.

If you can’t come to an agreement, the court will step in and distribute the assets based on state laws, which may be according to community property rules or the principals of equitable distribution.

Separating Joint Accounts

Failing to separate joint debt accounts after divorce can lead to unexpected consequences. If your name is still on a shared credit card or loan, you’re still legally responsible, regardless of the divorce decree.

It’s a good idea to close or refinance all joint accounts and remove authorized users where necessary. This can help prevent future charges and shields your credit from missed payments made by your ex.

Creating a Post-Divorce Budget

A new life calls for a new budget. Financial planning after divorce generally involves:

•   Recalculating income and expenses

•   Prioritizing debt repayment

•   Building emergency savings

•   Setting new financial goals

It can be helpful to consult a financial advisor during this transition period to help you get back on your feet and avoid future financial pitfalls.


💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

Paying Off Debt With a SoFi Personal Loan

If you’re overwhelmed with multiple high-interest debts after a divorce, consolidating them with a SoFi personal loan could be a smart move. SoFi offers fixed-rate personal loans with flexible terms and no-fee options.

Using a personal loan to pay off credit cards or medical debt can simplify repayment and potentially lower your overall interest rate. This can free up monthly cash flow and help you regain financial control faster.

The Takeaway

Divorce is rarely easy, and debt can make it even more stressful. Understanding how different debts are treated in your state can help you navigate the process more confidently.

Whether it’s dividing credit card balances, negotiating a mortgage transfer, or tackling student loans, it’s a good idea to try to work together to come up with a fair and transparent approach. With the right tools and guidance, you can emerge from divorce financially stable and ready to rebuild your future.

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

FAQ

Who is responsible for debt after a divorce?

Responsibility for debt after a divorce depends on state laws. In community property states, debts incurred during the marriage are typically considered jointly owned and equally shared between spouses, regardless of whose name is on the loan or credit card. In common law states, debt during marriage generally belongs to the spouse whose name is on the account or who incurred the obligation.

Can divorce ruin your credit?

Divorce itself doesn’t directly affect your credit score, but how you handle shared debts during and after divorce can.

Missed payments, defaults, or maxed-out joint accounts can have a negative impact on your credit profile if your name is still associated with them. Creditors report payment history regardless of divorce agreements. If your ex fails to pay a joint debt, your credit can also be adversary affected. To protect your scores, separate or close joint accounts and monitor your credit reports throughout and after the divorce process.

What happens to joint credit cards after separation?

Joint credit cards remain legally shared until they are closed or refinanced, even after divorce. This means that both parties are still responsible for any balance, regardless of who made the purchases. Ideally, couples should freeze or close joint accounts and transfer balances to individual accounts. Working with your attorney can help prevent misuse and protect your credit.

Should I pay off shared debt before finalizing a divorce?

It’s generally a wise idea to pay off shared debt before finalizing a divorce. Doing so can simplify division of assets, reduce post-divorce financial entanglements, and protect your credit. When joint debts are left unresolved, it can lead to late payments or defaults, which can negatively impact your credit profile.

If paying off the debt isn’t feasible, try to refinance or transfer it to individual accounts. Discussing debt management in the divorce settlement can help ensure clear financial responsibilities and minimize future disputes.

How can I protect my credit during and after a divorce?

To protect your credit during and after a divorce, start by checking your credit reports and identifying all joint accounts. You might then want to freeze or close joint credit cards, remove your name from authorized user accounts, and monitor payments closely.

It’s also important to work with your attorney to assign debts in the divorce decree. Just remember that creditors don’t honor divorce agreements and will continue to hold you responsible if your name is still attached to a debt.

Post-divorce, you’ll want to establish credit in your own name, pay bills on time, and regularly review your credit reports.

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

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