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A personal loan enables you to borrow a lump sum of money and repay it in fixed installments. While personal loans can be a useful tool, there are important factors to consider before taking one out.
According to recent statistics, millions of Americans have personal loan debt, with the average loan amount being $16,931. Personal loans can be used for various reasons, whether for debt consolidation, medical expenses, or home improvements. But how do you know if a personal loan is right for you?
Everyone’s financial situation is unique, so be sure to understand what to know about personal loans before you determine if it’s the best way to go. Here are seven things you should know before taking out a personal loan.
1. How Personal Loans Work
A personal loan allows you to borrow money and repay it in fixed installments. You can get a personal loan from banks, credit unions, or online lenders. Once you choose a lender, you’ll need to submit a formal application. When filling out the application, you’ll likely need to include identification such as your Social Security card, your address, and proof of income.
If your application is approved by the lender, you will receive a lump sum of money that you will repay in monthly payments plus interest.
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2. Debt Consolidation Isn’t for Everyone
With increasing amounts of credit card debt, personal loans are becoming increasingly popular. Although personal loans are a common solution for debt consolidation, that doesn’t mean it’s right for you. Here are a few indicators that debt consolidation through a personal loan is not the best solution, and you’d be better off seeking debt counseling or another financial avenue:
With your current financial pace, you’ll pay off your debt in less than a year. If this is the case, debt consolidation likely will not be worth it.
You can’t afford the monthly payment. You don’t want to be stuck with an additional payment you can’t afford. This could lead to late payments or, worse, loan default.
You will pay more interest and fees with a personal loan compared to your existing debt. You don’t want to take out a personal loan if it will cost you more money in the long run.
Your spending isn’t under control, and you might rack up more debt after you pay off your existing debt. There’s no point in taking out a personal loan to consolidate your debt if it will just tempt you to accumulate more debt on paid-off credit cards.
Your credit score isn’t good enough for an acceptable interest rate. You might want to take the time to improve your credit before applying for a personal loan.
Consider these statements and compare current debt costs to the costs of a personal loan to determine if debt consolidation is the best option. Also, note that not all personal loan providers are the best for debt consolidation. Some lenders specialize in debt consolidation, whereas others don’t have good enough offerings to make debt consolidation with their loans worth it.
3. The Difference Between Secured and Unsecured Loans
Most personal loans are unsecured loans. This means you do not have to offer any collateral to receive the loan. Types of collateral include owned property, a house, or a car—anything the lender can use to pay back the money owed if you default on the loan.
However, not all personal loans are unsecured, and some lenders offer secured loans that require collateral. For example, if you have little to no credit or a poor credit score, lenders may only offer you a secured loan because your credit report isn’t a good enough indicator that you will repay the loan. If you don’t mind putting up collateral and intend to pay back the loan in full, secured loans don’t have to be bad.
4. Compare APRs Before Selecting a Lender
The annual percentage rate (APR) combines the personal loan interest rate and any additional loan fees, and it fluctuates based on the personal loan provider. APRs typically range between around 5% and 36%, and this is partly determined by your credit history.
Popular personal loan providers, such as Best Egg and Achieve, are known for low APRs, especially if you have above-average credit. However, if you have a good credit score and a loan provider is still requiring a high APR, you might want to consider looking into other options for a better APR. A bad APR could cost you hundreds of unnecessary dollars over the course of the loan.
5. The Impact of a Hard Inquiry on Your Credit Score
A hard inquiry is when a lender or creditor pulls your credit for the purpose of offering you a loan. This will ding your credit a minimal amount. The hard inquiry will remain on your credit report for up to two years, but it will likely stop affecting your score after one year. Plus, if you repay your loan on time and take care of your credit in the meantime, your credit will bounce back.
It’s also important to note that you should keep your loan shopping within a specific time frame. In other words, only apply for personal loans for two weeks to 45 days at the most. If it takes any longer, you might receive multiple dings on your credit report rather than just one.
6. The Max Loan Offer May Not Be the Best Option
Personal loans can range between $2,000 to $50,000, and some lenders, such as SoFi, offer as much as $100,000 loans. With that in mind, you may qualify for a large amount, but that doesn’t necessarily mean you should take the highest offer. Consult your finances and budget before deciding what personal loan amount to accept, because if you accept one for more money than you can afford, you will likely regret this.
Check Your Credit Score Before Applying
Most personal loan providers require at least a 640 credit score. However, some companies, such as Achieve and Upstart, offer loans to 620 credit scores and up. If you make your personal loan payments on time and responsibly handle your other credit responsibilities, a personal loan can improve your credit in the long run and immensely help your credit card utilization rate if you choose to use it for debt consolidation.
Before you determine if a personal loan is right for you, pull your credit first. With Credit.com, you can check your credit score for free.
Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.
Key takeaways
National mortgage lenders provide home loans nationwide and tend to offer a variety of options, but may lack personalized service and charge higher costs.
Local mortgage lenders finance properties in a specific geographic location and often provide more personalized service, but may have limited loan options.
When choosing a lender, consider factors such as customer service, the type of loan you need and interest rates.
Deciding which mortgage lender to choose can be a daunting task, especially with the many options available. One of the key decisions to make is whether to go with a national or local lender. Here, we’ll break down the differences between national and local mortgage lenders and provide insights into which might be the best fit for you.
National vs. local mortgage lenders
National lenders
Available nationwide
Often a big bank or online lender
Typically offer a variety of mortgage options
Service might be less personalized
Local lenders
Finance mortgages within a specific geographic region
Often a community or local bank or credit union
Known for more personalized experience
Might not offer many home loan products
National lenders
A national mortgage lender works with qualified borrowers throughout the country. It might be an independent entity or a large bank providing a wide variety of home loan services. Examples of national lenders include Rocket Mortgage, Bank of America and U.S. Bank.
Pros
Extensive range of loan options
Offer mortgages to qualified individuals nationwide
More likely to have extended customer service hours and more online features
Cons
Might not get the personal touch that local lenders offer, as you’re likely to be one of many borrowers
Potential for more fees than local lenders, resulting in higher interest rates or closing costs
Emphasis on handling large volumes of loans might make them less flexible when providing tailored solutions to clients
Local lenders
Local mortgage lenders only finance home purchases within a specific geographic region. Known for their personalized service, the loan officers at these lenders have a deep understanding of the local housing market, which enables them to offer tailored loan programs for first-time homebuyers or those with complex financial circumstances. Working with a local lender means you can enjoy direct, face-to-face communication with loan officers who are part of the same community. Examples of local lenders include a credit union or community bank.
Pros
More personalized service allows you to interact directly with industry professionals and potentially get a deal more tailored to your financial situation
Loan officers have knowledge of the local housing market
Often offer lower interest rates than national lenders
Cons
Only operate within certain geographic areas, which won’t work if you’re moving from elsewhere
Might not have as diverse a range of loan options as their national counterparts
Might not have the same extended customer service hours as a national lender
National vs. local lenders: Which is right for me?
Choosing between a national and local mortgage lender depends on several key factors. If you prefer a more personal touch and insight into the local market, a local lender could be the right choice for you. However, if you value a wide range of loan options and broad accessibility, a national lender might be more suitable. To make the decision, evaluate your need for personal interaction, compare interest rates and reviews and consider the type of loan you need. Then, reach out to potential lenders to gauge their responsiveness and level of service.
Frequently asked questions
Credit unions are one option when taking out a mortgage. A credit union is a nonprofit financial institution controlled by its members and typically offers lower mortgage rates. However, at a credit union, you might only have access to a limited line of loan products, meaning you might not find exactly what you’re looking for. Plus, you’ll need to qualify for membership. That member-focused experience, though, could lead to more case-by-case flexibility that can help you with your mortgage needs.
An online mortgage lender allows you to move through the loan application process with an entirely (or almost entirely) digital experience. They often process applications in days and offer preapprovals within hours. They’re also worth considering if you want to take advantage of lower rates or fewer fees — their lack of overhead means lower costs and savings they pass on to you.
Convenience, cost and speed matter, but you might also need or want human interaction at some point in the process. With no branch locations, this can be difficult to come by with an online lender. You may or may not have an individual loan officer assigned to you and, since they could be anywhere in the country, they may be hard to reach at times. In short, they’re not ideal if you crave a face-to-face, personal touch.
Next steps on finding the best mortgage lender
When searching for the best lender — either a national lender or local lender — cost is important, but so are your needs and preferences. Some ways to narrow down your options include:
Consider your credit. If your credit score could use improving, look into lenders who have options for low-credit score borrowers or those who don’t fit the standard financial profile.
Compare quotes from multiple lenders. Studies show that shopping around for a mortgage could save you thousands.
Pay attention to how lenders communicate with you. The right lender shouldn’t be difficult to work with. The best lenders are able to answer your questions promptly, be easy to reach and keep you updated throughout the process. The right lender won’t hit you with a hard pitch, either.
Weigh the lender fees. Many lenders charge an origination fee and an application fee, to name just a few. Or they bump these charges up, to compensate for “discounts” elsewhere. Take this into account when shopping around and comparing offers.
If you’re considering a loan on a home you own outright, it’s important to note that when you own your home without any current mortgage, its entire value is equity.
You can utilize this equity by securing a loan against the home’s worth. Multiple mortgage loan options are available, such as a cash-out refinance, home equity loan, or HELOC.
To make the most informed decision, delve deeper into each option and discover which suits your needs best.
Check your loan options. Start here
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Can I get a loan on a house that’s paid for?
Yes, you can get a loan on a home you own outright through a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.
A home equity loan allows you to borrow a fixed amount of money using your home as collateral and pay it back with interest over a set term. A HELOC, on the other hand, works like a credit card where you can borrow money as you need it up to a certain amount, and pay it back with interest.
When you take out a home equity loan or a HELOC, the lender will determine the amount of equity you have in your home and use that as collateral for the loan. The amount of equity you have is determined by the difference between the current value of your home and the outstanding balance on your mortgage
Cash-out refinancing allows you to borrow up to 80% of your home’s appraised value. You’ll repay the loan via monthly payments, just like you did before you paid off your mortgage balance
Keep in mind that taking out a loan on a paid-off house puts your home at risk if you are unable to make payments. If you default on the loan, the lender may foreclose on your home to recoup their losses.
So, before taking out a home equity loan, or HELOC, make sure you can comfortably make the monthly payments and understand the risks involved.
Verify your eligibility. Start here
Home equity loans for a paid-off house
Getting a loan on a house you already own lets you borrow against the value of your home without selling.
The type of loan you’ll qualify for depends on your credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), and other factors. But assuming your personal finances are in good shape, you can likely choose from any of the following loan options that we summarized above.
Check your loan options. Start here
1. Cash-out refinance
Cash-out refinancing typically involves applying for a new mortgage to replace an existing one and borrowing cash from your home equity. When you already own your home outright, you aren’t paying off an existing mortgage. So most or all of the loan will come to you as a lump sum of cash.
You can typically borrow up to 80% of your home’s value using a cash-out refinance. However, with the VA cash-out refi, you could potentially get up to 100% of your home’s value. But only veterans and active-duty service members have VA loan eligibility.
Refinancing requires a home appraisal to measure your home’s market value. Unless your home is worth over $1 million, in which case you may be able to get an appraisal waiver. You’ll also pay closing costs, ranging between 2% and 5% of your loan balance.
You can pay closing costs out of pocket, or your lender might be willing to cover part of them in exchange for a higher interest rate. Alternatively, you could roll the closing costs into your loan balance.
Cash-out refinancing typically requires a credit score of at least 620. But a higher score (720 and up) will earn you a lower mortgage rate and help you save on interest costs.
2. Home equity loan
Another option is a home equity loan. As with a cash-out refinance, the amount you can borrow is based on your home’s value. Your loan terms will also depend on your credit score.
Homeowners can typically borrow up to 80% of their home’s equity with a home equity loan, which is also known as a second mortgage. However, some smaller banks and credit unions may allow you to pull out up to 100% of your equity.
Once approved, you’ll receive the entire loan amount in cash to use as you wish. Then you’ll repay the loan with interest by making monthly payments.
Home equity loans have higher interest rates than refinancing but lower interest rates than credit cards or personal loans. Since it’s an installment loan with a fixed interest rate, you’ll also have a fixed monthly payment.
Many lenders set their minimum credit score for a home equity loan between 620 and 700.
Verify your home equity loan eligibility. Start here
3. Home equity line of credit (HELOC)
A home equity line of credit is similar to a home equity loan. But rather than receiving a lump sum of cash, borrowers can draw from a line of credit as needed.
Home equity lines of credit often have a draw period of 10 years, meaning you can borrow from the credit line and repay it as often as you want within that time frame. After the draw period ends, there’s typically a repayment period of up to 20 years, during which you cannot borrow from the HELOC and must repay any outstanding balance with interest.
Check your HELOC options. Start here
A HELOC is a revolving account, like a credit card, so the amount borrowed determines your monthly payment. HELOCs usually have variable interest rates.
How to choose a loan on a home you own outright
Although you have several options when getting a loan on a home you own outright, the right mortgage depends on your specific goals. Here’s how to choose the best loan for your financial situation.
Talk to a lender about your mortgage options. Start here
You need cash to buy another property. You can purchase a new property with the aid of a cash-out refinance or a home equity loan. Both loans give you a lump sum payment up front and let you extend the fixed repayment term over a longer period of time. HELOCs can have higher interest rates and variable rates, leaving you with less certainty about your future rate and monthly payments HELOCs can have higher interest rates and variable rates, leaving you with less certainty about your future rate and monthly payments
You want to make home improvements. Home equity loans and HELOCs can be used to improve your home by making renovations or repairs. A home equity loan is great for a single project, while a HELOC is better for completing several projects over many years. You can also use a cash-out refi, but if you extend your loan term, you may pay more in interest over the life of the loan. This could make it harder for you to pay off your mortgage and add value to your home.
You want to consolidate high-interest debts. A cash-out refinance is a way to use home equity to pay off high-interest debts, such as credit card debt or personal loans. It can be a smart way to save money on interest, but it has risks, such as a risk of foreclosure and using a long-term asset, the value of your real estate, to pay for shorter-term needs
Regardless of the type of loan you choose, request quotes from at least three mortgage lenders to compare interest rates, discount points, and upfront fees. This will help you get the best deal.
Pros and cons of getting a loan on a home you already own
Leveraging a fully paid-off home for a loan comes with its own set of benefits and drawbacks. Here’s what you should consider before opting for a home equity loan.
Verify your home equity loan eligibility. Start here
Pros
Enjoy cost-effective borrowing. Home loans, when taken against a fully-owned property, typically offer more competitive interest rates than personal loans or credit cards. This is due to the house acting as a guarantee. Moreover, when opting for a new loan like a refinance, the associated closing expenses might be on the lower side
Unlock most of your home’s value. With no existing liens on your property, such a loan lets you access a large part of your equity. Lenders find this arrangement favorable, knowing you’ve successfully cleared a first mortgage. It’s important to keep in mind that the property’s valuation and your credit history will still determine the loan amount
Benefit from fixed-rate repayments. Such home loans usually come with fixed interest rates, ensuring consistent monthly outflows throughout the loan’s tenure
Flexibility in how you use your money. The loan amount can be channeled into various needs, be it home refurbishments, debt clearance, or any significant expenditure
Potential tax benefits. If the loan amount is reinvested into property enhancements, the interest might be deductible, giving it an edge over other financial products like personal loans or credit cards
Cons
Your property is on the line. If you default on the home equity loan repayments, you risk losing your fully owned home to foreclosure
It might cost more than other home loans. Generally, home equity loans have steeper interest rates compared to refinancing options and Home Equity Lines of Credit (HELOCs), making them potentially pricier
Be prepared for closing costs. Typically, these can range from 2% to 5% of the loan value, adding to the overall cost
Repayment terms might be rigid. Unlike some other options, such as HELOCs, which offer flexibility in repayment and re-borrowing, home equity loans have a fixed repayment schedule
Risk of the loan exceeding the property value. If you secure a loan on a home you own outright prior to a downturn in the property market, you might find yourself owing more than the property’s worth
3 things to consider before getting a loan on a home you already own
Considering taking a loan on a home you own outright? It’s an important decision with several facets to consider. Let’s delve into three key aspects:
1. Do you really need the liquidity?
What’s your primary motivation for tapping into equity? If you’re planning significant home improvements that could enhance its market value, that’s a strategic approach.
However, if the goal is to address other debts or make purchases that won’t hold their value, exercise caution. You wouldn’t want to jeopardize your home without good reason.
2. How much do you need to borrow and for how long?
The size of your loan will directly determine your monthly commitments. When considering a larger loan amount, it’s important to evaluate the monthly payments, interest rate, and the loan’s lifespan. If you’ve been enjoying a mortgage-free status for a while, it’s worth reflecting on whether you’re ready to recommit to a long-term debt.
3. Are you financially stable?
A few things to consider here. First, ensure that the monthly payments of the new loan align with your budget without overstretching. You should also ensure the offered rate is competitive and aligns with current market rates.
Lastly, always consider if there might be more suitable alternatives. Sometimes, continuing to save or exploring other financing avenues might be more beneficial.
Remember, leveraging your home’s equity is a significant step, and it’s essential to make decisions that resonate with your long-term goals and financial well-being.
How to get a loan on a home you own outright
Getting a home equity loan on home you own outright can be a smart financial decision, allowing you to tap into the equity you’ve built. It can be used for various purposes, such as home improvement, debt consolidation, or funding a significant purchase.
Verify your home equity loan eligibility. Start here
Here is a step-by-step guide on how to obtain a home equity loan on a fully paid-off house:
Determine your needs: Before applying for a home equity loan, identify why you need the loan and how much you want to borrow. Keep in mind that borrowing more than you need might lead to increased costs and interest rates.
Calculate your equity: Equity is the difference between your home’s current market value and any outstanding debts secured by the property. Since your house is paid off, your equity is equal to the current market value of your home. You can calculate your home’s equity using online tools or consulting a local real estate agent.
Check your credit score: A good credit score is essential for obtaining a home equity loan with favorable terms. Check your credit report for any errors and take steps to improve your credit score, if necessary, by paying off outstanding debts and ensuring timely bill payments.
Shop around for lenders: Research various financial institutions, including banks, credit unions, and online lenders, to find the best home equity loan terms and interest rates. Compare loan offers and choose the one that best suits your needs.
Gather necessary documents: Prepare the required documentation, including pay stubs, W-2 forms, bank statements, and tax returns.
Apply for the loan: Fill out the loan application and provide the required documentation. The lender will review your application and determine whether you qualify for the loan.
Close the loan: If you are approved for the loan, you will need to sign the loan documents and pay any closing costs or fees associated with the loan.
Once the loan is closed, you will receive the loan proceeds in a lump sum, which you can use for any purpose. Remember that you will be required to make monthly payments on the loan, and failure to do so could result in foreclosure on your home.
Alternatives to getting a loan on a home you own
Mortgages on your current home aren’t always necessary when buying a second home, vacation home, or investment property.
Verify your eligibility. Start here
“You may already have enough savings for a down payment without tapping into your equity,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Before getting a loan on a home you own outright, look into mortgage loans that allow low down payments. Home buyers should consider the following types of loans.
Conventional loans
If you’re buying a new home to use as your primary residence, conventional loans allow financing with as little as a 3% down payment. You could qualify with a credit score as low as 620.
At least a 10% down payment is required for a vacation home, 20% to avoid private mortgage insurance, and 20-25% for a rental or investment property.
Check your conventional loan eligibility. Start here
FHA loans
FHA loans require only a 3.5% down payment, allowing FICO scores as low as 580. You cannot use an FHA loan to purchase a vacation home or an investment property. But you can use one to buy a multi-unit property with up to four units, live in one of the units, and rent out the others.
Check your FHA loan eligibility. Start here
VA loans
VA loans are the best option for eligible veterans and service members due to their low mortgage rates, lack of mortgage insurance, and no down payment. However, they can only be used for a vacation or investment home when buying a multi-unit property with up to four units. You can also use a VA loan to buy a second home, but only if the second home becomes your primary residence.
Check your VA loan eligibility. Start here
Interest rates for a second home
If you’re using cash from your equity to buy another home, make sure you understand how interest rates work on a vacation home, second home, and investment property.
Check your loan options. Start here
Since the new home won’t be your primary residence, you can expect a slightly higher mortgage rate. This rate increase protects the lender because these properties have a higher risk of default. That’s because mortgage lenders know that in the event of financial hardship, homeowners prioritize paying the mortgage on their primary home before a second home or investment property.
But although you’ll pay a higher rate when buying a second home, shopping around and comparing loans can help you save. To see the impact of higher mortgage rates, you can experiment with a mortgage calculator.
FAQ: Loan on a home you own outright
How do you get a loan on a home you own outright?
To obtain a loan on a home you own outright, you can approach a financial institution or lender and apply for a home equity loan, HELOC, or cash-out refinance. The process typically involves an assessment of your property’s value, a review of your credit history, and verification of your income sources. Once approved, you can use your home as collateral to secure the loan.
What does it cost to get a loan on a house you own outright?
The costs associated with getting a loan on a house you own outright can vary based on the lender and the type of loan. Common expenses include appraisal fees to determine the home’s value, origination fees, title search fees, and potential closing costs. If you’re considering a reverse mortgage, there might be additional fees and insurance costs involved.
How much can you borrow against a house if you owe more than it’s worth?
If you owe more on your home than its current market value, you’re in a situation known as being u0022underwateru0022 on your mortgage. In such cases, borrowing additional funds against your home can be challenging. Lenders typically want the home’s value to exceed the loan amount to minimize their risk. However, some government programs might assist homeowners in this situation, but a reverse mortgage might not be an option unless there’s sufficient equity in the home.
What is the maximum amount I can borrow against a home that I own outright?
Typically, for home equity loans, lenders allow you to borrow up to 80-90% of your home’s value. But the maximum amount you can borrow against a home you own outright depends on several factors, including the home’s appraised value, your age (especially if considering a reverse mortgage), current interest rates, and lender-specific guidelines.
Should you mortgage the house you own?
Owning your home outright provides a valuable equity cushion, and it’s exciting when you no longer shoulder the burden of monthly mortgage payments. The good news is that you don’t have to sell your home to access your equity.
Using a cash-out refinance, home equity loan, or home equity line of credit, homeowners can pull cash from their equity and use the money for many different purposes.
Make sure you understand the pros and cons of each type of financing and choose the best one for you based on your specific goals.
Time to make a move? Let us find the right mortgage for you
Equity financing trades a percentage of a business’s equity, or ownership, in exchange for funding. Equity financing can come from an individual investor, a firm or even groups of investors.
Unlike traditional debt financing, you don’t repay funding you receive from investors; rather, their investment is repaid by their ownership stake in the growing value of your company. Equity financing is a common type of financing for startup businesses — especially for pre-revenue startups that don’t qualify for traditional loans — and businesses that want to avoid taking out small-business loans.
What is equity in business?
Business equity refers to the amount of ownership in a company or business, usually calculated as a percentage or by number of shares. For smaller private companies, equity is usually reserved for owners, investors and sometimes employees, while larger, publicly traded companies may also sell equity on the stock market.
Business equity is calculated by subtracting a business’s total liabilities from its total assets. For that reason, equity reflects a business’s value and indicates to shareholders the business’s overall financial stability.
How does equity financing work?
The process of getting equity financing will vary depending on the type of equity financing you’re looking for, your business and your investors. Generally, you can expect to follow these steps.
Gather documents
Before you start looking for investors, you’ll need documents like a business plan and financial reports, plus an idea of how much capital you need and what you will use it for. These are all things you’ll need to outline to a potential investor in your business pitch.
Find investors
If you don’t know investors or have potential investors in mind already, consider leveraging your personal or professional network to understand your options. You can also use online platforms to search for investors, or even check LinkedIn or attend local networking events.
Negotiate how much equity to give to your investors
Once you’ve found your investors, they may conduct their own business valuation, whereby they determine the potential value of your business to decide how much equity they want for their investment. Factors like business stage, amount of risk based on market trends and expected return based on financial projections will influence this negotiation. Angel investors may request 20-25% for example, while venture capitalists may want up to 40%.
Use funds
Once you’ve negotiated a price, the cash you receive from investors may be used for product development, new hires, debt refinance or working capital.
Share profits
Once your business starts making money, your investors will be entitled to a portion of your profits depending on how much equity they have in your business. This percentage will be paid to your investors in dividends within a predetermined time frame. If your business fails to make money, original investments do not have to be repaid.
Pros and cons of equity financing
Pros
No repayment terms. Strictly speaking, you don’t “repay” an investor in your company the way you would a lender. Instead, the initial investment is repaid by the prospect of the future value and profits of your business. While loans can be a great way to fund your business, not having monthly or weekly payments can be very beneficial to startups or businesses that are focused on growth.
Access to advisors. Most investors have invested before, and have likely even run their own businesses, which can make them a good resource as you navigate the ups and downs of running your business. Plus, because they have money invested in your business, your investors will have a special interest in helping your business succeed.
Larger funding amounts. You may qualify for larger amounts of financing with equity investors than with debt financing, especially if you’re a startup business. In addition, if you end up needing more money along the way, an investor may provide additional injections.
Alternative qualification requirements. Rather than business revenue or personal credit, investors will typically look at things like your business idea’s potential and your character.
Cons
Loss of ownership. Any time you receive an equity investment, your percentage of ownership in the business will decrease, which can affect your share of any future profits and value.
Loss of control. When you hand over ownership, you may also be handing over some control of your business, which can become problematic if you and your investors don’t see eye to eye.
Usually for high-growth, high-potential businesses. Equity financing is usually tailored for fast-growing businesses with high growth potential, which means many small businesses won’t be the right fit for this type of financing.
Common types of equity financing
Angel investing
Angel investors are high-net-worth individuals, most often accredited, who invest their own money in startups or early-stage operating businesses. It is possible to find angel investors through platforms like the Angel Capital Association or AngelList, but they can also be personal acquaintances or members of your professional network. Angel investors are a good option for business pitches or pre-revenue startups because they are often experienced individuals who can provide guidance in addition to funding.
Venture capital
Venture capital (VC) is a type of equity financing that’s similar to angel investing, but instead of wealthy individuals, VCs are usually investing on behalf of a venture capital firm. In general, VC can be a little more difficult to qualify for, and firms usually get involved after angel investors have already made initial investments. VC may be best fit for early-stage, high-growth businesses that have started operating already.
Equity crowdfunding
Equity crowdfunding is a form of equity financing that draws on groups of online investors, some accredited and some not, to fund businesses. Crowdfunding platforms allow potential investors to learn about businesses or business pitches through online profiles created by the business owners. Some may find less pressure in raising capital on crowdfunding platforms, which may make equity crowdfunding a good option for less experienced entrepreneurs or smaller businesses. However, online investing poses additional risk of fraud, so you want to be diligent about the platform you use. In addition, issuing more shares, however small, may dilute your ownership and increase costs more than using an angel investor or VC.
Alternatives to equity financing
Small-business loans. Small-business loans are a common type of debt financing, and a fair alternative to equity financing. Loans can be either term loans or lines of credit, and may come from banks, online lenders, credit unions or nonprofit lenders like community development financial institutions (CDFIs).
Small-business grants. If you want to avoid taking on debt and keep control of your business, and you don’t need a ton of funding, consider looking for small-business grants instead. Grants can be tricky to find and usually don’t fund in large amounts, but they can be worth it for funding that you don’t need to pay back.
Self-investing. Tapping into your own savings can be a way to maintain full ownership of your business and avoid paying any interest. However, you risk losing your savings if your business fails, so it’s best to seek the advice of a financial professional to determine whether this option is right for you.
Friends and family. If you have friends or family members you trust and who support you and your business, they may be willing to provide funding. Though this may feel less formal than receiving funding from a bank or other financial institution, you should still create a contract that details the terms of the loan.
Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket.
Home improvement loans let you finance the cost of upgrades and repairs to your home.
Some — like the FHA 203(k) mortgage — are specialized for home renovation projects, while second mortgage options — like home equity loans and HELOCs — can provide cash for a remodel or any other purpose. Your best financing option for home improvements depends on your needs. Here’s what you should know.
Check home improvement loan options and rates. Start here
In this article (Skip to…)
What is a home improvement loan?
A home improvement loan is a financial tool that allows you to borrow money for various home projects, such as repairs, renovations, or upgrades.
Unlike a secured loan like a second mortgage, home improvement loans are often unsecured personal loans, meaning you don’t have to put up your home as collateral. You get the money in a lump sum and pay it back over a predetermined period, which can range from one to seven years.
Now, you might be wondering how this is different from a home renovation loan. While the terms are often used interchangeably, there can be subtle differences.
Home improvement loans are generally more flexible and can be used for any type of home project, from installing a new roof to landscaping. Home renovation loans, on the other hand, are often more specific and may require you to use the funds for particular types of renovations, like kitchen or bathroom remodels.
How does a home improvement loan work?
So, you’ve decided to spruce up your home, and you’re considering a home improvement loan. But how does it work? Once you’re approved, the lender will give you the money in a lump sum. You start repaying the loan almost immediately, usually in fixed monthly installments. The interest rate you’ll pay depends on various factors, including your credit score and the lender’s terms.
Be mindful of additional costs like origination fees, which can range from 1% to 8% of the loan amount. Unlike a credit card, where you can keep using the available credit as you pay it off, the loan amount is fixed. If you find that you need more money for your project, you’ll have to apply for another loan, which could affect your credit score.
Home improvement loan rates
Interest rates for home improvement loans can vary widely, generally ranging from 5% to 36%. Your credit score plays a significant role in determining your rate—the better your credit, the more favorable your rate. Some lenders even offer an autopay discount if you link a bank account for automatic payments.
You can also prequalify to check your likely interest rate without affecting your credit score, making it easier to plan for the loan purpose, whether it’s a new kitchen or fixing a leaky roof.
So, whether you’re dreaming of solar panels or finally fixing up your master bedroom, a home improvement loan can be a practical way to finance your projects. Just make sure to read the fine print and understand all the terms, including any potential autopay discounts and bank account requirements, before you apply.
Types of home improvement loans
1. Home equity loan
A home equity loan (HEL) is a financial instrument that lets you borrow money using the equity you’ve built up in your home as collateral. The equity is determined by subtracting your existing mortgage loan balance from your current home value. Unlike a cash-out refinance, a home equity loan “issues loan funding as a single payment upfront. It’s similar to a second mortgage,” says Bruce Ailion, Realtor and real estate attorney. “You would continue making payments on your original mortgage while repaying the home equity loan.”
Check home equity loan options and rates. Start here
This kind of loan is particularly useful for big, one-time expenditures like home remodeling. It offers a fixed interest rate, and the loan terms can range from five to 30 years. You could potentially borrow up to 100% of your home’s equity.
However, there are some cons to consider. Since you’re essentially taking on a second loan, you’ll have an additional monthly payment if you still have a balance on your original mortgage. Also, the lender will usually charge closing costs ranging from 2% to 5% of the loan balance, as well as potential origination fees. Because the loan provides a lump-sum payment, careful budgeting is necessary to ensure the funds are used effectively.
As a bonus, “a home equity loan, or HELOC, may also be tax-deductible,” says Doug Leever with Tropical Financial Credit Union, member FDIC. “Check with your CPA or tax advisor to be sure.”
2. HELOC (home equity line of credit)
A Home Equity Line of Credit (HELOC) is another option for tapping into your home’s equity without going through the process of a full refinance. Unlike a standard home equity loan that provides a lump sum upfront, a HELOC functions more like a credit card. You’re given a pre-approved limit and can borrow against that limit as you need, paying interest only on the amount you’ve actually borrowed.
Check your HELOC options. Start here
While there’s more flexibility because you don’t have to borrow the entire amount at once, be aware that by the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender can be permitted to change the terms over the loan’s life. This can reduce the amount you can borrow if, for instance, your credit goes down.”
The pros of a HELOC include minimal or potentially no closing costs, and loan payments that vary according to how much you’ve borrowed. It offers a revolving balance, which means you can re-use the funds after repayment. This kind of financial instrument may be ideal for ongoing or long-term projects that don’t require a large sum upfront.
“HELOCs offer flexibility, and you only pull money out when needed, within the maximum loan amount. And the credit line is available for up to 10 years, which is your repayment period.” Leever says.
3. Cash-out refinance
A cash-out refinance is a viable option if you’re considering home improvements or other significant financial needs. When opting for a cash-out refinance, you essentially take on a new, larger mortgage than your existing one and then pocket the difference in cash.
This cash comes from your home’s value and can be used for various purposes, including home improvement projects like finishing a basement or remodeling a kitchen. However, the money can also be used for other things, like paying off high-interest debt, covering education expenses, or even buying a second home. Importantly, a cash-out refinance is most beneficial when current market rates are lower than your existing mortgage rate.
Check your eligibility for a cash-out refinance. Start here
The advantages of going for a cash-out refinance include the opportunity to reduce your mortgage rate or loan term, which could potentially result in paying off your home earlier. For instance, if you initially had a 30-year mortgage with 20 years remaining, you could refinance to a 15-year loan, effectively paying off your home five years ahead of schedule. Plus, you only have to worry about one mortgage payment.
However, there are downsides. Cash-out refinances tend to have higher closing costs that apply to the entire loan amount, not just the cash you’re taking out. The new loan will also have a larger balance than your current mortgage, and refinancing effectively restarts your loan term length.
4. FHA 203(k) rehab loan
The FHA 203(k) rehab loan is backed by the Federal Housing Administration that consolidates the cost of a home mortgage and home improvements into a single loan, which makes it particularly useful for those buying fixer-uppers.
Check your eligibility for an FHA 203(k) loan. Start here
With this program, you don’t need to apply for two different loans or pay closing costs twice; you finance both the house purchase and the necessary renovations at the same time. The loan comes with several benefits like a low down payment requirement of just 3.5% and a minimum credit score requirement of 620, making it accessible even if you don’t have perfect credit. Additionally, first-time home buyer status is not a requirement for this loan.
However, there are some limitations and downsides to be aware of. The FHA 203(k) loan is specifically designed for older homes in need of repairs, rather than new properties. The loan also includes both upfront and ongoing monthly mortgage insurance premiums. Renovation costs have to be at least $5,000, and the loan restricts the use of funds to certain approved home improvement projects.
According to Jon Meyer, a loan expert at The Mortgage Reports, “FHA 203(k) loans can be drawn out and difficult to get approved. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.”
5. Unsecured personal loan
If you’re looking to finance home improvements but don’t have sufficient home equity, a personal loan could be a viable option. Unlike home equity lines of credit (HELOCs), personal loans are unsecured, meaning your home is not used as collateral. This feature often allows for a speedy approval process, sometimes getting you funds on the next business day or even the same day.
Check home improvement loan options and rates. Start here
The repayment terms for personal loans are less flexible, usually ranging between two and five years. Although you’ll most likely face closing costs, personal loans can be easier to access for those who don’t have much home equity to borrow against. They can also be a good choice for emergency repairs, such as a broken water heater or HVAC system that needs immediate replacement.
However, there are notable downsides to consider. Unsecured personal loans generally have higher interest rates compared to HELOCs and lower borrowing limits. The short repayment terms could put financial strain on your budget. Additionally, you may encounter prepayment penalties and expensive late fees. Financial expert Meyer describes personal loans as the “least advisable” option for homeowners, suggesting that they should be considered carefully and perhaps as a last resort.
6. Credit cards
Using a credit card can be the fastest and most straightforward way to finance your home improvement projects, eliminating the need for a lengthy loan application. However, you’ll need to be cautious about credit limits, especially if your renovation costs are high.
You might need a card with a higher limit or even multiple cards to cover the costs. The interest rates are generally higher compared to home improvement loans, but some cards offer an introductory 0% annual percentage rate (APR) for up to 18 months, which can be a good deal if you’re sure you can repay the balance within that time frame.
Check home improvement loan options and rates. Start here
Credit cards might make sense in emergency situations where you need immediate funding. For longer-term financing, though, they’re not recommended. If you do opt for credit card financing initially, you can still get a secured loan later on to clear the credit card debt, thus potentially saving on high-interest payments.
How do you choose the best home improvement loan for you?
The best home improvement loan will match your specific lifestyle needs and unique financial situation. So let’s narrow down your options with a few questions.
Check your home improvement loan options. Start here
Do you have home equity available?
If so, you can access the lowest rates by borrowing against the equity in your home with a cash-out refinance, a home equity loan, or a home equity line of credit.
Here are a few tips for choosing between a HELOC, home equity loan, or cash-out refi:
Can you get a lower interest rate? If so, a cash-out refinance could save money on your current mortgage and your home improvement loan simultaneously
Are you doing a big, single project like a home remodel? Consider a simple home equity loan to tap into your equity at a fixed rate
Do you have a series of remodeling projects coming up? When you plan to remodel your home room by room or project by project, a home equity line of credit (HELOC) is convenient and worth the higher loan rate compared to a simple home equity loan
Are you buying a fixer-upper?
If so, check out the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with your home purchase loan. Just review the guidelines with your loan officer to ensure you understand the disbursement of funds rules.
Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a more straightforward process.
“The only time I’d recommend the FHA203(k) program is when buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options as well.”
Do you need funds immediately?
When you need an emergency home repair and don’t have time for a loan application, you may have to consider a personal loan or even a credit card.
Which is better?
Can you get a credit card with an introductory 0% APR? If your credit history is strong enough to qualify you for this type of card, you can use it to finance emergency repairs. But keep in mind that if you’re applying for a new credit card, it can take up to 10 business days to arrive in the mail. Later, before the 0% APR promotion expires, you can get a home equity loan or a personal loan to avoid paying the card’s variable-rate APR
Would you prefer an installment loan with a fixed rate? If so, apply for a personal loan, especially if you have excellent credit
Just remember that these options have significantly higher rates than secured loans. So you’ll want to reign in the amount you’re borrowing as much as possible and stay on top of your payments.
How to get a home improvement loan
Getting a home improvement loan is similar to getting a mortgage. You’ll want to compare rates and monthly payments, prepare your financial documentation, and then apply for the loan.
Check home improvement loan options and rates. Start here
1. Check your financial situation
Check your credit score and debt-to-income ratio. Lenders use your credit report to establish your creditworthiness. Generally speaking, lower rates go to those with higher credit scores. You’ll also want to understand your debt-to-income ratio (DTI). It tells lenders how much money you can comfortably borrow.
2. Compare lenders and loan types
Gather loan offers from multiple lenders and compare costs and terms with other types of financing. Look for any benefits, such as rate discounts, a lender might provide for enrolling in autopay. Also, keep an eye out for disadvantages, including minimum loan amounts or expensive late payment fees.
3. Gather your loan documents
Be prepared to verify your income and financial information with documentation. This includes pay stubs, W-2s (or 1099s if you’re self-employed), and bank statements, to name a few.
4. Complete the loan application process
Depending on the lender you choose, you may have a fully online loan application, one that is conducted via phone and email, or even one that is conducted in person at a local branch. In some cases, your mortgage application could be a mix of these options. Your lender will review your application and likely order a home appraisal, depending on the type of loan. You’ll get approved and receive funding if your finances are in good shape.
Get started on your home improvement loan. Start here
Home improvement loan lenders
When considering a home improvement loan, it’s necessary to explore various lending options to find the one that best suits your needs. The lending landscape for home improvement is diverse, featuring traditional banks, credit unions, and online lenders. Each type of lender offers different interest rates, loan terms, and eligibility criteria.
It’s advisable to prequalify with multiple lenders to get an estimate of your loan rates, which generally doesn’t affect your credit score. This way, you can compare offers and choose the most favorable terms for your renovation project.
Among the popular choices in the market, Sofi and LightStream stand out for their competitive rates, easy online application, and customer-friendly terms. Both are equal housing lenders, ensuring they adhere to federal anti-discrimination laws. In addition to these, other lenders like Wells Fargo and LendingClub also offer home improvement loans with varying terms and conditions.
How can I use the money from a home improvement loan?
When you do a cash-out refinance, a home equity line of credit, or a home equity loan, you can use the proceeds on anything — even putting the cash into your checking account. You could pay off credit card debt, buy a new car, pay off student loans, or even fund a two-week vacation. But should you?
It’s your money, and you get to decide. But spending home equity on improving your home is often the best idea because you can increase the value of your home. Spending $40,000 on a new kitchen remodel or $20,000 on finishing your basement could add significant value to your home. And that investment would be appreciated along with your home.
That said, if you’re paying tons of interest on credit card debt, using your home equity to pay that off would make sense, too.
Average costs of home renovations
Home renovations can vary widely in cost depending on the scope of the project, the quality of the materials used, and the region where you live. However, here’s a general idea of what you might expect to pay for various types of home renovations.
Renovation Type
Average Cost Range
Kitchen Remodel
$10,000 – $50,000
Bathroom Remodel
$5,000 – $25,000
Master Bedroom Remodel
$1,500 – $10,000
New Roof
$5,000 – $11,000
Exterior Paint
$6,000 – $20,000
Interior Paint
$1,500 – $10,000
New Deck
$15,000 – $40,000
Solar Panel Installation
$15,000 – $25,000
Window Replacement
$5,000 – $15,000
The information is based on data from HomeGuide.com and is current as of August 2023.
Please note that these are just average figures, and the actual costs can vary. For instance, a high-end kitchen remodel could cost significantly more, especially if you’re planning to use custom cabinetry and high-end appliances. Similarly, the cost of a new deck can vary depending on the size and type of materials used.
Home improvement loans FAQ
Check home improvement loan options and rates. Start here
What type of loan is best for home improvements?
The best loan for home improvements depends on your finances. If you have accumulated a lot of equity in your home, a HELOC, or home equity loan, might be suitable. Or, you might use a cash-out refinance for home improvements if you can also lower your interest rate or shorten the current loan term. Those without equity or refinance options might use a personal loan or credit cards to fund home improvements instead.
Should I get a personal loan for home improvements?
That depends. We’d recommend looking at your options for a refinance or home equity-based loan before using a personal loan for home improvements. That’s because interest rates on personal loans are often much higher. But if you don’t have a lot of equity to borrow from, using a personal loan for home improvements might be the right move.
What credit score is needed for a home improvement loan?
The credit score requirements for a home improvement loan depend on the loan type. With an FHA 203(k) rehab loan, you likely need a good credit score of 620 or higher. Cash-out refinancing typically requires at least 620. If you use a HELOC, or home equity loan, for home improvements, you’ll need a FICO score of 680–700 or higher. For a personal loan or credit card, aim for a score in the low-to-mid 700s. These have higher interest rates than home improvement loans, but a stronger credit profile will help lower your rate.
What is the best renovation loan
If you’re buying a fixer-upper or renovating an older home, the best renovation loan might be the FHA 203(k) mortgage. The 203(k) rehab loan lets you finance (or refinance) the home and renovation costs into a single loan, so you avoid paying double closing costs and interest rates. If your home is newer or of higher value, the best renovation loan is often a cash-out refinance. This lets you tap the equity in your current home and refinance into a lower mortgage rate at the same time.
Is a home improvement loan tax deductible?
Home improvement loans are generally not tax-deductible. However, if you finance your home improvement using a refinance or home equity loan, some of the costs might be tax-deductible.
Disclaimer: The Mortgage Reports do not provide tax advice. Be sure to consult a tax professional if you have any questions about your taxes.
Shop around for your best home improvement loan
As with anything in life, it pays to compare all your options. So don’t just settle on the first loan offer you find.
Compare lenders, mortgage types, rates, and terms carefully to find the best loan for home improvements.
Time to make a move? Let us find the right mortgage for you
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: 7.12%
15-year fixed mortgage rate: 6.41%
5/6 ARM mortgage rate: 6.87%
Jumbo mortgage rate: 7.01%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.12%
7.18%
-0.06
15-Year Fixed Rate
6.41%
6.40%
+0.01
5/6 ARM
6.87%
7.00%
-0.13
7/6 ARM
7.04%
7.15%
-0.11
10/6 ARM
7.15%
7.25%
-0.10
30-Year Fixed Rate Jumbo
7.01%
7.07%
-0.06
30-Year Fixed Rate FHA
6.78%
6.87%
-0.09
30-Year Fixed Rate VA
6.78%
6.86%
-0.08
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Friday, January 12, 2024. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.06
The average 30-year fixed-mortgage rate is 7.12%. Since the same time last week, the rate is down, changing -0.06 percentage points.
At the current average rate, you’ll pay $673.38 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 7.18%.
15-year fixed-rate mortgages are up, +0.01
The average rate you’ll pay for a 15-year fixed-mortgage is 6.41%, an increase of+0.01 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 6.40% last week, you would’ve paid $865.62 per month.
5/6 adjustable-rate mortgages are down,-0.13
The average rate on a 5/6 adjustable rate mortgage is 6.87%, a decrease of-0.13 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 6.87% will cost approximately $656.59 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.06
The average jumbo mortgage rate today is 7.01%, a decrease of-0.06 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
$673.38
$677.43
-$4.05
15-Year Fixed Rate
$866.17
$865.62
+$0.55
5/6 ARM
$656.59
$665.30
-$8.71
7/6 ARM
$667.99
$675.41
-$7.42
10/6 ARM
$675.41
$682.18
-$6.77
30-Year Fixed Rate Jumbo
$665.97
$670.01
-$4.04
30-Year Fixed Rate FHA
$650.59
$656.59
-$6.00
30-Year Fixed Rate VA
$650.59
$655.93
-$5.34
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.
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.
Your home equity can come in handy when you’re in a financial pinch. Whether you need to take care of home repairs, consolidate high interest credit card debt or cover a number of other potential expenses, your home equity could be the solution to your financial blues. Home equity loans are generally easy to access and typically come with far lower interest rates than personal loans and credit cards. Moreover, the average American homeowner has quite a bit of equity available.
Although home equity loans are widely available and come at a relatively low cost compared to unsecured lending options, they can have a negative impact on your financial stability if you use them improperly. But what should you, and shouldn’t you, do with home equity loans? Below, we’ll break down some important home equity dos and don’ts that owners should know.
Find out how much home equity you can tap into now.
Home equity loan dos and don’ts to know
“A home equity loan can be a great financial tool,” explains Derek Miser, investment advisor and CEO at Miser Wealth Partners in Knoxville, Tennessee. However, “it’s important to understand the dos and don’ts prior to using one.” Here are some of the most important home equity loan dos and don’ts to know:
Do: Review your financial needs
“First and foremost, you need to review your financial needs,” explains Miser. “Understand why you need the funds from a home equity loan and determine how much you need. Typically, home equity loans are used for home improvements, debt consolidation, emergency expenses, etc.”
For example, say you need to replace your roof. Rather than blindly taking out a home equity loan for what you think a roof replacement might cost, reach out to contractors for quotes. Since quotes aren’t always 100% accurate it’s a good idea to take out a loan for 10% more than the quote. So, if you expect your new roof to cost $10,000, you should consider an $11,000 home equity loan.
Use your home equity to access the money you need now.
Don’t: Borrow more than you need
“You want to ensure you don’t borrow more than you need,” says Miser. “Doing so can lead you to overextend yourself, ending in financial strain or even foreclosure, if payments cannot be made.”
Sure, it’s OK to borrow 10% more than you’ve been quoted for a job, but you shouldn’t borrow simply for the sake of borrowing. Using the example above, if you need $10,000 for a new roof, it’s OK to take out a home equity loan for $11,000. But you shouldn’t take one out for $20,000 for the sake of filling your pockets with additional spending cash.
Do: Compare lenders
“As with any large financial decision, shop around and compare rates and terms to find the option that works best,” explains Austin Niemiec, chief revenue officer for Rocket Mortgage.
Miser agrees, saying, “often, banks, credit unions and online lenders offer different rates, fees and repayment terms. Those should all be taken into consideration.”
Don’t: Forget your regular mortgage payment
“You’ll also want to make sure you don’t forget to pay your regular mortgage payment. This will still be required on top of the home equity loan payment,” explains Miser. Be sure to consider this before you apply, too. You wouldn’t want to take out a loan, only to find that when the payment is added to your current mortgage, you struggle to afford it.
Do: Understand the equity in your home
“It is important that homeowners fully understand the equity in their home – specifically the current value and the equity prior to applying for this type of loan,” explains Niemiec. So, you may want to start with an appraisal and compare the results to the remaining balance on your mortgage to determine how much home equity you actually have.
Don’t: Fail to have a repayment plan
Miser says it’s important to know how you’ll pay your loan back before you apply. “If you don’t have a clear plan for repaying the loan, then you probably shouldn’t get it. Make sure you can comfortably manage payments for the entire loan term prior to borrowing.”
Do: Use the funds for their intended purpose
“Finally, ensure you only use the funds for the intended purpose,” says Miser. “If you’re taking out money for an emergency, don’t apply the funds towards something that isn’t part of that emergency.” After all, if you spend the money on something other than what you took the loan out for, you’ll find yourself in the same position as you were before, but with a new loan payment on top of the existing financial hardship.
Find out how affordable home equity loans can be today.
The bottom line
Your home equity can be a valuable financial tool. But if you use it incorrectly, it can be a dangerous proposition. It’s important to consider your financial goals and how a home equity loan might fit into those goals when you decide whether or not to borrow against your home’s equity.
Joshua Rodriguez
Joshua Rodriguez is a personal finance and investing writer with a passion for his craft. When he’s not working, he enjoys time with his wife, two kids, three dogs and 10 ducks.
Many people mistakenly believe they can’t afford to buy a home because they don’t really know what their options are. Fortunately, home loans are not one-size-fits-all. There are various mortgages available to suit your budget and preferences.
So, before you start visiting open houses, take some time to familiarize yourself with the different home loans that are available. Going into the home buying process informed could help you save a lot of money on your down payment, interest, and fees.
The 8 Types of Mortgage Loans Available
Understanding the different types of mortgage loans will help you choose the option that’s best suited for you. Let’s look at a brief overview of the eight types of mortgages available in 2024.
1. Conventional Loans
A conventional loan is a mortgage that’s not issued by the federal government. There are two different types of conventional mortgages you can choose from: conforming and non-conforming loans.
A conforming loan falls within the guidelines laid out by Fannie Mae and Freddie Mac. You’ll take out a conforming loan through a private lender like a bank, credit union, or mortgage company. Since the government doesn’t guarantee the loan, conventional mortgages typically come with more stringent lending requirements.
According to the CFPB, the maximum loan amount for a conventional loan is $484,350. However, it may be as high as $726,525 in counties with a high cost of living. You’ll have to take out private mortgage insurance (PMI) if you don’t have a 20% down payment.
Conventional loans are fixed-rate mortgages, which means your monthly mortgage payment remains the same throughout the entire life of the mortgage loan. The terms typically range from 10 to 30 years:
30-year fixed-rate mortgage
20-year fixed-rate mortgage
15-year fixed-rate mortgage
10-year fixed rate mortgage
Pros:
It can be used to purchase a primary home or an investment property
Tends to cost less than other types of loans
You can cancel your private mortgage insurance (PMI) once you reach 20% equity in your home
Cons:
Must have a minimum FICO score of 620 or higher
Harder to qualify for than government-backed loans
You’ll need to have a low debt-to-income ratio to qualify
2. Conventional 97 Mortgage
A conventional 97 mortgage is similar to a conventional loan in that it’s widely available to various borrowers. The main difference is that with this type of home loan, you only have to pay a 3% down payment.
The program is available for first-time and repeat home buyers. However, it must be your primary place of residence, and the maximum loan amount is $510,400.
Pros:
Widely available to most borrowers
Only requires a 3% down payment
Available for first-time and repeat homebuyers
Cons:
Cannot be used to purchase investment properties
The maximum loan amount is $510,400
Requires a minimum FICO score of 660 or higher
3. FHA Loans
FHA loans are backed by the Federal Housing Administration and are a popular option for first-time home buyers. To qualify, you need to have a 3.5% down payment and a minimum credit score of 580.
If you have a credit score of 500 or higher, you can qualify for an FHA loan with a 10% down payment. These flexible requirements make FHA loans a suitable option for borrowers with bad credit.
To qualify for an FHA home loan, you must have a debt-to-income ratio of 43% or less. These loans can’t be used to purchase investment properties, and your home must meet the FHA’s lending limits.
These limits vary by state, so you’ll need to check the FHA’s website to see what the guidelines are for your area.
Pros:
Loans come with low down payment options
A viable option for borrowers with bad credit
Available for first-time and repeat homeowners
Cons:
Loans can’t be taken out for investment properties
If your credit score is below 580, a 10% down payment is required
You must have a debt-to-income ratio below 43%
Mandatory mortgage insurance premiums
4. FHA 203(k) Rehab Loans
An FHA 203(k) rehab loan is sometimes referred to as a renovation loan. It allows home buyers to finance the purchase of their home and any necessary renovations with a single loan.
Many people purchase older homes to fix them up. Instead of taking out a mortgage and then applying for a home renovation loan, you can accomplish both within a single mortgage.
A rehab loan is similar to an FHA loan in that you’ll need a 3.5% down payment. However, the credit requirements are stricter, and you’ll need a minimum credit score of 640 to qualify.
Pros:
Allows you to buy a home and finance the remodel within one mortgage
Requires a minimum 3.5% down payment
Easier to qualify since the FHA backs your loan
Cons:
Credit requirements are more stringent than typical FHA loans
You must hire approved contractors and cannot DIY the renovations
The closing process takes longer than other types of mortgages
5. VA Loans
The Department of Veteran Affairs guarantees VA loans. These loans are designed to make it easier for veterans and service members to qualify for affordable mortgages.
One of the biggest advantages of taking out a VA loan is that it doesn’t require a down payment or mortgage insurance premium (MIP). And there are no listed credit requirements, though the lender can set their own minimum credit requirements. VA loans typically come with a lower interest rate than FHA and conventional loans.
To qualify for a VA loan, you must either be active duty military, a veteran or honorably discharged. You’ll need to apply for your mortgage through an approved VA lender.
Pros:
No down payment required
No PMI required
Flexible credit requirements
Cons:
Must be a veteran to qualify
Some sellers will not want to deal with a VA loan
6. USDA Loans
A USDA loan is a type of mortgage that’s available for rural and suburban home buyers. It’s a viable option for borrowers with lower credit scores that are having a hard time qualifying for a traditional mortgage.
USDA loans are backed by the U.S. Department of Agriculture, and they help low-income borrowers find housing in rural areas. USDA loans do not require a down payment, but you will need a minimum credit score of 640 to qualify.
You will need to meet the USDA’s eligibility requirements to qualify for the loan. But according to the department’s property eligibility map, over 95% of the U.S. is eligible.
Pros:
No down payment required
A practical option for low-income borrowers
Available to first-time and repeat home buyers
Cons:
A minimum credit score of 640 is required
Housing is limited to rural and suburban areas
7. Jumbo Loans
A jumbo loan is a mortgage that exceeds the financing guidelines laid out by the Federal Housing Finance Agency. These loans are unable to be purchased or guaranteed by Fannie Mae or Freddie Mac.
A jumbo mortgage is financing for luxury homes in competitive real estate markets, and the limits vary by state. In 2024, the FHFA raised the limits for a one-unit property to $766,550, increasing from $726,200 in 2023. In certain high-cost areas, the limits for jumbo loans vary, reaching up to $1,149,825. These jumbo loans are for mortgages that exceed the set limits in their respective counties.
If you’re hoping to buy a home that costs more than $1 million, you’ll need to take out a super jumbo loan. These loans provide up to $3 million to purchase your home. Both jumbo and super jumbo mortgages can be difficult to qualify for and require excellent credit.
Pros:
These loans make it possible to purchase large homes in expensive areas
Typically comes with flexible loan terms
Cons:
Jumbo loans and super jumbo loans come with higher interest rates
You’ll need a good credit history to qualify
8. Adjustable Rate Mortgages (ARMs)
Unlike a fixed-rate mortgage, where the interest rate is set for the life of the loan, an adjustable-rate mortgage (ARM) comes with interest rates that fluctuate. Your interest rate depends on the current market conditions.
When you first take out an ARM, you will typically start with a fixed rate for a set period of time. Once that introductory period is up, your interest rate will adjust on a monthly or annual basis.
An ARM can be a suitable option for some borrowers because your interest rate will likely be low for the first couple of years you own the home. But you need to be comfortable with a certain level of risk.
And if you choose to go this route, you should look for an ARM that caps the amount of interest you pay. That way, you won’t find yourself unable to afford your monthly payments when the interest rates reset.
4 Types of ARMs
There are 4 different types of adjustable-rate mortgages typically offered:
One Year ARM – The one-year adjustable-rate mortgage interest rate changes every year on the anniversary of the loan.
10/1 ARM – The 10/1 ARM has an initial fixed interest rate for the first ten years of the mortgage. After 10 years is up, the rate then adjusts each year for the remainder of the mortgage.
5/5 and 5/1 ARMs – ARMs that have an initial fixed rate for the first five years of the mortgage. After 5 years is up, for the 5/5 ARM, the interest rate changes every 5 years. For the 5/1 ARM, the interest changes every year.
3/3 and 3/1 ARMs – Similar to the 5/5 and 5/1 ARMs, except the initial fixed-rate changes after 3 years. For the 3/3 ARM, the interest rate changes every 3 years and for the 3/1 ARM, it changes every year.
Pros:
Interest rates will likely be low in the beginning.
If you pay the loan off quickly, you could pay a lot less money in interest.
Cons:
Your monthly mortgage payments will fluctuate.
Many borrowers have gotten into financial trouble after taking out an ARM.
Choosing the Right Home Loan
When it comes to choosing a home loan, you need to consider a few key factors. First, you’ll want to think about the type of loan that is best suited to your needs.
Fixed-rate mortgages offer stability and predictability, while adjustable-rate mortgages (ARMs) can be a viable option for those who expect their income to increase significantly over time. You’ll also want to consider your budget and how much you can afford to borrow, as well as the size of your down payment and the length of the loan term.
It’s also crucial to shop around and compare offers from multiple mortgage lenders. While it’s tempting to go with the first lender you find, it pays to do your homework and see what other options are available.
This can help you get a better rate and more favorable terms on your loan. It’s a good idea to get quotes from at least three different lenders, and to consider both traditional banks and online lenders.
Tips for Getting the Best Rates and Terms
One of the most effective strategies is to improve your credit score. Lenders look closely at credit scores when deciding whether to approve a loan. Those with higher scores are typically offered better terms. You can improve your credit score by paying your bills on time, reducing your debt, and correcting any errors on your credit report.
Another tip is to make a larger down payment, which can help you secure a lower interest rate and reduce the size of your monthly payments. Finally, consider working with a mortgage broker, who can help you shop around and find the best deal.
Bottom Line
As you can see, there are many home loans for you to choose from. The type of mortgage that’s best for you will depend on your current income and financial situation.
If you’re not sure where to start, consider working with a qualified loan officer. They can assess your situation and recommend the option that will be best for you.
Has your soon-to-be college student chosen the school they’d like to attend in the fall? Or, are they just starting to think about the application process? Either way, it’s never too early to research ways to pay for college.
Student loans, federal and private, are one common method that students and their families use to cover the cost of higher education. Typically, students are the ones who take out these loans (and are responsible for repaying them). However, there are also student loans, both federal and private, available for parents.
Also keep in mind that if your child takes out a private student loan, you will likely need to act as a cosigner, which means you will be responsible for repayment if your child is unable to make payments.
No matter who acts as borrower, it’s important for parents to be in the loop when it comes to student loans. Here’s what you need to know.
Not All Loans Are Created Equally
When it comes to student loans, there are two main options:
• Federal loans (funded by the federal government)
• Private student loans (funded by private lenders)
Federal Student Loans
Federal student loans are provided by the U.S. Department of Education and come in several forms:
• Direct Subsidized Loans These are for undergraduate students and are awarded based on financial need. The government pays the interest on these loans while the student is in school and for six months after they graduate (known as the grace period).
• Direct Unsubsidized Loans These are available to undergraduates, graduate students, and professional students and are not awarded based on need. The borrower is responsible for paying all interest that accrues on the loan.
• Direct PLUS Loans These are for graduate and professional students and parents of dependent undergraduates. They are not based on financial need and a credit check is required.
• Direct Consolidation Loans This option allows you to combine all your federal loans into one loan payment under a single loan servicer.
All federal loans come with fixed interest rates, which means the rate won’t change over the life of the loan. Interest rates are set by Congress each year on July 1st. For most students, federal loan repayment starts after the post-graduation grace period.
To apply for federal student loans, you need to submit the Free Application for Federal Student Aid (FAFSA). 💡 Quick Tip: Make no payments on SoFi private student loans for six months after graduation.
Private Student Loans
Private student loans are available through banks, credit unions, and online lenders. Many private student loans mirror the terms and repayment periods of federal student loans, but not always. Differences between federal versus private loans include:
• Credit checks Most federal student loans don’t require a credit check (except PLUS loans) but it’s required for private student loans. To qualify for a private student loan, you’ll need to meet the lender’s credit and other eligibility requirements.
• Repayment start date Some lenders might allow you to defer making payments until six months after you graduate, while others may require you to begin repayment while you’re still in school.
• Interest rates Federal student loans have fixed interest rates that don’t change over the life of the loan; private student loans offer fixed or variable interest rates.
• Repayment terms Federal loans have long repayment terms — from 10 to 30 years, depending on your plan. Private student loans also vary in term length, but might not be as long.
• Loan forgiveness Some federal student loans offer forgiveness options for certain career paths, or after you’ve made a certain number of payments on an income-driven repayment plan. Private student loans aren’t required to offer this option to borrowers.
How Parents Can Help
If your student has tapped all available financial aid, including federal student loans, you might look into student loans for parents.
The federal government offers Direct PLUS Loans for parents. They have higher interest rates and fees and qualify for fewer repayment plans than federal direct subsidized and unsubsidized loans for students. The interest rate for federal direct PLUS loans is 8.05% for the 2023-24 academic year. There is also an origination fee of 4.228%, which is deducted from each loan disbursement.
To get a PLUS loan, you can’t have an adverse credit history (there may be exceptions to this rule if you meet other eligibility requirements) and you must complete the FAFSA with your child.
It’s important to note that a parent PLUS Loan will ultimately be your responsibility to repay. The only way to transfer parent loans is to have your child refinance the loan with a private lender in their name.
You also have the option of getting a parent student loan through a private lender, such as a bank or credit union.
If you have solid finances and expect to be able to work the entirety of your loan term, a private student loan may be a better deal. Private student loans often offer lower interest rates and typically don’t have origination fees. However, they generally don’t offer as many protections should you lose your income and have trouble repaying the loan.
You Can Use Loan Money Only for Certain Things
Typically, student loans are paid out directly to the school. The school will then apply your loan money to tuition, fees, and room and board (if your student lives on campus), and give any remainder to your student. They can then use the surplus funds but only for education-related expenses. This includes textbooks, computers/software, transportation to and from school, housing, meal plans or groceries, and housing supplies (e.g., sheets, towels, etc.).
Students can’t, however, use the proceeds of a student loan to pay for entertainment, going out to dinner, takeout meals, clothing, or vacations.
Federal Loans Offer More Forgiveness Options
Some student loan repayment plans, like income-driven plans, give graduates the opportunity to have their loans forgiven if they aren’t fully repaid at the end of the repayment period, which may be 20 or 25 years.
Depending on the field of work your student may enter, there may be other forgiveness options. For example, under Public Service Loan Forgiveness (PSLF), borrowers can have their loans forgiven after 120 monthly loan payments. To qualify, you must work for an eligible non-profit organization or government agency full-time while making those qualifying payments.
With the Teacher Loan Forgiveness Program, borrowers can qualify for up to $17,500 in loan forgiveness if they teach full-time for five full and consecutive academic years in a low-income elementary or secondary school or educational agency.
There are far fewer student loan forgiveness programs available for private student loans than federal loans. However, some private lenders offer loan modification or repayment assistance programs. 💡 Quick Tip: Would-be borrowers will want to understand the different types of student loans that are available: private student loans, federal Direct Subsidized and Unsubsidized loans, Direct PLUS loans, and more.
The Takeaway
You and your student will generally only want to look into student loans after you’ve tapped more cost-effective forms of funding, such as scholarships, fellowships, and grants — since that’s money you don’t have to pay back.
After that, you might consider federal student loans. You don’t need a credit history to qualify, and they come with low interest rates and programs, like income-driven repayment plans and loan forgiveness, that private loans don’t offer. If you still have gaps in funding, you might next look at 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.
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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.
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