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Before buying a house, applying for refinancing, or listing your house on the market, you’ll need to get a home appraisal. This is an important independent assessment of a property’s value, which matters to all parties involved: you, your buyer (if you’re selling), and a lender.

Here, learn the ins and outs of home appraisals so you understand the process and can manage it successfully. You’ll find out:

•  What is a home appraisal?

•  How long does a home appraisal take?

•  How can you prepare for a home appraisal?

•  What can you do if a home appraisal comes in low?

What Is a Home Appraisal?

A home appraisal is an objective and professional analysis of a home’s value. An appraisal aggregates an array of information, including details on the home itself (the floor plan, amenities, and property size), a visual examination, real estate trends in the area, and how much nearby homes sold for.

Generally, an appraisal will be completed when someone is buying, selling, or refinancing a home. It will tell a homeowner whether or not the price they’re putting on the home is fair based on the condition of the home, its amenities, and its location. It’s important to understand that there’s a difference between a home’s assessed value vs. its appraised value. An assessment is used for tax purposes. Having an assessment is not adequate when you are buying, selling, or refinancing a home — you’ll need a formal record of the appraised value.

Home appraisals will let those buying a home know if a home is a good price. (This can be especially reassuring for first-time homebuyers, who are new to the whole process.) An appraisal won’t, however, assure a buyer that a home’s mechanicals are in good working order. For that, a home inspection will be needed, and most buyers have both of these services before they arrive at the closing stage of a home purchase.

According to a National Association of Realtors® study from June 2024, appraisal issues led to delays in 7% of home transactions, so getting the appraisal right the first time around is an important step in buying or selling a home fast. Let’s take a closer look at the process.

When Is a Home Appraisal Required?

A home appraisal is necessary whenever a homebuyer is financing a home purchase. Having an appraisal helps assure the mortgage lender that the property is worth what the buyer has agreed to pay for it. Once a buyer has reached the appraisal stage, the lender will help guide them through how to get a home appraisal by connecting them with its chosen appraisal firm. Buyers financing the purchase with an FHA loan will need to use an appraiser who is specially qualified to do FHA home appraisals.

If you are already a homeowner and are borrowing money with a home equity loan or home equity line of credit (HELOC) using your home as collateral, the lender may require an appraisal in this scenario as well.

Some lenders will accept a desktop appraisal in place of an in-person examination by an appraiser. The appraisal is done remotely using software that analyzes available property data. In this case, the homebuyer will need to obtain an appraisal waiver. But for a home purchase, lenders typically require a visit to the property by an appraiser. So buyers need to put “schedule home appraisal” on their to-do list along with other home-buying tasks, like “figure out down payment amount” and “check mortgage rates.”

Buying, Refinancing, and Selling Scenarios

Here are a few examples of how home appraisals factor into the process of buying, refinancing, or selling a home so that you can see more clearly what is a home appraisal in home buying.

Buying A couple looking for their first home is excited to find a property that ticks all the boxes. The two have already obtained mortgage preapproval from a lender, so they know what they can afford to spend. They make an offer, which the seller accepts. The couple puts down a deposit and signs a contract with the seller. At that point, they need to finalize their home loan. The lender connects them with an appraiser and they schedule a visit to the property via the seller’s real estate agent. When the appraisal comes in, the home appraises for the agreed-upon purchase price. The deal moves forward.

Refinancing A homeowner notices that mortgage rates have declined significantly since their home purchase and decides it’s time to refinance. After seeking out rates and loan terms from a few possible lenders, they choose a lender. As part of the refinance process, the home mortgage lender requests an appraisal to ensure that the borrower is requesting financing that is appropriate based on what the home is actually worth. Only once the appraisal is completed can the homeowner close on the new loan.

Selling The appraisal value of a home helps a seller and their real estate agent determine how to price the property for sale. In this case, the seller hires the appraiser and pays for the appraisal before the home ever goes to market. (Note that once a buyer agrees to purchase the property, the buyer’s lender may still request another appraisal of the home. This time, the buyer will pay the appraiser.)

Recommended: Refinance Your Mortgage and Save

How Much Does a Home Appraisal Cost?

Most people can expect to pay between $300 to $600 for a home appraisal, but it could be higher depending on the specific property. The cost of a home appraisal covers things like the appraiser’s training, licensing, insurance, and expertise. It also covers the time it takes for the appraiser to assess nearby sales and market trends as well as conduct an in-person visual examination of the property.

You’re paying for the appraisal report (more on that in a minute), which will show how the appraiser came to their conclusion on the price and information about your home.

Factors That Influence Appraisal Costs

Some properties have costlier home appraisals. You can generally expect an appraisal to be more expensive if the property being examined contains a pond or lake, or if accessing the property is time-consuming due to a remote location. And if the appraiser is inspecting a larger home or a bigger overall property, then the home appraisal cost will go up. This is often the case with properties that require a jumbo loan, which is usually needed by borrowers purchasing homes priced in the upper six-figure and $1 million-plus range.

Who Pays for the Appraisal?

In a home purchase, the homebuyer will pay for the appraiser. However there are a few other situations in which the homeowner will cover the cost:

•  When the homeowner is refinancing, as noted above, or is obtaining a home equity loan or HELOC, an appraisal is often required by a prospective lender.

•  Sometimes a homeowner wants to get an appraisal and see what modifications they can then make to increase their home value when they’re ready to sell the property.

•  If a homeowner is going to sell their home to a family member or friend, an appraisal can help ensure that the parties involved are getting a fair price.

What Is the Home Appraisal Process?

The appraisal process may seem complicated, and you may wonder about how long a home appraisal will take and how deeply a home will be scrutinized. Fortunately, trained appraisers will be able to explain and guide you through every step. Some points to know in advance:

•  Generally, if a home is being sold, the appraisal happens after an offer on a house is accepted and within a week after an inspector has toured the home. (As noted above, sellers sometimes do a pre-listing appraisal.)

•  In most cases, the mortgage lender will seek out a third-party appraisal company as part of the mortgage loan process. The appraiser will come up with an objective analysis of the home and deliver an appraisal estimate.

Next, how long does a home appraisal take? The actual on-premises appraisal can take between one and three hours, depending on how big and complex the home is. Here’s how it typically goes:

•  The appraiser will usually bring a form to collect information about the home including things like measurements, nearby housing trends, the demographics of the neighborhood, the condition of your home, and how it compares to other properties in your area. (Some of this is research the appraiser will do back at their desk.)

•  The appraiser will also review things like the home’s location, quality of construction, parking situation, exterior condition, its age, its structure, the quality of the siding and gutters, and the square footage.

•  They will also research the appliances and mechanical systems, health and safety factors, the number of bedrooms and bathrooms, and the code compliance throughout.

•  The appraiser will usually take photos of the home as well as make notes. If you are the homeowner, try to avoid getting in the way when the appraiser is taking photos or interrupting them while they’re working.

•  The appraiser may ask questions about what has been done with the home to get a more accurate report. If the homeowner doesn’t want to be there for the appraisal, the real estate agent you’re working with can fill in to answer questions that may come up during the appraisal.

After the appraiser finishes, they’ll put together a report reflecting the visit and research into home values in your area and prevailing market trends. The appraiser may need to check that you had permits to make upgrades, which could delay the process. Typically, however, the finished product is delivered within a week to 10 days.

The report is usually about 10 pages long, but it could be longer if a property is large or complex. It will show details about the home as well as local properties that are similar to it. If the appraised value is around the same price as listed, then the sale could close shortly after that.

What If an Appraisal Comes in Low?

If a property appraises for less than the agreed-upon purchase price, buyer and seller have what’s known as an appraisal gap. There are several ways to proceed: The most obvious avenue is for the buyer to appeal to the seller to lower the asking price. If the seller won’t budge on the price (which can easily happen in a hot housing market), the buyer could make up the difference by increasing the down payment amount. Another possible route is to request a second look by the appraiser.

Challenging a Low Appraisal

Each lender may have different criteria for formally disputing an appraisal, so should there be an issue, it’s a good idea to contact the lender to review its policies. In most cases, only the lender can request a second appraisal.

Should the reevaluation move forward, one option could be to print out a list of similar homes in the community and show that they were valued at a higher price than the property in question. If you are the seller or buyer working with a real estate agent, the agent may be able to provide examples of comparable homes being of higher value.

Recommended: Track the Value of Your Home

Home Appraisal Checklist

One way to avoid facing the appraisal gap if you are the seller is to take steps to help the process go smoothly from start to finish.

What Appraisers Look for Inside and Out

You’ll want to be aware of what hurts a home appraisal. A homeowner can’t control all of these factors, of course. A home may appraise poorly if the neighborhood is undesirable, if the street is busy or noisy, or if other comparable homes in the area have sold at low prices. But if a homeowner has neglected to make needed repairs or updates, that is an appraisal red flag. This might be something as basic as a badly outdated kitchen, or it could be as severe as a leak that has led to water damage that caused mold to fester.

Tips for Improving the Appraisal Outcome

There are a few things an owner can do before the appraiser visits to help encourage a good outcome.

1.   Declutter. While messiness shouldn’t impact the value of your home, if you get rid of clutter (perhaps donate to a local thrift shop), the appraiser can do their job more easily and quickly.

2.   Clean. Thoroughly clean the inside and outside of the home, including the yard. Break out the cleaning supplies or hire a professional cleaning team. It can improve the overall impression of a home’s condition.

3.   Make minor repairs. It’s also a good idea to repair any cracks in the wall, paint over paint that is peeling, and make any other visual repairs that may need attention. Making some common home repairs may cost a little money, but it’s preferable to having a long list of things flagged in the appraiser’s report.

4.   Check fixtures and appliances. Test the lights, faucets, ceiling fans, and security system, as well as confirming that the windows and doors open and close easily. Run appliances like the oven and dishwasher as well to guarantee there are no problems.

5.   Think curb appeal. The exterior of your home is among the factors that affect property value. Consider trimming hedges, getting rid of cobwebs, cleaning the gutters, pulling weeds, and mowing the lawn. Adding plants or flowers could help, too. (Worth noting: Since the appraiser will be walking outside, avoid watering the grass on the day of the appraisal. This can help avoid mud or dirt being tracked through the house.)

6.   Plan for pets. If you have pets, consider putting them in a designated room or taking them to a family member or friend’s home during the appraisal.

7.   Wrangle upgrade info. If possible, make a list of all the upgrades that have been completed on the home and attach permits and receipts detailing how much it all cost.

With proper preparation on the seller’s end, and prompt scheduling on the homebuyer’s side, an appraisal can come off without a hitch and everyone can move on to the closing.

The Takeaway

Whether you’re buying, selling, or refinancing a home, a home appraisal is a key part of the experience. Knowing what to expect can help ensure the process goes as smoothly as possible. It’s also a good idea to understand the factors that go into an appraisal so you can be prepared if the results are not in the range expected.

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FAQ

What will fail a home appraisal?

Deferred maintenance is one major factor that can cause a home appraisal to fail to come in at the desired value. The longer the list of outdated or broken systems or appliances, the more likely the appraiser is to consider the house of lesser value. Or it could be due to the local market: If home sales are declining in value in your area, that could cause your number to go down as well.

How should I prepare for a home appraisal?

If you’re hoping to buy the house, you simply sit back and let the appraiser do their job. If you are the seller, you can prepare for a home appraisal by cleaning up your property and making whatever repairs are required. These moves can both make the process go more smoothly and possibly enhance the home’s value.

Does messiness affect a home appraisal?

A messy or cluttered house should not impact a home appraisal. Licensed appraisers are trained to look past such issues and focus on the house, not its contents. That said, if your property is untended and in rough condition, with peeling paint or overgrown landscaping, for example, that can take the home’s value down a notch.

How long is a home appraisal valid?

A home appraisal is generally considered up to date if the property was appraised in the past 120 days. However it’s ultimately up to the lender to determine whether or not to accept an appraisal based on its date.

What’s the difference between an appraisal and an inspection?

Put simply, a home appraisal tells you what a property is worth, while a home inspection tells you what repairs and updates are needed. Both processes usually include a visual examination of the property. But the appraiser will also be looking at the neighborhood and comparable home sale prices in the area, while a home inspector will be scrutinizing the home’s mechanicals and structural components — such as the HVAC system and roof — and looking for red flags such as rotting window frames or poor drainage.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.

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SOHL-Q126-001

When it comes to figuring out how much you’ll owe the Internal Revenue Service (IRS), it helps to understand the difference between marginal and effective tax rates. The marginal tax rate is the tax rate applied to the portion of your income in the highest tax bracket. The effective tax rate is the average tax rate applied to your total income.

Knowing how to calculate your marginal vs. effective tax rate can give you perspective on how much you’re paying in taxes. You can also use the comparison between the two to look for opportunities to maximize tax savings.

Marginal vs Effective Tax Rate: What’s the Difference?

Comparing effective vs. marginal tax rate can be a useful way to see what you’re paying in taxes compared to how you’re being taxed. In terms of the key differences, here are some of the most important things to know when assessing marginal tax rate vs. effective tax rate.

•   Purpose: Marginal tax rates determine the tax rate that you’re subject to, based on your income. Your effective tax rate reflects the percentage of income you pay in taxes.

•   Calculation: Your marginal tax rate is calculated by applying the appropriate tax rate to each level of income you have. Effective tax rates are calculated by dividing your tax liability by your taxable income.

•   Range: Marginal tax rates range from 10% to 37%. There is no upper or lower limit for effective tax rates; they’re typically lower than marginal tax rates.

•   Application: Your marginal tax rate tells you the tax rate on your last dollar of income. The effective tax rate lets you see what share of your annual income you actually pay in taxes.

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What Is a Marginal Tax Rate?

The marginal tax rate is the amount of tax that applies to each additional dollar of income earned. The higher your income, generally the higher your marginal tax rate will be.

The U.S. uses a progressive tax system in which your tax rate increases as your taxable income increases. Taxable income is the amount of income subject to tax, after deductions and exemptions are factored in. Your marginal tax rate corresponds to your tax bracket, which is determined by your income and your filing status.

As of tax year 2025 (filed in 2026), there are seven tax brackets, ranging from 10% at the lowest end to 37% at the highest. Marginal tax rates increase once you cross certain income thresholds. A difference of just one dollar can put you in a higher marginal tax bracket. However, only that last dollar will be taxed at that higher rate.

How Does Marginal Tax Rate Work?

Marginal tax rates work by determining which tax rate applies at various income levels. As mentioned, they’re based on taxable income only. The more tax deductions you’re able to claim, the more you can reduce your taxable income for the year.

When you file your tax return, your taxable income is what determines which marginal tax rates you pay. Different marginal tax rates apply for each tier of income you have across different tax brackets.

If you’re wondering what tax bracket you’re in, here’s how marginal tax rates add up for tax year 2025 (filed in 2026) and tax year 2026 (filed in 2027).

Calculating Marginal Tax Rates

Calculating marginal tax rates is a simple process that requires you to do two things.

•   Calculate your total taxable income for the year

•   Apply the appropriate marginal income tax rates to each level of taxable income

For example, say that you and your spouse had a gross income of $100,000 and a taxable income of $70,800 in 2025 and file jointly.

Here’s how your marginal tax rates would apply: 10% on your earnings up to $23,850 and 12% on the rest of your earnings.

•   $23,850 x 0.10 = $2,385

•   $46,950 x 0.12 = $5,634

In this example, you’d be subject to two marginal tax rates: 10% and 12%. Your total tax owed based on the marginal tax rate calculation would be $8,019. The higher your income, the more tax rates you’d be subject to.

What Is an Effective Tax Rate?

The effective tax rate, also referred to as average tax rate, is the total tax paid divided by taxable income. Average tax rates tell you how much of your income you paid in taxes overall.

Your effective tax rate includes federal taxes but typically excludes other taxes you pay, such as:

•   State and local income taxes

•   Sales taxes

•   Property taxes

Compared to marginal tax rates, determining your effective tax rate can be a simpler calculation. Average tax rates are usually lower than marginal tax rates due to the way each one is determined.

How Does Effective Tax Rate Work?

Effective tax rates tell you what percentage of your income you paid in taxes, after deductions are taken out. By looking at the average rate your income was taxed at, the effective tax rate is a more accurate representation of your overall tax liability than your marginal tax rate.

There’s no standardized chart that breaks down effective tax rates. They’re different for every person, since they’re dependent on your income, the deductions and exemptions you claim, and the amount of tax you pay based on your marginal tax rate.

You can, however, compare your effective tax rate vs. marginal tax rate by calculating your effective tax rate (details on that below) and comparing it to your marginal tax rate (the highest tax bracket your income falls into) to get a sense of how they differ. Again, you will likely see that even though you may be in a higher tax bracket, the actual percentage of income you pay in taxes is a lower number.

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Calculating Effective Tax Rates

Determining your effective tax rate is a fairly simple calculation. It requires you to know two things:

•   Your annual income

•   Your federal tax liability

To get your effective tax rate, you’d divide your federal taxes paid by your taxable income, then multiple that number by 100. Again, this is income after deductions which reduce your taxable income.

Going back to the previous example, a married couple had a taxable income of $70,800 and paid $8,019 in taxes for the year. If you divide the $8,019 they paid in taxes by their $70,800 in taxable income, then multiply that number by 100, you’ll see that their effective tax rate works out to be 11.32%.

Tips for Paying Your Taxes

Knowing how to prepare for tax season can make the process of filing your return easier. Here are a few tips that can help you get ready for tax filing with less stress.

•   Get organized. Keeping track of receipts, paystubs, and other forms means you’ll have everything you need to file once tax season begins. Starting the process early can prevent a potentially anxiety-provoking rush to figure out what a W-2 is and whether you received the 1099s you need to complete your return.

•   Track income. If you’re self-employed or have a side hustle, it’s a good idea to keep your own records for income even if you expect to get one or more IRS Form 1099.

•   File early. Filing early can help you get your refund faster if you’re owed one since you’re beating the rush.

•   Get help if you need it. If you need tax season help, tax filing software programs can make putting your return together easier. Or you might want to work with a professional tax preparer.

If you’re looking for free or low-cost options, you can find a list of resources at the IRS website.

•   Choose direct deposit. If you’re getting money back when you file, direct deposit can be the fastest way to get paid. For example, a refund from an electronically filed return could be with you in less than three weeks.

The Takeaway

Understanding the difference between marginal tax rate vs. effective tax rate can give you perspective on where your hard-earned dollars go. Marginal tax rates show you the different percentages of taxes you may pay on your income, while your effective tax rate tells you your overall tax rate.

If you are due a refund and need a great place to deposit it, you may want to make sure your bank account offers minimal or zero account fees and a competitive rate.

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FAQ

Between marginal and effective tax rates, which one is higher?

Marginal tax rates are usually higher than effective tax rates. Your marginal tax rate refers to the rate you pay on the top portion of your income. It’s the highest rate you pay, but typically doesn’t apply to all of your income. Your effective tax rate, on the other hand, is the average rate you pay on all your income.

How can I lower my effective tax rate?

Claiming more deductions can lower your effective tax rate. For example, if you normally claim the standard deduction, you might consider how you could reduce your taxable income by itemizing things like charitable contributions or interest paid on a mortgage loan.

What does it mean if the effective tax rate is negative?

A negative effective tax rate can mean that you qualify for refundable tax credits, such as the Earned Income Tax Credit or Child Tax Credit, that add up to more than what you owe in taxes. Keep in mind that you must file a tax return to claim refundable tax credits

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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SOBNK-Q425-052

What is the monthly payment on a $1 million mortgage at recent interest rates? If we remove property taxes, property insurance, and mortgage insurance from the equation, you can expect to spend between $6,653 and $8,988 a month on principal and interest alone, depending on which loan term you choose. But that’s not the whole story. There’s more you’ll need to know about a $1 million mortgage payment.

Cost of a $1 Million Mortgage

The cost of a $1 million mortgage varies depending on which home mortgage loan you choose and a few other factors, such as interest rate and property taxes. As you may know, different types of mortgage loans have different expenses, such as mortgage insurance, which can change your monthly payment.

Monthly Payments for a $1 Million Mortgage

The monthly payment on a $1 million mortgage is influenced by a variety of factors, which include:

•   Interest rate

•   Fixed vs. variable interest rate

•   Mortgage insurance

•   Property insurance

•   Loan term

•   Type of loan

•   Property taxes

Removing all variables except a 7.00% interest rate, a $1 million mortgage payment would be between $6,653 and $8,988 per month. If you’re a first time homebuyer considering a $1 million mortgage, make sure you understand the true cost of buying and owning a home. Remember that your property taxes and some insurance costs may be dictated by your home’s location. (You may want to analyze the cost of living by state. Some of the best affordable places to live in the U.S. may surprise you.)

If these variables are new to you, a home loan help center may smooth out any confusion you may have.

Where to Get a $1 Million Mortgage

You can get a $1 million mortgage with mortgage lenders such as banks, credit unions, and online lenders. However, they’ll need to offer jumbo home loans since $1 million exceeds the conventional loan limit of $832,750 in most areas. When comparing lenders, look at both interest rates and fees. Loan origination fees, in particular, can vary greatly between lenders.

💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put down as little as 10%.

What to Consider Before Applying for a $1 Million Mortgage

The monthly payment for a $1 million mortgage isn’t the only thing you should consider. Also keep in mind the total amount you’ll spend on interest for each loan term. For a 30-year loan with a 7.00% interest rate, you’ll spend $1,395,086 on interest. If you opt for a 15-year loan, you’ll spend just $617,890. This means if you can afford a 15-year loan, you’ll save $777,196.

While you’re home shopping, use a mortgage calculator to see the amount of money you’ll spend monthly and over the life of the loan. You may also want to use a home affordability calculator to incorporate your monthly debts and spending habits into the equation. While you may be able to technically afford a large monthly payment, would the expense leave room for dining out, vacations, and retirement contributions?

During the early years of your mortgage loan, more of your monthly payment typically goes toward paying off the interest on the loan, with a smaller proportion paying down the principal you owe. An amortization schedule shows how the proportions shift, and you build equity more quickly in the second half of the loan term. Here are sample schedules for 30-year and 15-year loan terms:

Amortization Schedule, 30-year, 7.00%

Amortization Schedule, 15-year, 7.00%

How to Get a $1 Million Mortgage

Anyone who has ever bought a home will tell you there are tips to qualify for a mortgage. The biggest ones include saving up for a large down payment, paying down your debts, and working on your credit score before applying for a mortgage. Paying off balances lowers your debt to income (DTI) ratio and helps you qualify for better mortgage terms. The maximum DTI is usually around 43%, but it can vary with each lender and borrower.

💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

The Takeaway

If you need to borrow $1 million to buy a home, a 15-year mortgage will require around a $9,000 a month mortgage payment, whereas a 30-year mortgage requires around $6,650. Assuming a 7.00% interest rate, homebuyers can expect to spend between $617,890 and $1,395,086 on interest alone.

Keep in mind that property taxes, home insurance, and mortgage insurance may increase your monthly payment. If you’re in the market to buy a $1 million house, principal and interest will comprise a majority of your monthly costs.

When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.

SoFi Mortgage Loans: We make the home loan process smart and simple.

FAQ

How much is a $1,000,000 mortgage a month?

You can expect to spend around $6,653 a month with a 30-year mortgage term and $8,988 a month with a 15-year term. This assumes you have a 7.00% interest rate (and doesn’t take into account property taxes, mortgage insurance, and property insurance).

How much income is required for a $1,000,000 mortgage?

Housing costs should be at or below 30% of your income. If you were to choose a 30-year mortgage, this suggests that your income should be around $265,000 a year. Choose a 15-year mortgage, and your income should be around $360,000.

How much is a down payment on a $1,000,000 mortgage?

Because a $1,000,000 mortgage typically means a jumbo loan, you may need to make a down payment of at least 10%. That means your minimum down payment would be $111,112 on a home priced around $1,112,000.

Can I afford a $1,000,000 house with a $70K salary?

No, a $70,000 annual salary would not be enough to cover the cost of a mortgage on a $1,000,000 house. This salary assumes about $5,833 gross a month (before taxes and deductions), which is not enough to cover the minimum payment required of either loan term.

Photo credit: iStock/Paul Bradbury

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SOHL-Q425-184

You may have come across the term “ESOP” and wondered, what does ESOP stand for? An employee stock ownership plan (ESOP) is a type of defined contribution plan that allows workers to own shares of their company’s stock. While these plans are covered by many of the same rules and regulations that apply to 401(k) plans, an ESOP uses a different approach to help employees fund their retirement.

The National Center for Employee Ownership estimates that there are approximately 6,533 ESOPs covering nearly 15 million workers in the U.S. But what is an employee stock ownership plan exactly? How is an ESOP a defined contribution plan? And how does it work?

If you have access to this type of retirement plan through your company, it’s important to understand the ESOP meaning and where it might fit into your retirement strategy.

What Is an Employee Stock Ownership Plan (ESOP)?

An ESOP as defined by the IRS is “an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan.” (IRC stands for Internal Revenue Code.) So what is ESOP in simpler terms? It’s a type of retirement plan that allows you to own shares of your company’s stock.

Though both ESOPs and 401(k)s are qualified retirement plans, the two are different in terms of how they are funded and what you’re investing in. For example, while employee contributions to an ESOP are allowed, they’re not required. Plus, you can have an ESOP and a 401(k) if your employer offers one. According to the ESOP Association, 93.6% of employers who offer an ESOP also offer a 401(k) plan for workers who are interested in investing for retirement.

How Employee Stock Ownership Plans Work

In creating an ESOP, the company establishes a trust fund for the purpose of holding new shares of stock or cash to buy existing shares of stock in the company. The company may also borrow money with which to purchase shares. Unlike employee stock options, with an ESOP employees don’t purchase shares themselves.

Shares held in the trust are divided among employee accounts. The percentage of shares held by each employee may be based on their pay or another formula, as decided by the employer. Employees assume ownership of these shares according to a vesting schedule. Once an employee is fully vested, which must happen within three to six years, they own 100% of the shares in their account.

ESOP Distributions and Upfront Costs

When an employee changes jobs, retires, or leaves the company for any other reason, the company has to buy back the shares in their account at fair market value (if a private company) or at the current sales price (if a publicly-traded company). Depending on how the ESOP is structured, the payout may take the form of a lump sum or be spread over several years.

For employees, there are typically no upfront costs for an ESOP.

Employee Stock Ownership Plan Examples

A number of companies use employee stock ownership plans alongside or in place of 401(k) plans to help employees save for retirement, and there are a variety of employee stock ownership plan examples. Some of the largest companies that are at least 50% employee-owned through an ESOP include:

•   Publix Super Markets

•   WinCo Foods

•   Amsted Industries

•   Brookshire Grocery Company

•   Houchens Industries

•   Performance Contracting, Inc.

•   Parsons

•   Davey Tree Expert

•   W.L. Gore & Associates

•   HDR, Inc.

Seven of the companies on this list are 100% employee-owned, meaning they offer no other retirement plan option. Employee stock ownership plans are popular among supermarkets but they’re also used in other industries, including engineering, manufacturing, and construction.

Pros & Cons of ESOP Plans

ESOPs are attractive to employees as part of a benefits package, and can also yield some tax benefits for employers. Whether this type of retirement savings plan is right for you, however, can depend on your investment goals, your long-term career plans, and your needs in terms of how long your savings will last. Here are some of the employee stock ownership plans pros and cons.

Pros of ESOP Plans

With an ESOP, employees get the benefit of:

•   Shares of company stock purchased on their behalf, with no out-of-pocket investment

•   Fair market value for those shares when they leave the company

•   No taxes owed on contributions

•   Dividend reinvestment, if that’s offered by the company

An ESOP can be an attractive savings option for employees who may not be able to make a regular payroll deduction to a 401(k) or similar plan. You can still grow wealth for retirement as you’re employed by the company, without having to pay anything from your own pocket.

Cons of ESOP Plans

In terms of downsides, there are a few things that might make employees think twice about using an ESOP for retirement savings. Here are some of the potential drawbacks to consider:

•   Distributions can be complicated and may take time to process

•   You’ll owe income tax on distributions

•   If you change jobs means you’ll only be able to keep the portion of your ESOP that you’re vested in

•   ESOPs only hold shares of company stocks so there’s no room for diversification

Pros and Cons of ESOP Plan Side-by-Side Comparison

By comparison, a 401(k) could offer more flexibility in terms of what you invest in and how you access those funds when changing jobs or retiring. But it’s important to remember that the amount you’re able to walk away with in a 401(k) largely hinges on what you contribute during your working years, whereas an ESOP can be funded without you contributing a single penny.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

ESOP Contribution Limits

The IRS sets contribution limits on other retirement plans, and ESOPs are no different. In particular, there are two limits to pay attention to:

•   Limit for determining the lengthening of the five-year distribution period

•   Limit for determining the maximum account balance subject to the five-year distribution period

Like other retirement plan limits, the IRS raises ESOP limits regularly through cost of living adjustments. Here’s how the ESOP compares for 2025 and 2026.

Cashing Out of an ESOP

In most cases, you can cash out of an ESOP only if you retire, leave the company, lose your job, become disabled, or pass away.

Check the specific rules for your plan to find out how the cashing-out process works.

Can You Roll ESOPs Into Other Retirement Plans?

You can roll an ESOP into other retirement plans such as IRAs. However, there are possible tax implications, so you’ll want to plan your rollover carefully.

ESOPs are tax-deferred plans. As long as you roll them over into another tax-deferred plan such as a traditional IRA, within 60 days, you generally won’t have to pay taxes.

However, a Roth IRA is not tax-deferred. In that case, if you roll over some or all of your ESOP into a Roth IRA, you will owe taxes on the amount your shares are worth.

Because rolling over an ESOP can be a complicated process and could involve tax implications, you may want to consult with a financial professional about the best way to do it for your particular situation.

ESOPs vs 401(k) Plans

Although ESOPs and 401(k)s are both retirement plans, the funding and distribution is different for each of them. Both plans have advantages and disadvantages. Here’s a side-by-side comparison of their pros and cons.

Recommended: Should You Open an IRA If You Already Have a 401(k)?

3 Other Forms of Employee Ownership

An ESOP is just one kind of employee ownership plan. These are some other examples of plans an employer might offer.

Stock options

Stock options allow employees to purchase shares of company stock at a certain price for a specific period of time.

Direct stock purchase plan

With these plans, employees can use their after-tax money to buy shares of the company’s stock. Some direct stock purchase plans may offer the stock at discounted prices.

Restricted stock

In the case of restricted stock, shares of stock may be awarded to employees who meet certain performance goals or metrics.

Investing for Retirement With SoFi

There are different things to consider when starting a retirement fund but it’s important to remember that time is on your side. No matter what type of plan you choose, the sooner you begin setting money aside for retirement, the more room it may have to grow.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

Can employees contribute to an ESOP?

In most cases, the employer makes contributions to an ESOP on behalf of employees. Rarely, employers may allow for employee contributions to employee stock ownership plans.

What is the maximum contribution to an ESOP?

The maximum account balance allowed in an employee stock ownership plan is determined by the IRS. For 2025, this limit is $1,415,000, and for 2026, it’s $1,455,000, though amounts are increased periodically through cost of living adjustments.

What does ESOP stand for?

ESOP stands for employee stock ownership plan. This is a type of qualified defined contribution plan which allows employees to own shares of their company’s stock.

How does ESOP payout work?

When an employee changes jobs, retires, or leaves the company for any other reason, the company has to buy back the shares in their account at fair market value or at the current sales price, depending if the company is private or publicly-traded. The payout to the employee may take the form of a lump sum or be spread over several years. Check with your ESOP plan for specific information about the payout rules.

Is an ESOP better than a 401(k)?

An ESOP and a 401(k) are both retirement plans, and they each have pros and cons. For instance, the employer generally funds an ESOP while an employee contributes to a 401(k) and the employer may match a portion of those contributions. A 401(k) allows for more investment options, while an ESOP consists of shares of company stock.

It’s possible to have both an ESOP and a 401(k) if your employer gives you that option. Currently, almost 94% of companies that offer ESOPs also offer a 401(k), according to the ESOP Association.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.