Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
Mortgage rates rose slightly in the first week of 2024, with the 30-year fixed-rate mortgage increasing by 0.10 percentage points, according to data from Curinos analyzed by MarketWatch Guides.
This slight increase took place in the midst of mixed economic signals. The Labor Department reported that employers added 216,000 jobs in December, exceeding economists’ expectations, while the stock market had a rocky start to the beginning of the year. Through last Friday, the S&P is down roughly 1% year-to-date.
Economists with the Mortgage Bankers Association are still confident that rates will fall over the coming months. The next Federal Reserve meeting is scheduled for the end of January, and though rates may be held steady at that meeting, the board previously indicated that they expect three rate cuts throughout the year.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.18%
15-year fixed mortgage rate: 6.41%
5/6 ARM mortgage rate: 6.90%
Jumbo mortgage rate: 7.03%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.18%
7.19%
-0.01
15-Year Fixed Rate
6.41%
6.38%
+0.03
5/6 ARM
6.90%
6.94%
-0.04
7/6 ARM
7.11%
7.11%
0.00
10/6 ARM
7.19%
7.19%
0.00
30-Year Fixed Rate Jumbo
7.03%
7.08%
-0.05
30-Year Fixed Rate FHA
6.84%
6.90%
-0.06
30-Year Fixed Rate VA
6.85%
6.87%
-0.02
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Wednesday, January 10, 2024. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.01
The average 30-year fixed-mortgage rate is 7.18%. Since the same time last week, the rate is down, changing -0.01 percentage points.
At the current average rate, you’ll pay $677.43 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.19%.
15-year fixed-rate mortgages are up, +0.03
The average rate you’ll pay for a 15-year fixed-mortgage is 6.41%, an increase of+0.03 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.41% will cost approximately $866.17 per $100,000 borrowed. With the rate of 6.38% last week, you would’ve paid $864.52 per month.
5/6 adjustable-rate mortgages are down,-0.04
The average rate on a 5/6 adjustable rate mortgage is 6.90%, a decrease of-0.04 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 6.90% will cost approximately $658.60 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.05
The average jumbo mortgage rate today is 7.03%, a decrease of-0.05 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$677.43
$678.11
-$0.68
15-Year Fixed Rate
$866.17
$864.52
+$1.65
5/6 ARM
$658.60
$661.28
-$2.68
7/6 ARM
$672.71
$672.71
$0.00
10/6 ARM
$678.11
$678.11
$0.00
30-Year Fixed Rate Jumbo
$667.32
$670.68
-$3.36
30-Year Fixed Rate FHA
$654.59
$658.60
-$4.01
30-Year Fixed Rate VA
$655.26
$656.59
-$1.33
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Personal loan amounts range from $2,000 to $100,000, which may not be enough to buy a regular home but could work if you need a small mortgage for a tiny or mobile home.
Personal loan interest isn’t tax deductible like a mortgage.
You can typically receive faster funding with a personal loan than a mortgage.
With median home sale prices approaching $400,000 at the end of 2023, a personal loan typically won’t give you the borrowing power you need to buy a home compared to a regular mortgage, However, if you’re in the market for a tiny home or a manufactured home, a personal loan may be a great financing choice. If not, a personal loan can help you tidy up your finances so you can qualify for a mortgage to buy your dream home.
Can you use a personal loan to buy a house?
Yes, if you can find a home at a price within standard personal loan amount limits (typically between $2,000 and $100,000) and can afford the payment timeline. That’s probably not enough to buy a regular home, but it may be perfect if you need a small mortgage for a tiny home or a mobile home.
Using a personal loan to buy a tiny home
Personal loans may be the right financing fit to buy tiny homes with prices averaging between $30,000 and $70,000. Mortgage lenders often shy away from loans below $100,000 because they aren’t profitable. In other cases, tiny homes don’t fit minimum property requirements. For example, tiny homes are typically less than 400 square feet, which is less than the Federal Housing Administration’s minimum.
Personal loans are typically unsecured, which means you won’t risk losing your home if you can’t make the payments. One disadvantage of a loan versus a mortgage is you can’t write off personal loan interest because it’s not tax-deductible like mortgage interest.
Using a personal loan to finance a manufactured home
On average, you’ll pay between $86,100 and $158,633 to buy a manufactured home, which means you could use a personal loan to buy one on the lower end of the price range. If you don’t plan to attach your home to land that you own, you may not be able to get mortgage financing, which makes personal loans a good option.
A personal loan may also be cheaper than a chattel loan, an expensive type of financing used to buy mobile homes that aren’t considered real estate.
6 ways you can use a personal loan to buy a house
If you’re buying a standard family home, you can use a personal loan to spruce up your finances to help you qualify for a home loan.
If you’re saddled with multiple credit card payments at high interest rates, you can use a personal loan for debt consolidation to combine them all into one monthly payment. Rates are typically lower than credit cards, and you’ll reduce your credit utilization ratio, which has a major impact on your credit score.
If your scores improve, lower monthly payments could help you qualify for a higher sales price or a better interest rate. Having fewer monthly payments reduces the chances of a late payment, which can really damage your credit score.
You’ll need a credit score of 780 or higher to get the best mortgage interest rates with the lowest closing costs. You could see a big boost to your credit score if you pay off maxed-out credit cards with a debt consolidation loan.
Besides allowing you to qualify for a higher-priced house, a lower interest rate can save you thousands of dollars in interest charges over the life of a 30-year mortgage.
If you took out an auto loan with a short term (12 to 36 months) to buy a new car, the payment will affect your debt-to-income (DTI) ratio, which measures how much total debt you have compared to your income. The higher your DTI ratio, the lower the mortgage amount you can qualify for.
If you’ve found your forever home but have been told your mortgage DTI ratio is too high, consider replacing your short-term auto loan with a longer-term personal loan. Keep in mind that you’ll end up paying more in interest if you choose a longer loan term than the loan you’re paying off.
If you don’t have enough saved up for a down payment for a house, consider putting the savings from steps one and two above into a down payment savings account. The more you put down, the lower your monthly mortgage payment will be. If you can swing a 20% down payment, you’ll avoid monthly mortgage insurance on a conventional mortgage.
Mortgage underwriting guidelines don’t allow you to use money from an unsecured loan like a credit card or personal loan toward your down payment or closing cost requirement to buy a home. However, there is an exception if your loan is secured to an asset like a car.
Mortgage lenders will allow you to use funds from a secured personal loan to qualify if you meet the DTI ratio requirements with the new payment. You’ll also need to provide paperwork to prove you own the asset and document the value of the asset with some third-party service (like Kelly Blue Book for a car loan).
If you’re trying to buy a home in a competitive market, your agent may recommend an all-cash offer, which may involve bidding more than the asking price on the home. If you’re short of funds to make an offer and need a quick path to extra cash, a personal loan may be worth a look.
Many personal loan lenders can get you cash within a day or two, which keeps you in the running against other cash buyers. If you want to pay the personal loan off once you’ve purchased the home, you borrow the funds against your home’s equity with a home equity loan, HELOC or a cash-out refinance.
Pros and cons of using a personal loan to buy a house
Pros
Replace multiple debts with one easy-to-remember monthly payment.
Improve your credit scores by paying off revolving credit card debt.
No assets are required for collateral.
Faster funding times than most mortgage products.
Can use debt consolidation savings to build a down payment fund.
Cons
Payment may affect your DTI ratio.
Rates are often higher than home equity loan and HELOC rates.
Shorter terms mean higher monthly payments than home equity products.
Potential prepayment penalties and high origination fees.
Personal loan interest isn’t tax-deductible for a home purchase.
Can you use a personal loan for a down payment?
The answer is a definite no if it’s an unsecured personal loan. However, as mentioned above, if the personal loan is secured by an asset like a car, collectible, artwork or other asset, then lenders will usually allow the borrowed funds to count toward your down payment. You’ll need to qualify with the extra payment and prove you own the secured asset.
Investing in real estate is some of the oldest and most reliable financial advice in the books. Few other assets can compete with real estate’s vast array of benefits. These benefits include tax advantages, appreciation, relative impunity to market shifts, and even the potential for passive income.
But even if you have every intention of investing in real estate, it can be challenging to get started. After all, even a modest home usually requires a substantial down payment. And it can take years to save up those five-figure sums. The term “real estate investor” may bring to mind a multi-millionaire who manages several properties, leaving you feeling overwhelmed enough to give up the ghost entirely.
Fortunately, it is possible to invest in real estate with little or no money, even if you aren’t swimming in discretionary income. For instance, with an Opportunity Fund or REIT (Real Estate Investment Trust) you can get your foot in the door even if you can’t afford to purchase an entire property. There are also a host of ways to leverage your own home. These include house hacking, renting vacation space on Airbnb, and more.
In this post, we’ll break down everything you need to know about how to invest in real estate. We’ll go over some of the most common types of real estate investing. We’ll also break down how they can help you make money. And we’ll explain how you can begin, no matter how much capital you have in hand.
Why Invest in Real Estate?
Before we dig into the meat of the post, let’s take a moment to backtrack. Why is real estate investing such a well-worn piece of financial advice?
You’ve probably heard that diversifying your portfolio of real estate investments is essential. But your “portfolio” doesn’t just have to live on the stock market! Real estate investing gives you, as the name suggests, a real, tangible asset. And it’s much less vulnerable to the capriciousness of the market.
Real estate investing can help you not only build home equity but also generate passive cash flow. Both through the process of appreciation and the more intentional, hands-on approaches we’ll study further below. And owning your own home can help you reap financial benefits while simultaneously providing for one of your most basic needs.
How to Invest in Real Estate with Little Money
When a down payment might cost as much as $60,000, it’s understandable that many first-time property shoppers feel overwhelmed. They say you have to spend money to make money. Yes, but that’s quite a hefty figure for the average American earner.
To be sure, some real estate investment strategies require a good deal of cash upfront to be workable. But there are other tactics that don’t necessitate such a large lump sum to begin with. This means you don’t have to be a real estate mogul to be a property owner. We’ll break down various strategies at both ends of the spectrum below.
Types of Real Estate Investing
Let’s get into the nitty-gritty. What types of real estate can you invest in?
There are three main types of investment properties available to real estate investors.
Residential properties are probably the ones you’re most familiar with. They are exactly what they sound like: buildings used by individuals and families as residential living spaces. These properties include single-family homes, duplexes, apartments, condominiums, and townhouses, and multi-family homes (so long as they’re being used residentially and don’t exceed four units).
Commercial real estate are properties used to conduct business. They may include offices, storefronts, retail spaces, farmland, and large multi-family houses or apartment buildings.
Industrial real estate are properties that serve industrial business purposes, such as factories, power plants, or storage and shipping warehouses.
Furthermore, there are both active and passive forms of real estate investing.
Active investing is, well, active. It requires a good deal of time, energy, and commitment from the investor. Active investing may become a part- or even full-time job for the investor. They usually share ownership with few (or no) other people and thus bears a lot of responsibility for the success of the investment.
Passive investing, on the other hand, allows the investor to reap the benefits of investing without taking on the pressure and responsibility of full ownership of a tangible property. In most cases, passive investing involves supplying capital to a larger investment pool. You earn capital gains on loan interest through dividends paid to shareholders.
We’ll go into it all of this in more detail, including specific ways you can invest in real estate, both active and passive.
How Real Estate Investing Can Help You Earn
Before we break down the specific ways you can get started investing in real estate, let’s talk about how it can help you make money. (After all, that’s the whole point!)
You can invest in real estate in several ways, depending on what type of investing you’re participating in.
Equity and appreciation
Purchasing real estate equips the owner with a “hard asset”; the tangible property or building. Owning this kind of asset confers equity, or value. It isn’t as vulnerable to the fluctuations of the market as stocks, bonds, and other securities. Furthermore, property has a longstanding history of increasing in value over time, or appreciating.
On the contrary, other types of purchases (like automobiles) depreciate, or lose value. Thus, purchasing a property may allow you to earn income passively simply through the process of appreciation. It more or less ensures that the cash value of your home is a safe and stable part of your overall net worth.
Rental income
Chances are, you’ve had to pay rent to a landlord at some point in your life. Well, if you become the landlord, someone’s paying you the rent. And as long as that rental price eclipses your total expenses, including your mortgage and maintenance costs, the rest is profit!
Aside from managing the investment property, you can also collect rental income by sharing your space on platforms like Airbnb or house hacking, which we’ll explain below.
Sale profit
This happens when you buy a home with the intention to fix it up and sell it down the line (also known as “house flipping”.) It’s the difference between your sale cost and your purchase cost (minus all the expenses put into maintenance and improvements) is pure profit.
Loan interest
The interest charged on home and property loans can increase the value of real estate investments made through REITs, investment platforms, and private equity firms.
Ways to Invest in Real Estate
Now we know a bit about the different types of properties available to investors and how those real estate investments stand to help you earn cash.
So, what are the specific ways to go about real estate investing? There are several in both the “active” and “passive” categories.
Active:
House flipping, or rehabbing, is when an investor purchases a property with the sole intent of fixing it up to sell it later on.
Wholesaling is similar to flipping houses, but less work intensive. Wholesaling occurs when an investor purchases a property they believe is underpriced, so they can quickly sell it to another investor at a profit.
Rental properties give investors a long-term way to draw profit from their investments, though they do require lots of hands-on management and maintenance over time.
Airbnb, Vrbo, and other vacation rentals can often be listed for substantial per-night prices. They can be especially lucrative in high-demand travel destinations.
Passive:
Private equity funds pool the assets of many investors, which creates a larger, more powerful investment fund. These funds are usually overseen and allocated by a dedicated manager. They may have high minimum investment thresholds and requirements to join.
Opportunity funds also pool investors’ assets, but with the specific purpose of making investments in qualified Opportunity Zones. These are low-income, up-and-coming communities that would benefit from private investments and economic development.
REITs are companies that invest in commercial properties. Private investors can purchase shares of the company and earn income on capital gains in the form of dividends.
Online REIT platforms can make real estate investing accessible to beginning investors, often carrying no net worth or accreditation restrictions. They may allow you to invest in specific properties or in pre-built, diversified portfolios of real estate.
We’re going to break down these different investment options in even more detail below. But first, let’s start a bit closer to home—literally.
Starting with Your Own Home
One of the most straightforward ways to invest in real estate is probably already on your financial to-do list, anyway: purchasing your own home.
Purchasing a home of your own allows you to kill two birds with one stone. You’re taking care of the basic need of shelter, while also leveraging the purchase to reap a host of financial benefits.
Here are just a few ways that owning a home can help you save and earn money.
Build equity: As discussed above, property ownership confers relatively immutable equity to the purchaser—that is, your home is a fairly safe, tangible asset to add to your overall investment portfolio.
Receive tax benefits: Certain homeowners’ expenses, including real estate taxes and home mortgage interest, are tax-deductible. And if you sell your home, you may exclude up to $250,000 of capital gains (or $500,000 if filing jointly) from your taxes.
Take advantage of appreciation: Even accounting for the 2008 crisis, the cost of homes and other properties have steadily increased over time for the past 50 years. So, the home you purchase today will likely be worth more than the price you paid for it in the future.
Stop paying rent: Although you’ll likely still have a mortgage payment and other expenses to cover as a homeowner, you won’t be paying rent to live in another person’s property. It’s a cost that is essentially entirely wasted, since you aren’t building home equity in the rental property.
Keep the value of your home improvements: When you own a home of your own, any improvements you make will add to the property’s total value, beefing up your asset as well as beautifying your living space.
House Hacking
Another way to make money by purchasing your own home is known as “house hacking“. It’s a real estate investment strategy wherein you leverage rental income from your primary residence to live there cost-free.
The term was originally coined by entrepreneur and author Brandon Turner, who wrote “The Book on Investing in Real Estate with No (and Low) Money Down” and “The Book on Rental Property Investing.”
House hacking may be done, for example, by purchasing a duplex. The investor rents out one unit at a price that covers the mortgage cost while living in the second unit. Some homeowners have also used space-share platforms like Airbnb to offset their housing costs in the same manner.
Real estate investors can use this strategy to pay off the property and even create a profit margin. This will eventually allow them to invest in more rental properties. Thus, house hacking is a great way to combine the personal financial benefits of homeownership with the long-term earning potential of other types of property investment.
Buying a Home Without a Huge Down Payment
Given the recent trends in the housing market, you may feel daunted by the prospect of becoming a homeowner. In 2023, the U.S. housing market experienced significant challenges, with home prices rising to near-record highs.
But there are many incentives and programs designed to make this large investment more feasible for first-time home buyers.
FHA (Federal Housing Administration) Loans may allow borrowers to purchase a home with a down payment as small as 3.5% of the purchase price and with credit scores as low as 580. (You may also be approved for an FHA loan with a lower credit score, but your minimum down payment may be higher.)
The USDA also offers low-cost loans to low- and moderate-income households purchasing homes in qualified rural areas.
Down Payment Assistance Programs offered by local governments and private firms can provide grants, loans, and educational materials to prospective home buyers
Many other financial institutions and organizations also have special incentives for those purchasing their first homes or low-income families in the housing market. Make sure you check with your local housing authority to learn more about what’s available in your area.
Active Investment Opportunities
Want to get hands-on? Here are the details on some of the most popular and accessible active real estate investment opportunities.
House Flipping
If you’ve ever watched more than thirty minutes of HGTV, chances are you’re at least passingly familiar with the idea of flipping houses. It’s basically where you purchase a home with the express intent of fixing it up and selling it (at a higher cost) later.
House flipping is a great way for investors to earn a significant profit. However, they do need to know how to complete the flip successfully without incurring too many costs. Expenses can quickly eat into the investment’s return.
Finding a Home to Flip
House flippers have to be able to recognize a home that may be slightly undervalued but would be able to sell well given the proper upgrades. This involves both an understanding of the area’s desirability and the types of improvements that generate increased home value.
House flippers are responsible for the entire cost of the home purchase. They must also pay for all the upgrades, which they may either do themselves or hire out to professionals.
Either way, flipping houses incurs a hefty up-front cost, and it does come at a risk. Even after you make all the improvements, it’s possible that the house will languish on the market.
This can mean racking up maintenance, taxes, and other expenses for the real estate investor. However, a properly executed, short-term flip can create a substantial profit margin in a relatively small period of time.
Wholesaling
Like house flippers, wholesalers purchase homes with the intent of selling them quickly. But, they aren’t planning to do any heavy lifting along the way.
Instead, wholesalers find properties that are undervalued for their market. They scoop them up and resell them to other investors at a price closer to their true value. Thus, earning the difference as a profit.
Rental Properties
While managing rental properties may seem like a straightforward and reliable way to earn income, it’s one of the most work-intensive approaches on this list. It does require enough up-front capital to purchase the property (or properties) in the first place. However, landlords do stand to see substantial and steady returns in exchange for the work and effort they put into their properties.
After purchasing a viable property, which needs to be well-maintained, in a desirable location, and well-advertised, landlords are responsible for filling that property with qualified tenants. This can involve a time-consuming and labor-intensive screening process.
After all, as a landlord, you’re giving your renters the keys to your investment—literally! It can be a very risky move if you don’t take the time to ensure your tenants are well-qualified.
Finding & Qualifying Tenants
Along with running a standard background check, landlords may also conduct interviews with and request credit reports from prospective renters, all of which takes time. And don’t forget: every month your rental property is unfilled is a waste of potential income.
Once you do find qualified tenants, you’ll be responsible for a host of obligations unless you hire a property management company. You’ll need to provide maintenance and repairs. You’ll also need to stay on top of rent collection and record-keeping. It can quickly become unwieldy once you have several properties.
You’ll also need to be sure you’re in compliance with all the renters’ rights that exist in your jurisdiction, including laws that regulate the eviction process. Of course, you’ll need to put in the work to find good renters and a well-maintained property in the first place. When done so, managing rentals can provide a smooth and steady source of income for relatively little active work.
Seller Financing
Want to buy an investment property with no money down? Look into seller financing or a land contract. This is where the seller acts as the bank. You make your mortgage payments, including interest, to the seller.
After a few years or so, you will have enough equity in the home to get a bank loan. You can then make a lump sum payment to the seller.
Private & Hard Money Lenders
Private money lenders generally charge between 6% to 12% on the money borrowed. Hard money lenders usually charge 10% to 18%. Hard money loans are not from banks. They are from individuals or businesses aimed at financing real estate investments for a return on their money.
Hard money loans are used by investors who don’t qualify for conventional financing. They are typically used to fund renovations. Once the house is finished or has some equity in it, the borrower then refinances to a conventional mortgage with a lower interest rate.
Airbnb, Vacation Rentals, and Space Sharing
Managing a traditional property, wherein renters sign a multi-month lease, is not the only way to make money from an investment property. Platforms like Airbnb have revolutionized the real estate market. They allow homeowners (and sometimes even renters) to make money by renting out their space on a temporary, per-night basis as a vacation rental.
What’s more, you don’t necessarily have to rent out an entire home or unit to participate. A private room, or even a couch in a shared living room, is acceptable for some travelers using these services.
Airbnb and other vacation rental platforms make it simple for a novice renter. You don’t need to have a huge amount of know-how to start earning money this way. In fact, you don’t even necessarily have to “invest” in any property at all. Some landlords may allow their renters to list their housing on Airbnb as a sublet.
Airbnb Laws
However, as this new form of investment property has expanded, it’s created housing crunches in some cities. It’s resulting in “Airbnb laws,” or short-term rental legislation. These laws may limit your ability to use your housing in this way.
Always check your local regulations before you list your space on Airbnb or another of these types of platforms. If you don’t own the space, ensure that short-term sublets are allowed. Check your lease or ask your landlord directly.
Real Estate Investing Groups and Passive Investing
You may have noticed that many of the active real estate investment opportunities listed above do require substantial upfront capital to get started. You can’t wholesale or flip a house if you can’t purchase the house in the first place!
Furthermore, these active strategies generally involve a high level of skill, effort, and responsibility. It may not be feasible for those committed to other full-time careers.
Fortunately, there are still other ways to get involved with real estate investing, even if you don’t want to own or manage tangible property. (Or if doing so is out of financial reach for you right now). These passive investment tactics can help you glean the benefits of real estate investing without taking on quite as much of a fiscal and physical burden.
Private Equity Funds
A private equity, or PE fund, pools contributions from various investors to make larger investments. They’re often limited liability partnerships. That means there are fixed periods during which investors do not have access to their holdings.
Instead, PE funds allow investors to earn gains on debt and equity assets passively, without putting in much active work or research. Asset allocation and investments are managed by a dedicated individual or group. They earn money through annual fees as well as profit sharing.
PE funds come in various types, including the following:
Core equity funds generally invest in established commercial properties. They don’t carry risks like needing major improvements or experiencing losses for lack of consumer demand. The core strategy is simultaneously the least risky among PE funds and, typically, the least gainful.
Core plus equity funds generally follow the core strategy, but take a few more risks on properties that may require minor upgrades. This leads to a higher risk-return ratio on average.
Value added equity funds may invest in commercial properties that require substantial upgrades or new management to operate at their full potential. They may also seek to sell the property after improvements are made to create an additional profit margin.
Opportunistic equity funds offer the highest potential rewards, along with the highest risk. Investment properties purchased via these funds may need new construction or even land acquisitions. The payoff of such a new business venture is all but guaranteed. Furthermore, these developments take time, which means your investment capital may be tied up for longer. However, when they pay off, opportunistic equity funds see some of the best returns of the bunch.
Although PE funds are powerful real estate investment engines, they do often have high minimum investment requirements, generally not less than $100,000. Some funds may also be limited to accredited or institutional investors who can demonstrate available means.
Opportunity Funds
Opportunity funds operate on a similar model to private equity funds but are specifically used to make investments in qualified Opportunity Zones. These are economically distressed areas designated by the state and certified by the Secretary of the U.S. Treasury. Opportunity funds are legally required to invest 90% of their assets into properties in these Opportunity Zones.
Because these areas tend to be up-and-coming (and because tax benefits can incentivize investors to support them), opportunity funds often see substantial capital gains for their investors. And taxes incurred on those gains can be deferred until December 26, 2026.
That means the longer the investment is held before that date, the lower your overall tax liability will be. And opportunity fund investments held for at least ten years prior can expect their capital returns to be permanently excluded from capital gains taxes.
Of course, this strategy requires parting with your investment capital for a significant period of time. It’s best for those who can afford to put down the money to play the long game. If you can, however, investing in one is a great way to see substantial returns for almost zero effort.
Real Estate Investment Trusts (REITs)
A real estate investment trust(REIT) is a company that invests in commercial properties. As an investor, you purchase shares of this company just as you would any other. You earn income through its debt and equity assets in the form of shareholder dividends.
REITs operate similarly to mutual funds. They provide an excellent way for the average earner to experience the benefits of real estate investing. You don’t have to have a huge amount of capital to get started, as minimum investment requirements may be quite low.
However, they may carry high investment fees, especially in the case of private REITs (i.e., those not publicly traded on the stock market). Fees at these companies may run as high as 15%. REITs may also be illiquid and keep your money locked up for longer periods of time.
Online Real Estate Investment Platforms
In this digital, all-sharing-all-the-time age, most of us have already heard of crowdfunding. Real estate investments are no exception to the rules of the new millennium.
Online real estate investment platforms have begun springing up. They can make real estate gains achievable for average investors who may not have the towering net worth or accreditation status necessary to buy into more formal funds. Depending on the specific company, you might be able to choose specific investment properties to fund or buy into a diversified portfolio of investments.
Fees and minimum investment requirements are relatively low on real estate crowdfunding platforms. For instance, Fundrise lets you get started with just $500. That is much less than you’d have to pay to get in on most types of active investments! Check out our full review of Fundrise here.
Ready to Get Started Investing in Real Estate?
As you can see, there are several ways to start investing without saving up a five- or six-figure sum. And if you do it right, your investments can actually help you reach those high savings goals. You can then fund other types of investment projects!
However, as with any financial objective, planning and strategizing is key. Saving up as much capital as possible will help you get the best return on your investment once you’re ready.
You can’t allocate your assets without first keeping track of them, and to achieve that, you need to create a budget. If you’re in debt, aggressively paying it off will free you of a weighty financial anchor, so check out these powerful debt relief options.
Finally, if you intend to purchase property either to live in or as an investment opportunity, your credit score matters. It’s as simple as that. If your credit score isn’t quite where you want it to be, take these steps to raise it. Doing so will allow you to get the best interest rate once you’re ready to make the big purchase.
FHA loans have been making homeownership more accessible for decades. Tailored to borrowers with lower credit, the FHA makes it possible to buy a house with a credit score of just 580 and only 3.5% down.
But home buyers aren’t the only ones who can benefit. For current homeowners, an FHA refinance may let you access low rates and home equity, even without great credit.
Not sure whether you’ll qualify for a mortgage? Check out the FHA program. You might be surprised.
Verify your FHA loan eligibility. Start here
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>Related: How to buy a house with $0 down: First-time home buyer
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA).
FHA insurance protects mortgage lenders, allowing them to offer loans with low interest rates, easier credit requirements, and low down payments (starting at just 3.5%).
Thanks to their flexibility and low rates, FHA loans are especially popular with first-time home buyers, home shoppers with low or moderate incomes, and/or lower-credit home buyers.
But FHA financing isn’t limited to a certain type of buyer — anyone can apply.
Verify your FHA loan eligibility. Start here
How does an FHA loan work?
The first thing to know about FHA mortgages is that the Federal Housing Administration doesn’t actually lend you the money. You get an FHA mortgage loan from an FHA-approved bank or lender, just like you would any other type of home mortgage loan.
The FHA’s role is to insure these mortgages, offering lenders protection in case borrowers can’t pay their loans back. In turn, this lets mortgage lenders offer FHA loans with lower interest rates and looser standards for qualifying.
The one catch — if you want to call it that — is that you pay for the FHA insurance that protects your mortgage lender. This is called “mortgage insurance premium” or MIP for the life of the loan or until the FHA home loan is refinanced into another type of mortgage. We go over this in detail below.
Types of FHA loans
FHA loans offer various options to meet different home buying needs. These government-backed loans are designed to make homeownership more accessible, especially for those with less-than-perfect credit scores or limited savings.
Each type of FHA loan is tailored to different financial situations and home buying needs. Here’s what you can expect.
Compare FHA loan quotes from multiple lenders. Start here
FHA mortgage loan
An FHA mortgage is ideal for first-time home buyers, requiring a minimum credit score of 580 for a 3.5% down payment. Those with credit scores between 500 and 579 can still qualify for a 10% down payment. These loans are popular due to their lenient credit score requirements and low-down payment options.
FHA rate-and-term refinance
An FHA refinance loan is suited for borrowers looking to improve their loan terms or lower interest rates, especially if their credit scores have improved since obtaining their original mortgage. It offers a way to adjust loan terms to better fit current financial situations.
FHA Streamline Refinance
For current FHA loan holders, the FHA Streamline Refinance provides an efficient way to refinance with minimal documentation and underwriting. It often results in lower interest rates and can potentially reduce mortgage insurance premiums. This option is advantageous for those who want to refinance without a complicated process.
FHA cash-out refinance
An FHA cash-out refinance allows homeowners to tap into their home equity, converting it into cash. It requires a minimum credit score of 620, and borrowers must leave at least 15% equity in their home after the refinance. It’s suitable for those needing extra funds for expenses or investments.
FHA Home Equity Conversion Mortgage (HECM)
HECM is a reverse mortgage for homeowners aged 62 and older, allowing the conversion of home equity into cash. It provides financial flexibility for seniors by enabling access to their home equity without selling the home.
FHA 203(k) loan
The FHA 203(k) loan is designed for home purchases requiring renovations. It combines the cost of the home and renovation expenses into one loan. Borrowers must meet specific credit score requirements and ensure that renovations are completed within six months.
FHA Energy Efficient Mortgage
This loan type allows borrowers to include energy-efficient upgrades in their FHA loan. It’s aimed at reducing utility costs and increasing the home’s environmental friendliness, thereby potentially increasing its value.
Section 245(a) loan
The Section 245(a) program is for borrowers expecting an increase in their income. It offers a graduated payment schedule that starts low and increases over time, aligning with anticipated income growth. This loan is particularly beneficial for young professionals expecting career advancement.
Check your FHA loan eligibility. Start here
FHA loan requirements
Homeownership can be a liberating experience, especially for first-time buyers. With their flexible guidelines and government backing, FHA home loans provide a welcoming path.
Understanding FHA loan requirements can make the process much easier, opening the door to a future in your ideal home.
Check your FHA loan eligibility. Start here
To be eligible for an FHA loan, applicants must adhere to specific guidelines:
The property must undergo a home appraisal by an FHA-approved appraiser.
The property must serve as the applicant’s primary residence; investment properties and second homes are not eligible.
Occupancy of the property is required within two months following the closing.
A mandatory inspection is conducted to ensure the property meets FHA’s basic standards.
There are a few more specific conditions to qualify, such as a down payment amount, mortgage insurance, credit score, loan limits, and income requirements.
FHA loan down payment requirements
FHA loans require a minimum down payment, which varies based on credit score. For credit scores of 580 and above, a minimum down payment of 3.5% is required. Borrowers with credit scores between 500 and 579 must make a 10% down payment.
FHA mortgage insurance premiums
FHA mortgage insurance premium (MIP) is what makes the FHA program possible. Without the MIP, FHA-approved lenders would have little reason to make FHA-insured loans.
There are two kinds of MIP required for an FHA loan. One is paid as a lump sum when you close the loan, and the other is an annual premium, which becomes less expensive each year as you pay off the loan balance:
Upfront Mortgage Insurance Premium (UFMIP) = 1.75% of the loan amount for current FHA loans and refinances
Annual Mortgage Insurance Premium (MIP) = 0.85% of the loan amount for most FHA loans and refinances
MIP is split into monthly payments that are included in your mortgage payment. You’ll have to pay FHA insurance for the life of the loan or if you refinance into another type of mortgage loan.
The good news is that, as a homeowner or home buyer, your FHA loan’s MIP rates have dropped. Today’s FHA MIP costs are now as much as 50 basis points (0.50%) lower per year than they were in previous years.
Also, you have ways to reduce what you’ll owe in FHA MIP.
Depending on your down payment and loan term, you can reduce the length of your mortgage insurance to 11 years instead of the entire loan.
Loan term
Original down payment
MIP duration
20, 25, 30 years
Less than 10%
Life of loan
20, 25, 30 years
More than 10%
11 years
15 years or less
Less than 10%
Life of loan
15 years or less
More than 10%
11 years
Or, you could refinance out of FHA MIP at a later date.
With FHA interest rates as competitive as they are today, refinancing could reduce your monthly mortgage payments and cancel your mortgage insurance premium if you have enough equity in the home.
Check your FHA loan rates. Start here
FHA loan credit score minimums
The minimum credit score requirement for an FHA loan is 500. However, a score of 580 or higher allows for a lower down payment. Credit scores directly impact loan terms and down payment amounts.
Debt-to-income ratio
FHA loans consider the borrower’s debt-to-income (DTI) ratio, a measure of monthly debt payments against monthly income. The FHA prefers a DTI ratio of no more than 43%, though exceptions can be made for higher ratios with compensating factors.
Income and employment requirements
There is no specific income threshold for FHA loans, but borrowers must demonstrate steady employment history. Verification includes pay stubs, W-2s, tax returns, and bank statements.
FHA loan limits
Loan limits for FHA loans vary by county. However, starting January 1, 2024, the new FHA loan limit will be $498,257 for a single-family home in most parts of the country. Limits increase for 2-, 3-, and 4-unit properties.
FHA loan rates
Interest rates for FHA loans are competitive and can vary based on factors such as prevailing market rates, borrower’s credit score, income, loan amount, down payment, and DTI ratio. Government backing often enables lenders to offer lower rates compared to conventional mortgages.
Compare your FHA loan rates from multiple lenders. Start here
Today’s rates for a 30-year, fixed-rate FHA loan start at % (% APR), according to The Mortgage Reports’ daily rate survey.
Thanks to their government backing, FHA loan rates are competitive even for lower-credit borrowers. But interest rates can vary a lot from one lender to the next, so be sure to shop around for your best offer.
FHA loan benefits
Check your FHA loan eligibility. Start here
1. Lower down payment: Just 3.5 %
For today’s home buyers, there are only a few mortgage options that allow for down payments of 5% or less. The FHA loan is one of them.
With an FHA mortgage, you can make a down payment as small as 3.5% of the home’s purchase price. This helps home buyers who don’t have a lot of money saved up for a down payment along with home buyers who would rather save money for moving costs, emergency funds, or other needs.
2. FHA allows 100% gift funds for the down payment and closing costs
The FHA is generous with respect to using gifts for a down payment. Very few loan programs will allow your entire down payment for a home to come from a gift. The FHA will.
Via the FHA, your entire 3.5% down payment can be a gift from parents or another family member, an employer, an approved charitable group, or a government homebuyer program.
If you’re using a down payment gift, though, you’ll need to follow the process for gifting and receiving funds.
3. FHA loans allow higher debt-to-income ratios
FHA loans also allow higher debt-to-income ratios.
Your debt-to-income ratio, or DTI, is calculated by comparing two things: your debt payments and your before-tax income.
For instance, if you earn $5,000 a month and your debt payment total is $2,000, your DTI is 40%.
Officially, FHA maximum DTIs are as follows.
31% of gross income for housing costs
43% of gross income for housing costs plus other monthly obligations like credit cards, student loans, auto loans, etc.
However, a 43% DTI is actually on the low end for most FHA borrowers. And FHA will allow DTI ratios as high as 50%. Although to get approved at such a high ratio, you’ll likely need one or more compensating factors — for instance, a great credit score, significant cash savings, or a down payment exceeding the minimum.
In any case, FHA is more lenient in this area than other mortgage loan options.
Most conventional mortgage programs — those offered by Fannie Mae and Freddie Mac — only allow debt-to-income ratios between 36% and 43%.
With down payments of less than 25%, for example, Fannie Mae lets you go to 43% DTI for FICOs of 700 or higher. But most people don’t get conventional loans with debt ratios that high.
4. FHA loans accept lower credit scores
Officially, the minimum credit scores required for FHA mortgage loans are:
580 or higher with a 3.5% down payment
500-579 with a 10% down payment
High credit scores are great if you have them. But past credit history mistakes take a while to repair.
FHA loans can help you get into a home without waiting a year or more for your good credit to reach the “excellent” level. Other loan programs are not so forgiving when it comes to your credit rating.
Fannie Mae and Freddie Mac (the agencies that set rules for conventional loans) say they accept FICOs as low as 620. But in reality, some lenders impose higher minimum credit scores.
5. FHA even permits applicants with no credit scores
What if an applicant has never had a credit account? Their credit report is, essentially, blank.
FHA borrowers with no credit scores may also qualify for a mortgage. In fact, the U.S. Department of Housing and Urban Development (HUD) prohibits FHA lenders from denying an application based solely on a borrower’s lack of credit history.
The FHA allows borrowers to build non-traditional credit as an alternative to a standard credit history. This can be a huge advantage to someone who’s never had credit scores due to a lack of borrowing or credit card usage in the past.
Borrowers can use payment histories on items such as utility bills, cell phone bills, car insurance bills, and apartment rent to build non-traditional credit.
“Not all lenders who are FHA approved offer these types of loans, so check with your loan officer individually,” cautions Meyer.
6. FHA loans can be up to $ in most of the U.S.
Most mortgage programs limit their loan sizes, and many of these limits are tied to local housing prices.
FHA mortgage limits are set by county or MSA (Metropolitan Statistical Area), and range from $ to $ for single-family homes in most parts of the country.
Limits are higher in Alaska, Hawaii, the U.S. Virgin Islands, and Guam, and also for duplexes, triplexes, and four-plexes.
7. FHA also allows extended loan sizes
As another FHA benefit, FHA loan limits can be extended where home prices are more expensive. This lets buyers finance their home using FHA even though home prices have skyrocketed in certain high-cost areas.
In Orange County, California, for example, or New York City, the FHA will insure up to $ for a mortgage on a single-family home.
For 2-unit, 3-unit and 4-unit homes, FHA loan limits are even higher — ranging up to $.
If your area’s FHA’s loan limits are too low for the property you’re buying, you’ll likely need a conventional or jumbo loan.
8. If you have an FHA loan, you can lower your rate with an FHA Streamline Refinance
Another advantage for FHA-backed homeowners is access to the FHA Streamline Refinance.
The FHA Streamline Refinance is an exclusive FHA program that offers homeowners one of the simplest, quickest, and most affordable paths to refinancing.
An FHA Streamline Refinance requires no credit score checks, no income verifications, and home appraisals are waived completely.
In addition, via the FHA Streamline Refinance, homeowners with a mortgage pre-dating June 2009 get access to reduced FHA mortgage insurance rates.
Verify your FHA loan eligibility. Start here
FHA loan disadvantages
What is the downside to an FHA loan? Among the numerous benefits of FHA loans, there are certain disadvantages that potential borrowers should be aware of. These drawbacks can impact the overall cost and flexibility of the loan.
Here are the downsides that you should know about FHA home loans.
FHA loan mortgage insurance premiums
One of the primary drawbacks of FHA loans is the mandatory mortgage insurance premiums. These include an upfront premium at closing, generally 1.75% of the loan amount, and ongoing monthly payments. This additional cost can make FHA loans more expensive over the long term
Loan limits
One notable limitation of FHA loans is the lower loan limits compared to conventional loans, which can be restrictive for higher-income buyers. The FHA mortgage limit for a one-unit property ranges from $ to $ for single-family homes in most parts of the country, which may not be sufficient in areas with higher property values.
Strict property requirements
FHA loans come with stringent property requirements. The purchased home must be the borrower’s primary residence and must meet specific safety and condition standards. This requirement can limit the types of properties that qualify for an FHA loan.
FHA loan alternatives
Alternative loans, like USDA and VA loans, offer distinct advantages, such as no down payment requirements, but come with specific eligibility criteria. Understanding these alternatives ensures you make a well-informed decision about the type of mortgage that’s right for you.
Conventional 97
The Conventional 97 program comes with a down payment requirement of just 3%. It stands out due to the absence of income limits and mandatory home buyer education, making it accessible to a broader range of homebuyers.
Check your conventional loan eligibility. Start here
HomeReady Mortgage by Fannie Mae
The HomeReady mortgage program is designed for low- to moderate-income families, allowing a home purchase with only a 3% down payment. Furthermore, this program permits the entire downpayment and closing costs to be covered by gifts or grants, offering significant financial flexibility.
Freddie Mac Home Possible
The Home Possible loan is notable for its reduced mortgage insurance costs compared to other similar programs. With a 3% down payment requirement and lower ongoing costs, Home Possible is an attractive alternative for those looking to save on mortgage insurance.
USDA loans
USDA loans, backed by the U.S. Department of Agriculture, are an attractive alternative, especially for moderate-income buyers in rural areas. They don’t require a down payment, which is a significant advantage. However, eligibility for USDA loans is restricted based on income and geographical limits, and not every property qualifies for this type of financing.
VA loans
VA loans are another viable alternative, particularly for U.S. military service members, veterans, and certain surviving spouses. Like USDA loans, VA loans also require no down payment. However, eligibility for VA loans is exclusive to the military community, limiting their accessibility to the general public.
FAQ: FHA loans
Can I choose between a fixed rate and an adjustable-rate FHA loan?
Yes, FHA loans offer both fixed-rate and adjustable-rate (ARM) options. A fixed-rate FHA loan provides a consistent interest rate and monthly payment for the life of the loan, ideal for those who prefer stability. An adjustable-rate FHA loan, on the other hand, has an interest rate that can change over time, typically offering lower initial rates.
Do FHA loans have lower interest rates?
FHA loans often have lower interest rates compared to many conventional loan options. This is largely due to the government backing of FHA loans, which reduces the risk for lenders. As a result, lenders are generally able to offer more competitive mortgage rates to borrowers. However, the actual interest rate you’ll receive on an FHA loan can vary based on several factors, including your credit score, loan amount, and the current market conditions. It’s always a good idea to compare rates from multiple lenders to ensure you’re getting the best deal possible for your situation.
Are FHA loans assumable?
Yes. A little-known FHA benefit is that the agency will allow a home buyer to assume the existing FHA mortgage on a home being purchased. The buyer must still qualify for the mortgage with its existing terms but, in a rising mortgage rate environment, it can be attractive to assume a home seller’s loan. Five years from now, for example, a buyer of an FHA-insured home could inherit a seller’s sub-3 percent mortgage rate. This can make it easier to sell the home in the future.
Can you buy a rental property with an FHA loan?
While you can’t buy a true rental property with an FHA loan, you can buy a multi-unit property — a duplex, triplex, or fourplex — live in one of the units, and rent out the others. The rent from the other units can partially, or even fully, offset your mortgage payment.
Are closing costs higher for FHA loans?
Closing costs are about the same for FHA and conventional loans with a couple of exceptions. First, the appraiser’s fee for an FHA loan tends to be about $50 higher. Also, if you choose to pay your upfront MIP in cash (instead of including this 1.75% fee in your loan amount), this one-time fee will be added to your closing costs. Additionally, the fee can be rolled into your loan amount.
What credit score do I need for an FHA loan?
Most borrowers will need a minimum credit score of 580 to get an FHA loan. However, home buyers who can put at least 10% down are eligible to qualify with a 500 score. Yet, each lender may have their own credit score minimums, separate to those established by the Federal Housing Administration.
What is the loan-to-value ratio requirement for FHA loans?
The loan-to-value (LTV) ratio for FHA loans typically cannot exceed 96.5%, meaning you can borrow up to 96.5% of your home’s value. This high LTV ratio is part of what makes FHA loans accessible, especially for first-time homebuyers who might not have substantial savings for a down payment.
How does PMI work with FHA loans?
For FHA loans, the equivalent of private mortgage insurance (PMI) is the mortgage insurance premium (MIP). MIP is required for all FHA loans, regardless of the down payment or loan-to-value ratio. This insurance protects lenders from losses in case of borrower defaults and is included in both upfront and ongoing mortgage costs.
What happens if I default on an FHA loan?
If you default on an FHA loan, the lender can initiate foreclosure proceedings. The FHA loan program, backed by the Federal Housing Administration, is designed to minimize the risk of defaults by offering more lenient qualification criteria. However, consistent failure to make mortgage payments may lead to foreclosure, impacting your credit score and homeownership status.
Today’s FHA loan rates
Now is an opportune time to consider an FHA loan, with current mortgage rates being historically competitive.
FHA loan interest rates are typically among the most competitive. To capitalize on these favorable rates, start by comparing offers from FHA-approved lenders.
Finding the most affordable loan could be just a few clicks away. Begin your journey towards homeownership today by exploring your options and discovering the best rates available for your financial situation.
Time to make a move? Let us find the right mortgage for you
Homebuyers looking to escape the hustle and bustle of city life may long for a quieter life in the country. But anytime you’re considering making a major lifestyle change, finances can become an issue.
If this sounds like you, you may be able to qualify for a USDA loan. This government-sponsored loan program focuses on houses located in designated rural and suburban areas.
What is a USDA home loan?
A USDA home loan is a type of mortgage for eligible rural and suburban homebuyers. It’s offered by the United States Department of Agriculture. USDA loans are issued through the USDA Rural Development Guaranteed Housing Loan Program.
One of the biggest draws of the Rural Development program is that it doesn’t require any down payment. So, you can purchase your own home with a minimal amount of cash.
If you think this sounds like a good opportunity, you may be right. Keep reading to find out the benefits of applying for a USDA loan.
What are the different types of USDA loans?
The USDA offers three main mortgage programs for people who want to buy or repair a single-family home in a rural area:
USDA Direct Loans: Also known as Section 502 direct loans, these loans are issued to qualifying low-income borrowers with interest rates as low as 1% with certain subsidies and no down payment is typically required.
USDA Guaranteed Loans: Also known as the Section 502 Guaranteed Loan Program, these loans are issued by USDA-approved lenders and offer 100% financing, low interest rates, and minimal down payments to eligible buyers.
USDA Home Improvement Loans: Also known as the Section 504 Home Repair program, these loans are given to qualified homeowners to repair, improve, or modernize their homes. They’re also given to low-income elderly homeowners to remove health and safety hazards. The home improvement loan is up to $$40,000 and grants are also available up to $10,000. Additionally, loans and grants can now be combined for up to $50,000 in assistance.
USDA Streamline Refinance: Those with an existing USDA loan may be able to take advantage of lower rates with a USDA refinance loan. For those who qualify, the USDA streamline refinance is an attractive option as it does not require a home appraisal or income documentation. However, to be eligible, you must already have a USDA loan.
How much can I borrow with a USDA loan?
The majority of loans offered by the U.S. Department of Agriculture (USDA) do not feature loan limits. Direct Loans are the only type of USDA loans with specific limits, but they are a small portion of all USDA loans. Therefore, it is unlikely that you will find any limits on your USDA loan.
For the USDA Direct Loan program in 2024, the loan limit is 766,550 in most parts of the country. However, in more expensive high-cost areas, the loan limits are higher.
4 Benefits of a USDA Loan
Listed below are the four biggest advantages of taking out a USDA loan.
1. No down payment
For many people, the thought of scraping together a down payment is the most significant barrier to buying a home. But with a USDA loan, there’s no down payment required. In comparison, you’ll need a 3.5% down payment for FHA loans and a minimum 5% down payment for conventional loans.
2. Low private mortgage insurance (PMI)
Anyone who buys a home with no down payment must purchase private mortgage insurance (PMI). The costs vary, but PMI generally costs between 0.5% to 1.0% of the total loan amount.
With the USDA mortgage program, you still have to purchase PMI, but the rates are lower than they are with a conventional loan.
3. Low credit requirements
USDA loans also come with more flexible credit requirements than what other lenders look for. If your credit score is at least 640, your application should be approved pretty quickly. And the program is available for borrowers that are short on credit history.
4. Finance your closing costs
When you buy a home, the lender charges closing costs for issuing the loan. The closing costs usually fall between 2% and 5% of the total loan amount. So if you buy a $200,000 home, you can expect to pay at least $4,000 in closing costs.
When you take out a USDA loan, you can roll your closing costs into the loan financing. This means you can finance your closing costs instead of paying them out of pocket.
How do you qualify for a USDA loan?
Taking out a USDA loan doesn’t mean you have to move to the middle of nowhere. There are a wide variety of properties eligible for purchase through the USDA loan program.
While you won’t find any homes located in a major metropolitan area, you may be able to find some in certain suburban areas. But, of course, the most extensive selection is available in rural areas since the purpose of the program is to strengthen these communities.
To find out if a home you’re interested in qualifies, simply input the address into the USDA website. The USDA does have strict requirements the home must meet to be eligible for the program, which we’ll discuss in more detail below.
See also: First-Time Home Buyer Grants and Programs
USDA Loan Requirements
If you can’t qualify for a conventional loan, you may be eligible for either a USDA guaranteed loan or a USDA direct loan. Here is an overview of the borrower requirements for USDA home loan programs:
You must be a U.S. citizen, non-citizen national, or qualified alien.
The home must be located in an eligible location.
You must be purchasing the home as your primary residence.
The loan must be taken out through a USDA-approved lender.
You must be able to meet the minimum credit requirements.
Income limits
USDA loan programs are designed to help low to middle-income families, so borrowers must meet certain income limitations. To qualify, your household income cannot exceed 115% of the median income in your area.
The income requirements for USDA loans are determined by county, so you can check the USDA’s website to determine the requirements in your area. You can also work with a USDA-approved lender to determine your eligibility.
Property Eligibility
The U.S. Department of Agriculture also puts certain restrictions on the type of property you can buy with a USDA loan. Here are the types of properties that are eligible for a USDA mortgage loan:
Single-family homes
New construction homes
Townhomes and approved condos
Planned Unit Developments
Approved modular homes
What credit score do you need for a USDA loan?
If you’re applying for a guaranteed USDA loan, there are a few basic credit requirements you’ll need to meet. The USDA doesn’t set a minimum credit score requirement, but your application will get processed much faster if your credit score is at least 640.
A credit score below 640 doesn’t automatically rule you out, but your application will go through stricter underwriting guidelines. This is to ensure you can handle the monthly payments.
And you’re less likely to be approved if you have any collections on your credit report in the past 12 months. However, you may be granted an exception if you can prove that your credit was damaged because of a medical issue or something outside your control.
And finally, a USDA loan may be a viable option for you if you’re still in the process of building your credit scores. Your application may be approved even if you have a limited credit history if you can supply other credit references, like utility payments or rent payments.
USDA Income Limits
Income limits are set on all USDA loans to ensure the USDA loan program benefits low to middle-income families. These income restrictions are determined by various factors, including the median income for your local city or county. You can check your income eligibility to find out if you qualify.
The size of your family also helps determine your eligibility. If you have a large family, then it’s expected you’ll need a more substantial income to live on, and you’ll receive more leeway.
There are also different tiers of eligibility, depending on the type of USDA loan you’re taking out. For example, USDA guaranteed loans call for a moderate income, whereas USDA direct loans require applicants to fall in the low-income category.
Stable Income
Finally, you must have a stable monthly income to be eligible for a USDA loan. Usually, you need to show a history of stable employment for at least 24 months.
If you have questions about your eligibility, you can contact a mortgage lender that specializes in USDA loans. Just be sure to ask so you don’t waste your time working with a lender who doesn’t understand the nuances of USDA loans.
Real estate agents that work in a rural area may also be able to point you in the right direction, since they’re likely to have more experience with clients utilizing these programs.
Are there any other eligibility requirements?
This article is mainly focused on the USDA’s requirements, but keep in mind, the USDA isn’t lending you any money. Each lender can apply its own requirements as long as they meet the USDA’s basic guidelines. Your lender will want a complete financial picture, as well as your credit history and current employment status.
And one of the guidelines surrounds PITI, which stands for principal, interest, taxes, and insurance. Each of these things are combined to form your total monthly mortgage payment.
This amount can’t be more than 29% of your pre-tax monthly income. So if you make $3,000 per month, your total monthly payment would have to be less than $900.
Debt-to-Income Ratio
Another common requirement is known as your debt-to-income ratio. This is when the lender looks at compares your income to your total monthly debt payments. Ideally, your debt-to-income ratio shouldn’t be higher than 41%.
So if your income is $3,000 per month, your total monthly debt payments should be less than $1,230. And remember, your mortgage will be included in the total debt payments. But you may qualify for a higher debt ratio if your credit score is higher than 680.
Bottom Line
With a USDA mortgage, you can purchase your dream home without having to save up for a down payment. However, not everyone will qualify for this program.
If you’re interested in taking out a USDA loan, you should start by finding out if you meet the income restrictions in your county. And you might consider working with an experienced USDA lender to find out if you’re a suitable candidate for the program.
USDA Loan FAQs
How does a USDA loan work?
USDA loans provide low-interest home mortgages to qualified borrowers. These loans are issued by the United States Department of Agriculture, and are designed to help eligible borrowers purchase homes in rural areas and some suburban areas.
To qualify for a USDA loan, borrowers must typically meet certain income and credit requirements, as well as have a debt-to-income ratio that is lower than the national average. Once approved, the loan is typically issued in the form of a 30-year fixed-rate mortgage, with the interest rate set by the USDA. Borrowers can then use the funds to purchase a home and make mortgage payments over time.
What’s the difference between FHA, VA, and USDA Loans?
FHA loans are mortgage loans insured by the Federal Housing Administration that are available to homebuyers with less-than-perfect credit and relatively low down payments.
VA loans are mortgage loans guaranteed by the U.S. Department of Veterans Affairs that are available to qualifying veterans and military members with competitive terms and no down payment.
USDA loans are mortgage loans offered by the U.S. Department of Agriculture that are available to low-income borrowers in rural areas.
All three loan types require mortgage insurance, but the payment requirements vary.
What is the interest rate on USDA loans?
The interest rate on a USDA loan varies depending on the type of loan, the lender, the borrower’s credit score and other factors. Generally, USDA loan interest rates range from 1.00% to 4.00%.
The current interest rate for Single Family Housing Direct home loans is 3.75%. This fixed rate is based on current market rates at loan approval or loan closing, whichever is lower.
If payment assistance is applied, the interest rate can be as low as 1%. The payback period can be up to 33 years, or 38 years for very low-income applicants who can’t afford the 33-year loan term.
What are the fees associated with a USDA loan?
The upfront guarantee fee is 1% of the amount of the loan, and this fee must be paid at closing. This fee is non-refundable and is not included in the loan amount.
In addition to the upfront fee, there is an annual fee, which ranges from 0.35% to 0.50%. This fee is calculated as a percentage of the loan amount and is generally due each year.
USDA home loans also have other typical closing costs associated with them, such as appraisal fees, title fees, and recording fees.
Whether you’re buying a house or a car, financing a wedding or vacation, embarking on a major home renovation, paying for rising medical costs, or even consolidating debt, you might need to take out a loan.
But what about when you’re retired?
Even though they don’t earn a traditional income from a paying job, retirees can still take out loans. Requirements for retirees to secure a loan might be a little stricter, but it’s certainly possible.
Below, we’ll dive into loans for retired people — how they work, common types, and where to find them.
What Are Retiree Loans?
A retiree loan is any loan that you take out in retirement. It doesn’t refer to one specific type of loan, but rather a collection of loan types available to anyone in retirement, as long as they qualify.
Qualifying for a loan as a retiree can be more challenging than someone who is still employed full-time, since lenders like to see steady income. But many retirees have reliable sources of income outside of a job that can help them qualify. 💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.
Considerations for a Loan
When considering loans for retired individuals, lenders may consider a number of income sources, as well as an applicant’s debt-to-income ratio and credit score.
Retirement Income
One of the main sources of income for seniors who no longer work is their retirement accounts. If you are retired, you might receive regular payments from an IRA, 401(k), pension, and/or Social Security.
Collectively, these accounts make up your retirement income. And they may be significant enough to take out a retiree loan, like a personal loan, car loan, or even a mortgage.
Fixed Income
Retirees may have other sources of fixed income beyond their retirement income. For example, retirees might earn income from investments, earn annuity income, or receive spousal or survivor’s benefits. Retirees may also generate revenue from rental properties.
If any of these are limited sources of income — that is, they’ll run out eventually — the lender might require proof that you’ll at least receive that income for a set number of years. Without that proof, they might not factor in that source of income when determining loan eligibility.
Some retirees continue to work, whether full- or part-time or even as a contractor. If you’ve taken up a side hustle, like driving for a rideshare service or acting as a consultant in the field from which you retired, your 1099 income may also help when applying for a loan in retirement.
Assets
Retirees who have a significant portion of their money tied up in assets may be able to leverage those assets to secure a loan. For example, mortgage lenders might offer a securities-backed loan.
Securities-backed loans offer retirees liquidity without selling their assets. Instead, the lender can claim ownership of your assets — stocks, bonds, and real estate, for instance — if you default on your loan.
Because investment values fluctuate, a lender will likely consider only a reduced value of your assets (up to 70%). This protects them in the event that your assets decrease in value during the life of the loan.
Debt-to-Income Ratio
Lenders consider more than just your income when you apply for a loan, especially in retirement. They’ll also look at your debt — and thus your debt-to-income (DTI) ratio.
Your debt-to-income ratio is a calculation of all your monthly debts divided by your gross monthly income. This might include credit card debt, mortgage payments, car loans, personal loans, and even student loans.
For example, if your monthly debts total $2,000 and your monthly income is $10,000, your DTI ratio is 2,000 / 10,000. That’s 0.20, or 20%.
The higher your DTI ratio, the less likely a lender is to approve you for a loan. While requirements will vary by lender and the type of loan you’re applying for, you’ll likely have a harder time securing a loan if your debt-to-income is 50% or higher.
Credit Score
As with any other loan, lenders will also factor in your credit score when you apply for a retiree loan. By improving your credit score, you increase your chances of getting a loan.
So what affects your credit score? Generally, five key factors can influence your rating:
• Credit utilization
• Payment history
• Credit history length
• Credit mix
• New credit
Retirees generally have longer credit histories, especially if they keep credit cards open and have been paying a mortgage for decades. By paying your bills on time, keeping your credit usage down, and resisting the temptation to apply for new credit cards, retirees may be able to raise their credit scores ahead of applying for a larger loan in retirement.
Where to Find a Retiree Loan
Retirees can look for loans in the same places that other borrowers do. Financial institutions like banks and credit unions generally offer a wide range of loans, from mortgages and car loans to personal loans and debt consolidation loans. Your own bank or credit union is a good place to start.
Where you get a retiree loan can also depend on the type of loan. For example, if you’re purchasing a new car, the dealership may help you find financing. When you work with a real estate agent to buy a home, they might put you in touch with a lender.
Common Retiree Loans
Retirees have access to a wide range of loans depending on their needs. Here are some of the most common types of retiree loans you might come across:
Home Equity Loan
A home equity loan allows you to borrow against the equity you’ve built in your house. You generally need to have paid off at least 15% to 20% of your home to have enough equity for a loan; the more you’ve paid off, the larger the loan could be.
You might use a home equity loan to fund a renovation project, medical payments, or even debt consolidation. But remember, your house serves as collateral, so it’s important to make your payments.
Reverse Mortgage Loan
Reverse mortgage loans are available to people who are 62 or older who have paid off most of their mortgage or own their homes outright. When you get a reverse mortgage, you retain the title to the home and don’t have to pay the loan (and interest) until the last surviving borrower has moved out permanently.
Reverse mortgage loans are not for everyone. Weigh the pros and cons of a reverse mortgage before moving forward.
Debt Consolidation Loan
Retirees who are struggling with various debts may choose to consolidate in a single loan, ideally at a lower interest rate. Consolidating your debt means only a single monthly payment, but it could extend the number of years it’ll take you to be debt-free. 💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.
401(k) Loan
If you’re strapped for cash ahead of retirement, you may be able to borrow from your 401(k) account balance before you start receiving distributions. Doing so has certain tax implications to review with your accountant.
Unfortunately, you cannot take out an IRA loan, though if you’re 59 ½ or older, you may be able to make early withdrawals penalty-free.
Personal Loan
You can take out a personal loan for almost anything — wedding costs, home improvements, even credit card debt consolidation. Personal loan interest rates and terms vary depending on the length of the loan. For example, SoFi offers personal loans with low interest rates, and there are no fees required.
Just make sure you have the right credit score for a personal loan before applying. Bad credit borrowers may qualify, but the interest rates can be significantly higher.
Payday Loan
Seniors in retirement may also take out payday loans in an emergency, but keep in mind that there are a lot of risks with payday loans, including high costs.
Requirements for Getting a Personal Loan as a Senior Citizen
Lenders have similar requirements for all applicants, including retirees. The notable difference is that your sources of income will be different from an employed individual receiving a steady paycheck.
Here’s what lenders will generally look for when deciding to approve your loan application:
• Your sources of income (retirement distributions, Social Security, investment revenue, part-time work, etc.)
• Age (some lenders may not give out loans to borrowers who are 75 or older)
• Credit score
• Debt-to-income ratio
• Collateral or assets
The Takeaway
Retiree loans refers to any loan you take out in retirement. Depending on your needs and financial goals, it may make sense to apply for a personal loan, home equity loan, 401(k) loan, debt consolidation loan, or other loan type. Retiree loan requirements are similar to those of any other borrower; you’ll just have to demonstrate other sources of income since you’re no longer employed full-time.
You’ll also need a low debt-to-income ratio and a high credit score.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
FAQ
What are retiree loans?
Retiree loans are any type of loan you get in retirement. Retirees may take out personal loans, mortgages or reverse mortgages, home equity loans, and even debt consolidation loans.
What are the requirements for a retiree loan?
Requirements for a retiree loan are similar to those of other borrowers. Lenders will need to see all your sources of income, and you’ll also need a low debt-to-income ratio (generally below 50%) and high credit score (requirements vary by type of loan). You’ll also need assets to back up a secured loan.
Where can I get a retiree loan?
Retirees can look for loans anywhere that other borrowers might apply for a loan. Common retiree loans include home equity loans, 401(k) loans, debt consolidation loans, and personal loans. Because retirees typically no longer have a traditional source of income (i.e., a paying job), they may have to meet additional requirements to qualify for a loan.
Photo credit: iStock/SDI Productions
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.
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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.
Student loans give many college students the opportunity to finance their education. Being well-informed on the nuts and bolts of student loans can make it easier to fund your education, while still keeping your eye on long-term goals like starting a career and saving for the future.
10 Student Loan Questions, Answered
There are many different types of student loans, with different loan amounts, costs, benefits, and repayment terms. In short, student loans are complicated. But don’t stress. We have answers to questions on everything from the difference between federal and private student loans to interest rates to when and how you’ll need to start repaying your loans. Let’s dive in. 💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.
1. How Do I Apply for Federal Student Loans?
To apply for federal student loans, you’ll need to fill out the Free Application for Federal Student Aid (FAFSA®). This opens the door to many forms of financial aid, including grants, work-study, and federal student loans.
After you submit the FAFSA, you’ll receive a Student Aid Report (SAR) via email or regular mail. The report includes your responses to the FAFSA questions as well as your Student Aid Index (SAI), formerly called Expected Family Contribution (EFC). Your SAI is a number that is used to determine your eligibility for federal financial aid.
Schools that receive information from your FAFSA will be able to tell you if you qualify for federal student loans. Almost every American family qualifies for federal student loans. Direct Subsidized Loans (in which the government covers your interest while you are in school and for six months after you graduate) are awarded based on financial need. Direct Unsubsidized Loans (in which you are responsible for all interest that accrues on the loan) are not need-based.
2. How Do I Fill Out a FAFSA Form?
You can fill out the FAFSA online at StudentAid.gov . While the FAFSA is known for being a confusing and complex application to complete, the form was streamlined for the 2024-2025 award year. Applicants can now skip as many as 26 questions, and some applicants may be able to complete it in as little as ten minutes.
While the FAFSA is typically available starting on October 1 for the following academic year, the new 2024-2025 FAFSA will not be available until December 31, 2023.
The first step to filling out the FAFSA is to create an FSA ID through StudentAid.gov, which serves as an electronic signature. Both you and your parents will need to create your own unique FSA ID. You’ll then want to check what information you’ll need to fill out the FAFSA and gather it before you begin.
The online FAFSA is typically processed by the Department of Education within three to five days, and then the information is sent to the list of schools you provided (keep in mind that you can list schools that you have not yet applied to.) The colleges use your FAFSA information to determine financial aid eligibility.
3. What is the Difference Between Private Student Loans and Federal Ones?
Federal student loans are funded through the government and are strictly regulated. To qualify for them, students must fill out the FAFSA. Private student loans, by contrast, are funded by banks, credit unions, and other private lenders.
Federal student loans for undergraduates don’t require a credit check and rates are set by Congress each year. Federal student loans also come with guaranteed benefits and protections, including income-driven repayment plans, deferment and forbearance options, and forgiveness programs.
Private student loans do require a credit check and rates are set by individual lenders. Generally, borrowers (or their parent cosigners) who have strong credit qualify for the lowest rates. Loan limits vary by lender, but you can often get up to the total cost of attendance, which is more than you can borrow from the federal government.
Since private student loans generally have higher interest rates than federal student loans and lack the same protections, it’s generally recommended that you tap all forms of federal aid, including federal student loans, before applying for private student loans.
Recommended: Private vs Federal Student Loans
4. How Much Does College Cost?
The average cost of tuition and fees for the 2023-2024 school year is $42,162 at private colleges, $23,630 for out-of-state students at public universities, and $10,662 for in-state residents at public schools, according to U.S. News.
The actual amount you will pay for college will depend on where you choose to go and how much financial aid, including need-based and merit-based aid, the school awards you.
If you submitted the FAFSA, each school that accepts you will also send you a financial aid award letter, also known as the student aid package or school offer. This letter will include the annual total cost of attendance and a list of financial aid options. Typically, your financial aid package will be a mix of gift aid, meaning financial aid that doesn’t have to be repaid, and federal student loans, which you have to repay with interest. The award letter is specific to that university or college, so you’ll receive a different letter from every school that accepts you as an incoming student.
5. Is College Worth the Cost? What Are the Benefits?
College represents an investment in yourself and your future, and only you can decide how much that’s worth. So, we’ll focus instead on the potential benefits of going to college. The most obvious benefit is that, if you want to pursue certain careers, you’ll likely need the appropriate college education and training.
Studies show that college graduates earn significantly more money, accumulated over a lifetime, than those who did not attend. Earning your degree of choice requires a solid plan and commitment, and these are excellent strategies and skills to develop before entering the working world. Plus, people often make lifelong friendships at college, and many universities have a strong alumni network, which can be helpful on many levels as you begin your career.
6. What Can Student Loans Be Used For?
Funds from federal and private student loans can be used for a variety of education-related expenses, including tuition, fees, textbooks, computers/software, transportation to and from school, housing (on or off campus), meal plans or groceries, and housing supplies (e.g., sheets, towels, etc.).
Basically, if the expense is essential to your educational success — meaning it supports your living arrangements, basic daily needs, or attendance at school — it’s likely a permissible use of student loan funds.
Recommended: Using Student Loans for Housing and Living Expenses
7. What is a Grace Period for Student Loans?
For most federal student loans, after you graduate, leave school, or drop below half-time enrollment, you have a six-month grace period before you must begin making payments. Grade periods for private student loans can vary by individual lender.
The student loan grace period is designed to give students a chance to find employment before their monthly loan payments kick in.
You are not required to make interest or principal payments during the grace period. However, if your loan isn’t subsidized by the government, interest will still accumulate during the grace period and be added to your balance, or capitalized, if you don’t pay it before your first loan payment is due. Making at least interest-only payments even when it’s not required can save you a significant amount of money over the life of your student loans.
8. How Do I Repay Student Loans?
Repayment on federal student loans generally begins after the six-month grace period. The standard repayment plan for federal student loans is 10 years, but borrowers are able to select one of the other repayment plans at any time without incurring any costs.
Federal student loans also offer income-driven repayment plans, which tie the borrower’s monthly payment to their income. While this may make the loan more expensive in the long-term, it can make the monthly payments more affordable. When deciding on a repayment plan, you want to consider factors like your income, estimated monthly payments on the student loan, and your overall budget. Over time, you may find it helpful to reevaluate the payment plan you’ve selected as your financial situation may change.
To determine the repayment options available with a private student loan, check directly with the individual lender.
If you have higher-interest Direct Unsubsidized Loans, graduate PLUS loans, and/or private loans, you may be able to refinance your student loans after you graduate at a lower interest rate. This could lower the total cost of your loans and make repayment easier.
9. Can I Repay Student Loans Early?
Yes, you can generally pay off student loans, including federal student loans and private student loans, early without incurring prepayment penalties. You may want to reach out to your lender first to make sure they will apply your extra payments to your principal, rather than towards your next payment.
There are many benefits to paying off your student debt early. You will save on student loan interest and get out of debt faster. However, you’ll want to make sure you have enough income to cover a higher monthly payment. Paying too much toward your student loan could cause you to fall short on essential bills like rent or a car loan. It might also delay saving for other goals.
Recommended: 6 Strategies to Pay off Student Loans Quickly
10. How Can I Apply for a Private Student Loan?
If you decide to apply for a private student loan to help pay for college, it’s a good idea to shop around and compare lenders. Your school’s financial aid office may be able to provide you with a list of lenders that they work with. However, you’re not restricted to this list.
Before you choose a lender, it’s a good idea to review factors including interest rate, loan terms, any additional fees associated with the loan, and the repayment plans available at each lender. Many lenders will allow potential borrowers to get prequalified to find out how much they may qualify to borrow and at what rates.
Another thing that may be worth considering is if the lender has any sort of programs for borrowers who run into financial difficulties down the road and may have trouble making payments on their student loans. Some lenders offer unemployment protection that allows eligible borrowers to temporarily pause payments on their student loans should they lose their job through no fault of their own. 💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.
The Takeaway
Student loans can be instrumental in helping you pay for college, but it’s important to understand how they work before borrowing. Broadly, there are both federal and private student loans. Federal student loans are backed by the federal government and come with unique benefits like income-driven repayment plans and forgiveness programs.
Private student loans are offered by private lenders and generally require potential borrowers to undergo a credit check during the application process. Since private student loans tend to have higher interest rates and lack federal protections, you generally want to consider federal loans first.
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.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
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 Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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.
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.
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.
Most people in the US have at least one credit card. These cards are a popular, convenient way to pay for items as you go about your day, tapping and swiping. They can also allow you to buy items that you can’t afford to pay for in one fell swoop, such as airfare to Hawaii or a new laptop.
But they have downsides, too; perhaps most notably, their high interest rates. At the end of 2023, one analysis found that the average interest rate was nudging close to 25%; two years earlier, the rate was hovering around 15%. That’s a considerable increase.
Here, you’ll learn more about how and why credit card payments can balloon as interest rates rise. You’ll also read advice on keeping your credit card in check, which can benefit your financial wellness.
How Interest Is Calculated
If you’re confused by all of the fine print that accompanies a credit card offer or the thought of an annual percentage rate (APR) calculation makes you wince, you probably aren’t the only one. To understand how rising rates can affect your credit card payment, it helps to understand a bit about how credit card interest is calculated.
• First, there are two types of consumer loans: installment loans and revolving credit. A mortgage, student loan, or car loan are all examples of installment loans. With an installment loan, the borrower is loaned an amount of money (called the principal), plus interest to be paid back over a designated amount of time.
• Revolving credit, on the other hand, is not a loan disbursed in one lump sum, but is a certain amount of credit to be used by the borrower continuously, up to a designated limit. A credit card is revolving credit. A borrower’s monthly payment is determined by how much of the available credit they are using at any given time; therefore, minimum payments may change from month to month.
Installment credit is sometimes easier than revolving credit to understand and calculate. First, installment loans often come with fixed rates, which means that the interest rate doesn’t change (unless you miss payments). For example, the rate on a federal student loan or a 30-year fixed mortgage won’t change, even if government-set interest rates shoot to the sun.
Revolving credit almost often has a variable rate, which means that the interest rate applied to the credit balance fluctuates.
The average rate on credit cards is quoted as an annual percentage rate, or an APR. The APR is the approximate interest rate that a borrower will pay in one year. Why approximate? The prime rate could fluctuate based on when the Fed changes the federal fund target rate. 💡 Quick Tip: Need help covering the cost of a wedding, honeymoon, or new baby? A SoFi personal loan can help you fund major life events — without the high interest rates of credit cards.
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How Credit Card Interest Rates Change
Generally, when the Fed raises the federal funds rate, it can slow economic growth because it dissuades banks from lending money — and discourages consumers from borrowing at a subsequently higher interest rate. Raising rates is also used as a technique to combat rising inflation.
While this may be a normal and natural part of an economic cycle, rising rates can be frustrating for anyone who is currently carrying a credit card balance.
Credit card interest rates have risen as a result of 11 rate hikes enacted by the Federal Reserve (the Fed) since March 2022. Although the Fed does not control interest rates on credit cards directly, credit card interest rates are often pegged against the prime rate, which changes with the federal funds rate.
What Does a Rising Prime Rate Mean for Credit Card Holders?
A change in interest rates is likely to impact anyone with a variable rate on their credit card balance. When the Fed raises federal funds interest rates, it can be expected that credit card interest rates may follow.
How much would your credit card interest rate increase? It depends on your credit card. Generally, credit cards move in sync with rate hikes, which usually happen in quarter-percent increments.
However, the Fed has said, as of the end of 2023, that they don’t plan to raise rates further in the immediate future.
How to Combat a High Credit Card Bill
Here are some ideas for battling a high credit card bill and potentially paying less in interest over time:
1. Pay More Than the Minimum Payment
If at all possible, pay off as much of your credit card balance as you can each month. Making payments greater than the minimum amount due can help reduce your balance. The faster you can work on reducing the actual principal balance on your credit card, the less interest you’ll likely pay. If you only pay your credit card’s minimum payment, you may wind up in debt longer and paying more interest in the long run.
2. Switch to a Balance Transfer Card
Balance transfer credit cards typically have 0% APR introductory offers lasting for several months to a couple of years. If you’re serious about getting rid of your debt, you could transfer your debt over to one of these cards and then actively work on paying off the debt while you’re not paying interest.
If you do this, make sure to look for a card that has no transfer fee. Beware: If the root of the problem is actually overspending, this will not be a good long-term solution. Sometimes, 0% APR cards have interest rates that jump up dramatically after the trial period is over. And the 0% APR may no longer apply if you make a new purchase on the card.
3. Negotiate a Lower Rate
You might be surprised to find out that a credit card rate can be negotiable. It may be worth giving your credit card company a call and seeing whether they can reduce your rate.
When talking to the person on the other end of the line, explain your situation, be kind to them, and see what happens. Again, this isn’t a permanent solution or a guaranteed outcome, but it could help give you a leg-up on the payback journey.
4. Sign up for Credit Counseling
You might benefit from professional credit counseling to help with your credit card debt. The National Foundation for Credit Counseling (NFCC) is a nonprofit organization that offers free and affordable advice for people who are struggling to manage debt on their own. If you’re unable to envision a path to paying down debt, it could be a good idea to ask for assistance.
5. Consider a Personal Loan
One tactic to consider in an environment where prime interest rates are rising is paying off credit card balances with a fixed-rate unsecured personal loan.
These are sometimes referred to as “debt consolidation loans” and allow a qualified borrower to pay off high-interest debt, such as credit cards, with this lower-rate personal loan. With a fixed-rate personal loan, the rate never changes (as long as payments are made on time), and it helps provide the borrower with a defined plan to pay off the debt.
If you decide to go this route, it’s a good idea to shop around to ensure that you’re getting a fair rate. You can get a personal or debt consolidation loan from banks, credit unions, and online lenders.
To compare estimated personal loan interest charges to credit card interest charges, you can use a tool like a personal loan calculator.
Shopping for a Personal Loan
Each lender sets its own terms for making these types of loans, so be sure to ask lots of questions about rates, terms, and fees.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
The 30-year fixed-rate mortgage has stayed close to 7% for the last two weeks, according to data analyzed by MarketWatch Guides – but recent economic news could signal that rates will continue to fall. After hitting 8% in mid-October, the 30-year fixed-rate mortgage has dropped nearly a percentage point over two months.
In their last meeting of 2023, the Federal Reserve held interest rates steady, leaving the federal funds rate at a target range of 5.25% to 5.50%. The Fed also foreshadowed multiple rate cuts in 2024.
Mortgage rates do not always move in tandem with the federal funds rate, instead tending to track the yield on 10-year Treasury bonds. However, economists with the National Association of Realtors predict that mortgage rates will continue to fall in 2024 if the Fed sticks to its forecast and inflation cools.
In fact, November estimates from the Mortgage Banker Association predict that the 30-year fixed-rate mortgage will end next year at 6.1%, almost another full percentage point lower than where it stands today.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.08%
15-year fixed mortgage rate: 6.31%
5/6 ARM mortgage rate: 6.97%
Jumbo mortgage rate: 7.09%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.08%
7.42%
-0.34
15-Year Fixed Rate
6.31%
6.72%
-0.41
5/6 ARM
6.97%
7.27%
-0.30
7/6 ARM
7.09%
7.45%
-0.36
10/6 ARM
7.15%
7.50%
-0.35
30-Year Fixed Rate Jumbo
7.09%
7.32%
-0.23
30-Year Fixed Rate FHA
6.86%
7.08%
-0.22
30-Year Fixed Rate VA
6.85%
7.04%
-0.19
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Monday, December 18, 2023. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.34
The average 30-year fixed-mortgage rate is 7.08%. Since the same time last week, the rate is down, changing -0.34 percentage points.
At the current average rate, you’ll pay $670.68 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.42%.
15-year fixed-rate mortgages are down, -0.41
The average rate you’ll pay for a 15-year fixed-mortgage is 6.31%, a decrease of-0.41 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.31% will cost approximately $860.70 per $100,000 borrowed. With the rate of 6.72% last week, you would’ve paid $883.25 per month.
5/6 adjustable-rate mortgages are down,-0.30
The average rate on a 5/6 adjustable rate mortgage is 6.97%, a decrease of-0.30 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 6.97% will cost approximately $663.29 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.23
The average jumbo mortgage rate today is 7.09%, a decrease of-0.23 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$670.68
$693.74
-$23.06
15-Year Fixed Rate
$860.70
$883.25
-$22.55
5/6 ARM
$663.29
$683.53
-$20.24
7/6 ARM
$671.36
$695.79
-$24.43
10/6 ARM
$675.41
$699.21
-$23.80
30-Year Fixed Rate Jumbo
$671.36
$686.93
-$15.57
30-Year Fixed Rate FHA
$655.93
$670.68
-$14.75
30-Year Fixed Rate VA
$655.26
$667.99
-$12.73
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If your parents are high earners, you might assume you won’t get any financial aid to help pay for college. But that’s not necessarily the case. The Department of Education doesn’t have an official income cutoff to qualify for federal financial aid. So, even if you think your parents’ income is too high, it’s still worth applying (it’s also free to do so).
Read on to learn how to get financial aid for college when you think your parents make too much money, as well as how to pay for college costs if you don’t qualify for financial aid.
Table of Contents
It All Starts With the FAFSA®
The first step to knowing whether or not you qualify for any financial aid is to fill out the Free Application for Federal Student Aid (FAFSA). Even if you think your parents make too much to qualify for financial aid, it’s a smart idea to fill out and submit this form.
For one reason, there’s no income cutoff for federal student aid, so you may be surprised by what you are able to qualify for. For another, the FAFSA gives you access to non-need-based aid, such as Direct Unsubsidized Loans and institutional merit aid. 💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.
Who Determines Aid Amount and Type?
The financial aid office at your chosen college or career school will determine how much financial aid you are eligible to receive. Here’s a look at what goes into the decision.
1. The first factor considered is the cost of attendance (COA), or what it costs a typical student to attend a particular college or university for one academic year. Cost of attendance includes tuition and fees, as well as books, lodging, food, transportation, loan fees, and eligible study-abroad programs.
2. Then the school considers your Student Aid Index, or SAI (formerly called Expected Family Contribution, or EFC). Your SAI is an eligibility index number that results from the information that you provide in your FAFSA.
3. To determine how much need-based aid you can get, the school will subtract your SAI from the COA. Need-based aid includes Pell Grants, Direct Subsidized Loans, and federal work-study.
4. To determine how much non-need-based aid you qualify for, the school takes the COA and subtracts any financial aid you’ve already been awarded. Federal non-need-based aid includes Direct Unsubsidized Loans, Direct PLUS Loans, and TEACH Grants.
One big difference between subsidized and unsubsidized loans is when interest accrual starts. Because subsidized loans are need-based, the government covers any interest that accrues until loan repayment starts (typically six months after graduation). With unsubsidized loans, the interest starts to accrue from day one (though you don’t need to start making loan payments until six months after graduation).
You can estimate your eligibility for federal student aid by using either the Federal Student Aid Estimator or your school’s net price calculator (which you can find using the Department of Education’s search tool).
What Are Rules on Dependency, Divorce?
A student’s dependency status can make a big difference on their SAI. Not living with parents or being claimed on their taxes, however, does make you an independent student. To be considered independent for federal financial aid, a student must be at least 24 years of age, married, on active duty in the U.S. Armed Forces, financially supporting dependent children, an orphan (both parents deceased), a ward of the court, or an emancipated minor.
The rules regarding financial aid and divorce are changing for the 2024 – 2025 school year. The new FAFSA rules require the parent who provided the most financial support in the “prior-prior” tax year to complete the FAFSA application instead of the custodial parent. Prior-prior refers to the tax year two years ago from the beginning of the college semester. For the 2024 – 2025 award year, FAFSA would be looking at the 2022 tax year for this determination.
Other Routes to Meeting All Needs
The government isn’t the only path to money for school. Here are several other options you may want to consider.
Scholarships
The best thing about scholarships? You don’t need to pay them back. The second best thing is that they’re most often based on merit, not need.
So even if your parents make a good living, you may still be eligible. While many are awarded solely on academics, others are given for athletic talent, specific interests, or being a member of a specific group.
There are numerous college scholarships out there, offered by schools, employers, individuals, private companies, nonprofits, communities, religious groups, and professional and social organizations. To suss out scholarship opportunities you might be eligible for, talk to your high school guidance counselor, your college’s financial aid office, and/or check out one of the many online scholarships search tools.
An Appeal of Your SAI
If your financial aid offer is less than you need to be able to afford college, you are within your rights to appeal to the school’s financial aid director.
You might want to be prepared to back up your request with detailed information such as your SAI, the amount you’ll need to successfully attend school, or a change in circumstances that will affect your family’s actual ability to pay, such as a parent’s job loss.
Recommended: How To Write a Financial Aid Appeal Letter
Parent Loans
Parents can apply for a Parent Plus Loan through the Department of Education. These loans are available to parents regardless of income, provided they do not have an adverse credit history. For loans disbursed on or after July 1, 2023, and before July 1, 2024, the interest rate is 8.05%. This is a fixed interest rate for the life of the loan. There is also an origination fee of 4.228%, which is deducted from each loan disbursement.
Some private lenders also offer parent student loans. You can apply for a private parent student loan directly with the lender. Before signing up for a private parent loan, it’s a good idea to shop around to find the lowest student loan interest rate you qualify for. Some lenders have a pre-qualification process that allows you to see a personalized rate before the lender does a hard credit pull.
Both federal and private parent loans can be used to cover any gaps left over after scholarships, grants, and other financial aid have been applied, up to the full cost of attendance. 💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.
Private Student Loans
Private student loans are also available to students to help them cover the costs of higher education, and they could be a good Plan B if there’s a gap between the aid you received (including federal student loans) and the cost of attendance.
Private student loans don’t have federal benefits like income-driven repayment plans and forgiveness programs, and interest rates are typically higher than undergraduate federal student loans. However, unlike federal student loans, you can apply for them at any time of the year. Plus, you can typically borrow up the full cost of attendance, which gives you more borrowing power than you get with federal student loans.
Private student loans can have either a fixed or variable interest rate; rates are determined by the lender. Qualifying for a private student loan is based on the borrower’s creditworthiness rather than need.
The Takeaway
What happens if your parents make too much money to qualify for financial aid? You may have to shift course a little bit, but there are other ways to get help paying for all of the expenses of college, including merit-based scholarships, non-need-based federal student loans, and private student loans.
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.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
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 Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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.
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.