Life insurance provides a safety net for beneficiaries after a loved one dies. Broad choices exist between term life and whole life policies. Here is more info.
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Wondering how to buy life insurance—and what kind of life insurance you need in the first place? This step-by-step guide will set you straight.
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Table of Contents
Investing for the long term is a time-honored way to help manage certain market risks so you can reach financial goals, like saving for a downpayment on a house and retirement.
When it comes to building a nest egg for bigger life expenses, saving alone may not get you where you need to go. If this is the case, the boost of potential investment returns over time may help you reach your savings goal. That’s where long-term investing, also called buy-and-hold, comes in.
That said, long-term investing isn’t a risk-free endeavor, and there are also tax implications for holding investments long term. Knowing the ins and outs can make all the difference to your portfolio over time.
Key Points
• Long-term investing focuses on longer-term goals like education, buying a home, and retirement.
• Starting investing early helps increase the potential benefits of compound growth and market returns.
• Understanding risk tolerance can be helpful in choosing the right mix of investments.
• Automating contributions can make saving and investing easier.
• Reducing fees and using tax-advantaged accounts can enhance long-term returns.
An advantage of a long-term investing strategy is that “time in the market beats timing the market,” as the saying goes. In other words, by sticking to an investment plan for the long term, your portfolio is more likely to weather its ups and downs, and fluctuations in different securities.
So how do you go about establishing a long-term investment plan? These tips should help.
Your financial goals will largely determine whether or not long-term investing is the right choice for you. Spend time outlining what you want to achieve and how much money you’ll need to achieve it, whether that’s paying for your child’s college tuition, retirement, or another big goal.
Once you’ve done that, you can think about your time horizon — when you’ll need the cash — which can help you determine what types of investments are suited to your goals.
For example, stock market investing can be appropriate for big goals in the distant future, such as saving for a child’s education or your own retirement, which could be 20 or 30 or more years down the line. This relatively long time horizon not only gives your investments a chance to grow, but it means that you also have the time to ride out market downturns that may occur along the way. That may translate to a more favorable return on investment, although there are no guarantees.
Your risk tolerance is essentially a measure of your ability to stomach volatile markets. It can help you determine the mix of investments that you may choose for your portfolio. But your risk tolerance also depends on (or interacts with) your goals and time horizon.
Longer time horizons may allow you to take on more risk in some cases, because you’re not focused on quick gains. Which in turn means you might be more inclined to hold a greater proportion of stocks inside your portfolio, for example.
How long should you hold stocks? Generally speaking, holding stocks longer could be beneficial from a tax perspective, and from a risk perspective. Theoretically, the longer you stay invested, the longer you have to recover should markets take a dive.
Setting your risk tolerance also means knowing yourself. If you’re somebody who won’t be able to sleep at night when the market takes a downward turn, even if your goal is still 20 years away, then you may not want a portfolio that’s aggressively allocated to stocks. While there are no safe investments per se, it’s possible to have a more conservative allocation.
On the other hand, if short-term market volatility doesn’t bother you, a more aggressive allocation may be an option to help you achieve your long-term goals.
Understanding your goals, time horizon, and risk tolerance can help give you an an idea of the mix of assets, such as stocks, bonds, and cash equivalents you may want to hold in your portfolio.
As a general rule of thumb, the longer your time horizon, the more stocks you may want to hold. That’s because stocks tend to be drivers of long-term growth — although they also come with higher levels of risk.
As you approach your goal, you may want to consider shifting some of your assets into fixed-income investments like bonds. The reason for this shift? As you get closer to the time when you’ll need your money, you’ll be more vulnerable to market downturns, and you may not want to risk losing any of your cash.
For example, if the market experiences a big drop, you may be left without enough money to meet your goal. By gradually shifting your money to bonds, cash, or cash equivalents like CDs or a money market account, you can help protect it from potential stock market swings. That way, by the time you need your cash, you may have a more stable source of income to draw upon.
A key factor of investing is portfolio diversification. The idea is that holding many different types of assets helps reduce risk inside your portfolio in the long and short term. Imagine briefly that your portfolio consists of stock from only one company.
If that stock drops, your whole portfolio drops. However, if your portfolio contains stocks from 100 different companies, if one company does poorly, the effect on the rest of your portfolio will be relatively small.
A diverse portfolio generally contains many different asset classes, such as stocks, bonds, and cash equivalents, as mentioned above. And within those asset classes a diverse portfolio holds many different types of assets across size, geographies, and sectors, for example.
The basic principle behind diversification is that assets in a diverse portfolio are not perfectly correlated. In other words, they react differently to different market conditions.
Domestic stocks for example, might react differently than European stocks should U.S. markets start to struggle. Or investing in energy stocks will be different from tech-stock investing. So, if oil prices drop, energy sector stocks might take a hit, while tech might be less affected.
Many investors may choose to add diversification to their portfolios by using mutual funds, index funds, and exchange-traded funds ETFs, which themselves hold diverse baskets of assets.
Increasing your time horizon gives you the opportunity to invest for longer. Take stocks, for example. Though risky, stocks typically offer higher earning potential than other types of investments, such as bonds. Consider that the average stock market return annually is about 10% (or 7% when adjusted for inflation).
Second, the sooner you start investing, the sooner you are able to take advantage of compound growth, one of the most potentially powerful tools in your investing toolkit. The idea here is that as your money grows, and you reinvest your returns, you steadily keep increasing the amount of money on which you earn returns.
As a result, your returns may keep getting bigger and your investments could start to grow exponentially.
💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.
Humans are emotional creatures and sometimes those emotions can get the better of us, leading us to make decisions that aren’t always in our best interest. Letting emotions dictate our investing behavior can result in costly mistakes, as behavioral finance studies have shown.
For example, if you’re investing during a recession and the stock market starts to drop, you may panic and be tempted to sell your stocks. However, doing so can actually lock in your losses and means that you miss a potential subsequent rally.
On the other end of the spectrum, when the stock market is roaring, you may be tempted to jump on the bandwagon and overbuy stocks. Yet, doing so opens you up to the risk that you are jumping on a bubble that may soon burst.
There are a number of strategies that can help these mistakes be avoided. First, fight the urge to constantly check how your investments are doing. There are natural cycles of ups and downs that can happen even on a daily basis. To help reduce potential anxiety, you might want to avoid constant checking in and instead keep your eye on the big picture of achieving your long-term goals.
Tinkering with your asset allocation based on emotions and spur-of-the-moment decisions can throw off your allocation and make it difficult to achieve your goals.
Taxes and fees can take a hefty bite out of your potential earnings over time. Many investment fees are expressed as a small percentage (e.g. less than 1% of the money you have invested) that may seem negligible, but it’s not.
Also, many investment costs can be hard to track. Meanwhile, various expenses can add up over time, reducing any overall gains.
To cover the cost of management, mutual funds and exchange-traded funds charge an expense ratio — a percentage of the total assets invested in the fund each year. An actively managed mutual fund might charge 0.75% or more. A passively managed ETF or index fund may charge an average of 0.12%. So you may want to choose mutual funds with the lowest expense ratios, or you may consider passive ETFs or index funds that charge very low fees.
The expense ratio is deducted directly from your returns. You may also encounter annual fees, custodian fees, and other expenses.
You can also be charged fees for buying and selling assets as well as commissions that are paid to brokers and/or financial advisors for their services. It’s important to manage these costs as well. One of the best lines of defense is doing your research to understand what fees you will be charged and what your alternatives are.
There are a few long-term goals that the government generally encourages you to save for, including higher education and retirement. As a result, the government offers special tax-advantaged accounts to help you achieve these goals.
A 529 savings plan can help you save for your child’s college or grad school tuition. Contributions can be made to these accounts with after-tax dollars. This money can be invested inside the account where it grows tax-free. You can then make tax-free withdrawals to cover your child’s qualified education expenses.
Your employer may offer you a 401(k) retirement account through your job. These accounts allow you to contribute pre-tax dollars, which lower your taxable income and can grow tax-deferred inside the account. If your employer offers matching funds, you could try to contribute enough to receive the maximum match. When you withdraw money from your 401(k) at age 59 ½ or later, it is subject to income tax.
You may also take advantage of traditional IRAs and Roth IRAs. Traditional IRAs use pre-tax dollars and allow tax-deferred growth inside your account. You pay tax on withdrawals in retirement.
Roth IRAs are funded with after-tax dollars, so money in your account grows tax-free, and withdrawals are not subject to income tax.
There are other tax-advantaged accounts that can work favorably for long-term investors, including SEP IRAs for self-employed people, and health savings accounts (or HSAs), in addition to other options.
You can continually add to your investments by making saving a regular activity. One easy way to do this is through automation. If you have a workplace retirement account, you can usually automate contributions through your employer.
If you’re saving in a brokerage account you can set it up so that a fixed amount of money is transferred to your brokerage account each month and invested according to your predetermined allocation.
Automation can take the burden off of you to remember to invest. And with the money automatically flowing from your bank account to your investments accounts, you probably won’t be as tempted to spend it on other things.
You may want to periodically check in on your portfolio to make sure your asset allocation is still on track. If it’s not, it may be time to rebalance your portfolio.
This could occur, for example, if the stock market does really well over a given period, upping the portion of your portfolio taken up by stocks.
If this is the case, you might consider selling some stocks and purchasing bonds to bring your portfolio back in line with your goals. Periodic check-ins can also provide opportunities to examine fees and other costs (like taxes) and their impact on your portfolio.
💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Long-term investing is a strategy of investing for years. A long-term investment is an asset that’s expected to generate income or appreciate in value over a longer time period, typically five years or more. Long-term investments often gain value slowly, weathering short- to medium-term fluctuations in the market, and (ideally) coming out ahead over time.
Short-term investments are those that can be converted to cash in a few weeks or months, but they’re generally held for less than five years. Some investors trade these assets in short periods, like days, weeks, or months, to profit from short-term price movements.
However, a short-term investing strategy can be highly risky and volatile, resulting in losses in a short period.
It’s also worth noting that for tax purposes, the IRS considers long-term investments to be investments held for more than a year. This is another important consideration when developing a longer-term strategy.
Investments sold after more than a year are subject to the long-term capital gains rate, which is equal to 0%, 15%, or 20%, depending on an investor’s income and the type of investment. The long-term capital gains rate is typically much lower than their income tax rate, which can help incentivize investors to hang on to their investments over the long run.
Long-term investing can be beneficial for the three reasons noted above:
• Holding investments long-term may allow certain securities to weather market fluctuations and, ideally, still see some gains over time. While there are no guarantees, and being a long-term investor doesn’t mean you’re immune to all risks, this strategy may help your portfolio recover from periods of volatility and continue to gain value.
• In the case of bigger financial goals, such as saving for retirement or for college tuition, embracing a long-term investment plan may help your savings to grow and better enable you to reach those larger goals.
• Last, there may be tax benefits to holding onto your investments for a longer period of time.
The most important tips for long-term investing involve setting financial goals, understanding your time horizon and risk tolerance,diversifying your holdings, minimizing taxes and fees, starting early so your portfolio can benefit from compounding, and understanding how tax-advantaged accounts can be part of a long-term plan.
These strategies can help you build an investment plan to match your financial situation.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
A realistic long-term investment return will ultimately depend on the investments you choose, how long you hold them, as well as the fees and taxes you pay. To give some perspective, the average historical return of the U.S. stock market is about 10% (or 7% with inflation taken into account), but that’s an average over about a century. Different years had higher or lower returns.
All investments come with some degree of risk. One lower-risk way to invest for the long-term might be with fixed-income securities like bonds, which pay a set return over a period of time. Money market accounts and certificates of deposit (CDs) generally also have fixed rates. But remember, there is always some risk involved. Also, generally, the lower the risk, the lower the return.
Long-term investments, like all investments, are vulnerable to market changes. Even when investing for the long haul, it’s possible to lose money. Another threat is the risk of inflation. As inflation rises, your money doesn’t go as far. So even if you save and invest for decades, if inflation is also rising at the same time, your money may have less purchasing power than you expected.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.
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Key Points
• Home equity loans allow homeowners to borrow against the equity in their homes.
• There are three main types of home equity loan options: traditional home equity loans, home equity lines of credit (HELOCs), and cash-out refinances.
• Traditional home equity loans provide a lump sum of money with a fixed interest rate and fixed monthly payments.
• HELOCs function like a credit card, allowing homeowners to borrow and repay funds as needed up to a specified limit within a set time frame.
• Home equity loans and HELOCs can be used for various purposes, such as home renovations, debt consolidation, or major expenses.
When folks think of home equity loans, they typically think of either a fixed-rate home equity loan or a home equity line of credit (HELOC). There is a third way to use home equity to access cash, and that’s through a cash-out refinance.
With fixed-rate home equity loans or HELOCs, the primary benefit is that the borrower may qualify for a better interest rate using their home as collateral than by using an unsecured loan — one that is not backed by collateral. Some people with high-interest credit card debt may choose to use a lower-rate home equity loan to pay off those credit card balances, for instance.
This does not come without risks, of course. Borrowing against a home could leave it vulnerable to foreclosure if the borrower is unable to pay back the loan. A personal loan may be a better fit if the borrower doesn’t want to put their home up as collateral.
How much a homeowner can borrow is typically based on the combined loan-to-value ratio (CLTV ratio) of the first mortgage plus the home equity loan. For many lenders, this figure cannot exceed 85% CLTV. To calculate the CLTV, divide the combined value of the two loans by the appraised value of the home. In addition, utilizing a home equity loan calculator can help you understand how much you might be able to borrow using a home equity loan. It’s similar to the home affordability calculator you may have used during the homebuying process.
Of course, qualifying for a home equity loan or HELOC is typically contingent on several factors, such as the credit score and financial standing of the borrower.
Fixed-rate loans are pretty straightforward: The lender provides one lump-sum payment to the borrower, which is to be repaid over a period of time with a set interest rate. Both the monthly payment and interest rate remain the same over the life of the loan. Fixed-rate home equity loans typically have terms that run from five to 30 years, and they must be paid back in full if the home is sold.
With a fixed-rate home equity loan, the amount of closing costs is usually similar to the costs of closing on a home mortgage. When shopping around for rates, ask about the lender’s closing costs and all other third-party costs (such as the cost of the appraisal if that will be passed on to you). These costs vary from bank to bank.
This loan type may be best for borrowers with a one-time or straightforward cash need. For example, let’s say a borrower wants to build a $20,000 garage addition and pay off a $4,000 medical bill. A $24,000 lump-sum loan would be made to the borrower, who would then simply pay back the loan with interest. This option could also make sense for borrowers who already have a mortgage with a low interest rate and may not want to refinance that loan.
Recommended: What Is a Fixed-Rate Mortgage?
A HELOC is revolving debt, which means that as the balance borrowed is paid down, it can be borrowed again during the draw period (whereas a home equity loan provides one lump sum and that’s it). As an example, let’s say a borrower is approved for a $10,000 HELOC. They first borrow $7,000 against the line of credit, leaving a balance of $3,000 that they can draw against. The borrower then pays $5,000 toward the principal, which gives them $8,000 in available credit.
HELOCs have two periods of time that borrowers need to be aware of: the draw period and the repayment period.
• The draw period is the amount of time the borrower is allowed to use, or draw, funds against the line of credit, commonly 10 years. After this amount of time, the borrower can no longer draw against the funds available.
• The repayment period is the amount of time the borrower has to repay the balance in full. The repayment period lasts for a certain number of years after the draw period ends.
So, for instance, a 30-year HELOC might have a draw period of 10 years and a repayment period of 20 years. Some buyers only pay interest during the draw period, with principal payments added during the repayment period. A HELOC interest-only calculator can help you understand what interest-only payments vs. balance repayments might look like.
A HELOC may be best for people who want the flexibility to pay as they go. For an ongoing project that will need the money portioned out over longer periods of time, a HELOC might be the best option. While home improvement projects might be the most common reason for considering a HELOC, other uses might be for wedding costs or business startup costs.
Unlike the rate on a fixed-rate loan, a HELOC’s interest rate is variable and will fluctuate with market rates, which means that rates could increase throughout the duration of the credit line. The monthly payments will vary because they’re dependent on the amount borrowed and the current interest rate.
When you take out a HELOC, you’ll start out in the draw period. Once you take out funds, you’ll be charged interest on what you’ve withdrawn. With some HELOCs, during the draw period, you’re only required to pay that interest; others charge you for both interest and principal on what you’ve withdrawn. During the repayment period, you won’t be able to withdraw money any longer, but you will need to make regular payments to repay the principal and interest on what you withdrew.
Home equity loans and HELOCs both come with closing costs and fees, which may be anywhere from 1% to 5% of the loan amount. What those fees are and how you pay them, however, can vary by loan type. HELOCs may involve fewer closing costs than home equity loans, but often come with other ongoing costs, like an annual fee, transaction fees, and inactivity fees, as well as others that don’t pertain to home equity loans.
Generally, under federal law, fees should be disclosed by the lender. However, there are some fees that are not required to be disclosed. Borrowers certainly have the right to ask what those undisclosed fees are, though.
Fees that require disclosure include application fees, points, annual account fees, and transaction fees, to name a few. Lenders are not required to disclose fees for things like photocopying related to the loan, returned check or stop payment fees, and others. The Consumer Finance Protection Bureau provides a loan estimate explainer that will help you compare different estimates and their fees.
Since the passage of the One Big Beautiful BIll Act in July 2025 made permanent the mortgage deduction provisions of the Tax Cuts and Jobs Act of 2017, interest on home equity loans and HELOCs is only deductible if the funds are used to buy, build, or substantially improve the home securing the loan. What’s more, there’s a max of $750,000 on the amount of mortgage interest you can deduct ($375,000 each for spouses filing separately). Checking with a tax professional to understand how a home equity loan or HELOC might affect a certain financial situation is recommended.
Mortgage refinancing is the process of paying off an existing mortgage loan with a new loan from either the current lender or a new lender. Common reasons for refinancing a mortgage include securing a lower interest rate, or either increasing or decreasing the term of the mortgage. Depending on the new loan’s interest rate and term, the borrower may be able to save money in the long term. Increasing the term of the loan may not save money on interest, even if the borrower receives a lower interest rate, but it could lower the monthly payments.
With a cash-out refinance, a borrower may be able to refinance their current mortgage for more than they currently owe and then take the difference in cash. For example, let’s say a borrower owns a home with an appraised value of $400,000 and owes $200,000 on their mortgage. They would like to make $30,000 worth of repairs to their home, so they refinance with a $230,000 mortgage, taking the difference in cash.
As with home equity loans, there typically are some costs associated with a cash-out refinance. Generally, a refinance will have higher closing costs than a home equity loan.
This loan type may be best for people who would prefer to have one consolidated loan and who need a large lump sum. But before pursuing a cash-out refi you’ll want to look at whether interest rates will work in your favor. If refinancing will result in a significantly higher interest rate than the one you have on your current loan, consider a home equity loan or HELOC instead.
A cash-out refinance is worth looking into when you’ve built up equity in your home but feel that your mortgage terms could be better – and you need a lump sum. Let’s say you want to renovate your kitchen, and you need $40,000. You’ve had your mortgage for a few years but your credit score has improved since you got it and you could be eligible for a significantly better interest rate now. That combination of factors makes a cash-out refi worth considering. If a refinance would not make sense for you, then a cash-out refi wouldn’t, either. Instead, you might want to consider another kind of loan.
Cash-out refinances involve both advantages and drawbacks. Here are some of the most significant.
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• Allow you to access a lump sum of cash
• Can potentially give you a lower mortgage rate
• May let you change your mortgage terms to adjust your payments
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• Uses your home as collateral
• Adds another debt in addition to your mortgage
• Requires you to pay closing costs
The different types of home equity loans all allow you to draw on the equity you’ve built in your home to access funds. But each type has different strengths and weaknesses, and the best type of home equity loan option for you will depend on your situation and the characteristics of the loan.
If you’re content with your mortgage – you don’t think you could get a better rate and your payments fit your budget – and you need a lump sum all at once, a home equity loan might make the most sense. To consolidate high-interest debt, buy a boat, or take a once-in-a-lifetime vacation, this might be a good option.
If your mortgage is fine and you need funds for a project that’s going to require withdrawals over time, a HELOC might be a good fit. Say you’re financing your child’s college education or starting a new business – having a line of credit to draw on when you need it could be extremely helpful.
Finally, if you’re looking for a lump sum and you feel that your mortgage isn’t a good fit, a cash-out refinance could be for you. Perhaps you could get a lower interest rate now or you’d like your term to be shorter and can afford the higher payments. In that case, a cash-out refinance could be useful.
As you do your home equity loan comparison and think about your options, it’s important to consider carefully what will really work best for you. Here are some questions to review.
• Will you be able to handle the additional debt in your budget?
• Do you need an upfront cash sum or access to funds over time?
• Can you realistically improve significantly on your current mortgage terms?
• Is what you stand to gain worth more than the price of your closing costs and any other fees involved?
• Are you okay with payments that vary or would you prefer knowing that your payments will stay the same?
• Are you comfortable knowing that your lender may be able to foreclose on your home if you can’t make your payments?
There are three main types of home equity loans: a fixed-rate home equity loan, a home equity line of credit (HELOC), and a cash-out refinance. Just as with a first mortgage, the process will involve a bank or other creditor lending money to the borrower, using real property as collateral, and require a review of the borrower’s financial situation. Keep in mind that cash-out refinancing is effectively getting a new mortgage, whereas a fixed-rate home equity loan and a HELOC involve another loan, which is why they’re referred to as “second mortgages.”
While each can allow you to tap your home’s equity, what’s unique about a HELOC is that it offers the flexibility to draw only what you need and to pay as you go. This can make it well-suited to those who need money over a longer period of time, such as for an ongoing home improvement project.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
The primary downside of a home equity loan is that the collateral for the loan is your home, so if you found yourself in financial trouble and couldn’t make your home equity loan payment, you risk foreclosure. A second consideration is that a home equity loan provides you with a lump sum. If you are unsure about how much you need to borrow, consider a home equity line of credit (HELOC) instead.
The exact cost of a $50,000 home equity loan depends on the interest rate and loan term. But if you borrowed $50,000 with a 6.50% rate and a 10-year term, your monthly payment would be $568 and you would pay a total of $18,129 in interest over the life of the loan.
Typically, you can use a home equity loan for just about anything you want to. Common reasons for taking out a home equity loan are to consolidate higher-interest debt, to pay for medical bills, and to fund major home repairs or upgrades. It’s important to remember that your house serves as collateral for the loan, so you want to be sure your use is worth the risk.
To qualify for a home equity loan, you generally need to be a homeowner with at least 20% equity in your home. You’ll also need to have a credit score of at least 620 and a debt-to-income ratio of no more than 43%. Typically, lenders will want to see that you have a steady, reliable source of income and will be able to pay back the loan.
A home equity line of credit (HELOC) and a cash-out refinance are both ways of tapping your home equity to get cash, but they work differently. With a HELOC, you use your home as collateral to get a revolving line of credit, which lets you take out cash as you need it, up to a set limit, during the initial draw period (usually 10 years). During the repayment period that follows, you repay principal and interest on what you’ve borrowed. A cash-out refinance involves refinancing your mortgage for more than you currently owe and taking the difference as a cash lump sum.
²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
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Many homebuyers swimming in the pool of new mortgage terminology may wonder how mortgage principal differs from their mortgage payment. Simply put, your mortgage principal is the amount of money you borrowed from your mortgage lender.
Knowing what your mortgage principal is and how you can pay it off more quickly than the average homeowner could save you a lot of money over the life of the loan. Here’s what you need to know about paying off the principal on a mortgage.
Key Points
• Mortgage principal is the original amount borrowed to pay for a home, distinct from the monthly mortgage payment or the home’s purchase price.
• Every month you make a payment on your mortgage, and principal, interest, and escrow accounts for taxes and insurance are typically all paid from that amount.
• Making extra payments toward principal can help pay off the mortgage early and reduce interest costs over the life of the loan.
• Amortization schedules show how each mortgage payment is split between principal and interest, with earlier payments mostly going toward interest.
• Benefits of paying additional principal on a mortgage are building equity, lowering interest costs, and shortening the loan term, but it should be considered in the context of overall financial priorities.
Mortgage principal is the original amount that you borrowed to pay for your home. It is not the amount you paid for your home; nor is it the amount of your monthly mortgage payment.
Each month when you make a payment on your mortgage loan, a portion goes toward the original amount you borrowed, a portion goes toward the interest payment, and some goes into your escrow account, if you have one, to pay for taxes and insurance.
Your mortgage principal balance will change over the life of your loan as you pay it down with your monthly mortgage payment, as well as any extra payments. This changing balance may be called your outstanding mortgage principal. (While there is a difference between outstanding mortgage principal vs. mortgage principal balance, the terms are often used interchangeably.) Your equity will increase while you’re paying down the principal on your mortgage.
Your mortgage payment consists of both mortgage principal and interest. Mortgage principal is the amount you borrowed. Mortgage interest is the lending charge you pay for borrowing the mortgage principal. Both are included in your monthly mortgage payment, and your mortgage statement will likely include a breakdown of how much of your monthly mortgage payment goes to mortgage principal vs. interest.
When you start paying down principal, as the mortgage amortization schedule will show you, most of your payment at this point will go toward interest rather than principal. Later on in the life of your loan, you’ll be paying more mortgage principal vs. interest.
Hover your cursor over the amortization chart of this mortgage calculator to get an idea of how a given loan might be amortized over time if no extra payments were made.
Your total monthly payment is divided into parts by your mortgage servicer and sent to the correct entities. It includes principal plus interest, and often other components.
Your monthly payment isn’t typically just made up of principal and interest. Most borrowers are also paying installments toward property taxes and homeowners insurance each month, and some pay mortgage insurance, too. In the industry, this is often referred to as PITI, for principal, interest, taxes, and insurance.
A mortgage statement will break all of this down and show any late fees.
Among the many mortgage questions you might have for a lender, one should be whether you’ll need an escrow account for taxes and insurance or whether you can pay those expenses in lump sums on your own when they’re due. Many lenders prefer to take on the responsibility for your taxes and insurance in order to protect their investment, but they will charge you for those costs in your mortgage payments and hold that money in an escrow account until needed.
Conventional mortgages typically require an escrow account if you borrow more than 80% of the property’s value. In the world of government home loans, FHA and USDA loans need an escrow account, and lenders usually want one for VA-backed loans. If you live in a flood zone and are required to have flood insurance, an escrow account may be mandatory.
When you get a conventional loan and put down less than 20% of the home’s value, your lender will require you to pay private mortgage insurance (PMI).It will probably want to handle this through an escrow account also, to avoid the possibility of your making late payments.
Making extra payments toward principal will allow you to pay off your mortgage early and will decrease your interest costs, sometimes by an astounding amount.
If you make extra payments, you may want to let your mortgage servicer know that you want the funds to be applied to principal instead of the next month’s payment.
Could you face a prepayment penalty? Conforming mortgages signed on or after January 10, 2014, cannot carry one. Nor can FHA, USDA, or VA loans. If you’re not sure whether your mortgage has a prepayment penalty, check your loan documents or call your lender or mortgage servicer.
If you make additional payments toward your principal, you will decrease the amount of money that you’re being charged interest on, as your principal balance drops. This means that in the long run, you would end up paying less interest than if you simply made your payments as scheduled.
It can be helpful – and motivating – to keep an eye on how your mortgage payments are impacting your principal balance and how much of them is going to interest. There are a couple of easy ways to do this.
An amortization schedule can be a big help in understanding your mortgage payments and how you’re paying down principal on your mortgage. Essentially, it’s a chart that lists each planned payment for the entirety of your mortgage, detailing how much of each will go to principal and how much to interest. You’ll also see how much principal you still owe after each payment.
To get a full amortization schedule for the life of your loan, you may need to sign on to your account online or contact your lender and request the schedule.
The easiest way to keep track of how much you’re currently paying on your mortgage principal and interest is to look at your mortgage statements every month. The mortgage servicer will send you a statement with the amount you owe and how much it will reduce your principal each month. You may also see the breakdown for your previous payment and/or for the year to date, as well as your total outstanding mortgage principal. If you have an online account, you can usually see the numbers there.
Paying off the mortgage principal is done by making extra payments. Because the amortization schedule is set by the lender, a high percentage of your monthly payment goes toward interest in the early years of your loan.
When you make extra payments or increase the amount you pay each month (even by just a little bit), you’ll start to pay down the principal instead of paying the lender interest.
It pays to thoroughly understand the different types of mortgages that are out there.
One tactic homeowners use is biweekly payments. Traditionally, you pay your mortgage once a month. But if you pay it every two weeks – which often aligns with pay schedules – you’ll be making an extra payment every year. That may not sound like much, but it can let you finish your loan term up to six or more years early.
A relatively painless way to prepay principal is to apply any “extra” money you get – like a work bonus or an unexpected bequest – toward your principal. If you have a solid emergency fund in place and no higher-interest debts to pay off, this could be a good place to put your money.
Knowing exactly how mortgage principal, interest, and amortization schedules work can be a powerful tool that can help you pay off your mortgage principal faster and save you a lot of money on interest in the process.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
The mortgage principal is the amount you borrow from a mortgage lender and must pay back. It is not the same as your mortgage payment. Your mortgage payment will include both principal and interest, as well as any escrow payments you need to make.
You can pay off your mortgage principal early by paying more than your mortgage payment. Since your mortgage payment is made up of principal and interest, any extra that you pay can be taken directly off the principal – just make sure that your lender knows you want the extra funds applied there. If you never make extra payments, you’ll take the full loan term to pay off your mortgage.
Paying extra on the principal will allow you to build equity, pay off the mortgage faster, and lower your costs on interest. Whether you can fit it in your budget or if you believe there is a better use for your money depends on your personal situation.
Mortgage principal is the amount you borrow from a lender; interest is the amount the lender charges you for borrowing the principal.
When you make extra payments or pay a lump sum to your lender, you can specify that those funds should be applied to your mortgage principal. This will reduce your principal and your interest payments.
Yes. Since loans are typically amortized, at the beginning of the loan term, most of your monthly payment will be applied toward your interest charges. Over time, that balance will shift as you pay down your mortgage, and principal will be most of each payment that you make closer to the end of your loan. Your decreasing principal amount is sometimes called your outstanding mortgage principal vs. mortgage principal balance.
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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.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SOHL-Q325-035
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