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If your monthly mortgage payment no longer fits your lifestyle or financial goals, you may be able to change it with mortgage refinancing or recasting. Recasting and refinancing are two ways a borrower can save on mortgage costs — sometimes a jaw-dropping amount. To understand which might be best for you, it helps to understand the difference between them and the pros and cons of recasting your mortgage vs. refinancing.

The Difference Between Recast and Refinance

Recasting is the reamortizing of an existing mortgage, meaning the lender will recalculate your monthly payments. Refinancing involves taking out a completely new mortgage with a new rate, and possibly a new term, and paying off your old mortgage in the process.

Recasting

If your lender offers mortgage recasting and your loan is eligible, here’s how it works: You make a large lump-sum payment — $10,000 might be required — toward the principal balance of your mortgage loan. The lender recalculates the monthly payments based on the new, lower balance, which shrinks the payments. The lender may charge a few hundred dollars to reamortize the loan.

Mortgage recasting does not change your loan length or interest rate. But because your principal amount is lower, you’ll have lower monthly payments and will pay less interest over the life of the loan.

If you were to put a chunk of money toward your mortgage principal and not recast the loan, your payments would not change, though the extra principal payment would reduce your interest expense over the life of the loan.

Who might opt for mortgage recasting? Someone who has received a windfall and wants to put it toward the mortgage might like this option. Sometimes it’s someone who has bought a new home before selling the previous one. Once the old home is sold, the homeowner can use some of the proceeds to recast the new mortgage.

Another candidate for recasting might be someone who wants to use the lump sum to pay their loan down to 80% of the home’s value so they can request to stop paying for private mortgage insurance (PMI) or get it automatically dropped (when they reach 78%).

FHA, VA, and USDA loans are not eligible for mortgage recasting. Some jumbo loans are also excluded. If you want to change the monthly payments on those types of mortgages, you’ll need to refinance your loan.

Refinancing

When you seek refinancing, you’re applying for a brand-new loan with a new rate and terms, possibly from a new lender. Most people’s goal is a lower interest rate, a shorter loan term, or both.

While finding a competitive offer might take some legwork, refinancing could help you save money. A lower interest rate for a home loan of the same length will reduce monthly payments and the total amount of interest paid over the life of the loan.

A homeowner who refinances to a shorter term, say from 30 years to 15, will pay much less total loan interest. Fifteen-year mortgages also often come with a lower interest rate than 30-year home loans.

Refinancing may make sense for homeowners who are planning to stay put for years; those who want to switch their adjustable-rate mortgage to a fixed-rate one; and borrowers with FHA loans who want to shed mortgage insurance premiums (MIP), on a loan they’ve paid down or a home that has appreciated. Most FHA loans carry mortgage insurance for the life of the loan. Equity-rich homeowners who’d like to get their hands on cash may find cash-out refinancing appealing.

Recommended: Mortgage Questions for Your Lender

Pros and Cons of Mortgage Recasting

There are both positive and negative aspects to mortgage recasting.

Pros of Recasting

Mortgage recasting lowers your monthly mortgage payments and lets you save on total loan interest while keeping the same interest rate. Since you recast your mortgage with your existing lender, the process is pretty straightforward, and the cost could be as low as $150.

Cons of Recasting

There are some potential drawbacks to mortgage recasting, as well. Making a large lump-sum payment means you could be trading liquidity for equity – and creating financial instability if unexpected expenses arise or if the housing market takes a downward turn.
If you have other debts with higher interest rates, you may want to avoid mortgage recasting. It could make more sense to use the money you would put toward the principal to pay down your higher-interest debt first.

“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.

Recommended: Cash-Out Refinance vs HELOC

Pros and Cons of Mortgage Refinancing

Mortgage refinancing also has upsides and downsides.

Pros of Refinancing

If you are eligible to refinance, you won’t need a large cash source in order to lower your mortgage payments. Instead, your main goal is to qualify for a lower interest rate. If you succeed, you will save a lot of money in interest over time.

With a cash-out refi, you can tap your home equity and use that money for whatever you need to do: pay down higher-interest debt, add to the college fund, or remodel your kitchen.

Cons of Refinancing

Reducing your loan term with a refi could result in a higher mortgage payment, even though it can let you save total interest over the life of the new loan.

Refinancing involves closing costs, which could range from 2% to as much as 6% of the remaining principal. You’re taking out a new mortgage, after all. Some lenders will let you roll closing costs into your loan, though this may raise your interest rate or your loan balance.

To figure out whether a refinance might be worth the price of closing costs, it’s a good idea to calculate the break-even point, when interest savings will exceed closing costs. Everything beyond that break-even point will be savings.

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

When to Choose Recasting Over Refinancing

Recasting vs. refinancing can seem like a tough choice. But there are a number of situations in which a recast may make more sense.

•   You’ve gotten a windfall and don’t have other pressing financial issues. A recast allows you to cheaply and easily reduce your monthly payments.

•   You have a better rate on your mortgage than you could get today. A recast will let you keep that rate, while reducing your payments.

•   You’re self-employed or have poor credit and would have difficulty qualifying for a mortgage refinance, but you want to lower your monthly payments.

•   You want to lower your monthly payments with a cheaper, faster process than a refinance.

Factors to Consider Before Making a Decision

As you contemplate getting a mortgage recast vs. a refinance, there are a few things to keep in mind.

Loan Type and Lender Policies

It may sound appealing to recast vs. refinance your mortgage but only conventional loans are eligible. If you have a government-backed loan – like a VA home loan or an FHA mortgage – you may need to consider a refinance vs. a recast.

Even if you do have a conventional loan, you’ll still need to find out if your lender offers mortgage recasts (not all of them do). If your lender does provide mortgage recasts, ask what your lender’s requirements are and see if you meet them. Typically, lenders may want:

•   A minimum payment toward principal – typically $10,000

•   Sufficient home equity, as determined by the lender

•   Good financial standing, meaning that you have built up a history of on-time payments

Long-Term Financial Goals

Before you decide on mortgage recasting vs. refinancing, you’ll want to review which process aligns better with your long-range plans.

Say you’re planning an early retirement. If you’d really like to pay off your mortgage soon and not have to budget for that monthly payment any longer, you may want to consider a mortgage refinance vs. a recast. It will let you adjust your interest rate and loan term. And though closing costs are more expensive than a recast servicing fee, a refinance can let you pay your loan off earlier.

However, if you’re planning to work for the next 30 years but would like to pay less each month and save on your overall interest, a mortgage recast vs. a refinance may make sense for you. That’s especially true if you’ve gotten a windfall – from a bonus at work or from selling a previous home, for instance – and don’t have other pressing debts or needs.

A recast may also be appealing if you already have a great interest rate and probably couldn’t get a better one, for instance. Or if you just started a business and don’t have the kind of documentable financial stability a lender would want to see before giving you a refinance. In these situations, you may want to consider recasting your mortgage vs. refinancing.

The Takeaway

A mortgage recast vs. refinance: different animals with similar aims. A recast requires a lump sum upfront but will shrink payments and total loan interest. A mortgage refinance may greatly reduce borrower costs and sometimes free up cash or shorten the loan term. The one that is right for you will depend on your current loan terms and your available cash, among other factors.

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

FAQ

Can you recast and refinance at the same time?

Not exactly. However, a cash-in refinance combines characteristics of both, letting you make a large payment toward your principal as you get a new home loan. This allows you to get new and, ideally, more favorable terms on a smaller loan, which can save you money. You will, however, have to pay closing costs.

Can you recast any type of mortgage loan?

No. You can recast conventional loans, but not government-backed loans like FHA or VA mortgages. Some lenders may recast jumbo loans.

Does recasting your mortgage affect your interest rate?

Unlike refinancing, recasting your mortgage doesn’t change your interest rate or your loan term.

Are there fees associated with a mortgage recast?

There may be service fees for a mortgage recast, but those are typically no more than a few hundred dollars.

When is refinancing better than recasting?

You may be better off with a refinance vs. a recast if you are interested in paying your loan off earlier than originally planned, if you can get a better interest rate now, or if you don’t have a significant lump sum to put toward your loan principal.

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-criteria for more information.

SOHL-Q325-034

The Secured Overnight Financing Rate (SOFR) is the benchmark interest rate that has replaced the London Interbank Offered Rate (LIBOR) in the U.S. In fact, for the past several years, lenders have been gradually switching from using LIBOR to determine rates for consumer loans, such as private student loans, to using SOFR.

Here’s what you need to know about SOFR, including how it differs from LIBOR, and how you might be impacted by the change.

What Is the Secured Overnight Financing Rate (SOFR)?

Financial institutions now use Secured Overnight Financing Rate, or SOFR, as a tool for pricing corporate and consumer loans, including business loans, private student loans, mortgages, and credit cards. SOFR sets rates based on the rates that financial institutions pay one another for overnight loans (hence the name). The SOFR rate is published daily by the Federal Reserve Bank of New York.

SOFR is a popular benchmark because it is risk-free and transparent. It is based on more than $1 trillion in cleared marketplace transactions. This is in contrast to the index it has replaced, the London Interbank Offered Rate, better known as LIBOR. LIBOR was based on hypothetical short-term loan rates. This has historically made LIBOR less reliable and more vulnerable to insider manipulation.

Recommended: A Complete Guide to Private Student Loans

How Does the SOFR Work?

When large financial institutions lend money to one another, they must adhere to reserve and liquidity requirements. They do this by using Treasury bond repurchase agreements, known as “repos”. Using repo agreements, banks are able to make overnight loans with Treasurys as collateral.

The SOFR interest rate index is made up of the weighted averages of the interest rates used in real, finalized repo transactions. Every morning, the New York Federal Reserve Bank publishes the SOFR rate it has calculated for repo transactions on the previous business day.

Current SOFR Rates

The New York Federal Reserve publishes the SOFR rate every business day. The latest rate is:

4.30% on July 24, 2025

The History of SOFR

Financial institutions, banks, and lenders rely on certain indexes to determine interest rates. Before the 1980s, there wasn’t one particular index that was used internationally. However, during the 1980s, increased complexity in the market resulted in the need for more standardized use of a benchmark tool for determining adjustable rates.

The international financial industry adopted LIBOR as the standard because it was viewed as a trusted, accurate, and reliable index. Other indexes were still used, but the majority of institutions used LIBOR. LIBOR rates were once the basis for about $300 trillion in assets around the world.

Fast forward to around 2008, and certain large financial institutions were manipulating interest rates illegally in order to increase their profits. This was possible in part because LIBOR is based on hypothetical rates. Manipulation of rates was one factor that led to the financial crisis.

Once that manipulation was discovered, there was a global demand for a new rate benchmark and a call to end the use of LIBOR. As a result of the 2008 financial crisis, banking regulations led to less borrowing and a lessening of trading activity. Less trading made LIBOR even less reliable.

In 2017, the Federal Reserve formed a group of large financial institutions known as the Alternative Reference Rate Committee (ARRC) to work on finding an alternative to LIBOR. They ultimately chose SOFR.

Both LIBOR and SOFR were being used by banks and lenders until June 2023, when SOFR became the standard in the U.S.

How SOFR Is Different From LIBOR

There are some key differences between SOFR and LIBOR, which help explain the shift towards SOFR and away from LIBOR. Here’s a look at some of the biggest.

•   SOFR is based on completed transactions, whereas LIBOR is based on the rates that financial institutions said they would offer each other for short-term loans. Because it’s based on hypotheticals, LIBOR is more vulnerable to manipulation.

•   Lending based on LIBOR doesn’t use collateral, making it unsecured. Loans using LIBOR include a premium due to credit risk. SOFR, on the other hand, is secured, as it is based on transactions backed with Treasurys. Therefore, there is no premium included in the interest rates.

•   SOFR is a daily (overnight) rate, while LIBOR has seven variable rates.

Recommended: What’s the Average Student Loan Interest Rate?

How SOFR Could Affect You

There has been some concern that the shift away from LIBOR would cause great market disruption. However, the changeover was designed to be slow and gradual and, generally, hasn’t caused any sudden changes for borrowers.

In fact, if you have a private student loan with a fixed-rate, the change from LIBOR to SOFR has not — and will not — have any impact on your loan, since the rate is fixed for the life of the loan. If you are entering into a new loan, SOFR rates are already being used. Keep in mind, though, that only private student loans use SOFR, as federal student loans have fixed rates set by law.

If you have a student loan (or any other type of loan) with a variable rate, the shift from LIBOR to SOFR may have impacted your loan — but likely not in any noticeable way. Switching from one index (LIBOR) to a largely similar index (SOFR) — in the absence of any other market changes — won’t have much impact on a loan’s interest rate, according to the Consumer Financial Protection Bureau.

The rate on an adjustable-rate loan can go up and down over time. These changes, however, are largely due to general ups and downs in interest rates across the economy. Loan rates have been going up across the board, but that is not due to the shift from LIBOR to SOFR. Rather, it’s the result of efforts by the Federal Reserve to tamp down inflation.

Recommended: Private Student Loans vs Federal Student Loans

The Takeaway

If you have a private student loan, you may have received a notice from your lender or servicer about a change in the index rate for your loan. Instead of LIBOR, lenders in the U.S. are now using SOFR. The indexes work in a similar way and it should not have a major impact on your loan. If you’re in the market for a new loan, you won’t be affected by the switch, since U.S. lenders have already made the shift to SOFR.

Keep in mind, though, that interest rates on loans are based on numerous factors, including general market conditions and your qualifications as a borrower.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

What is the secured overnight financing rate?

The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate based on overnight repurchase agreements (repos) collateralized by U.S. Treasury securities. It reflects the cost of borrowing cash overnight in the repo market.

What is a 30-day SOFR?

The 30-day SOFR is the average of the daily Secured Overnight Financing Rates (SOFR) over a 30-day period. It provides a measure of the cost of borrowing cash secured by U.S. Treasury securities over a month.

Is SOFR a risk-free rate?

SOFR is considered a nearly risk-free rate because it is based on transactions in the highly liquid U.S. Treasury repo market. However, it is not entirely risk-free, as it can be affected by market conditions and liquidity constraints.

Photo credit: iStock/Nicholas Ahonen

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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.

SOISL-Q325-038

What happens when you pay off your mortgage? You may have some paperwork and account switching (such as property taxes) to take care of. And you may look forward to greater cash flow.

But is paying off a mortgage always the right move? In some cases, a person who is about to pay off a mortgage may want to consider a couple of options that might make more sense for their particular financial situation.

Learn more about the payoff path and alternatives here.

Should I Pay Off My Mortgage Early?

Paying off your mortgage is a fantastic milestone to reach, but it’s not without trade-offs. Here are a few considerations to help you make the best decision for your situation.

Pros of Paying Off Mortgage Early

The upsides of paying off your mortgage early may seem obvious. You won’t need to make that monthly payment any longer, which can free up cash. You’ll save much of the interest you would have paid over the life of your home loan. And you’ll be reducing the amount of money you’ll need during your retirement, which is good planning. Plus, with no mortgage, you’ll be minimizing your risk of foreclosure.

Cons of Paying Off Mortgage Early

There are potential negatives, as well. If you’re making extra payments, you may miss out on investment opportunities and alternative uses for your money, and after you pay off your mortgage, much of your cash will be tied up in your home equity. Additionally, if you’re paying the loan off early, there may be prepayment penalties, depending on the terms of your mortgage. And once you’ve paid off your mortgage, you won’t be able to deduct your mortgage insurance from your taxes, if you’re someone who took advantage of that option.

💡 Quick Tip: Thinking of using a mortgage broker? That person will try to help you save money by finding the best loan offers you are eligible for. But if you deal directly with an online mortgage lender, you won’t have to pay a mortgage broker’s commission, which is usually based on the mortgage amount.

What Happens After You Pay Off Your Mortgage?

Here’s how mortgage payoff works:

•   To find out the amount you need to pay off your mortgage, the first thing you need to do is request a mortgage payoff letter. If you pay the amount on your last statement, you won’t have the right amount. A mortgage payoff letter will include the appropriate fees and the amount of interest through the day you’re planning to pay the loan off.

•   Know that the payoff letter is only good for a set amount of time, and make sure to get your payment in on time.

•   Follow the instructions you’re given about where and how to submit the payment.

•   Once you’ve sent the payoff amount, your mortgage lender is responsible for sending you and the county recorder documentation to release the mortgage and lien on your home.

•   You should be sent any funds remaining in escrow.

•   You will want to contact your insurance company about this change if you paid your lender for your homeowners insurance along with your mortgage payment and have the bills switched over to you directly.

•   If your property taxes were paid as part of your mortgage payment, you will want to contact your local tax authority about shifting those bills to you as well.

What Documents Do You Get After Paying Off a Mortgage?

After paying off your mortgage, you should receive (or have access to) documents proving you paid off the mortgage and no longer have a lien attached to your home.

Mortgage Payoff Statement

As noted earlier, when you’re thinking about paying off your mortgage, you can request a payoff letter that will detail the exact amount you need to pay off your mortgage, what it covers, and when it’s due. If you decide to follow through, your lender may send you a payoff statement showing that your loan has been paid in full.

As further evidence that your mortgage has been satisfied, you may receive your canceled promissory note. This is your promise to pay your mortgage, and you signed it when you closed on your home. Now that your mortgage has been satisfied, you may receive this document back with a “canceled” or “paid in full” marked on it, though it’s also possible you may have to call and request the document.

Satisfaction of Mortgage or Release of Lien

This is an official, signed document that your lender will prepare to confirm that you have fulfilled the conditions of the mortgage and the lender no longer has any claim to the property. Typically, this document will be filed with the county recorder (or other applicable recording agency) by the lender. It details the mortgage and states that the mortgage has been satisfied and the lien released. Ideally, you should receive notification from the filing authority once the document has been filed. Having this document on file can help expedite things if you later want to sell your home, for example.

What Should You Do After Paying Off Your Mortgage?

After you pay off your mortgage, you’ll need to take care of a few housekeeping items, as mentioned earlier.

Update Your Records and Insurance

You may be wondering what do you pay after your mortgage is paid off? Now that you have full title to your home, you’ll need to take on a few responsibilities your lender may have handled. Your lender will send you any remaining funds from your escrow account. But you’ll need to take care of the items funded through your escrow account, usually your taxes and homeowners insurance. Contact your tax authority to make sure you’ll get its messages going forward, and reach out to your insurance company to let it know of the change as well.

Plan for Ongoing Property Expenses

Without that escrow account, you’ll need to start budgeting for ongoing property expenses, including your property taxes and homeowners insurance. Fortunately, those costs will probably be far lower than the mortgage premiums you’ve been paying, so just be sure you budget in advance to cover them. As for other ongoing costs, like maintenance and utilities, you’ve likely been paying those while you’ve had your mortgage, but now you may want to budget for larger projects or additions to your home. It’s wise to make plans for that freed-up cash, whether it’s paying off other debts, shoring up your emergency fund, adding to your retirement fund, or building a garage. Cash you don’t make plans for has a way of slipping away.

Recommended: 2025 Home Loan Help Center

Is Prepaying a Good Idea?

Generally, paying off your mortgage early is a great idea. It reduces the principal, which in turn reduces the amount you’ll pay in interest over the life of your loan. Still, there are reasons that some homeowners consider not paying their mortgage off early.

Most lenders do not charge a prepayment penalty, but home loans signed before January 10, 2014, may include one. Some conventional mortgage loans (especially nonconforming loans) signed on or after that date may have a prepayment penalty that applies within the first three years of repayment. (The different types of mortgage loans include conforming and nonconforming conventional mortgages.)

The best way to find out if prepayment is subject to a penalty is to call your mortgage servicer. The terms of your mortgage paperwork should also outline whether or not you have a prepayment penalty.

Should You Refinance Instead?

Another option you might consider is refinancing your mortgage. There are several reasons you may want to refinance instead of paying off your mortgage.

Lower monthly payment. Getting a lower rate or different loan term may lower your monthly payment without requiring as much cash as a payoff. Be sure to check out current rates, and use a mortgage calculator to find out what a possible new payment would be.

Shorter mortgage term. Refinancing a 30-year mortgage to, say, a 15-year mortgage can keep you close to paying off your mortgage while also providing financial flexibility. Note that your monthly payments may increase, though you’ll likely save money in interest over the long term.

Spare cash. Whatever your need is — home renovations, college funding, paying off higher-interest debt — a cash-out refinance might be an option.

💡 Quick Tip: Compared to credit cards and other unsecured loans, you can usually get a lower interest rate with a cash-out refinance loan.

The Takeaway

What happens when you pay off your mortgage? After doing a jig in the living room, you’ll need to take care of a few housekeeping tasks and make plans for the extra money.

An alternative to consider: Would a refinance to a shorter term make more sense, or pulling cash out with a cash-out refi? It can be wise to review all your options as you move toward taking this major financial step.

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

FAQ

Is paying off your mortgage a good idea?

The answer depends on your individual situation. If you have the money and you’d love to shed that monthly obligation for good, paying off a mortgage can be a good idea. But if you’re worried about funding your retirement or losing opportunities to invest, paying off your mortgage may not be a good idea for you.

What do you do after you pay off your mortgage?

Ensure that you have received your canceled promissory note, and update your property tax and insurance billers on where to bill you. And remember what you do need to pay after your mortgage is paid off: Since you no longer will have a mortgage servicing company, you must pay your insurance and property taxes yourself.

Is it better to pay off a mortgage before you retire?

Paying off a mortgage could give you more money to work with in retirement. But if your retirement accounts need a boost, most financial experts contend that allocating money there is a better idea than paying off your mortgage. Paying off a mortgage when you have low cash reserves can also put you at risk.

Does paying off your mortgage early affect your credit score?

Surprisingly, paying off your mortgage early won’t affect your credit score much. Your credit score has already taken into account the years of full, on-time payments you made each month.

What documents prove your mortgage is paid off?

When you’ve paid off your mortgage, your lender will send you a number of documents indicating that your mortgage is paid off. These may include a mortgage statement showing your obligations were paid in full and/or a canceled promissory note. Additionally, the lender should have filed a satisfaction of mortgage or release of lien with your county recorder’s office. While you should keep all documentation pertaining to your mortgage payoff, if you haven’t, you may be able to request a copy from your county recorder.

Photo credit: iStock/katleho Seisa

*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-Q325-027

When you’re looking for a mortgage loan, credit union vs. bank is a key question. Each option comes with pros and cons.

Here’s an overview to help you make the right choice for your situation.

How Credit Union and Bank Mortgages Are Similar

In many ways, banks and credit unions can be quite similar as mortgage providers. At a high level, approval processes are the same at each type of financial institution. Each will have mortgage underwriting guidelines, and after a borrower applies, the loan will be reviewed and approved, suspended, or denied. Plus, both may offer mortgage preapprovals.

Below are more similarities.

Application Process

As you look at credit union mortgages vs. bank mortgages, you’ll see that both typically offer you multiple ways to apply for a loan, including in an in-person appointment at a branch office, over the telephone, or online on the organization’s website.

Types of Mortgages

Generally, you’ll be able to apply for many different mortgage types at a bank or a credit union. Common types of home loans include fixed-rate and adjustable-rate loans as well as conventional and government-insured loans (such as FHA and VA mortgages).

One-Stop Shop for Finances

Both credit unions and banks usually offer a range of financial services, so you can also turn to them for savings and checking accounts, personal or auto loans, and CDs, among other services.

💡 Quick Tip: SoFi’s Lock and Look + feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home

Differences Between Credit Union and Bank Mortgages

While there are similarities between bank and credit union mortgages, there are also differences to be aware of.

Membership

Banks are typically open to serving most customers, but credit unions are meant for their members. There can be membership criteria – such as living in a certain area or being a member of a specific profession – that can limit the credit union options open to you.

Loan Options

When it comes to options among mortgage loans, credit unions vs. banks may have a disadvantage. Major national banks may have more loan choices available than credit unions, which tend to be smaller institutions.

Profitability

Banks are generally for-profit businesses, and aim to make money for their stockholders. Credit unions, on the other hand, are generally non-profit organizations.

Underwriting Process

Banks, especially large ones, often follow strict underwriting guidelines. Credit unions, which tend to be smaller and more local, may underwrite loans locally, giving them a fuller picture of their members’ financial situations, and may be able to be more flexible

Benefits of Getting a Credit Union Mortgage

Are credit unions good for mortgages? In many ways they are. While a bank has stockholders, a credit union consists of members (account holders) who more or less serve in this same role. A bank must satisfy its investors by making a profit; credit unions don’t have that obligation, so they can return those dollars to members through more attractive interest rates, lower fees, and more.

To enhance their members’ financial wellness, credit unions typically provide the following benefits.

Looser Approval Criteria

In general, credit unions may approve more loans in the lower- to middle-income range for their members. And if your credit scores are less than ideal, a credit union loan is sometimes the better choice.

Lower Interest Rates

Overall, credit unions offer lower rates on their mortgage loans. To estimate how much money this may save you, use a mortgage calculator.

Fewer Fees

Credit unions can pass on savings to members through lower fees as well as lower rates.

The Personal Touch

Because credit unions are less likely to sell their mortgage loans to a third party, a borrower is more likely to know the loan servicer (the credit union). This can lead to more personalized service.

Local Market Knowledge

Since a credit union is typically more local, with ties in the community, you’re likely to be working with a loan officer who is familiar with your area, what’s typically available, and what the going rates for different kinds of homes are. This knowledge can help you find and make a fair offer on your home more easily.

Recommended: How Does the Mortgage Preapproval Process Work?

Disadvantages of Getting a Credit Union Mortgage

Are credit unions better for mortgages? That depends on your needs and preferences. Credit union mortgages also have downsides.

Membership is a Must

In most cases, a borrower must meet certain requirements to join a credit union. This can include living in a certain community, belonging to a certain profession, or otherwise having the appropriate affiliation.

Fewer Locations

Usually, credit unions have fewer branches, which can limit their geographical range. So when you’re away from home, outside the credit union’s range, it may be harder to conduct all the financial transactions you might like. For example, the ATM network may be smaller and less convenient.

Stale Tech

Because credit unions are often more local institutions, they typically won’t have the up-to-date technology found at larger banks. So if a borrower wants first-class online and mobile banking, credit unions may not be the best choice.

Limited Menu

Credit unions may offer fewer financial products, especially on the savings and investment side. They may only offer checking and savings accounts, for example, plus credit cards. Although that may not affect a borrower’s ability to get a mortgage, it can limit what other products they can benefit from at the credit union.

Possibly Higher Interest Rates

Sometimes credit unions can’t compete with banks, especially when a large bank offers especially good interest rates. So be sure to compare rates if you’re looking for the most attractive ones.


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

Benefits of Getting a Bank Mortgage

Getting a home loan at a bank has its upsides, including the following.

Variety of Services

Banks often offer a significant range of savings, lending, and retirement-related financial products, making it easier for a borrower to have an all-in-one financial institution.

Multiple Branches and ATMs

Banks, especially national ones, will typically allow you to have access to multiple branches in more locations as well as a larger ATM network. This can make for a more convenient experience.

New Tech

Banks are, overall, more likely to have the latest in banking technology, including the ability to bank online and to use more sophisticated mobile apps.

Access to Loan Products

Because they tend to be larger and serve a broader population, banks often have a wider range of loan products available to their customers, like jumbo loans.

Disadvantages of Getting a Bank Mortgage

Drawbacks of getting a bank home loan can include the following.

Higher Interest Rates

Banks need to generate profit for stockholders — and credit unions don’t — so banks may charge a higher rate on home loans. But this isn’t universally true, so it’s always a good idea to compare rates.

Higher Fees

In general, banks charge higher mortgage fees than credit unions do. Although not always true, this is something to investigate.

Less Personalized Customer Service

Because credit union membership tends to be smaller and more local, bank customers may receive less personal service, especially when using a branch outside their more typical one (perhaps while traveling). Plus, banks are more likely to sell mortgage loans to a third-party loan servicer.

With any lender, bank, or credit union, a house hunter should feel at ease asking a range of mortgage questions.

Recommended: Tips on How to Shop Around for a Mortgage Lender

How to Choose the Right Mortgage Lender

Whether you’re better off with a mortgage from a bank or a credit union depends heavily on your situation and preferences.

First, consider what kind of experience you want. If you’re looking for a wide network of services and many different loan options, a bank may work for you. If you’d like a more personalized approach that could involve less rigorous qualifications and allow you to tap into local expertise, a credit union may be the better option.

You’ll also want to consider the cost. Though credit unions may typically offer lower rates, costs, and fees, that’s not always true, so it’s worth looking around and comparing.

Finally, you may want to factor in convenience. Banks typically have more branches and more up-to-date tech options, but credit unions may more easily allow you to develop ongoing relationships with local loan providers who understand your situation.

Taking all these factors into account, you can make an informed decision about what option will best suit you.

The Takeaway

Thinking about a credit union mortgage vs. a bank mortgage? Each has its upsides and potential downsides. If you’re a borrower looking for a home mortgage loan, explore the pros and cons to make the right choice for your specific situation.

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

FAQ

Is it better to get a mortgage at a credit union?

Not necessarily. It’s a good idea to look into what each route offers before making the right choice for you.

What are the disadvantages of credit unions?

Credit unions tend to be smaller and more localized than many banks, so disadvantages can include fewer locations, a smaller ATM network, and more limited financial products. Borrowers must qualify to become a credit union member; technology probably won’t be as modern as that at a larger bank; and, in some cases, rates can be higher.

Are credit unions safe for mortgages?

The National Credit Union Administration insures deposits of up to $250,000 at all federal and some state credit unions, protects the members who own credit unions, and regulates federal credit unions. Eligible bank accounts of the same amount are insured by the Federal Deposit Insurance Corporation.

Can I take out a HELOC or second mortgage through a credit union?

Not all credit unions offer the same products, but many of them do offer home equity lines of credit and home equity loans.

Do credit unions have better mortgage rates than banks?

Sometimes credit unions have better mortgage rates than banks, but that isn’t always true. In some cases, large banks may be able to offer lower rates, so it’s always worth shopping around and comparing credit union mortgage rates vs. bank rates to find the best terms you can get.

Photo credit: iStock/Lemon_tm

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-criteria for more information.

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When you apply for a mortgage, any outstanding debts you have — including personal loans, credit cards, and auto loans — can impact how much of a mortgage you can get, and whether you even qualify in the first place.

If you’re planning to buy a home within the next couple of years, applying for a personal loan could potentially reduce how much you can borrow. A personal loan can also affect your credit — this impact could be positive or negative depending on how you manage the loan.

Whether you’re thinking about getting a personal loan or currently paying one off, here’s what you need to know about how personal loans interact with mortgages.

How Do Personal Loans Work?

A personal loan is a lump sum of money borrowed from a bank, credit union, or online lender that you pay back in fixed monthly payments, or installments. Unlike mortgages and auto loans, personal loans are typically unsecured, meaning there’s no collateral (an asset that a borrower pledges as security for a loan) required.

Lenders typically offer loans from $1,000 to $50,000, and this money can be used for virtually any purpose. Common uses for personal loans include:

•   Debt consolidation

•   Home improvement projects

•   Emergencies

•   Medical bills

•   Refinancing an existing loan

•   Weddings

•   Vacations

Personal loans usually have fixed interest rates, so the monthly payment is the same for the term of the loan, which can range from two to seven years. On-time loan payments can help build your credit file, but missed payments can hurt it.

Can Personal Loans Affect Mortgage Applications?

Yes, getting a personal loan could impact a future mortgage application. When you apply for a home mortgage loan, the lender will look at your full financial picture. That picture includes your credit history (how well you’ve managed debt in the past), how much debt you currently have (including personal loans, credit cards, and other debt), your income, and credit score.

Depending on your financial situation, getting a personal before you buy a house could have a positive or negative impact on a mortgage application. Here’s a closer look.

Negative Effects

A personal loan could have a negative impact on your mortgage application if the loan payments are high in relation to your income. A lender may worry that you don’t have enough wiggle room to cover your current expenses and debts, plus a mortgage payment.

Another potential drawback is the impact on your credit score, especially if the loan is recent. When you apply for a personal loan, it triggers a hard inquiry on your credit report, which can temporarily lower your score. In addition, any missed or late payments on your personal loan impact your payment history, which is a significant factor in your credit score.

Recommended: Using a Personal Loan for a Down Payment

Positive Effects

If you have a personal loan that is a reasonable size (relative to your income), your personal loan payment history shows that you regularly pay on time, and you’re consistently paying down any other debts, a mortgage lender could see that as a positive indicator that you’d likely be a low-risk investment.

What’s more, a personal loan adds variety to your credit mix — the types of credit you use. A balanced credit portfolio that includes both revolving credit (like credit cards) and installment credit (like personal loans) may help strengthen your credit profile.

How Personal Loans Can Affect Getting a Mortgage

Here’s a closer look at the ways in which getting a personal loan can affect your ability to get a home mortgage.

Credit Score

Your credit score is one indication to a lender of how likely you are to be to repay a loan — or, in other words, how much risk you represent to the lender. A personal loan can affect your credit score in several different ways. These include:

Payment History

Your bill-paying track record is typically the most significant factor in your credit scores, accounting for approximately 35% of your FICO® Score. On-time payments on a personal loan demonstrate financial responsibility and help build a positive payment history. Over time, this consistency can have a favorable impact on your credit file. On the flip side, missed or late payments can negatively affect your credit profile and damage your chances of mortgage approval.

New Credit

When you apply for a personal loan, the lender will run a hard credit inquiry. This type of credit check can cause a small, temporary drop in your scores. In addition, a new loan reduces the average age of your credit accounts, which may further impact your credit file, especially if your credit history is limited.

Credit Mix

Credit mix accounts for about 10% of your FICO credit score. Lenders like to see that you can manage various types of credit responsibly. If you only have credit cards, adding an installment loan like a personal loan could positively impact your credit file and make you look more attractive to a mortgage lender.

Credit Utilization

If you use a personal loan to consolidate and pay off high-interest credit card debt, it could favorably impact your credit by lowering your credit utilization ratio.

Your credit utilization ratio is the percentage of available credit that you’re currently using on your credit cards and other lines of credit, and is another important factor in your credit scores. Keeping your utilization below 30% is generally recommended for maintaining good credit health.

Recommended: Personal Loan Calculator

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio refers to the total amount of debt you carry each month compared to your total monthly income. Your DTI ratio doesn’t directly impact your credit score, but it’s an additional factor lenders may consider when deciding whether to approve you for a new credit account, such as a mortgage. Having a personal loan will increase your debt load and, in turn, your DTI ratio.

To calculate your DTI ratio, add up all your monthly debt payments and divide them by your gross monthly income (that’s your income before taxes and other deductions are taken out). Next, convert your DTI ratio from a decimal to a percentage by multiplying it by 100.

The DTI ratio you need to secure a mortgage varies by lender. Generally, though, mortgage lenders prefer a DTI ratio of 36% or below.

Should You Pay Off Your Personal Loan Before Applying for a Mortgage?

If you already have a personal loan, are close to the end of your repayment term, and can afford to pay off the remainder before applying, eliminating the debt could improve your chances of getting the mortgage amount you’re looking for.

Another reason why you may want to pay off your personal loan before buying a home is that home ownership generally comes with a lot of additional expenses. Not having a personal loan payment to make each month can free up cash you may need for other things, like mortgage payments, homeowners insurance, and more.

That said, if paying off a personal loan will use up money you had earmarked for a downpayment on a home or leave you cash poor (with no emergency fund), it might be better to keep making your monthly payments, rather than pay off your personal loan early.

Tips to Help Your Mortgage Application

Generally speaking, having a personal loan won’t make or break your odds of getting a mortgage. If you’re concerned about being approved, however, here are some steps that can help.

Avoid Taking on New Debt Before Applying

It’s wise to avoid taking any type of new debt in the months before applying for a mortgage. New debt can increase your DTI and also cause a temporary drop in scores due to the recent hard inquiry. It also signals to lenders that you may be relying on credit to make ends meet, which can raise concerns about your financial stability.

Check Your Credit Report for Errors

Before you submit a mortgage application, it’s a good idea to review your credit reports to make sure there are no errors or inaccuracies. Mistakes like incorrect balances, outdated accounts, or erroneous late payments can hurt your chances of approval.

You’re entitled to a free credit report every week from each of the three major credit bureaus — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com. If you find any mistakes, you can dispute them with the appropriate bureau.

Consider Getting Prequalified

Getting prequalified for a mortgage gives you an idea of how much you may be able to borrow based on your income, credit, and debts. It’s not a guarantee of loan approval, but it can help you identify any red flags in your financial profile — such as a high DTI or low credit score — before formally applying.

Prequalification also helps you set realistic expectations when house hunting and shows sellers you’re a serious buyer.

The Takeaway

A personal loan can impact your ability to get a mortgage, but the effects depend on how you manage the loan and your overall financial situation. Personal loans can increase your debt burden and negatively affect your credit file if mismanaged. But they can also help build credit and demonstrate responsible borrowing when used wisely.

If you’re not planning to apply for a mortgage right away, and can comfortably manage the personal loan payments (and possibly even pay off the loan early), getting a personal loan could help you build credit and make it easier to get a mortgage.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can a personal loan hurt your chances of getting a mortgage?

A personal loan could potentially hurt your chances of getting a mortgage. A personal loan increases your monthly debt obligations, which could reduce the amount you’re approved to borrow. Also, If you struggle to make timely payments on the personal loan, it will negatively impact your payment history, which is a key component of your credit score.
That said, having a personal loan and managing it responsibility could be a net positive if it adds to your positive payment history and diversifies your credit mix. This could improve your chances of getting a mortgage.

Should you close a personal loan before applying for a mortgage?

Closing (or paying off) a personal loan before applying for a mortgage can be beneficial, especially if it lowers your debt-to-income (DTI) ratio. A lower DTI can improve your mortgage eligibility and may help you qualify for better interest rates. However, it’s important to weigh this decision carefully. If paying off the personal loan significantly depletes your savings and limits your ability to make a substantial down payment, it might be more strategic to continue making regular payments.

How much does a personal loan impact debt-to-income ratio?

A personal loan directly affects your debt-to-income (DTI) ratio because its monthly payment is included in your total monthly debt obligations. Lenders calculate DTI by dividing total monthly debt by gross monthly income. Even a relatively small personal loan can increase your DTI enough to impact your mortgage eligibility. Keeping your DTI below 36% is generally recommended for mortgage approval.

Is it easier to get a mortgage without other active loans?

Yes, having no other active loans can make it easier to qualify for a mortgage. Without additional debt, your debt-to-income (DTI) ratio will be lower, making you appear less risky to lenders. A low DTI may also allow you to qualify for a larger loan amount or better interest rates. However, having a mix of well-managed credit can also be favorable. The key is maintaining a healthy balance — manageable debt, on-time payments, and a strong credit score.

Do mortgage lenders consider personal loans as part of your liabilities?

Yes, mortgage lenders include personal loans when calculating your total liabilities. These liabilities help determine your debt-to-income (DTI) ratio, a key factor in mortgage approval. Lenders will look at your credit report to verify outstanding balances and monthly payment obligations, including personal loans. Even if the loan has a low balance, the monthly payment counts toward your DTI. Keeping loan payments manageable and your overall DTI low can improve your chances of mortgage approval.

Photo credit: iStock/kate_sept2004

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

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