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A reverse mortgage is a loan that allows homeowners to turn part of their home equity into cash. Available to people 62 and older, a reverse mortgage can be set up and paid out as a lump sum, a monthly payment, or a line of credit, which can then be used to fund home renovations, consolidate debt, pay off medical expenses, or simply improve one’s lifestyle.

While older Americans, particularly retiring baby boomers, have increasingly drawn on this financial tool, reverse mortgages aren’t for everyone. Find out how they work, their advantages and disadvantages, and alternatives you might consider instead.

How Does a Reverse Mortgage Work?

Usually when people refer to a reverse mortgage, they mean a federally insured home equity conversion mortgage (HECM). That being said, there are two other types of reverse mortgages (more on those below).

To qualify for an HECM, all owners of the home must be 62 or older and have paid off their home loan or have a considerable amount of equity. Borrowers must use the home as their primary residence or live in one of the units if the property is a two- to four-unit home. Certain condominium units and manufactured homes are also allowed. The borrower cannot have any delinquent federal debt. Plus, the following will be verified before approval:

•   Income, assets, monthly living expenses, and credit history

•   On-time payment of real estate taxes, plus hazard and flood insurance premiums, as applicable

The reverse mortgage amount you qualify for is determined based on the lesser of the appraised value or the HECM mortgage loan limit (the sales price for HECM to purchase), the age of the youngest borrower or the age of an eligible non-borrowing spouse, and current interest rates. Generally, the older you are and the more your home is worth, the higher your reverse mortgage amount could be, depending on other eligibility criteria.

The reverse mortgage loan and interest do not have to be repaid until the last surviving borrower dies, sells the house, or moves out permanently. In some cases, a non-borrowing spouse may be able to remain in the home.

Loan Costs

An HECM loan may include several charges and fees, such as:

•   Mortgage insurance premiums

◦   Upfront fee (2% of the home’s appraised value or the Federal Housing Administration (FHA) lending limit, whichever is less)

◦   Annual fee (0.5% of the outstanding loan balance)

•   Third-party charges (an appraisal fee, surveys, inspections, title search, title insurance, recording fees, and credit checks)

•   Origination fee (the greater of $2,500 or 2% of the first $200,000 of the home value, plus 1% of the amount over $200,000; the origination fee cap is $6,000)

•   Servicing fee (up to $30 per month if the loan interest rate is fixed or adjusted; if the interest rate can adjust monthly, up to $35 per month)

•   Interest

Your lender can let you know which of the above fees are mandatory. Many of the costs can be paid out of the loan proceeds, meaning you wouldn’t have to pay them out of pocket. However, financing the loan costs reduces how much money will be available for your needs.

The servicing fee noted above is a cost you could incur from the lender or agent who services the loan and verifies that real estate taxes and hazard insurance premiums are kept current, sends you account statements, and disburses loan proceeds to you.

💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.

What Is the Most Common Kind of Reverse Mortgage?

The most common type of reverse mortgage is the HECM, or home equity conversion mortgage, which can also be used later in life to help fund long-term care. HECM reverse mortgages are made by private lenders but are governed by rules set by the Department of Housing and Urban Development (HUD). The current loan limit is $1,089,300.

To qualify for this kind of reverse mortgage loan, you must meet with an HECM counselor, which you can find through the HUD site. When you meet with the counselor, they may cover eligibility requirements, potential financial ramifications of the loan and when the loan would need to be paid back, including circumstances under which the outstanding amount would become immediately due and payable. The counselor may also share alternatives.

The reverse mortgage loan generally needs to be paid back if the borrower moves to another home for a majority of the year or to a long-term care facility for more than 12 consecutive months, and if no other borrower is listed on the loan.

However, a new HUD policy offers protections to a non-borrowing spouse when a partner moves into long-term care. The non-borrowing spouse may remain in the home as long as they continue to occupy the home as a principal residence, are still married, and were married at the time the reverse mortgage was issued to the spouse listed on the reverse mortgage.

In 2021, HUD also removed the major remaining impediment to a non-borrowing spouse who wanted to stay in the home after the borrower’s death. Now they will no longer have to provide proof of “good and marketable title or a legal right to remain in the home,” which often meant a probate filing and had forced many spouses into foreclosure.

Two Other Types of Reverse Mortgages

The information provided so far answers the questions “What is a reverse mortgage?” and “How do reverse mortgages work?” for HECMs, but there are also two other kinds: the single-purpose reverse mortgage and the proprietary reverse mortgage.

Here’s more information about each of them.

Single-Purpose Reverse Mortgage

This loan is offered by state and local governments and nonprofit agencies. It’s the least expensive option, but the lender determines how the funds can be used. For example, the loan might be approved to catch up on property taxes or to make necessary home repairs.

Check with the organization giving the loan for specifics about costs, as they can vary.

Proprietary Reverse Mortgage

If a home is appraised at a value that exceeds the maximum for an HECM ($1,089,300), a homeowner could pursue a proprietary reverse mortgage.

Counseling may be required before obtaining one of these loans, and a counselor can help a homeowner decide between an HECM and a proprietary loan.

Typically, proprietary reverse mortgages can only be cashed out in a lump sum. The costs can be substantial and interest rates higher. This type of reverse mortgage, unlike an HECM, is not federally insured, so lenders tend to approve a lower percentage of the home’s value than they would with an HECM.

One cost a borrower wouldn’t have to pay with a proprietary mortgage: upfront mortgage insurance or the monthly premiums. In some cases, the costs associated with this type of mortgage may cause a homeowner to decide to sell the home and buy a new one.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Pros and Cons of Reverse Mortgages

Reverse Mortgages: Pros and Cons

Pros	Cons
•   No monthly payments •   Flexibility on how you get money •   Can pay back the loan whenever you want •   The money counts as a loan, not as income •   An HECM can be used to buy a new primary residence	•   Rates can be higher than traditional mortgage rates •   Generally requires reducing your home equity •   Must keep up with property taxes, insurance, repairs and any association dues •   Interest accrued isn’t deductible until it’s actually paid

If you’re nearing retirement, it’s easy to see why reverse mortgages are appealing. Here are some of their pros:

•   Unlike most loans, you don’t have to make any monthly payments. The HECM loan can be used for anything, whether that’s debt, health care, daily expenses, or buying a vacation home (although this is not true for the single-purpose variety).

•   How you get the money from an HECM is flexible. You can choose whether to get a lump sum, monthly disbursement, line of credit or some combination of the three.

•   You can pay back the loan whenever you want, even if that means waiting until you’re ready to sell the house. If the home is sold for less than the amount owed on the mortgage, borrowers may not have to pay back more than 95% of the home’s appraised value because the mortgage insurance paid on the loan covers the remainder.

•   The money from a reverse mortgage counts as a loan, not as income. As a result, payments are not subject to income tax. Social Security and Medicare also are not affected.

•   An HECM can be used to buy a new primary residence. You’d make a down payment and then finance the rest of the purchase with the reverse mortgage.

Then again, here are some cons of reverse mortgages to consider:

•   Reverse mortgage interest rates can be higher than traditional mortgage rates. The added cost of mortgage insurance also applies, and, like most mortgage loans, there are origination and third-party fees you will be responsible for paying, as described above.

•   Taking out a reverse mortgage generally means reducing the equity in your home. That can mean leaving less for those who might inherit your house.

•   You’ll need to keep up property taxes and insurance, repairs, and any association dues. If you don’t pay insurance or taxes, or if you let your home go into disrepair, you risk defaulting on the reverse mortgage, which means the outstanding balance could be called as immediately “due and payable.”

•   Interest accrued on a reverse mortgage isn’t deductible until it’s actually paid (usually when the loan is paid off). And a deduction of mortgage interest may be limited.

Alternatives to Reverse Mortgages

A reverse mortgage payout depends on the borrower’s age, the value of their home, the mortgage interest rate and loan fees, as well as whether they choose a lump sum, line of credit, monthly payment, or a combination of those options.

If the payout will not provide financial stability that allows an individual to age in place, there are other ways to tap into cash, including:

Cash-out refi: If you meet credit and income requirements, you may be able to borrow up to 80% of your home’s value with a cash-out refinance of an existing mortgage. Closing costs are involved, but this product lets you turn home equity into cash and possibly lock in a lower interest rate.

Personal loan: A personal loan could provide a lump sum without diminishing the equity in your home. This kind of loan does not use your home as collateral. It’s generally a loan for shorter-term purposes.

Home equity line of credit (HELOC): A HELOC, based in part on your home equity, provides access to cash in case you need it but requires interest payments only on the money you actually borrow. Sometimes a lender will waive or reduce closing costs if you keep the line open for at least three years. HELOCs usually have a variable interest rate.

💡 Recommended: What Are Home Equity Lines of Credit (HELOC)?

Home equity loan: A fixed-rate home equity loan allows you to borrow a lump sum based on your home’s market value, minus any existing mortgages. You make a monthly principal and interest payment each month. Again, lenders may reduce or waive closing costs if you keep the loan for, usually, at least three years.

The Takeaway

A reverse mortgage may make sense for some older people who need to supplement their cash flow. But many factors must be considered, including the youngest homeowner’s age, home value, equity, loan rate and costs, heirs, and payout type. As homeowners are weighing the pros and cons, remember there are other options.

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

SoFi Mortgages: simple, smart, and so affordable.

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

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

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

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

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Can I Direct Deposit into a Savings Account?

Yes, you can direct deposit into a savings account. And it can be a good idea: Putting direct deposits into a savings account vs. checking account allows you to sock away money without manually transferring cash from your checking to your savings account. As a result, direct deposit can automate your savings strategy and get your money to the right place as soon as your employer pays you.

This can optimize your financial gains and help keep you from overspending out of your checking account. Money sitting in checking can tempt you to go shopping or head out to a pricey restaurant dinner.

Here’s how to set up direct deposit to your savings account and a closer look at the perks you’ll enjoy.

Read on to learn:

•   What is direct deposit?

•   Can direct deposit go into a savings account?

•   How do you set up direct deposits into savings?

Direct Deposits Explained

Direct deposit is how you can receive payments, such as a paycheck, without a physical check, electronic check, or cash. Instead, funds go from the payer directly into your bank account. The electronic processing of your paycheck saves you a trip to the bank and is typically quicker than physical forms of payment.

You probably receive payment via direct deposit, as more than nine out of ten workers in the United States do. This automatic process gets money to your bank account with minimal effort by the employee and a lower cost to the employer. What’s more, you can split your paycheck between your checking and savings accounts to optimize your finances.

How direct deposit works:

•   Your employer uses your bank account number and routing number to set up direct deposit.

•   At the end of every payment period (typically two weeks), your employer’s payroll department communicates with the Automated Clearing House (ACH) network.

•   The ACH receives information and deposits money into your account according to your employer’s instructions.

💡 Recommended: What Happens if a Direct Deposit Goes to a Closed Account?

How to Set Up Direct Deposits Into Your Savings

Whether you recently started a new job or have worked for the same employer for years, you can put direct deposits into a savings account in a similar way to how you direct money into your checking account.

Step 1. Getting a Direct Deposit Form

As a new hire, you usually complete paperwork during your first week of employment, including a form to set up direct deposit. If you’re not new to your workplace, you can request a new form from your HR or payroll department to add or update your direct deposit information. You’ll then fill out the forms with the necessary information, such as Social Security number and account information.

Step 2. Determining How Much to Send to Savings

Next, designate the percentage of your paycheck you’d like to go into your savings account versus your checking account. For example, you may want 20% of your paycheck in your savings account and the rest deposited in checking.

Step 3. Submitting the Form to Your Employer or Bank

Finally, provide the form along with, if requested, a voided check for your checking account and a deposit slip from your savings account. These documents can help your employer verify the deposits will go to the right place.

Is It Better to Direct Deposit to Savings or Checking?

Direct depositing into your different account types isn’t an “either-or” proposition; it may be a “both-and” scenario. In other words, depositing money into both accounts has advantages, so it’s a matter of what amount to deposit. Here are some points to consider:

•   Depositing funds into your checking account allows you to access your money to pay for both essentials, like rent and food, to fun purchases like clothes and entertainment.

•   A direct deposit into a savings account allows you to build up your savings and earn more interest on the cash you don’t touch. You might even have multiple savings accounts for different goals, such as putting money in an emergency fund or towards a down payment on a house.

Therefore, it can be an excellent idea to deposit as much into your savings account as you can afford. You might follow the 50/30/20 budget rule and allocate 20% of your take-home pay towards your savings.

It can be hard to save money today with the rising cost of living, so automating the process can help you be successful in achieving this goal.

In addition, your deposit allocations should ensure your checking account has the minimum balance your bank requires, if any, so you can avoid banking fees.

Difference Between Checking and Savings Accounts

Understanding the difference between checking and savings accounts is critical to deciding how much to deposit to each account. A quick overview of checking accounts:

•   Checking accounts are for spending money. Your bank gives you a debit card linked to your checking account so you can make purchases in person and online with funds from your checking account. You also receive checks you can use to pay for purchases and expenses.

•   Because checking accounts have no transaction limits, they are ideal for regular purchases.

•   You can withdraw cash from your checking account by using your debit card at an ATM; you will also probably be able to deposit cash in an ATM.

•   Many checking accounts don’t pay any interest or perhaps a minimal annual percentage yield (APY).

Savings accounts are quite different:

•   Savings accounts are for stockpiling cash and earning compounding interest on your account balance. For example, a savings account with $5,000 and a 3.00% compounding interest rate will earn over $150 annually. It’s advantageous to put money in a savings account because anything you don’t spend will earn a higher interest rate than your checking account.

•   Savings accounts often have transaction limits, meaning you can only withdraw money from your account several times a month (typically six times a month). As a result, it’s best to deposit money you don’t plan on withdrawing into your savings account.

💡 Recommended: See the complete comparison between checking and savings accounts.

Direct Deposit With SoFi

Direct deposit is an excellent way to grow your savings account. Once you submit your direct deposit information to your employer, you’ll automatically receive payments. You can define the percentage of your paycheck you’d like to go to your checking and savings account every time you’re paid. This way, you can accumulate savings without having to transfer money between accounts or risk spending too much from your checking account.

If you’re looking for a way to bank smarter, now is a great time to check out what SoFi offers. When you open a new online bank account with SoFi, you can receive a direct deposit bonus, plus you’ll earn a competitive APY and pay no account fees, which are all good ways to help your cash grow faster. Plus, you’ll spend and save in one convenient place, because we think banking should be easy.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

How do I automatically deposit into my savings account?

You can automatically deposit into your savings account by assigning a percentage of your paycheck to your savings account when you set up direct deposit with your employer. In addition, you can update your direct deposit preferences with your employer if you want to start automatically moving money into your savings account.

Can I automatically transfer money from checking to savings?

Most banks offer automated savings for customers. This feature allows you to arrange for your bank to automatically transfer a specific amount from your checking to your savings account every month.

Can I deposit monthly in a savings account?

Direct deposit allows you to contribute a percentage of your paycheck to your savings account. As a result, your savings account will receive a specific amount as often as your employer pays you. If this doesn’t suit you, you can check with your bank about setting up automatic monthly transfers from checking into savings.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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When homebuyers take out a conventional mortgage but don’t have a 20% down payment, they will likely need to get private mortgage insurance. PMI is usually required when the down payment is less than 20% of the home’s value.

In some situations, a lender may arrange for PMI coverage. It then becomes known as lender-paid mortgage insurance. For some homebuyers, LPMI can work in their favor. But for others, having a lender secure private mortgage insurance can end up costing them.

Read on to learn more about LPMI and the pros and cons for homebuyers.

How Does Lender-Paid Mortgage Insurance Work?

Unless 20% or more of a home’s value is paid upon closing, homebuyers can typically expect to be required to purchase private mortgage insurance, or PMI.

While government-back loans tend to have their own insurance programs (for instance, most FHA loans require a mortgage insurance premium for 11 years or the life of the loan), most loans not provided by the government with a loan-to-value ratio higher than 80% require PMI to protect the lender in case of default.

PMI is typically purchased in one of four ways, and it’s a home-buying cost you’ll want to budget for. PMI can be paid:

•   Along with monthly mortgage and insurance payments

•   In one annual premium

•   With one large payment and corresponding monthly payments

•   By the mortgage lender in a LPMI policy

While it may seem that the last option, LPMI, eliminates a task on a homebuyer’s to-do list, there is some fine print to be aware of.

Having LPMI for a loan doesn’t mean the cost is absorbed by the lender. A homebuyer will still pay for the coverage in one of two ways:

•   A one-time payment due at the beginning of a loan.

•   A slightly higher interest rate — usually 0.25% — which increases the monthly mortgage payment. This is the more common arrangement of the two.

So while many homebuyers accept an LPMI arrangement in hopes of saving money, that isn’t automatically the case. Sometimes LPMI is more about convenience than savings.

In fact, unless they’re paying a one-time lump sum, homebuyers could end up spending more for LPMI over the life of their loan than if they had chosen a traditional PMI route. That’s a potential home-buying mistake you’ll want to avoid.

LPMI might be a good choice for a homebuyer planning to keep the mortgage for five to 10 years or stay in the home. It usually takes 11 years to build enough equity to cancel a borrower-paid PMI policy.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

A Pro of LPMI

Before a homeowner writes off lender-paid mortgage insurance altogether, it’s best to look at a potential benefit the arrangement offers over traditional monthly mortgage insurance.

More Affordable Monthly Payment

With LPMI, the monthly payment could be more affordable because the cost is spread out over the entire loan term rather than bunched into the first several years.

Here’s an example. If Sarah buys a home with a 10% down payment and it takes her 10 years to get the loan-to-value ratio down to 78% (a lender automatically drops PMI payments at this percentage if the borrower is in good standing), those 10 years of payments could all include several hundred dollars in addition to her premium and interest payments.

While LPMI may not save Sarah money overall, she may have smaller monthly payments because the additional payments for coverage are stretched out equally over the entire life of her loan rather than the start.

Recommended: How to Get a Mortgage in 2023

… and Potential Cons

In the right situation, LPMI can make sense. But there are potential downsides homebuyers should know about as well.

Rate Never Drops

While having mortgage insurance stretched out over the life of a loan can save some homebuyers money, it can cost others. The higher interest rate — as mentioned, a 0.25% rate increase is common — will never drop, even once the loan balance is less than 80% of a home’s purchase price.

LPMI can end up costing homebuyers more than if they had bought PMI on their own. Much depends on how long the borrower expects to hold the mortgage.

Refi Costs

Some homebuyers navigate toward LPMI because of the initial savings and hope they can refinance in the future.

While this may be a possibility, they must consider the sizable out-of-pocket costs that go along with refinancing, and that refi rates may be higher in the coming years.

No Itemizing

LPMI can’t be itemized if you deduct mortgage interest at tax time.

💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show proof of prequalification to the real estate agent. With SoFi’s online application, it can take just minutes to get prequalified.

PMI vs LPMI

There are several numbers to take into consideration when choosing between traditional PMI and LPMI, including:

•   the down payment

•   remaining mortgage

•   interest rate (for LPMI, a 0.25% rate increase is common)

•   average mortgage insurance rate (PMI is typically 0.5% to 1.5% of the loan amount per year)

•   anticipated life of the mortgage loan

•   monthly budget.

A borrower may want to not only consider the monthly payment but also the lifetime loan costs.

The difference between PMI and LPMI is different for every homeowner and situation. Taking the time to crunch the numbers is the only way to fully understand the pros and cons of each option.

LPMI Alternatives

LPMI isn’t always the clear winner when choosing between mortgage insurance options. There are alternatives to consider.

Put More Down

A down payment of at least 20% will eliminate the need for PMI entirely. There are several other benefits that go along with larger down payments as well, such as a better loan rate, making this a great option for those who can afford it.

Shop Around

One main disadvantage of LPMI is that the homeowner has little to no control over the price and provider. So when homeowners are responsible for their own PMI, shopping around for the best price becomes an option.

Piggyback Mortgage

A piggyback mortgage makes it possible to avoid PMI with a combination of loans.

It’s important to understand the pros and cons of a piggyback mortgage before deciding on one as an alternative to LPMI to avoid potential financial pitfalls.

Recommended: Second Mortgage Explained: How It Works, Types, Pros, Cons

The Takeaway

If mortgage insurance is necessary to secure a loan, understanding all the options is the first step any house hunter should take. This includes lender-paid mortgage insurance vs. PMI. While LPMI may serve as an overpriced convenience for some, it can be the financially smarter option for others.

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

SoFi Mortgages: simple, smart, and so affordable.

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*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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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

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

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Unlike the local bank where you may keep your checking account, central banks are responsible for implementing monetary policy. Some of the main activities of central banks include managing currency and controlling the money supply.

These are important responsibilities: Central banks aim to promote financial stability within a country or group of countries. They play an important role in the economy and within consumer banking. Without central banks, other banks couldn’t exist and operate.

While a lot of the work that central banks do happens behind the scenes, it can have far-reaching impacts on how you personally manage your money. Here, you’ll learn more, including:

•   What is a central bank?

•   What do central banks do?

•   What are the pro?

What Is a Central Bank?

Central banks are public institutions that use monetary policy to navigate and manage economic changes. While commercial banks are largely concerned with providing banking products and services to customers, central banks take a broader focus.

So, what do central banks do?

The specific powers a central bank has may vary from one country to another. Generally speaking, central banks are responsible for:

•   Effecting interest rate changes to manage monetary policy

•   Setting targets for inflation rates to achieve price stability within an economy

•   Adjusting the money supply, which can occur through the sale or purchase of securities on the open market

•   Regulating interbank activities

•   Loaning money to commercial banks in order to maintain solvency during a financial crisis

Most central banks operate independently of the government, which is intended to keep political influence out of decision-making processes. Understanding their function is important when establishing a working central bank definition.

What Is the Central Bank of the United States?

The Federal Reserve System or “Fed” is the central bank of the United States. The Fed operates to manage the economy and promote public interests. In terms of what the Federal Reserve does, its duties are concentrated in five distinct areas:

•   Monetary policy. The Fed uses monetary policy to promote employment, create pricing stability, and manage interest rates. For example, when the economy is in danger of overheating, the Fed may raise rates to cool off inflation.

•   Financial system stability. Risk management is another important task the Fed carries out. This is done through active monitoring of systemic risks that may endanger the U.S. economy, both domestically and abroad.

•   Supervision and regulation. The Federal Reserve is also concerned with ensuring the safety and stability of individual financial institutions. It takes an active role in monitoring and regulating banks to minimize negative impacts on the financial system.

•   Payment systems. Payment systems allow money to move through an economy. The Fed monitors payments systems to ensure that they’re safe and efficient so financial transactions can be facilitated.

•   Consumer protection and community development. The Federal Reserve is also concerned with ensuring that consumers are protected against unfair banking processes and that attention is given to issues that may hinder consumers ability to get the financial services they need.

The Federal Reserve has three main parts: the Board of Governors, the Reserve Banks, and the Federal Open Market Committee (FOMC). While the Fed is independent, it works in conjunction with other agencies to manage economic policy, including the Department of the Treasury and the Federal Deposit Insurance Corporation (FDIC). There are 12 Federal Reserve banks with 24 branches that operate throughout the U.S.

History of Central Banks

Historically, central banking dates back centuries. A few highlights:

•   In the 1600s, the Swedish Riksbank was founded. The bank, which was chartered in 1668, was designed to operate as a joint stock bank. Its functions included lending money to the government and acting as a clearinghouse for commercial transactions.

•   In 1694, the Bank of England was founded for a similar purpose. This joint stock bank purchased government debt. These early central banks were soon followed by other central banks in other European countries, including the Banque de France which was established by Napoleon in 1800.

•   The history of the Fed begins a little later, with its founding in 1913 through the passage of the Federal Reserve Act. The Act was passed in response to widespread instability within the banking system and the greater economy. Earlier attempts had been made to centralize banking following the end of the Revolutionary War but that goal was only fully realized with the creation of the Fed.

•   Since its initial inception, the Federal Reserve’s powers and duties have expanded and evolved. The latest change occurred in 2010 with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act expanded the Fed’s supervisory responsibilities while also making its operations more transparent.

Today, central banks operate in countries around the world. For example, the European Central Bank manages monetary policy for countries that are part of the European Union and use the euro as their currency. The Reserve Bank of Australia is the central bank that controls monetary policy for the states and territories of Australia.

💡 Recommended: What Is a Bank Reserve?

Are Central Banks Effective?

Whether central banks are effective ultimately depends on the scope of powers they have, how they approach monetary policy, and the outcomes of that approach. If a central bank’s policies produce the intended result then, yes, they can be considered effective. On the other hand, if the end result is significantly different from what was intended, that could be an argument against the bank’s effectiveness. In other words, there is much variation in making this assessment.

In the U.S., for example, economists have argued for and against the effectiveness of the Federal Reserve’s decision to raise or cut interest rates at different points in time. The Fed’s rate hikes may attempt to curb inflation and keep the economy from burning out and plunging into what is known as a recession. Rate cuts, on the other hand, are designed to encourage spending and stimulate the economy.

Consider a specific example: In March 2022, the Fed began a series of rate hikes in an attempt to put the brakes on rising inflation. At that point in time, inflation hovered around 8%. By April 2023, the inflation rate had fallen to 5%. Based on the numbers, it would seem that the Fed’s policy is working. In general, the greater transparency there is around central banking, the more effective it may be.

Are There Downsides to Central Banks?

Central banks are not perfect, and there are some potential disadvantages associated with a central banking system. Here, what are central banks’ downsides:

•   For example, how a central bank uses interest rates to control monetary policy can have a direct impact on consumers and businesses. When the central bank raises rates, borrowing becomes more expensive. On one hand, that’s a good thing if the end goal is to rein in consumer spending. However, if you’re trying to get a mortgage or you need a business loan to cover expenses, you’re going to pay more in interest for convenience of borrowing.

•   The money supply is another issue. If a central bank has the authority to print money at will and artificially inflate the money supply, that can lead to devaluation of the currency. When a central bank also has the ability to purchase assets that can lead to an increase in a country’s national debt.

•   Finally, there’s the question of regulation and accountability. If central banks are established and operated independent of government agencies, it can be difficult to draw a line on what the bank can or cannot do. That can open the door for central banks to take risks they might otherwise avoid when there’s no government oversight to keep them in check.

The Takeaway

Central banks help to keep economies balanced and stable, while providing a safe banking environment for consumers. The next time you’re swiping your debit card or logging in to online banking to pay bills, remember that central banking makes those activities possible.

3 Money Tips

1. Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.
2. When you overdraft your checking account, you’ll likely pay a non-sufficient fund fee of, say, $35. Look into linking a savings account to your checking account as a backup to avoid that, or shop around for a bank that doesn’t charge you for overdrafting.
3. If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt; rates have recently been climbing into the double-digit range, so try to eliminate that ASAP.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

What is the difference between a bank and a central bank?

A bank is a financial institution that accepts deposits and makes loans. Banks make it possible for their customers to move money from point A to B, and they can also pay interest on deposits. Central banks, however, play a larger role, overseeing monetary policy to ensure the smooth operation of a country’s economy.

What is the difference between a federal and a central bank?

A federal bank is a bank that operates under the regulation of a federal government. They receive their charter from the federal government, rather than a state government. Central banks typically operate independently of any government agency or institution.

What is a central bank and its function?

A central bank is a public institution that directs monetary policy within a country, state, or territory, or within a group of countries, states, and territories. The main function of a central bank is to promote financial and economic stability. Central banks do that by controlling the money supply and adjusting interest rates.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

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Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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You’ve likely heard that the most important aspect of real estate is “location, location, location.” If that’s true, then the second most important consideration may be size or square footage.

At its most basic, square footage tells you the size of a property. It can also determine whether you’ll be able to squeeze a king-size bed plus your home office into the primary bedroom or your beloved baby grand piano in the family room.

Square footage also plays a major role in how a home that is for sale is priced. Getting square footage wrong when you are buying or selling can be a big headache and an expensive mistake. For instance, you don’t want to pay too much for a home that’s smaller than you thought it was.

Here, you’ll learn more about how square footage is correctly calculated.

Why Measure Square Footage of a House?

Here are some reasons why you may need to know the square footage of a house:

•   When selling a house, square footage plays a big role in determining the asking price.

Real estate agents will look at comps in the neighborhood — houses of similar size and style — that have sold recently to help them gauge demand for this new listing and set a price.

Square footage isn’t the only factor in pricing a home. An agent will also look at things like condition and building materials when determining value.

•   For those who are buying a home, square footage will play a big part in the price. It’s important that buyers verify that the listed square footage is correct so they know they are getting the space they’re paying for.

When you’re securing a mortgage loan, the lender will need to verify square footage as well, to make sure the house is worth the price the buyer and seller have settled on.

Lenders send an appraiser to conduct a real estate appraisal. This looks at the house to spot anything else that will adversely affect the value of the home, such as cracked walls, leaky foundations, and roofs that need repair.

If a lender’s appraiser finds discrepancies in square footage, there may be issues with a mortgage going through. Lenders may be unwilling to underwrite a loan for a house they think is overvalued for its size.

To save time, buyers should consider doing their due diligence and measure square footage before putting in an offer. Because the size of a house helps determine its value, it also influences property tax assessments.

•   You may also need to know the square footage if you want to dispute a high tax assessment or apply for permits to add on to your house.

Homeowners who think their property is overvalued for tax purposes can dispute the assessment. Confirming square footage is a good place to start. If a home is actually smaller than the recorded size, that may put a homeowner in a favorable position to have their property taxes reduced.

There are a number of reasons the assessed size of your home could be off. Assessors may have used an estimate for their initial assessment, builders may have made a calculation error when they were filing for building permits, or a portion of the house in the initial plans may never have been finished.

If you think the square footage in the public record isn’t correct, contact your city’s assessment department and ask for a review. The city may ask you to file an appeal or a grievance.

Finally, if you’re planning on hiring someone to remodel your home or put on an addition, you may need to know your square footage in order to pull a building permit for the work you want to do.

💡 Quick Tip: Mortgage loans are available with flexible term options and down payments as low as 3%.*

How to Measure Square Footage

There are no hard and fast rules about what parts of your house should be included in a square footage measurement.

The American National Standards Institute provides the generally accepted guidelines about how to calculate square footage, but there are no laws governing the issue, and standards may vary by region or even by listing agent. These discrepancies are another good reason to double-check square footage yourself.

That said, the gross living area is what most people mean when they discuss square footage. Here’s an easy way to calculate it yourself.

•   First, get prepared to brush off your drawing skills, and bust out a pen and paper — preferably graph paper. Each square of the graph paper can represent one square foot.

•   Next, moving one room at a time, measure the walls with a tape measure or laser measure, rounding to the nearest half-linear foot. As you measure each wall, draw it out on your paper and write the measurement next to the line.

•   For regular rectangular rooms, you will be able to calculate the square footage by multiplying the length of the room by its width.

•   If the room you are measuring is an irregular shape, break it down into small rectangles, triangles, or other shapes and measure those separately. Add up the square footage of these small areas to get the room total.

•   Add on to your floor plan room by room, and don’t forget to include hallways and closet spaces that may be between rooms. Stairways are also usually counted in gross living area.

•   Do this for every floor of the house, and once you have a complete floor plan, tally the square footage of all the rooms in the house to get total square footage. Round the result to the nearest square foot.

•   If you have a two-story house, you may be tempted to simply measure the square footage of one floor and multiply that by two. The danger with this approach is that not every floor will have the same footage.

For example, if you have any double-height rooms, you can’t count that square footage as part of the second floor.

Note: ANSI guidelines measure square footage from the exterior of the house. This method does not subtract interior walls from the square footage, so it may not give a completely accurate sense of a home’s living space.

Recommended: Things to Budget for After Buying a House

What to Leave Out

Living space that is above the land line and has heating, lighting, and ventilation is included in the gross living area. Garage space does not make the cut. In general, neither do basements, even if they’re finished (although appraisers will include the space in their appraisal valuation).

A good rule of thumb is that anything that is built below grade, i.e. underground, does not count toward gross living area. Other buildings, including guesthouses and pool houses, that require you to go outside to them can’t be included in the gross living area either.

Finished attic space may be included in the gross living area as long as it has enough clearance — generally a ceiling of at least seven feet. Enclosed porches can be included if they are heated by the same unit that heats the rest of the house.

That said, it can be helpful to measure the square footage of these areas for your records, and they can be included separately in a sales listing

💡 Recommended: First-Time Homeowner Guide

Other Considerations Before Buying

If you’re in the market for a new home, the first thing you can do to verify square footage is take a look at the city’s building department records.

When homes or condominiums are built, plans submitted for a building permit include square footage.

Many of these records are available online and provide a way to check whether the listed square footage is at least in the ballpark of city records.

Note that houses that have unpermitted additions will not have that extra space show up in official records.

In fact, add-ons built without going through the proper city channels can add uncertainty to the real estate process, and may not even be included in the gross living area advertised in a real estate listing. And appraisers may not include these additions in the value of the home.

If it’s hard for you to get information on the home you’re interested in from the city and you don’t have the opportunity to measure the home yourself, you can hire an appraiser who can do the measuring for you.

Real estate agents also have a lot of experience determining the square footage of houses. They can give a quick estimate of size or help you measure the square footage more carefully.

There is a lot to think about when buying a house, and square footage is just one factor. There are other things to consider when buying a home.

Would you prefer a smaller house in tip-top condition or a larger one that needs some TLC? Do you like the design and layout or would you be looking at major renovation work to have it be your dream home? Is the location right? Is it near schools, your work, businesses you like to go to, or parks? Is it in your price range?

Recommended: Housing Market Trends by Location

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

SoFi Mortgages: simple, smart, and so affordable.

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*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.

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

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