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The median home sales price in the U.S. was nearly $417,000 in the first quarter of 2025, so it’s not uncommon for first-time homebuyers to find themselves in this price range. The answer to the question “how much down payment do I need for a $400,000 house?” can vary based on the type of home loan and your creditworthiness as a borrower.

Here’s a closer look at how first-time buyers can afford a $400K house, from the down payment to mortgage preapproval and what you can expect for monthly mortgage payments.

How Much Income Do I Need to Afford a $400K Home?

The income you’ll need to afford a $400,000 home goes beyond saving up for a down payment. Rather, it’s about your ability to afford the monthly mortgage payment. How much you’ll pay each month depends on whether you pay private mortgage insurance (PMI), the interest rate, and other factors.

Many financial experts suggest spending no more than 30% of your gross monthly income on housing costs. Using this budgeting rule, let’s crunch the numbers with a mortgage payment calculator on what income you’ll need to afford a $400,000 home purchase without overextending your finances.

For example, let’s say you made a 3% down payment of $12,000 on a $400,000 house, which could be possible when buying your first home, depending on your qualifications. Let’s also assume that you take out a 30-year home loan at a 7.00% interest rate. That would amount to about $2,580 for a monthly mortgage payment. To reasonably afford this, you’d need to earn $8,600 per month. In other words, that’s an annual income of around $103,000. This assumes you don’t have any debts beyond your home loan payment.

Also note that this estimate does not include PMI, property taxes, and other costs of homeownership. When crunching the same numbers with a mortgage calculator with taxes and insurance, the monthly payment comes closer to $3,100. This would mean earning $10,300 a month ($123,600 per year) to comfortably afford payments on a $400,000 home.

Calculating home affordability also involves factoring in your existing debts, such as student loans and auto loans, plus other cost of living expenses.

Recommended: Average Monthly Expenses for One Person

How Much Is the Down Payment for a $400K House?

Conventional wisdom suggests putting a 20% down payment on a home. Though this helps avoid paying PMI, you may be eligible to put as little as 3% down if you qualify as a first-time homebuyer. Considering these as the two ends of the spectrum, a down payment for a $400,000 house could range from $12,000 to $80,000.

Homebuyers have other upfront expenses to account for when determining how much house they can afford. Notably, closing costs typically add up to 2% to 5% of a home purchase price. There may also be home renovation and moving costs to include in your home-buying budget.

What Are the Down Payment Options for a Home Worth $400K?

How much down payment do you need for a $400,000 house? Here are your potential down payment options depending on the type of mortgage loan you apply for.

•   With any mortgage, putting 20% down means not having to pay PMI, which costs 0.5%-1.5% of the home loan amount each year. A 20% down payment is most common with a conventional mortgage, and would amount to $80,000 for a $400,000 home.

•   Qualified first-time borrowers could secure a conventional mortgage with a down payment of as little as 3%, amounting to $12,000 in this example. Other buyers may need to fork out 5%, or $20,000, to qualify. Down payment assistance programs can help some first-time buyers, veterans, and other eligible applicants afford a down payment on a home.

•   With a government-backed FHA loan, first-time homebuyers could make a down payment of just 3.5%, or $14,000 for a $400,000 house. Borrowers need a credit score of 580 or higher to qualify for this minimum down payment. (You might also get an FHA loan with a score of 500 to 579, but a 10% down payment would be necessary.)

•   Other government-backed loans, including VA loans and USDA loans, may not require any down payment to qualify, though putting some money down can help build equity and secure a more competitive rate.

Recommended: Best Affordable Places in the U.S.

What Does the Monthly Mortgage Payment Look Like for a $400K Home?

To recap, your monthly mortgage payment is determined by several factors. The interest rate you qualify for is based on your credit score, debt-to-income (DTI) ratio, and other personal financial information. How much money you put down and the length of the loan term — typically 15 or 30 years — also has an impact on the monthly mortgage payment for a $400,000 home.

If you put $12,000 toward a $400,000 home with a 30-year fixed-rate mortgage at 7.00%, you can expect a monthly payment of $2,580. Upping the down payment to 5% or 10%, would cut the monthly payment to around $2,528 and $2,395, respectively. On the other hand, locking in a better interest rate, say 6.50%, would lower a monthly payment from $2,580 to $2,452, using the first example with a 3% down payment.

Your mortgage payments will go toward the loan interest and principal, with a greater share going toward interest during the initial part of the loan term. Making additional payments on the loan principal each month is one strategy for saving on interest and shortening repayment.

What to Do Before You Apply for a $400K Mortgage

Buying a home is often the largest purchase in one’s lifetime and home expenses are a major contributor to the cost of living in the U.S. If time allows, there are some steps you can take to improve your borrower qualifications and secure more favorable loan terms.

Paying off existing debts, especially high-interest debts, can reduce your DTI ratio and the perceived risk for lenders to issue you a mortgage. Having a DTI ratio of 36% or less is preferred, though borrowers may qualify with a higher DTI ratio. Building up more savings toward a down payment and closing costs can also enhance your chances of approval, plus reduce stress on you and your finances.

Should I Get Preapproved Before Applying for a Mortgage?

Home buying can be competitive, so it’s helpful to demonstrate that you’re a serious buyer by getting preapproved before making an offer. The mortgage preapproval process involves submitting documentation about your income and assets. Lenders will evaluate your credit and financial history, too.

If you get preapproved, lenders will provide a letter listing the specific loan amount and interest rate you’re preapproved for. This is not a commitment, and it’s typically only valid for up to 90 days.

How to Get a $400K Mortgage

Applying for a mortgage is a fairly straightforward process that can be done online or in person. The applications require many of the same materials you’d have already gathered for mortgage preapproval, plus information on the property you’re intending to purchase.

It’s important to compare lender offers and find the best mortgage terms before applying. As noted above, a slight change in the interest rate can significantly lower monthly payments and the total interest paid over the life of the loan. Remember, though, that if you aren’t overjoyed with your original interest rate, a mortgage refinance can be an option down the road.

The Takeaway

How much down payment do you need for a $400,000 house? You could put as little as $12,000, or up to $80,000, toward a down payment depending on the type of home loan, your creditworthiness, and whether you’re a first-time buyer. It’s also possible to get a home loan with zero money down.

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

How much should I make to afford a $400,000 house?

If you follow the 30% rule, which says your housing costs shouldn’t exceed 30% of your gross income, you should make at least $103,000 a year to afford a $400,000 house, assuming a 3% down payment and 7% interest rate on a 30-year fixed rate mortgage. Borrowers with more saved for a down payment could potentially afford a $400,000 house with less income. Those with other debts will need a greater income.

What credit score is needed to buy a $400,000 house?

Credit score requirements to buy a $400,000 house depend on the type of home loan. FHA loans require a minimum credit score of 500, whereas borrowers usually need a 620 credit score to qualify for a conventional mortgage.

How much is a $400K mortgage per month?

The monthly payment on a $400K mortgage depends on the interest rate you qualify for and loan term. A low interest rate of 5.50% could mean a payment of about $2,300 per month, while a higher interest rate of 7.5% could see monthly payments of $2,800. The added cost of homeowners insurance, property taxes, and mortgage insurance could further increase the monthly payment.

Photo credit: iStock/DragonImages

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SOHL-Q225-143

Strong financial performance is key to a company’s long-term success, but it’s a subjective evaluation. There’s no single metric that defines a business’s financial health. Rather, a company’s performance is based on multiple factors, including its revenue, expenses, assets, liabilities, and profitability.

Because financial performance takes a broad view, there are lots of different levers companies can pull to improve it. Here’s a closer look at what financial performance means and strategies to enhance it.

What Is Financial Performance?

Financial performance is a broad view of a company’s overall health. It takes multiple dimensions into account, such as revenue, operating expenses, cash flow and debts, rather than looking at any one metric in isolation.

There are lots of stakeholders in a business, from creditors to investors to employees to management. All of these stakeholders have a vested interest in a company’s financial performance and long-term success.

The Securities and Exchange Commission (SEC) requires public companies to share information on their financial performance annually with Form 10-K. This form provides stakeholders with up-to-date data on a company’s finances. It’s accessible to the public in the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) database.

Core Financial Performance Metrics

There are a variety of metrics you can use to evaluate a company’s financial performance, including profitability ratios, liquidity metrics, and others.

Profitability Ratios (Gross Margin, Net Profit Margin, ROI)

Whether or not a business is profitable is key to its financial performance. Here’s how to value a business in terms of its profitability:

•  Gross margin: The gross margin tracks how much revenue a business keeps after subtracting the cost of goods sold (COGS). It’s typically calculated as a percentage. A higher percentage points to profitability, while a low percentage means there’s room for improvement.

•  Net profit margin: Similar to the gross margin, the net profit margin measures the amount of revenue a company receives from its sales. However, it additionally subtracts business expenses and taxes to get a clearer picture of net profit.

•  Return on investment (ROI): ROI measures how much profit a business makes relative to the cost of an investment. A simple formula for ROI is net profit divided by the cost of the investment. When a business is measuring its financial performance, it might look at the ROI of specific initiatives, such as a marketing campaign, a new product line or the purchase of equipment or technology.

Liquidity Metrics (Current Ratio, Quick Ratio, Cash Flow)

Liquidity metrics measure a company’s ability to pay off short-term obligations with liquid assets. Here are some small business financial ratios to know.

•  Current ratio: This term refers to a company’s solvency. It divides assets by liabilities to determine whether a company can cover short-term obligations.

•  Quick ratio: This measurement divides a company’s liquid assets by its liabilities. Unlike the current ratio, it doesn’t take inventory into account, but instead focuses on “quick assets” like cash and accounts receivables.

•  Cash flow: As the name suggests, cash flow refers to how money moves in and out of a company. A positive cash flow means there’s more money coming in than going out, while a negative cash flow indicates the opposite.

Operational Efficiency (Inventory Turnover, Asset Utilization)

Another important metric when evaluating a company’s financial performance is the efficiency of its operations. Some factors to measure operational efficiency include:

•  Inventory turnover: This tracks how much inventory a company sells within a certain time period. Stakeholders may look at how often a company sells out of its entire stock of inventory.

•  Asset utilization: From equipment to technology, business assets can be expensive. Asset utilization looks at how efficiently a company is using its assets. It considers the value a company is getting out of its assets vs. the cost of acquiring and maintaining them.

Solvency and Leverage (Debt-to-Equity, Interest Coverage)

Solvency and leverage are key factors when assessing a business’s financial performance. They have to do with a company’s ability to meet debt obligations and how much it relies on debt to maintain operations. Some measures of solvency and leverage include:

•  Debt-to-equity ratio: This ratio compares a company’s debt to its equity. A higher ratio can be riskier, since it reveals that a company is financed more by small business loans than by capital.

•  Interest coverage ratio: This ratio compares a company’s earnings (before interest and taxes) to the interest charges it must pay on debt. It reveals how easily a business can afford interest expenses.

8 Strategies To Improve Financial Performance

Since financial performance depends on a variety of factors, there are lots of strategies you can use to improve it. Here are some financial performance tips.

1. Revenue Growth Optimization

Optimizing revenue may be an obvious way to boost financial performance, but it doesn’t happen by accident. A business can come up with a revenue growth strategy by analyzing various factors, including pricing, inventory, demand and market conditions. Revenue optimization may come through acquiring new customers, entering new markets, innovating products, diversifying income streams or pursuing other sources of growth.

2. Cost Reduction and Expense Management

Bringing down costs is another way to increase cash flow and improve solvency. As a business owner, you can review all your expenses closely to identify any areas of waste. You might also negotiate with vendors to bring down costs. Reducing expenses can improve profitability, as long as it doesn’t sacrifice product quality or customer experience.

3. Cash Flow Enhancement

Enhancing cash flow can help a business cover its financial obligations and operating costs. A business may analyze its cash flow on a monthly basis to see where cash is coming in and going out of the business. If cash flow is trending negative, consider ways to turn things around, such as cutting costs, boosting revenue or improving accounts receivable collection.

4. Working Capital Improvements

Working capital refers to the money a business has on hand to meet its short-term obligations. You can calculate it by subtracting your business’s current liabilities from its current assets. A negative result indicates financial problems, while a positive result means your business has the means to cover operating costs. At the same time, high working capital isn’t necessarily the goal, as it can suggest that a business isn’t investing its profits back into growth.

5. Strategic Debt Management

Taking on debt can improve a business’s financial performance if it fuels growth. A business might take out a startup business loan, SBA loan, or business line of credit, for example, to hire employees, invest in marketing, or expand to a bigger facility. Equipment financing can be used to purchase equipment. Before borrowing, though, a business should carefully consider a loan’s interest rate, fees, monthly payments, and other terms to make sure it’s affordable. Businesses may also consider debt management strategies like consolidation to simplify repayment or potentially save on interest.

6. Operational Process Improvement

Taking a magnifying glass to your business’s processes can help you make them more efficient and get better results. You may enhance your accounts receivable process by sending invoices more quickly or making it easier for customers to pay. Or you could streamline your supply chain to cut costs and receive products faster. Continuously monitoring your processes can help you improve them, cut out inefficiencies, and boost your business’s bottom line.

7. Data-Driven Financial Decision Making

Financial performance management shouldn’t happen in a vacuum. You can rely on financial analytics and other data to make informed decisions about business processes, growth, and investments. Collecting data before and after a decision can help you evaluate whether it’s working or if you need to change course.

8. Strategic Financial Planning

Strategic financial planning is how your business can achieve its long-term goals. It’s all about defining objectives and making sure they align with your current practices. This planning may be a continuous process that evolves as your business grows.

💡 Recommended: Improving Business Performance

Implementing Financial Performance Improvements

There are many ways that companies can improve their financial performance, but they must take action on these strategies and measure results as they go. Reducing expenses, managing debt, and making processes more efficient can all benefit a company’s financial well-being.

Before making changes, measure key metrics to see where things stand. Then, you can continue to collect data while you implement new strategies to measure how effective they are.

The Takeaway

There are various ways to enhance business performance, such as cutting waste and leveraging debt strategically. Non-financial metrics, such as customer satisfaction and employee happiness, can also contribute to a company’s bottom line. Taking a multifaceted approach — and measuring results as you go — can help you improve a business’s financial performance and realize its long-term vision.

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

FAQ

How often should a business evaluate its financial performance?

A business may evaluate its financial performance on a monthly and quarterly basis to stay on top of trends. Most businesses also perform a thorough review annually to compare their financial performance from one year to the next.

Which financial performance metrics are most important for small businesses?

Some of the most important performance metrics for small businesses include gross and net profit margins, operating cash flow, working capital, and debt-to-equity ratio.

How does cost control affect financial performance?

Cost control has the potential to improve financial performance, as it involves a thorough review of your business expenses to find areas to save. Reducing costs — and preventing them from spiraling out of control — can improve cash flow and increase profitability. At the same time, make sure that reducing costs doesn’t diminish the quality of your products or customer experience.

What’s the difference between financial performance and profitability?

Profitability is a specific metric that measures how much money a business makes after subtracting its expenses. Financial performance, on the other hand, is a broad measure of a company’s well-being and includes profitability, cash flow, liabilities and other metrics.

How do non-financial metrics impact overall financial performance?

Non-financial metrics, such as customer satisfaction, employee engagement and operational efficiency, can impact a business’s overall financial performance. Dissatisfied customers, for instance, could be an early signal of profit loss, while a lack of employee engagement could prevent the company from reaching its growth goals.

Photo Credit: iStock/Liubomyr Vorona

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SOSMB-Q225-013

No one wants to see their hard-earned cash sitting in the bank and earning a minuscule amount of interest. Instead, most people want their money to work hard and grow at a healthy rate over time.

Achieving that may be as simple as switching banks or even just swapping account types. Or trying a couple of other smart financial moves that can help you build your wealth.

Read on to learn smart strategies that may help you earn more interest than you are currently.

What Is Interest?

Interest is the percentage paid when money is borrowed or loaned out. Here are a couple of examples.

💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

How Do You Earn Interest?

When you deposit money into a bank account, you are, in effect, loaning them the money. They pay you interest in return.

The financial institution can use that money in any number of ways, including lending it out to others. Say you deposit $10,000 in a savings account that earns a 3.00% interest rate. The bank could then use some of your money and that of other depositors to make a $100,000 mortgage loan at 7.00% to a borrower.

The difference between the 7.00% they are charging the person with the home loan and the 3.00% they are paying you and other savings account holders is one of the ways banks make money. And it’s also a good example of how and why you earn interest on your deposit.

How Does Interest Work?

Interest can work in a couple of different ways.

Here’s an example of what a $10,000 savings account would look like at the end of a year if you earned 3.00% simple interest:

$10,000 principal + $300 interest = $10,300 at the end of the year.

However, if that interest was compounded daily, by the end of the year, you would have:

$10,000 principal + $304.53 interest = $10,304.53 at the end of the year.

While it doesn’t sound like much, over time, the difference is amplified. If you’re wondering how to make money with interest, consider what those numbers would look like after 10 years:

Simple interest: $13,000
Compound interest: $13,498.42

It can be wise to check with financial institutions and see how often interest is compounded. The more frequent the compounding, the more your money will grow.

Recommended: Compound Interest Calculator

7 Ways to Gain Interest on Your Money

Now that you understand what interest is, consider these seven ways you might help your money grow faster thanks to the power of interest.

1. High-Interest Savings Accounts

Want to earn more interest on savings? Some banks offer high-interest or high-yield savings accounts that can pay higher rates than traditional savings accounts, while still providing fairly easy access to your money.

How big a difference can this make? When comparing annual percentage yield (APY), regular savings accounts are paying an average of 0.42% APY as of December 16, 2024 while high-yield accounts are offering about 3.00% APY.^[1] When looking for a good interest rate for a savings account, most people would rather snag the latter.

Some high-interest accounts may limit you to six withdrawals or transfers per month, which was previously required by the Federal Reserve. While this Regulation D rule has been suspended since the coronavirus pandemic, some banks will still charge fees or have other penalties for more than six withdrawals, so be sure to check.

You can often find high-interest savings accounts at online-only banks. Because these institutions tend to have lower operating costs than brick-and-mortar banks, they often offer higher rates than traditional banks. They may also be less likely to charge monthly fees.

A high-yield savings account can be a great place to build an emergency fund or save for a vacation or home repair while providing safety and liquidity.

2. Rewards Checking Accounts

Checking accounts are traditionally used for storing money that you use frequently, and they typically don’t pay much, if any, interest. However, some banks offer rewards checking accounts. These may pay higher interest rates than traditional checking and savings accounts. For instance, while some standard checking accounts may pay little or no interest, rewards accounts may offer an APY of around 0.50%, or 1.00%, or more.

However, there may be some restrictions. For instance, the balance that earns the elevated rate may be limited. In addition, you may have to meet certain direct deposit or debit card transaction requirements each month to earn the higher rate.

Like other checking accounts, rewards checking accounts are highly liquid and typically come with check-writing privileges, ATM access, and debit cards. Plus, deposits can be withdrawn at any time.

If you’re considering a rewards checking account, however, you may want to first make sure you can meet any requirements.

3. Credit Unions

Another of the best ways to earn interest on your money is to consider joining a credit union.

Unlike banks, credit unions are owned by the people (or members) who hold accounts at the credit union. Because of this, these financial institutions work for the benefit of account holders instead of shareholders.

In some cases, that can translate into lower fees, better account perks, and higher interest rates. To join a credit union, you typically need to live or work in a certain geographic area or work for a certain employer.

If you have a credit union near you, you may want to check the rates it offers and see if you can get a good deal.

4. Money Market Accounts

A money market account is a type of deposit account that usually combines the features of both checking and savings accounts. This kind of account often requires a higher minimum balance to open than a standard savings account and typically earns a higher interest rate.

Some money market accounts also come with a debit card or checks (which you generally won’t find with savings accounts), but financial institutions may require that they not be used more than six times per month. Some will charge a fee if you go over that number.

It can also be a good idea to ask about other fees, such as monthly account fees and penalties, before opening one of these accounts.

Recommended: Guide to Deposit Interest Rates

5. Certificates of Deposit

Certificates of deposit (CDs), which are a kind of time deposit, typically offer higher interest rates than traditional savings accounts in exchange for reduced withdrawal flexibility.

When you put money in a CD, you agree to leave the money in the account for a set period of time, known as the term. If you withdraw your deposit before the term expires, you’ll usually have to pay an early withdrawal penalty.

One benefit of CDs is that you typically lock in a set interest rate when you open the CD. Even if market rates drop, you’ll keep earning the same rate. On the other hand, if rates rise, you’ll be stuck earning the lower rate until the CD matures.

One way to work around this is to open several CDs that mature at different times, a technique known as CD laddering. Having a mix of short- and long-term CDs allows you to take advantage of higher interest rates, if they bump up, but still have the flexibility to take advantage of higher rates in the future.

A CD ladder also helps with the lack of liquidity that comes with CDs. Because of the staggered terms of the certificates, one is likely to be coming due (or available) if you need to use the cash.

6. Bank Bonuses

Many banks offer special bonuses from time to time; these can be a way to boost the earnings on your money. You may want to keep your eyes open for high-yield savings accounts that offer a sign-up bonus or an interest rate bonus. These incentives can boost your earnings, though you may have to maintain a high minimum balance in the account to earn the higher rate.

You may want to keep your eyes open for high-yield savings accounts that offer a sign-up bonus.

Some banks also offer cash bonuses to customers who open new checking accounts. While this may also come with some requirements, such as setting up direct deposit and/or keeping your account open for a certain number of months to earn the bonus, it can be another good way to increase the income you earn on your bank deposits.

7. Bonds or Bond Funds

Another way to gain interest on your money could be with bonds, which are loans that the government or companies issue. These pay investors interest on a regular basis until the bond hits its maturity date.

These investments, however, are not insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) the way an account is at a bank or credit union. U.S. savings bonds are backed by the government, but bonds may carry risk.

Other Ways to Make Your Money Work For You

If you’re planning to park your cash for at least five years or so and you are willing to take some risk, you may want to consider investing your money in the market.

While an investment may have the potential to generate a higher return, all investments come with the risk that you could lose some or all of your money.

You may better weather this risk by investing for the long term, which essentially means only investing funds that you would not likely need to touch for maybe five years or longer, so that the market has time to recover from downturns.

There are a variety of ways to start investing. If your employer offers a 401(k), that can be one of the easiest ways to start investing. Another option for retirement is opening an individual retirement account (IRA).

You could also open a brokerage account to help you target your financial goals. This is a taxable account, typically opened with a brokerage firm, that allows you to buy and sell investments like stocks, bonds, and mutual funds.

If you’re ready to start investing, you may want to speak with a qualified financial advisor who can help you establish your savings goals and risk tolerance and help you develop a personalized investment strategy.

Creating a SoFi Savings Account Today

If you’re looking to make more interest on your money, you may be able to increase returns by opening a high-yield account at SoFi.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What does it mean to “gain interest”?

Gaining interest is similar to earning interest. It means that your money (the principal) is growing over time thanks to the interest rate being paid. The exact amount it grows will be determined by the interest rate, how long it sits, and how frequently (if at all) the interest is compounded.

How can you make money with interest rates?

You can earn interest through various types of accounts. High-yield savings and high-yield checking accounts typically offer better rates than traditional ones. Money market accounts, which combine features of checking and savings accounts, may offer higher interest rates, but often come with certain restrictions. Certificates of deposit (CDs) provide a fixed interest rate for money locked in for a set time period. You may also consider investing in bonds, which provide periodic interest payments until the bond matures.

How much interest does $10,000 earn in a year?

How much interest $10,000 will earn in one year will depend on the interest rate and how often the interest is compounded, if at all. If the interest rate is 3.00%, without compounding, it would earn $300. With daily compounding, it would earn $304.53. If the interest rate were 7.00%, the account holder would have $700 in interest at the end of the year with simple interest, and $725.01 with daily compounding.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

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The U.S. debt ceiling — sometimes called the debt limit — is the legal limit on how much money the U.S. federal government can borrow to fund government operations.

U.S. government debt comes from bonds issued to individuals, businesses, and foreign governments, as well as intragovernmental loans. As of January 2025, the U.S. government owed some $36.1 trillion — meaning it had reached the current debt ceiling.

Because the government is now poised to exceed the debt limit, the cap on federal borrowing will need to be lifted in order to allow the government to meet its obligations. As of Q3 2025, lawmakers were anticipating a new debt ceiling later this year, to avoid the risk of default.

The U.S. has never defaulted on its debts, and doing so could roil markets here and abroad. If lawmakers don’t raise the debt ceiling, the U.S. could see a credit downgrade, a potential spike in interest rates, which could impact the value of the dollar and could destabilize markets.

What Is the Debt Ceiling?

All governments borrow money to fund various obligations. The United States has the largest debt obligation in the world, as of June 2025, with some $36.1 trillion in outstanding loans it has borrowed from individual investors, governments (like Japan, China, the U.K.), businesses, and even from itself, via intragovernmental loans.

The debt ceiling is set by the Department of the Treasury, and reflects the allowable amount the government can borrow to fund obligations such as interest payments on current debt, national programs like Social Security and Medicare, military salaries, and much more.

Recent Changes to the Debt Ceiling

Lawmakers suspended the debt ceiling from June of 2023 through January of 2025, when it was re-set to match the amount of the U.S. debt obligation at that time: some $36.1 trillion.

Because the debt ceiling only authorizes borrowing to cover existing obligations, and it does not allow for new spending, the government began 2025 in anticipation of another fight over whether to raise the debt ceiling yet again.

When federal spending bumps up against this limit, as it is right now, Congress must vote to raise the debt ceiling. And there is ongoing concern about whether it’s sustainable to continue to issue new debt.

The current debt ceiling of $36.1 trillion represents about 122% of the nation’s gross domestic product, or GDP, and grows by about $1 trillion every quarter.


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What Does the Debt Ceiling Mean for Investors?

In the last 65 years, Congress has either raised, extended, or changed the debt ceiling 78 times to allow for increased borrowing and reliable debt payments to Treasury bondholders. That’s largely because the U.S. government has always honored and repaid its debts, and thus owning U.S. government bonds has long been considered a safe haven for investors looking for stable securities.

The debt ceiling isn’t simply about bond payments, however. It’s a reflection of the financial stability of the U.S. If the government were forced to default on its obligations, this would not only be a historical event, the likely downgrade of U.S. creditworthiness could spark upheaval in markets worldwide.

The Debt Ceiling, the Economy and Securities

For example, a downturn in demand for government bonds would push up interest rates, which could spur inflation and lower the value of the dollar — with a decline in equity markets as well.

•   Higher interest rates would spell higher inflation.

•   Higher inflation impacts the value of the dollar.

•   Equity markets here and abroad could react negatively to a higher rate environment, fuelling volatility.

Although the current trade environment is in flux, if a default came to pass these combined factors have the potential to spark a financial crisis.

What Is the Status of the Debt Ceiling?

While precedent suggests that lawmakers will likely vote to increase the debt ceiling in 2025, it’s unclear how the current debt ceiling debate will pan out. Some potential outcomes:

•   Congress could vote to raise the debt limit, as it has done since the debt ceiling was first created in 1917 (see more on the history of the debt ceiling below).

•   Both political parties could negotiate a way forward, by agreeing to cut spending while also raising the debt ceiling.

•   The president could use his executive powers to bypass the debt ceiling.

Finally, although very unlikely, as noted above, the government could default on its debts. This has never occurred, and would be unprecedented — potentially leading to a global financial crisis.

Recommended: Who Owns the U.S. National Debt?

Where Did the Debt Ceiling Come From?

Congress first enacted the debt ceiling in 1917, at the beginning of World War I, through the Second Liberty Bond Act. That act set the debt ceiling at $11.5 billion. The creators of the debt ceiling believed it would make the process of borrowing easier and more flexible.

In 1939, as World War II loomed on the horizon, Congress established a debt limit of $45 billion that covered all government debt.

Before the creation of the debt ceiling, Congress had to approve loans individually or allow the Treasury to issue debt instruments for specific purposes. The debt ceiling granted the government greater freedom to borrow funds via issuing bonds, allowing it to spend as needed. And over time the ceiling was often raised, and rarely contested.

The debt ceiling has, however, become a partisan pain point in recent years.

Benefits and Drawbacks of the Debt Ceiling

The debt ceiling has several advantages. It allows Congress to fund government operations, and it simplifies the process of borrowing. It also, theoretically, serves as a way to keep government spending in check because the federal government should consider the debt ceiling as it passes spending bills.

However, there are also some drawbacks. Congress has consistently raised the debt ceiling when necessary, which some analysts claim dampens the legislative branch’s power as a check and balance. And if Congress does not increase the debt ceiling, there is a risk that the government will default on its loans, lowering the country’s credit rating and making it more expensive to borrow in the future.

Recent Overview of the Debt Ceiling and Congress

In the last 15 years, Congress has found itself embroiled in partisan battles over raising the debt ceiling. For example, during the Obama administration, there were two high-profile debt ceiling standoffs between the president and Congress.

In 2011, some members of Congress threatened to allow the U.S. government to hit the debt ceiling if their preferred spending cuts were not approved.

This standoff led Standard & Poor’s, a credit rating agency, to downgrade U.S. debt from a AAA to a AA+ rating.

Moreover, in 2013 there was a government shutdown when members of Congress would not approve a bill to fund the government and raise the debt ceiling unless the president made their preferred spending cuts. This standoff ended after 16 days when Congress finally approved a spending package and a debt ceiling increase partially due to the potential for a further downgrade of U.S. debt.

More recently, after a showdown in Congress in June 2023, lawmakers voted to suspend the debt ceiling altogether, until January 1, 2025.

Then, the debt ceiling was reinstated on January 2, 2025, reflecting the amount of outstanding debt from January 1, and setting the stage for another standoff. On May 16, Moody’s downgraded the U.S. credit rating one notch, from Aaa to Aa1.


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What Happens If Congress Fails to Raise the Debt Ceiling?

The current debate centers on finding a long-term solution for raising the debt ceiling. If the executive and legislative branches can not reach an agreement, there could be several consequences.

Potential Consequences for the Economy and Markets

•   The government will swiftly run out of cash if it cannot issue more bonds. At that point, the money the government has coming in would not cover the millions of debts that come due each day. The government may default, at least temporarily, on its obligations, such as pensions, Social Security payments, and veterans benefits.

•   A U.S. government default could also have a ripple effect throughout the global economy. Domestic and international markets depend on the stability of U.S. debt instruments like Treasuries, which are widely considered among the safest investments.

•   Interest rates for Treasury bills could rise, and interest rates across other sectors of the economy could follow suit, raising the borrowing cost for home mortgages and auto loans, for example.

•   A default could also create stock volatility in global equity markets, turmoil in bond markets, and push down the value of the U.S. dollar.

Recommended: What Is the U.S. Dollar Index?

What Are Extraordinary Measures?

When the government hits the debt limit, there are certain “extraordinary measures” it can take to continue paying its obligations. For example, the government can suspend new investments or cash in on old ones early. Or it can reduce the amount of outstanding Treasury securities, causing outstanding debt to fall temporarily.

These accounting techniques can extend the government’s ability to pay its obligations for a very short amount of time.

Once the government exhausts its cash and these extraordinary measures, it has no other way to pay its bills aside from incoming revenue, which doesn’t cover all of it. Revenue from income tax, payroll taxes, and other sources only cover about 80% of government outlays, according to the U.S. Treasury.

Can Congress Get Rid of the Debt Ceiling?

As noted above, the debt ceiling debate has become fertile ground for partisan fighting in Congress, but theoretically, it doesn’t have to be that way. For example, Congress could give responsibility for raising the debt ceiling to the president, subject to congressional review, or pass it off to the U.S. Treasury.

Congress could also repeal the debt ceiling entirely, which it came close to doing in mid-2023.

The Takeaway

A failure to raise the debt ceiling and a subsequent default on U.S. government debt obligations could have a significant impact on financial markets, from increased volatility to a decline in the value of the dollar to a lower national credit rating or even a recession. Given such consequences, it’s likely that Congress will continue to find ways to raise the debt ceiling, although political battles around the issue may continue.

Even if the debt ceiling continues to go up, the growing national debt could lead to economic instability, according to some economists. It’s hard to predict, since the debt ceiling has been raised about 100 times since World War I, when it was first established, and the U.S. has yet to face grave consequences as a result.

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FAQ

How much is the U.S. debt in 2025?

The U.S. government currently owes well over $36 trillion in debt to investors, businesses, other governments, and even itself via intragovernmental loans.

Who is the U.S. most in debt to?

The Federal Reserve is the largest domestic holder of U.S. debt, because it keeps Treasuries as part of monetary policy. Foreign countries also hold large amounts of U.S. debt, with Japan, China, and the U.K. in the top three.

Can the U.S. ever get out of debt?

While it might be possible, getting out of debt would require substantial changes to policies and programs and could take decades to accomplish.

Photo credit: iStock/William_Potter