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If you’re thinking about buying an apartment, you’ll probably look at co-ops and condos rather than single-family homes.

Read on to understand the difference between condos and co-ops, the forms an apartment might take, and who might be best suited to buy one.

What Is an Apartment?

An apartment is a property within a larger building, and especially in big cities, it’s not uncommon to hear that someone is buying an apartment.

When a buyer is considering different types of homes, the price of an apartment often beats that of a single-family home with land.

Both co-ops and condos allow residents to use the common areas, including pools, gyms, and courtyards. If you buy a condo, you’ll own everything within your unit and have an interest in the common elements. If you “buy a co-op apartment,” that really means you’ll hold shares in the residents’ housing cooperative, a nonprofit corporation that owns the property, and will have the right to live in one of the co-op units. Shares are based on the market value of each unit.

Getting a mortgage loan for a co-op might be harder than for a condo. You aren’t actually buying real estate with the former. (A home loan help center may, well, help.)

And monthly fees tend to be higher at a co-op than for a condo.

Then again, the co-op fee may cover more, co-op units tend to cost less per square foot, and the closing costs of a co-op deal are often lower.

What Are the Types of Apartments?

Diving further into the definition, the apartment shape-shifts. While they may all technically be apartments, each comes with its own quirks and defining characteristics. Especially if you’re a first-time homebuyer, you’ll want to get comfortable with the lingo. Layouts or terminology may vary by building or region.

Studio

The ultimate open-concept space, a studio is a one-room apartment with a bathroom. The bedroom, living room, dining room, and kitchen are all in a single room.

Alcove Studio

An alcove studio, if L shaped, has a built-in nook to signify where a bed and small dresser could go. Older units might put the alcove in the middle of the room. If an average studio is 550 square feet, the alcove might add 40 — not much, but a big dose of privacy.

Alcove studio apartments are often more expensive than studios but cheaper than true one-bedroom units.

Convertible Apartment

A step up, size-wise, from a traditional studio, a convertible apartment may have a bedroom or a flex space that could be used as an office. The space might have a sliding glass door or partial wall that has an opening instead of a door.

By some definitions, a convertible apartment is bigger than a typical studio but doesn’t quite have the square footage of a one-bedroom unit. A bedroom, according to New York City regulations, must be at least 80 square feet and have space for at least one window of 12 square feet or larger.

Micro-Apartment

The micro-apartment might be the perfect fit for a minimalist. Usually micro-apartments are even smaller than studios, at about 350 square feet, and are popular in densely populated, high-cost cities. Micro-apartments offer enough space for a bed, sitting area, kitchenette, and tiny bathroom.

A micro-apartment might have a Murphy bed or a futon that folds into a bed at night.

Loft

Lofts are typically retrofitted from a factory or other commercial building. In one open space (except the bathroom), lofts have high ceilings, large windows, and perhaps an overall industrial feel.

Garden Apartment

A garden apartment can refer to two distinct types of units, so buyers should pay attention. A garden apartment can be a unit in the basement or on the ground floor of a small apartment building.

A garden apartment can also mean apartment buildings surrounded by greenery in either an urban or suburban area. These buildings are typically no higher than three stories and have access to green space, such as a park or trail.

High-Rise

A high-rise apartment building has 12 floors or more. When apartment buildings enter high-rise territory, residents can expect one or more elevators.

Mid-Rise

A mid-rise apartment building is between five and 11 stories tall. Expect an elevator in the building.

Low-Rise

A low-rise apartment building is anything shorter than five stories. With a low-rise apartment, there’s no guarantee of an elevator.

Railroad Apartment

A railroad apartment is laid out like a train car, meaning one room leads to the next without a hallway. Railroad apartments are typically found in older buildings or converted properties.

Walk-Up

In a walk-up, residents should expect to, well, walk up to their apartment. The designation implies that the building doesn’t have an elevator.

Walk-up apartments are often more affordable than elevator-accessible units, as stairs may be inconvenient or unmanageable.

Recommended: Tips to Qualify for a Mortgage

Should You Live In an Apartment? Who Are Apartments Best Suited for?

Apartment living isn’t for everyone. Those best suited to an apartment might want some or all of the following:

•   City living. Apartments are often in densely populated areas, meaning residents want to be near the hustle and bustle.

•   Limited space. Apartments typically have less space than traditional family homes, so they are often best suited for small families or singles.

•   Low maintenance. Exterior repairs and maintenance, and even some utilities, are up to the building at large, not the resident.

•   Relatively good price. Apartments are typically more affordable than nearby single-family homes, meaning they could be a good fit for the price-sensitive buyer.

•   Minimal lifestyle. Those who don’t need a lot of space may prefer a condo or co-op unit to a sprawling home.

Pros and Cons of Living in an Apartment

As with any type of home, living in an apartment comes with its benefits and drawbacks.

	Pros	Cons
Outdoor space	Residents aren’t responsible for maintaining exterior or green space.	Limited or no private green outdoor space — or no outdoor space at all.
Maintenance	Residents are typically responsible for their unit alone.	The monthly fee can be high and on the rise.
Group living	Neighborly vibe and shared amenities that could include a gym, pool, rooftop patio, and business center or community room.	Close proximity to neighbors, often with one or more shared walls, floors, or ceilings.
Square footage	Apartments are often smaller, which means less upkeep, from cleaning to repairs.	Smaller spaces can mean less storage and room to spread out.
Affordability	Apartments tend to be more affordable than single-family homes in the same area.	Condos and co-op units don’t appreciate as quickly as single-family homes.

The Takeaway

If you’re interested in buying an apartment, you’re probably talking about a condo or co-op unit. Apartments come in all shapes and sizes and can sometimes be a little trickier to finance than traditional homes. But with a bit of smart shopping and some good research skills you’re likely to find both the apartment and the mortgage loan that is the best fit for you.

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.

FAQ

What are the costs of owning an apartment?

Apartments come with a monthly fee. Condo fees are usually lower than a co-op’s, because the latter fee can include payment for the building’s mortgage and property taxes, utilities, maintenance, and security.

Is it a good idea to buy an apartment?

For a buyer focused on less maintenance and typically limited square footage, an apartment may be the right fit.

What should I look for when renting an apartment?

One of the first things to ask when renting an apartment is what is included. Does rent include any utilities, laundry in the unit, or parking?

It’s a good idea to also ask about credit requirements, application fee, security deposit, and terms of the lease.

What credit score do you need to rent an apartment by yourself?

All landlords are different, but many look for a FICO® score above 600. Not all property managers look at credit scores, though.

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Photo credit: iStock/hrabar

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.

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

*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.

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.

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.

SOHL-Q224-1903803-V1

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A wrap-around mortgage is a form of seller financing that benefits the seller financially and helps buyers who can’t qualify for a traditional mortgage.

There are risks associated with this kind of creative financing, and alternatives to consider.

What Is a Wrap-Around Mortgage?

Traditionally, a buyer weighs the different mortgage types and obtains a mortgage loan to pay the seller for the home. The seller’s existing mortgage gets paid off, with any extra money going to the seller.

With a wrap-around mortgage, a form of owner financing, the original mortgage is kept intact, and the funds a buyer needs to purchase the home are “wrapped around” the current balance.

How Does a Wrap-Around Mortgage Work?

First, the seller must have an assumable mortgage and lender permission to wrap the mortgage. The seller and buyer agree on a price and down payment.

The buyer signs a promissory note, vowing to make agreed-upon payments to the seller. The seller might transfer the home title to the buyer at that time or when the loan is repaid.

The seller continues to make regular mortgage payments to their lender, keeping any monetary overage.

To make this feasible and worthwhile to the seller, the buyer typically pays a higher interest rate than what’s being charged on the original loan (on which the seller is still making payments).

Let’s say you want to sell your home for $200,000, and you still owe $75,000 on your mortgage at 5%. You find a buyer who is willing to pay your price but who can’t get a conventional mortgage approved.

Your buyer can give you $20,000 for a down payment. The two of you will then sign a promissory note for $180,000, at, say, 7%. You’ll make a profit on the spread between the two interest rates and the difference between the sale price and original mortgage balance.

If you’re crunching numbers, a mortgage payment calculator can help.

What Are the Advantages of a Wrap-Around Mortgage?

Here are ways that a wrap-around mortgage can benefit the buyer as well as the seller.

Benefits for the buyer:

•   A carry-back loan allows you to buy a house that you might not otherwise qualify for, perhaps because of low credit scores.

•   As long as a seller is willing to sell to you under this arrangement, your financing is essentially approved without your needing to do anything else.

•   You’ll pay no closing costs on the loan.

•   If you are self-employed, you likely won’t need to provide statements from past income as you would with a traditional mortgage lender. The seller may only be interested in your ability to pay now.

Benefits for the seller:

•   You don’t need to wait for a buyer to be approved for financing.

•   You can charge a higher interest rate than what you’re paying, allowing you the opportunity to create steady cash flow and make a profit.

•   In a buyer’s market, where the supply of homes for sale is greater than demand, your willingness to offer a wrap-around mortgage can make you stand out.

Are There Risks With Wrap-Around Mortgages?

Yes. Wrap-around mortgages come with risks for both buyers and sellers.

Risks for the buyer:

•   You’ll likely want to pay an attorney to review the agreement. If you don’t, then you’re assuming more of the risks as described in the next two bullet points.

•   You are putting your trust in the seller. If they don’t keep up the mortgage payments on the original loan, the home could go into foreclosure. (You could ask to make payments directly to the lender, which the seller may or may not agree to.)

•   If the seller has not told their lender about the arrangement, this could lead to problems. If the original mortgage has a due-on-sale clause, the financial institution could demand payment in full from the seller.

Risks for the seller:

•   The buyer may not make payments on time — or could stop making them altogether. If this happens, you still owe mortgage payments to your lender.

•   Any lag in making your payments can have a significant negative impact on your credit scores, making it more challenging to get good interest rates on loans.

•   Suing the buyer for past-due funds can get expensive, and if the buyer doesn’t have the money to pay you, this may not provide you with any real mortgage relief.

If you’re shopping for a mortgage, it can make sense to explore alternatives. A home loan help center is a good place to start.

Alternatives to Wrap-Around Mortgages

Alternatives can include the following:

•   FHA loans

•   VA loans

•   USDA loans

Here’s an overview of each.

FHA Loans

With loans insured by the Federal Housing Administration, FHA-approved lenders can offer low down payments while easing up on credit scores required to qualify.

VA Loans

The U.S. Department of Veterans Affairs offers low-interest-rate VA loans directly to qualifying borrowers (based on service history and duty status) and backs loans made by participating lenders.

USDA Loans

The U.S. Department of Agriculture guarantees USDA loans for qualifying rural Americans who have low to moderate levels of income. The USDA also offers funding to improve homes to safe and sanitary standards.

The Takeaway

A wrap-around mortgage could sound enticing, but buyer beware. Taking time to repair damaged credit or looking into other types of loans might make more sense. If you do enter into this transaction, you’ll probably want to involve a lawyer to make sure your interests are protected.

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.

FAQ

Is a wrap-around mortgage a good idea?

This type of mortgage has benefits and risks for both the buyer and the seller.

What is an example of a wrap-around mortgage?

Let’s say a buyer can’t get traditional financing but agrees to purchase a $250,000 house from the seller, with some down payment. The seller still owes $50,000. The buyer agrees to make payments to the seller on the purchase price, and the seller uses a portion of that money to make the usual mortgage payments. The seller profits from charging a higher interest rate than that of the original mortgage.

Who is responsible for a wrap-around loan?

The buyer will be responsible for making payments to the seller according to the agreement signed by the two parties. The seller will be responsible for continuing to make payments on the original mortgage until it is paid off. So both parties have responsibilities to fulfill.

Can wrap-around loans help a buyer purchase a home?

Yes. The key benefit for buyers is that seller financing helps them purchase a home that they otherwise may not have been able to own.

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Photo credit: iStock/Tatiana Buzmakova

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.

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

*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.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

SOHL-Q224-1904627-V1

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Even in a hot real estate market, it’s possible to learn how to buy a house with no money down. The trick is, you need to know where to look. Zero-down home loans aren’t available everywhere and to every borrower, but if you do qualify and can find an area with a zero-down mortgage, homeownership could be much more attainable.

Here’s exactly what you need to know about how to buy a house with no money down.

Can You Buy a House With No Money Down?

You can buy a house with no money down with certain loan programs in certain areas. There are more homeowner resources to help you buy a home than you may realize, and first-time homebuyer qualifications can be more flexible than you know. Here’s where to look for and what to expect on a zero-down mortgage.

Recommended: Learn more about first-time home buyer programs.

How to Buy a House With No Money

Of all the things you need to buy a house, a down payment holds many buyers back. But there are a few avenues you can take to get a mortgage loan and buy a home with no money down.

•   Buy a home with a VA or USDA loan. These loans, from the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture, are no down payment mortgages

•   Receive assistance for your down payment or closing costs from a state or local program or a family member

•   Receive a lender credit

•   Ask for a seller concession

USDA Loan

A USDA loan requires no money down and is intended for buyers in rural areas. There are two ways the U.S. Department of Agriculture loans money:

•   Single-family housing direct loans

•   Single-family housing guaranteed program

The direct loans are issued by the USDA and come with a 33-year term for low- and very-low-income households. (Very-low-income applicants may stretch the repayment term to 38 years.) The guaranteed program is run through approved lenders with a 30-year fixed rate for low- to moderate-income households.

VA Loan

A VA loan guaranteed by the U.S. Department of Veterans Affairs is a zero down payment mortgage with low interest rates for qualified veterans, active-duty service members, certain reservists and National Guard members, and surviving spouses. Most borrowers pay a one-time funding fee, which can be rolled into the loan. Lenders can be more flexible with credit scores, mortgage amounts, and debt-to-income ratios.

Down Payment and Closing Cost Assistance Programs

Many city and state agencies offer different mortgage types and down payment assistance to buyers, especially low- to moderate-income homebuyers, first-time homebuyers, veterans, and people buying in federally targeted areas.

The terms vary. Sometimes the assistance for a down payment is in the form of a second mortgage that is repaid over time. Other terms include deferred payments that are only due if the property is sold, loans that are forgivable if the property is occupied by an owner for a specified amount of time, and even grants.

HUD, the U.S. Department of Housing and Urban Development, steers homebuyers to city, state, and nonprofit programs that offer down payment assistance.

Down Payment Gift From a Family Member

A down payment gift from a family member can also help you buy a house with no money down. The main thing to remember about a down payment gift from a family member is that the money must be properly documented with a gift letter. Your lender will likely provide a template to make sure you have all the crucial elements included.

Lender Credits

Lender credits are what you get when you agree to pay a higher interest rate in return for some money that the lender contributes toward your closing costs. The more lender credits you receive, the higher your rate will be. With some lenders, you can cover your closing costs entirely with lender credits. This is a common practice when refinancing a loan.

Seller Concessions

One strategy real estate agents have used is to ask for a credit from the seller, to be contributed toward the buyer’s closing costs. Making an offer above asking price in tandem with the seller concessions makes this option more palatable for sellers in a competitive housing market.

Recommended: Home Loan Help Center

The Takeaway

Learning how to buy houses with no money takes some research, but could be well worth your time. With a VA or USDA loan, down payment assistance, gift money, or lender credits, it is possible to obtain a no money down mortgage. Qualifying first-time buyers can also still catch a break with a conventional mortgage loan — some lenders will let you put just 3% down.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can cash gifts be used as a down payment?

Yes, but certain rules must be followed for the gift to be documented by the lender, usually in the form of a gift letter.

Are there any homebuyer grants?

Sometimes. They’re usually reserved for first-time buyers, veterans, or people buying homes in federally targeted areas. You might start a search for assistance with your state housing finance agency or HUD and then look for city and county programs.

What are down payment assistance programs?

Down payment assistance programs help homebuyers afford down payments and sometimes closing costs as well. This is done in the form of grants and loans and can vary by location.

What credit score do I need to buy a house with no money down?

For a zero down mortgage backed by the USDA or VA, lenders are advised to look at a borrower’s situation case by case. Approved USDA loan lenders usually require a minimum credit score of 640, though the department itself doesn’t have a credit score requirement.

Most VA loan lenders will want to see a credit score above 620, but again, the VA does not have a minimum credit score. Applicants may qualify with a score below 620 when debt, income, and the ability to shoulder future mortgage payments are given a close look.

Down payment assistance programs often require a minimum credit score of 620.

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Photo credit: iStock/Paperkites

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.

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

*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.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

SOHL-Q224-1903338-V1

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If you’re shopping for a new home and traditional single-family houses are out of your price range or the mere idea of lawn mowing and tree trimming makes you sweat, a townhouse could be the answer. Many — but not all — buyers will find that townhouses rise to the occasion.

What Is a Townhouse?

Among the different home types, from condos to modular homes, are townhouses. But what is a townhouse, specifically? It’s a multi floor home with its own entrance that shares at least one wall (not floors or ceilings) with an adjacent townhouse. Townhomes may be part of a community of units with a uniform appearance, but that isn’t always the case.

Why Buy a Townhouse?

There are pros and cons of buying a townhouse, with benefits including the following:

•   Ownership

•   Affordability

•   Low maintenance

Here’s more about each benefit.

Ownership

It’s a bit tricky because some townhouses are sold as condos. If you buy a townhome as a condo, you will own just the inside of your unit. If you buy it as a townhouse, you’ll own the interior and exterior of the structure and the land under and sometimes around your property.

This means fewer restrictions on how you’d use your yard compared with a condo owner. Townhouse owners could, as just one example, have the right to grill in their private outdoor space.

Ownership of the structure and land also means that financing a townhouse is much less complicated than financing a condo. It’s basically the same as getting a mortgage for a detached single-family house.

Affordability

Townhouses are typically less expensive than detached single-family homes, which can be especially important in expensive cities and for first-time homebuyers. Townhouses can serve as space-efficient choices, too, in places where land is scarce.

Note that townhouses may be more expensive than a condo in the same community.

Low Maintenance

Yards are likely smaller and, if the townhouse is part of a homeowners association (HOA), you may benefit from its security protocols and maintenance of shared areas. In some cases, you can enjoy amenities like pools because of HOA membership.

Some home downsizers may appreciate the lack of interior and exterior sprawl to maintain.

Recommended: First-Time Homebuyer Guide

Disadvantages of Buying a Townhouse

Buying a townhome can also come with disadvantages, including:

•   HOA fees and restrictions

•   Lack of privacy

•   Stairs

Here’s more about each potential disadvantage.

HOA

If the townhouse is part of an HOA, there will be fees to cover shared services and spaces. Plus, HOA rules may limit how you can decorate your townhouse. Who is responsible for exterior repair costs can sometimes cause confusion. So be sure to find out the specifics of a townhome you’re interested in buying.

Lack of Privacy

Shared walls automatically mean less privacy than with a detached home, which can be especially problematic for families with young children. This can also be a consideration for young couples who may want to start a family or for other people for whom privacy is a plus.

Stairs

Because townhouses are multistory dwellings, residents will need to climb stairs, which can be challenging for those with temporary or permanent mobility issues. Plus, if someone is used to a larger yard, having a small lot with neighbors nearby can feel constraining.

How to Buy a Townhouse

When buying a townhome, there are several steps to take.

Find a Real Estate Agent

Very few buyers go it alone, so finding a real estate agent who is experienced in your geographical location can help you to make savvy choices. This agent can guide you through the process of finding the right townhouse and help negotiate the best deal for you.

Know the Market

An experienced real estate agent can look into comps, or recently sold townhomes in the area that are similar in size, condition, and features, and you can also use a real estate website to find asking prices of similar townhouses and other real estate in the area.

If more than one buyer is interested in the same townhouse, you’ll need to be clear in your mind about how much you’re willing to pay for the property and strategically make an offer without busting your budget.

Investigate the HOA Fees

If the townhouse is part of an HOA, you’ll want to know what the monthly fees will be and what they’ll cover.

You might ask when the HOA last raised the fee, by how much, and when any new increase might happen. Looking at the HOA’s budget and reserve study could also be a good idea. If the reserves are low, the community is at risk of needing a special assessment.

Shop for a Mortgage and Get Preapproved

If you’re shopping for a mortgage, you’ll benefit from looking at more than advertised interest rates. You can apply with more than one lender and then compare loan estimates.

You may want to compare the APR of different loans: The annual percentage rate reflects the interest rate, lender fees, discount points, and the loan term. If comparing, realize that escrow fees and mortgage insurance can skew the APR.

The loan estimate will also tell you what your monthly payment would be on your home mortgage. To get a sense of what a payment might be with different down payments, you can also use an online mortgage calculator.

By getting mortgage preapproval, you’ll know exactly how much of a townhouse you can afford to buy, which can give you the ability to bid on a property with confidence and compete with other buyers for a property of choice.

Order a Home Inspection

It’s a good idea to get the townhouse inspected inside and out. Also pay attention to how well neighbors are maintaining their properties.

The Takeaway

Buying a townhouse could be a good choice for first-time homebuyers, lawn-mower phobics, downsizers, and people priced out of the larger market. If you decide that buying a townhome is the right choice for you, you’ll probably need to apply for a mortgage.

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.

FAQ

Is it worth buying a townhouse?

Townhouses, in general, don’t appreciate in value as quickly as detached single-family homes. But the purchase price is often lower.

Is a townhome a good first home?

A townhouse can be a good first home because of the low maintenance, and amenities may be included. Plus, the price is right for many first-time homebuyers.

Why shouldn’t you buy a townhouse?

Disadvantages can include a lack of privacy and usually a small yard. If an HOA is in place, ongoing fees and rules are involved. Plus, the stairs that come with townhomes may be challenging for some people to navigate.

How do I choose a good townhouse?

When buying a townhome, make sure that it has the features you want and need in a neighborhood where you’d like to live at a price within your budget. If it’s part of an HOA, ensure that the fees are palatable and cover what you expect them to.

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Photo credit: iStock/cmart7327

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.

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

*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.

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Wondering whether to pay off a mortgage or put the funds toward investments is a happy dilemma for some homeowners. The answer will depend on your financial situation, but let’s look at pros and cons of each along with a strategy that can allow you to combine the best of both worlds.

Paying Off a Mortgage vs Investing in the Market

Maybe you’ve socked away a nice savings. Or perhaps you inherited some money. If you’re trying to decide whether to put the money toward paying down your home mortgage loan or into the market, it helps to understand the mortgage payment process.

How Does a Mortgage Loan Work?

There are different mortgage types you likely considered when shopping for a mortgage, but in general, someone borrows money from a lender to buy a house at a certain interest rate and term length. As payments are regularly made (usually monthly), part of each payment goes toward the principal, lowering the balance. Early on in the life of your loan, the bulk of the payment will cover your interest charges. As the balance goes down, more of each payment typically goes toward the principal.

Recommended: Answers to Common Mortgage Questions

Components of a Mortgage Payment

You may hear the components of a mortgage payment summarized in an acronym: PITI. This stands for principal, interest, taxes, and insurance.

Principal

Initially, your principal is the amount of money you borrow. As you pay down your loan, the principal is the remaining (current) balance. When it comes to the mortgage loan payments themselves, the principal is the portion of the payment that goes toward the balance, reducing the amount. As noted above, as the balance goes down, more of your payment goes toward the principal and less to interest.

Interest

The interest is based on the interest rate charged on the loan’s principal, and these dollars go to the lender, serving as a key part of the cost of borrowing. As your loan balance goes down, less of your payment typically goes toward interest. Most mortgage loans have a fixed interest rate; others are variable, based on a certain financial index.

Move your cursor on the amortization chart of this mortgage calculator tool to see how principal and interest change over time.

Taxes and Insurance

A mortgage payment typically contains a month’s worth of property tax, which is based on the assessed value of the home and the tax rate where you live. A payment also may include a month’s worth of homeowners insurance and, if applicable, mortgage insurance that protects the lender in case of default.

Investment Gains vs Loan Interest Saved

At a high level, to determine which strategy can have the biggest positive financial impact, you can compare what investment gains you’ve had (or estimate future gains) and compare that to how much interest you would save when paying down your mortgage more quickly.

Pros and Cons of Paying Off Your Mortgage Early

Pros include the following:

•   You won’t have a mortgage payment anymore, which frees up money for other purposes: investing, paying for a child’s college expenses or wedding, and so forth.

•   You no longer have to worry about having the funds to make your payment. This can be especially helpful if unexpected expenses arise.

•   Typically, paying off your mortgage early will lower the amount of money that you pay in total interest — which means that you’ll pay less for your home overall.

•   Paying off a mortgage early gives you a guaranteed financial return, while there is always risk involved in putting money into the market.

•   If you need to borrow against the home in the future, none of the proceeds will be needed to pay off a current mortgage.

Cons include the following:

•   If the current stock market return rate is pretty good and your mortgage rate is low, paying off your mortgage early could have a lower rate of return than being in the market.

•   Your credit score could drop a bit because you’ll no longer have a mortgage in your mix of open types of credit.

•   Focusing on rapidly paying off a mortgage may cause someone to drain their emergency savings fund, something that’s not typically recommended.

•   Although uncommon now, some lenders charge a prepayment penalty for early mortgage payoffs. When this clause exists, it’s for the first three years of a mortgage. Check your mortgage note for specifics, or ask your lender or loan servicer.

•   When you no longer have a mortgage, you no longer qualify for the mortgage interest tax deduction.

Pros and Cons of Investing

Pros include the following:

•   Many times, when you buy shares of stock, you can get a good return on your investment in the long term. To get a sense of current returns, you can check the 10-year annualized return for the S&P 500.

•   If you’re in a workplace retirement plan, like a 401(k), your employer may match your contributions up to a certain amount.

•   Stocks are liquid assets, which means that you can buy and sell a portion of your portfolio at any time. You can’t really do that with a house. Plus, some stocks will provide you with dividends that you can reinvest or spend.

Cons include the following:

•   You could lose your entire investment in the stock market, including the initial investment. If you’re a common stockholder, you get paid last if a company defaults.

•   If you’re managing your own portfolio, you’ll need to invest time into investigating stocks, deciding what to buy and sell, and otherwise monitoring the stock market.

•   If you sell stocks at a profit, you’ll usually need to pay capital gains tax (although this can be offset if you also have some losses).

•   While investing, you’ll still need to make your mortgage payment (until the home is paid off).

•   Depending on your personality type, watching a stock that you own decline in value can be an emotional experience, and for some people, keeping tabs on their portfolio can be stressful. check that portfolio.

Evaluating Your Financial Situation

You may feel the urge to pay down your mortgage or make investments, but whether you should actually do so requires calculating two key figures: your net worth and your debt-to-income ratio (DTI). To determine your net worth, add up all of your assets (what you own) and subtract your liabilities (what you owe). Assets include your home’s value, vehicles, bank accounts, investments, and cash. Do not include your income. Liabilities are your mortgage, car, personal and student loans, credit card balances, and so forth. If you owe more than you own, the time may not be right to make a big investment — in either your home equity or the stock market — even if you are paying all your bills on time.

For the second metric — your DTI — add up your gross (pre-tax) monthly income as well as your monthly debt obligations, such as your mortgage, car payment, and other loan payments. Divide your total monthly debt by your total gross monthly income, and the resulting ratio (say, 0.30 or 30%) is your DTI. A lower DTI (say, under 30% or even 20%) indicates more cash flow to either put toward your mortgage or to invest.

Factors You Should Consider

Timing The earlier you can begin to apply extra payments to pay down your mortgage principal, the more you’ll benefit, because a lower principal will reduce interest over the life of the loan. That said, the earlier you can begin to invest, the longer you’ll have for your investments to build in value. Plus, because of compound interest, each dollar that you invest today will be worth more than a dollar that you would invest years from now.

Taxes Starting in 2018 and set to last through 2025, the federal government nearly doubled the amount of the standard deduction that taxpayers can claim. This means that far fewer people itemize their deductions, which in turn means that the mortgage interest deduction isn’t used by those taxpayers when they file their income taxes.

Home values If real estate values are dropping in your area, paying down your mortgage can help you from going underwater (owing more on the home than what it’s currently worth). Being underwater can make it more difficult to sell or refinance the home. Struggling homeowners can look for mortgage relief programs.

Recommended: Home Loan Help Center

Other Considerations

To this point, the post has largely focused on this question: Is it better to pay off a mortgage or invest? Let’s take a step back and look at issues to consider before doing either. First, do you have an emergency savings fund that could cover your monthly expenses for three to six months? If not, that’s a priority often recommended by experts.

Plus, if you have high-interest debt, such as credit card balances that you don’t pay off each month, it’s usually better to pay that off before either paying extra on your mortgage or investing.

Another strategy: You could consider refinancing your mortgage to a lower rate to lower your mortgage payment. Then, when you put extra money toward the balance, even more would go to the principal than when the interest rate was higher.

Deciding What’s Best for You

Pay off your house or invest? Perhaps the information provided has already allowed you to make a decision. However, there’s one more strategy to consider: doing both.

Best of Both Worlds: Funding Both at Once

Instead of simply considering two options, pay off mortgage or invest, another possibility meets in the middle: making additional contributions to your investments while also paying extra on your mortgage principal. This is most effective early on, but adds value through the life of the mortgage.

If the stock market becomes especially volatile or is significantly heading downward, you could focus on the mortgage paydown during that time period.

The Takeaway

Whether you choose to pay off a mortgage or invest depends on your financial situation and priorities. Each choice has pros and cons, but a best-of-both-worlds strategy is to do both.

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.

FAQ

Is there any disadvantage to paying off your mortgage early?

If a mortgage note includes a prepayment penalty, this can cost you money. Other disadvantages are loss of the mortgage interest tax deduction and a potential drop in credit scores. Plus, it may be more advantageous to invest those dollars instead.

Should I pay off my mortgage or save money?

It depends, but you definitely want to make sure you save up three to six months of expenses in an emergency fund before you pay down your mortgage.

Is it better to pay off my mortgage or invest for retirement?

Ideally, you can do both. If that’s not financially possible right now, weigh the interest rate on your loan and whether or not you benefit from the mortgage interest deduction on your tax return vs. what you think you might be able to earn on investments in the market. This will help you make your decision.

Should I invest when I have a mortgage and other debts?

If “other debts” include high-interest debt, such as credit cards that aren’t paid off in full each month, it typically makes sense to prioritize the payoff of that debt over investing. If your employer offers a retirement plan with a company match, you might want to prioritize that investment in order to capture the match. And if you are paying your current debts comfortably, investing more widely could be the right move.

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Photo credit: iStock/burcu saritas

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.

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

*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.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

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