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.
Buying a home is an exciting milestone, but it comes with its fair share of financial responsibilities, including the often-misunderstood closing costs. These costs are a vital part of your home purchase budget and can significantly impact your financial planning as a new homeowner.
Far from being just a trivial detail, closing costs encompass a range of fees and charges that, when understood correctly, can help you make more informed decisions and potentially save money in your home-buying journey.
Here’s everything you need to know about mortgage closing costs to avoid any last-minute surprises.
Who Pays the Closing Costs: Buyer or Seller?
When it comes to closing costs in a home purchase, the question of who pays what is often a topic of negotiation and varies by transaction. Generally, both buyers and sellers have their own set of fees to handle, but the exact distribution can differ.
Your mortgage lender is required to provide you with an estimated breakdown at multiple points in the loan process. The loan estimate outlines the estimated closing costs and lists out all the different fees, as well as who is responsible for paying them.
Buyer’s Responsibility
Typically, the buyer shoulders a significant portion of the closing costs, which can include:
Loan-related fees (such as application and origination fees)
Appraisal and inspection fees
Initial escrow deposit for property taxes and mortgage insurance
Title insurance and search fees
Seller’s Contribution
Sellers commonly pay for:
Real estate agent commissions
Transfer taxes and recording fees
Any homeowner association transfer fees
Room for Negotiation
It’s important to note that these are not hard and fast rules. In many cases, closing costs are a point of negotiation in the sale agreement. For example, in a buyer’s market, a seller might agree to cover a larger portion of the closing costs to attract buyers. Conversely, in a seller’s market, the buyer might take on a larger share to make their offer more appealing.
Case Example
Imagine you’re buying a home priced at $300,000. The closing costs, amounting to approximately 3% of the purchase price, would be around $9,000. As a buyer, you might agree to pay $6,000 of this, covering most of the loan-related fees and escrow deposits. The seller, in turn, might handle the remaining $3,000, covering their portion of fees like the agent’s commission and transfer taxes.
Comprehensive List of Fees Associated with Mortgage Closing Costs
Mortgage closing costs can be broken down into a few different categories: lender fees, real estate fees, and mortgage insurance fees.
Lender Fees
These fees may vary depending on the lender you choose. Here’s a basic rundown of each closing cost to give you an idea of what you can expect.
Application fee: Covers processing your mortgage loan application and obtaining your credit report.
Attorney fee: In some states, an attorney must review the mortgage paperwork; fees vary and can be hourly or a flat rate.
Broker fee: If using a mortgage broker, they typically charge a commission, usually between 1% and 2% of the home’s purchase price.
Origination fee: The origination fee compensates the lender for administrative tasks and is typically around 1% of the loan amount.
Discount points: Paying points upfront can lower your interest rate; each point equals one percent of your loan amount.
Prepaid interest: Covers the interest that accrues between the closing date and the first mortgage payment.
Recording fee: Charged by local governments for recording the mortgage documents; it covers the administrative costs of maintaining public records.
Underwriting fee: Charged for the underwriter’s services in evaluating and preparing your loan; includes costs like due diligence and legal fees.
Real Estate Fees
Real estate fees are related to costs surrounding the property itself. Some are one-time fees, while others are recurring.
Appraisal fee: Necessary to assess the market value of the home. Costs vary, but typically around $500 to $600, payable before the appraisal or at closing.
Property tax: Generally an annual or biannual payment. Most lenders require at least two months’ worth pre-paid into an escrow account at closing.
Homeowners’ insurance policy: An annual premium required for a home loan. The first year’s premium is often paid at closing, with subsequent payments included in your mortgage.
Title search and insurance: Ensures the property is lien-free. Lender’s title insurance protects the lender, while owner’s title insurance safeguards the buyer.
Transfer tax: Imposed by governments when a property is sold, usually a percentage of the sale price.
HOA fees: For properties in a homeowners association, this may include a transfer fee and potentially the first year’s annual assessment.
Mortgage Insurance Fees
When you pay less than 20% of your home purchase price as part of your down payment, you’re usually required to pay mortgage insurance. Your private mortgage insurance (PMI) premium is typically assessed as a monthly fee within your mortgage payment. However, you may also have some costs at closing.
Upfront mortgage insurance fee: Depending on your loan type and lender, you may have to pay an additional application fee for a loan with mortgage insurance. Additionally, some loans require that you pay a one-time fee at the time of closing on top of your annual fee throughout the mortgage.
Government-backed loan fees: If your loan is from the FHA, USDA, or VA, then you may have extra mortgage insurance fees if your down payment is under 20%. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% and a monthly fee. The VA and USDA don’t charge mortgage insurance, but instead have guarantee fees. VA fees fall between 1.25% and 3.3% while USDA fees are a flat 2%.
Understanding How Closing Costs Are Calculated
That list may seem huge and overwhelming. However, before making an offer on a house, you can estimate your closing costs using some shortcuts. Average closing costs are usually about 2% – 6% of the loan amount.
Let’s look at that in real numbers.
Say you buy a home for $200,000. You can realistically expect your closing costs (not including your down payment) to extend anywhere between $4,000 and $10,000. That’s a pretty big range, so use that as a starting point when you begin to compare loan offers.
But don’t wait until you’ve fallen in love with a house to financially plan for closing costs.
Instead, use an online closing costs calculator early in the process to get a more specific estimate. You will want to use real information like average property taxes in your area and the costs associated with your type of loan.
A good mortgage lender can walk you through the variables, including how different loan types affect your closing costs.
Strategies for Reducing Closing Costs: Negotiation Tactics
Negotiating closing costs can be an effective way to reduce the financial burden of buying a home. While some fees are fixed, others offer room for negotiation. Here are strategies and insights to help you lower these costs:
Understand What Can Be Negotiated
Identify which fees are negotiable. These often include certain lender fees like the origination fee, broker fees, and some third-party charges. Knowing what can be adjusted is the first step in negotiation.
Compare and Shop Around
Before settling with one lender, shop around. Get Good Faith Estimates from multiple lenders and compare their closing costs. This can give you leverage in negotiations, as lenders are often willing to offer competitive pricing to win your business.
Ask the Seller to Contribute
In some real estate markets, it’s common for buyers to ask sellers to cover a portion of the closing costs. This is particularly feasible in buyer’s markets, where sellers are motivated to make the sale.
Look for Lender Credits
Some lenders offer credits in exchange for a slightly higher interest rate on your loan. These credits can be used to offset closing costs. While this increases your long-term interest cost, it can significantly reduce upfront expenses.
Negotiate with Service Providers
For services like home inspections and title searches, you have the option to choose your provider. Shop around and negotiate with these providers for better rates.
Review the Closing Disclosure Form
Before closing, you’ll receive a Closing Disclosure form listing all the fees. Review it carefully and question any fees that seem off or weren’t previously disclosed. Sometimes, errors can be corrected, leading to lower costs.
Time Your Closing
By scheduling your closing towards the end of the month, you can reduce the amount of prepaid interest you’ll need to pay.
Seek Legal or Financial Advice
Consider consulting with a real estate attorney or a financial advisor. They can provide valuable advice on which costs can be cut and how to negotiate effectively.
Options for Financing Your Closing Costs
In some cases, you can roll your closing costs into the mortgage, but you have to meet some basic requirements. First, it depends on your type of loan, since not all loans allow you to do this. Most government-backed loans, like FHA and USDA loans, do offer the possibility to add them into your home loan.
What’s the downside to this idea?
A higher loan amount means a higher monthly mortgage payment and a larger amount of interest paid over the life of your mortgage. Furthermore, your new home needs to appraise for the higher amount you want to finance. Plus, your debt-to-income ratio needs to be able to support that larger payment to qualify for such a loan.
If you’re getting a loan that doesn’t allow for closing costs to be rolled into the mortgage, you can still get around it. However, you must meet those criteria we just talked about.
Simply ask the seller (through your real estate agent) to pay for closing costs in exchange for paying the extra amount as part of the purchase price. Here’s an example.
If your $200,000 offer is accepted, but closing costs are $5,000, ask the seller to contribute $5,000 and change your offer to $205,000. At the end of the day, the seller still walks away with the same amount of money.
Again, this strategy is contingent upon the numbers working for you, your financial situation, and your mortgage application.
Finalizing Payment: Methods to Cover Your Closing Costs
When you finally get to closing day, it’s almost time to relax and move into your new home. But first, don’t forget to set up a way to pay closing costs.
You can ask your lender or settlement company for the preferred payment method. However, in most cases, you can either get a cashier’s check from your bank or set up a wire transfer. There’s usually a minor fee associated with each one. It’s a quick and easy process, but it shouldn’t be forgotten before you get to closing.
Conclusion
Closing costs are a crucial aspect of buying a home. Being well-informed and prepared for these expenses can make a significant difference in your financial planning. Remember, while some fees are fixed, others offer room for negotiation, and shopping around can lead to potential savings.
By factoring in these costs from the start, you can ensure a smoother, more predictable home-buying experience. Buying a house is a major step – financially and personally. Approach it with the right knowledge, and you’ll be set to make this important decision with confidence and peace of mind.
Frequently Asked Questions
What is an escrow account, and how does it relate to closing costs?
An escrow account is a third-party account where funds are held during the process of a transaction, like buying a home. Regarding closing costs, part of these costs often includes initial deposits into an escrow account for future property taxes and homeowners’ insurance. This ensures that there is enough money set aside to cover these recurring expenses.
Can closing costs be included in the mortgage loan?
In some cases, closing costs can be rolled into the mortgage loan. This is more common with certain types of loans, like FHA loans. However, including closing costs in the loan increases the total loan amount and, consequently, your monthly mortgage payments and the total interest paid over the life of the loan.
Are there any tax benefits related to closing costs?
Yes, certain closing costs can have tax benefits. For example, points paid to lower your interest rate may be deductible in the year you buy your home. Always consult a tax professional to understand how your closing costs might affect your taxes.
How can first-time homebuyers prepare for closing costs?
First-time homebuyers should start saving early for closing costs, which typically range from 2% to 6% of the home purchase price. It’s also helpful to research and understand the different types of fees involved in closing costs, and consider attending homebuyer education courses for more detailed information.
What happens if I can’t afford closing costs?
If you find that you can’t afford closing costs, there are a few options. You can negotiate with the seller to pay some or all of the costs, look for lender credits, or explore programs available for first-time buyers or low-income buyers that offer assistance with closing costs.
A 401(k) is an integral part of many people’s retirement strategies. But did you know you may be able to take out a loan against it?
There are plenty of pros and cons associated with this plan. However, it can be beneficial to avoid the loan application process, credit check, and heavy interest associated with many lenders.
It’s a big decision to make, so we’ll walk you through the entire process to help you understand exactly what to expect with a 401(k) loan.
Ready to get started?
What is a 401(k) loan?
If your employer offers a 401(k) to employees as part of your retirement savings strategy, chances are you could be eligible to take out a loan from your contributions.
After all, among both mid and large-sized companies, a full 94% allow 401(k) loans on the money you have contributed. In addition, 73% of these employers also allow employees to borrow money against the employer’s contributions.
So, you can borrow money from your own retirement savings rather than waiting for them to accumulate or paying a 10% penalty tax as you would with a traditional IRA.
Eligibility Criteria for a 401(k) Loan
There are a few restrictions surrounding a 401(k) loan. While we mentioned that many larger companies typically allow you to borrow for your account, not all do. You can find out about your workplace policy by referencing your employee handbook or contacting the human resources department.
You also must still be working at the company where you had your 401(k) to take out a loan. So if you left willingly or were fired, unfortunately, you aren’t able to take advantage of this opportunity.
There are also some limits on how much you can borrow from your account. IRS regulations state that you can only borrow the smaller of the following two options:
$50,000 or
Half the amount of your vested account balance
Your interest rate is also determined by when you borrow. That’s because it’s typically set at the prime rate plus an extra 1% to 2%. So if the prime rate is at 4.25% and your employer’s 401(k) plan adds 2%, you’re looking at a 6.25% interest rate. The interest does, however, go directly back into your retirement account.
Benefits of Borrowing from Your 401(k)
Like any financial product, the 401(k) loan comes with both pros and cons. Some experts scream that you should never touch your retirement savings, while others have noted countless success stories.
It’s essential to weigh the positives and negatives concerning your situation thoroughly. Then, you can make a fully informed decision on whether a 401(k) loan is right for you specifically.
Being your own lender comes with a few perks.
Easy Approval
First, you don’t have to fill out an application. There’s no underwriting process since the funds are already in your name. You also don’t have to worry about any type of minimum credit score.
So if you need an infusion of cash for some reason but have gone through a rough financial patch, you can sidestep a bad credit loan and the accompanying bad credit.
Repayment Terms
Repaying a 401(k) loan involves direct deductions from your paycheck, which reduces your take-home pay. For example, a monthly repayment of $200 will decrease a $3,000 take-home pay to $2,800. It’s important to budget with this reduced income in mind.
If repayments are missed, the loan may default. The remaining balance then becomes a taxable distribution, potentially incurring a 10% early withdrawal penalty if you’re under 59 ½. This could significantly raise the loan’s cost.
Remember, while repaying the loan, the borrowed funds aren’t earning investment returns, impacting your retirement savings growth. Consider these factors carefully to understand how a 401(k) loan fits into your financial planning.
Use of Loan Funds
401(k) loans offer flexibility in how you can use the borrowed funds, whether for home repairs, education, or debt consolidation. However, it’s crucial to use this money responsibly. Since these funds are part of your retirement savings, using them for non-essential expenses can jeopardize your financial future.
Consider the long-term implications before diverting retirement savings for current expenses. It’s wise to reserve 401(k) loans for situations that contribute to your financial stability or urgent needs, rather than discretionary spending. Misusing these funds can lead to a shortfall in your retirement account, affecting your financial security in your later years.
Lower Interest Rate
Borrowing from your 401(k) typically offers a lower interest rate compared to credit cards or personal loans. This can be a cost-effective borrowing option, especially if you’re facing high-interest debt. However, consider the long-term impact on your retirement savings when opting for a 401(k) loan.
Drawbacks of Borrowing from Your 401(k)
It’s important to consider both the short- and long-term impacts of taking money out of your 401(k).
Double Taxed
Double taxation on a 401(k) loan can be confusing. Essentially, when you repay the loan, you do so with after-tax dollars. This means the money you use for repayment has already been taxed as part of your income taxes. Later, when you withdraw from your 401(k) in retirement, you are taxed again on these funds.
For example, if you pay $1000 back into your 401(k) as loan repayment, this $1000 has already been taxed as part of your salary. When you retire and withdraw this money, it’s taxed again as income.
Further Contributions
You also may not be allowed to continue making retirement contributions during the repayment period. It depends on your employer’s plan. During this process, your retirement nest egg could suffer.
First, you’d lose any gains made on the funds you took out. Then, you’d be taking a hiatus for at least a few years. That can really add up when you think about compounding gains.
Leaving Your Job Could Accelerate Loan Repayment
If you leave your job, voluntarily or not, while a 401(k) loan is outstanding, the remaining balance often becomes due within 60 days. This can create a significant financial burden, especially if the loan amount is large.
Plan carefully and consider the stability of your current employment situation before taking a 401(k) loan, as unforeseen job changes could lead to challenging repayment demands.
Financial Penalties from Defaulting on a 401(k) Loan
Failing to repay a 401(k) loan can lead to significant financial consequences. If you default, the unpaid balance is treated as a taxable distribution. For those under 59 ½, this also incurs a 10% early withdrawal penalty.
These penalties, combined with the owed taxes, can substantially increase the cost of the loan, impacting your current financial health and diminishing your retirement savings.
Repayment Process: How to Manage Your 401(k) Loan
If you decide to take out a 401(k) loan, make sure you understand how the loan repayment process works. Your loan payments are taken directly out of your paycheck, but there is a certain degree of risk involved. If, for some reason, you can’t (or simply don’t) make a payment for 90 days, you’ll incur significant penalties.
It’s almost considered to be a short-term default because you’ll pay taxes on it and the 10% early withdrawal penalty on the amount owed.
When you take out a 401(k) loan, you don’t have to pay any type of application fee or origination fee, so it seems like a low-cost option. But again, you have to consider the money you’re losing by not having as much invested in your account.
A great way to analyze the numbers is to use a retirement calculator. You can figure out how much you’d have to sacrifice to get your loan funds right away, and then decide whether it’s worthwhile.
Is a 401(k) loan right for you?
This is a personal decision, and there are many factors to consider regarding whether a 401(k) loan is a good idea. First, think about how far away you are from retirement. If you’re expecting to start making withdrawals in the near future, you may want to reconsider dipping into that money ahead of schedule.
If you’re further away from retirement, you have more time to make up for any financial losses you’d incur while the loan is out. Just make a plan to ensure you’re able to catch up over time.
Of course, your intended use for your 401(k) loan funds also affects whether it’s a good choice. Short-term uses are a little less worrisome. For example, if you’re using it for a down payment on a house and can quickly repay the loan, it can be a good way to avoid those penalties.
But if you’re using the 401(k) loan as a band-aid during an ongoing financial downturn, you may want to think again. Is it really solving the problem or just providing temporary relief?
Furthermore, think twice about using your 401(k) loan to pay off debts. If you’re still in financial trouble, you can lose your existing assets.
But retirement savings are typically protected from any kind of insolvency, but not if they’ve been taken out as a loan. If there’s a chance you might lose the money permanently, try to find another solution.
Alternatives to Using Your 401(k) for a Loan
A 401(k) loan isn’t the only alternative to a traditional personal loan. Here are a few other options to consider.
Emergency Savings
Ideally, you have accessible cash set aside to use in the case of a financial emergency. Most experts recommend at least six months of income to tide yourself over. Just make sure any use of this money truly is for an emergency.
Home Equity Loan
Home equity loans are for people who have a fair amount of equity in their homes. It’s essentially a second mortgage, but the repayment term lasts a much shorter period. The pro is that the interest you pay on the loan is tax-deductible.
401(k) Taxable Withdrawal
Here’s another way to utilize your 401(k) funds. Instead of taking a loan, you may be able to take out a hardship withdrawal. If you’re using the money for medical needs, you may be able to avoid the 10% penalty, although you’d still have to pay income taxes on whatever you take out.
IRA 72(t) Withdrawal
IRA 72(t) withdrawals offer an alternative to borrowing from your 401(k), especially for those with substantial IRA funds. Under IRS Rule 72(t), you can take early, penalty-free withdrawals from your IRA, provided the withdrawals are part of a series of substantially equal periodic payments (SEPPs). These payments must continue for 5 years or until you reach age 59 ½, whichever is longer.
This option requires careful calculation, as the SEPPs must be based on one of three IRS-approved methods. It’s important to note that once started, the 72(t) payments must be taken as scheduled, and any deviation can result in retroactive penalties. Consider consulting a financial advisor to understand how these withdrawals could affect your long-term retirement savings and tax situation.
Bottom Line
Deciding on a 401(k) loan involves balancing immediate financial needs with long-term retirement goals. While it offers immediate liquidity and potentially lower interest rates, the impact on your future savings and the risks associated with job changes and loan defaults must be carefully weighed.
Financial planning is a dynamic process, requiring you to consider both present circumstances and future aspirations. A 401(k) loan can be a strategic tool in your financial toolkit, but it demands careful consideration and thorough understanding of its terms and consequences.
Before proceeding, explore all financial options, assess the stability of your employment, and consider seeking advice from a financial advisor. The key is to make an informed decision that aligns with both your immediate financial needs and your long-term retirement objectives.
Frequently Asked Questions
How do I take out a loan from my 401(k)?
Most 401(k) plans allow you to borrow up to 50% of your vested account balance, up to a maximum of $50,000. You will need to fill out a loan application and provide documentation of your loan purpose and repayment schedule.
What are the repayment terms of a 401(k) loan?
Repayment terms vary by plan, but you are typically given 5 years to repay the loan. However, if the loan is used to purchase a primary residence, the repayment period can be extended to 10 years. You must make regular payments that include both principal and interest.
Does taking a 401(k) loan affect my credit score?
No, a 401(k) loan is not reported to credit bureaus and therefore has no direct impact on your credit score. However, it’s important to manage these loans responsibly as they can affect your long-term financial health.
Are there any penalties for defaulting on a 401(k) loan?
Yes, if you default on a loan from your 401(k) plan, you will be subject to taxes and penalties on the amount of the loan.
Can I take a 401(k) loan if I already have an outstanding loan from the same plan?
This depends on your plan’s rules. Some plans allow multiple loans, while others restrict the number of outstanding loans. Check with your plan administrator for details.
Are there any restrictions on how I can use the money from a 401(k) loan?
Yes, most plans restrict the use of loan proceeds to specific purposes, such as purchasing a primary residence or paying for college tuition and expenses.
Can I make extra payments on my 401(k) loan?
Yes, you can make extra payments on your 401(k) loan. This can help you pay off the loan sooner and reduce the amount of interest you pay.
What happens if I cannot repay my 401(k) loan due to financial hardship?
If you face financial hardship and can’t repay your loan, it may be considered a distribution and subject to taxes and penalties. It’s crucial to consider this risk before taking a loan.
WASHINGTON, D.C. (January 10, 2024) — Mortgage applications increased 9.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 5, 2024. The results include an adjustment to account for the New Year’s holiday.
The Market Composite Index, a measure of mortgage loan application volume, increased 9.9 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 45 percent compared with the previous week. The holiday adjusted Refinance Index increased 19 percent from the previous week and was 30 percent higher than the same week one year ago. The unadjusted Refinance Index increased 53 percent from the previous week and was 17 percent higher than the same week one year ago. The seasonally adjusted Purchase Index increased 6 percent from one week earlier. The unadjusted Purchase Index increased 40 percent compared with the previous week and was 16 percent lower than the same week one year ago.
“Despite an uptick in mortgage rates to start 2024, applications increased after adjusting for the holiday,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The increase in purchase and refinance applications for both conventional and government loans is promising to start the year but was likely due to some catch-up in activity after the holiday season and year-end rate declines. Mortgage rates and applications have been volatile in recent weeks and overall activity remains low.”
The refinance share of mortgage activity increased to 38.3 percent of total applications from 36.3 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 5.4 percent of total applications.
The FHA share of total applications decreased to 14.4 percent from 14.5 percent the week prior. The VA share of total applications increased to 16.3 percent from 14.6 percent the week prior. The USDA share of total applications decreased to 0.4 percent from 0.5 percent the week prior.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.81 percent from 6.76 percent, with points remaining unchanged at 0.61 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $726,200) increased to 6.98 percent from 6.86 percent, with points increasing to 0.43 from 0.41 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 6.56 percent from 6.51 percent, with points decreasing to 0.84 from 0.86 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 15-year fixed-rate mortgages increased to 6.41 percent from 6.26 percent, with points decreasing to 0.55 from 0.73 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 5/1 ARMs increased to 6.17 percent from 5.71 percent, with points decreasing to 0.56 from 0.59 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks, and thrifts. Base period and value for all indexes is March 16, 1990=100.
If you would like to purchase a subscription of MBA’s Weekly Applications Survey, please visit www.mba.org/WeeklyApps, contact [email protected] or click here.
The survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks, and thrifts. Base period and value for all indexes is March 16, 1990=100.
For those who are at or getting close to retirement age and are looking for ways to rev up their cash flow, a reverse mortgage may seem like a wise move. After all, the TV ads make them look like a simple solution to pump up the money in one’s checking account.
A reverse mortgage can be a way to translate your home equity into cash, but, you guessed it: There are downsides along with the benefits. Whether or not to take out a reverse mortgage requires careful thought and research.
Here, you’ll learn the pros and cons to these loans, so you can decide if it’s the right move for you and your financial situation.
Reverse Mortgages 101
There are many different types of mortgages out there. Here are the basics of how reverse mortgages work.
• A reverse mortgage is a loan offered to people who are 62 or older and own their principal residence outright or have paid off a significant amount of their mortgage. You usually need to have at least 50% equity in your home, and typically can borrow up to 60% (or more, but not 100%) of the home’s appraised value.
• The lender uses your home as collateral in order to offer you the loan, although you retain the title. The loan and interest do not have to be repaid until the last surviving borrower moves out permanently or dies. A nonborrowing spouse may be able to remain in the home after the borrower moves into a health care facility for more than 12 consecutive months or dies.
• Here’s another aspect of how reverse mortgages work: Fees and interest on the loan mean that over time, the loan balance increases and home equity decreases.
• You may see reverse mortgages referred to as HECMs, which stands for Home Equity Conversion Mortgage. This is a popular, federally insured option.
💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.
Pros of Reverse Mortgages
A reverse mortgage offers older Americans the opportunity to turn what may be their largest asset — their home — into spendable cash. There are a variety of ways in which this can be attractive.
Securing Retirement
Many seniors find themselves with a fair amount of their net worth rolled up in their home but without many income streams. A reverse mortgage is a relatively accessible way to cover living expenses in retirement.
Paying Off the Existing Home Loan
While you have to have some of your home loan paid down in order to qualify for a reverse mortgage, any remaining mortgage balance is paid off with reverse mortgage proceeds. This, in turn, can free up more cash for other expenses.
No Need to Move
Those who take out reverse mortgages are allowed to remain in their homes and keep the title to their home the entire time. For established seniors who aren’t eager to pick up and move somewhere new — or downsize — to lower expenses, this feature can be a major benefit.
No Tax Liability
While most forms of retirement funding, like money from a traditional 401(k) or IRA, are considered income by the IRS, and are thus taxable, money you receive from a reverse mortgage is considered a loan advance, which means it’s not.
Heirs Have Options
Heirs can sell the home, buy the home, or turn the home over to the lender. If they choose to keep the home, under HECM rules, they will have to either repay the full loan balance or 95% of the home’s appraised value, whichever is less.
Thanks to FHA backing, if the home ends up being worth less than the remaining balance, heirs are not required to pay back the difference, though they’d lose the house unless they chose to pay off the reverse mortgage or refinance the home.
Recommended: Guide to Cost of Living by State
Cons of Reverse Mortgages
As attractive as all of that may sound, reverse mortgages carry risks, some of which are pretty serious.
Heirs Could Inherit a Loss
While heirs may not be forced to pay the shortfall of an upside-down reverse mortgage, inheriting a home in that scenario could come as an unpleasant surprise. Keeping a home in the family is an accessible way to build generational wealth and ensure that heirs have a home base for the future. Therefore, the potential for them to lose — or have to refinance — the house can be painful.
Losing Your Home to Foreclosure
Unfortunately, losing your house with a reverse mortgage is a possibility. You’ll still be required to pay property taxes, any HOA fees, homeowners insurance, and for all repairs, along with your regular living expenses, and if you can’t, even with the reverse mortgage proceeds, the house can go into foreclosure.
Reverse Mortgages Are Complicated
As you probably realize this far into an article explaining the pros and cons of reverse mortgages, these loans aren’t exactly simple. Even if you understand the basics, there may be caveats or exceptions written into the documentation.
Before applying for an HECM, you must meet with a counselor from a HUD-approved housing counseling agency. The counselor is required to explain the loan’s costs and options to an HECM, such as nonprofit programs, or a single-purpose reverse mortgage (whose proceeds fund a single, lender-approved purpose) or proprietary reverse mortgages (private loans, whose proceeds can be used for any purpose).
Impacts on Other Retirement Benefits
Although your reverse mortgage “income” stream isn’t taxable, it may affect Medicaid or Supplemental Security Income benefits, because those are needs-based programs. (Proceeds do not affect Social Security or Medicare, which are non-means-tested programs.)
Costs of Reverse Mortgages
Like just about every other loan product out there, reverse mortgages come at a cost. You’ll pay:
• A lender origination fee
• Closing costs
• An initial and annual mortgage insurance premium charged by your lender and paid to the FHA, guaranteeing that you will receive your expected loan advances.
These can be rolled into the loan, but doing so will lower the amount of money you’ll get in the reverse mortgage.
Reverse Mortgage Requirements
Not everyone is eligible to take out a reverse mortgage. While specific requirements vary by lender, generally speaking, you must meet the following:
• You must be 62 or older
• You must own your home outright (or have paid down a considerable amount of your primary mortgage)
• You must stay current on property expenses such as property taxes and homeowners insurance
• You must pass eligibility screening, including a credit check and other financial qualifications
Recommended: How Homeownership Can Help Build Generational Wealth
Is a Reverse Mortgage Right for You?
While everyone interested in a reverse mortgage needs to weigh the pros and cons for themselves, there are some instances when this type of loan might work well for you:
• The value of your home has increased significantly over time. If you’ve built a lot of equity in your home, you probably have more wiggle room than others to take out a reverse mortgage and still have some equity left over for heirs.
• You don’t plan to move. With the costs associated with initiating a reverse mortgage, it probably doesn’t make sense to take one out if you plan to leave your home in the next few years.
• You’re able to comfortably afford the rest of your required living expenses. As discussed, if you fall delinquent on your homeowners insurance, flood insurance, HOA fees, or property taxes, you could lose your home to foreclosure under a reverse mortgage.
There are options to consider. They include a cash-out refinance, home equity loan, home equity line of credit, and downsizing to pocket some cash.
The Takeaway
A reverse mortgage may be a way to turn your home equity into spendable cash if you’re a qualified older American, but there are important risks to consider before taking one out. While reverse mortgages can free up funds, they are complicated, can involve fees, and can wind up putting your home into foreclosure if you can’t keep up with payments.
Reverse mortgages are just one of many different mortgage types out there — all of which can be useful under the right circumstances. SoFi doesn’t offer reverse mortgages at this time but has an array of home loan products that may meet your needs.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
Photo credit: iStock/Prostock-Studio
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.
Getting a mortgage as a teacher can be tough, particularly if you still have student loan debt to pay off. Fortunately, there are programs to help make buying a home possible.
Whether you’re looking for down payment assistance, lender discounts, or more lenient credit requirements, there are plenty of options available to help teachers achieve their homeownership goals. Here’s what to know about the Teacher Next Door program and other programs or home loans for teachers.
Are there home loans for teachers?
Teachers who are looking to become homeowners have a wide array of options available to help them, including both teacher-specific programs and more general first-time homebuyer loans.
Some teacher-specific homebuyer assistance includes Teacher Next Door, Good Neighbor Next Door, Home for Heroes, or benefits through your teachers union. Your state or city may also have homebuyer programs specifically geared toward teachers. Check your local housing authority’s website to see what’s available to you.
But you may have better luck looking at mortgages available to all borrowers, regardless of profession. There are more of these programs available, and many of them come with bigger benefits than what you’ll find with some profession-specific programs.
How does the Teacher Next Door program work?
Teacher Next Door is a program for homebuyers that’s available to teachers as well as other school personnel, including administrators, office staff, lunchroom workers, custodians, and paraprofessionals.
“Affordable housing is a major concern for everyone, including teachers,” says Stephen Parks, the national director of the Next Door programs, which includes Teacher Next Door. “Many times, the grants and other assistance we provide is the difference maker in a purchasing new home for their family.”
Through this program, eligible professionals can get a grant of up to $8,000, which doesn’t have to be repaid. Teacher Next Door will also help connect you to local down payment assistance programs and says participants can get as much as $10,681 in down payment assistance.
Teacher Next Door is sometimes confused with the Good Neighbor Next Door program, which is overseen by the US Department of Housing and Urban Development. But these are two completely separate programs.
“The Teacher Next Door Program is much more inclusive and flexible than the Good Neighbor Next Door Program, since you may purchase any home on the market, not just in revitalization areas, and there are no minimum residency restrictions,” says Parks.
To get a grant and down payment assistance through Teacher Next Door, you’ll need to work with a real estate agent who’s affiliated with the program and one of the program’s preferred mortgage lenders.
If you’re considering buying a home through the Teacher Next Door program, it’s a good idea to also get your own mortgage rate quotes from other lenders to be sure you’re getting a good deal.
Teacher Next Door program income limits
The Teacher Next Door program doesn’t have any income limits. However, if you have a higher income, you might not qualify for some of the local down payment assistance programs that Teacher Next Door connects you with.
Good Neighbor Next Door program for teachers
The Good Neighbor Next Door program offered through HUD lets public servants buy a home at a 50% discount in certain areas. Teachers are eligible for the Good Neighbor Next Door program.
The catch is that the inventory for this program is extremely limited. Not all homes are eligible — it has to be a HUD-owned foreclosed home in a designated “revitalization area,” which are areas that are lower income and have low homeownership rates. As of December 2023, there were only four homes in the entire country that were eligible for the GNND program, according to HUD’s website.
Homes for Heroes program for teachers
Homes for Heroes offers homebuying discounts to teachers and other public service professionals. According to its website, program participants save an average of $3,000 with Homes for Heroes.
To save money with the Homes for Heroes program, you’ll work with homebuying professionals who are affiliated with the program. For example, working with a Homes for Heroes-affiliated real estate agent could save you $700 for every $100,000 of your home’s purchase price. You’ll get your discounts in the form of a check after closing.
Teachers union mortgage benefits
If you belong to a union, you may want to see if it offers discounts with any mortgage lenders or other types of homebuyer assistance.
For example, the American Federation of Teachers has a mortgage program through Amalgamated Bank that includes a discount on your origination fee. AFT members can also get discounts on professional movers or truck rentals.
Low-down-payment home loans for teachers
There are a variety of low- or no-down-payment home loans available to borrowers, including both conventional and government-backed options.
Conventional loan
When you get a mortgage that isn’t backed by a government agency, it’s called a conventional mortgage. Borrowers can get a conventional loan with a down payment as low as 3%.
However, this might not be the best option for you if your credit isn’t great, since lenders typically have stricter standards for conventional loans. You’ll need at least a 620 credit score to qualify for one of these mortgages.
If you have a lower score, you might want to consider your government-backed mortgage options.
FHA loan
FHA loans are backed by the Federal Housing Administration, and they’re geared toward first-time and low-income homebuyers.
FHA loans have less stringent credit requirements; you can get one of these mortgages with a score as low as 580 with a 3.5% down payment, or 500 if you can put 10% down.
VA loan
To be eligible for a VA loan, you’ll need to be a veteran or current servicemember who meets minimum service requirements. You’ll also generally need at least a 620 credit score, though it varies depending on your lender.
If you qualify for a VA loan, you’ll be able to get a mortgage with 0% down.
USDA loan
Mortgages backed by the US Department of Agriculture are geared toward borrowers buying in rural areas, though some suburban areas also meet the USDA’s requirements. These mortgages also require no down payment.
To qualify for a USDA loan, you’ll typically need at least a 640 credit score.
First-time homebuyer loans and down payment assistance for teachers
Many of the best mortgage lenders for first-time buyers have their own unique programs that come with features and benefits that make homeownership more accessible to borrowers. This includes things like low down payments, down payment or closing cost grants, or flexible credit requirements.
These products aren’t unique to teachers, though they often do come with income or geographical limits.
As you search for a lender, ask about any affordable loan options they offer.
For example, Chase Mortgage has a loan called the DreaMaker Mortgage. It allows 3% down payments, reduced private mortgage insurance costs, and flexible credit requirements. This mortgage can also be combined with the bank’s Homebuyer Grant, which offers up to $5,000 in down payment or closing cost assistance. Many other major mortgage lenders have similar programs.
Home loans for teachers FAQs
The Teacher Next Door program is a legitimate homebuyer program that can help teachers and other school personnel who are buying a home get grants and down payment assistance.
Teacher Next Door could be a good option to help you become a homeowner — but there are a wide array of homebuyer assistance programs out there, so it’s a good idea to explore your options first. With the Teacher Next Door program, you’ll be limited to working with a lender affiliated with the program, which might not be ideal if you can get a lower rate from a different mortgage lender.
You might be able to get a discount on your mortgage through your teachers union or a credit union that offers special rates to educators. Check with local lenders in your area to see what’s available to you.
Getting a graduate degree can help you move up the company ladder, boost your salary, or switch to a different career. But going back to school can be costly. On average, students rack up $78,118 in student debt to pay for graduate school, according to the Education Data Initiative. That average reflects debt for all advanced degrees beyond the bachelor’s level, including master’s and doctoral degrees.
Many students who borrow money to pay for grad school already have debt from undergraduate studies. Including the average undergraduate student loan debt balance ($37,337), raises total average student debt for graduate students to $115.455.
Fortunately, there are ways to get a graduate degree without taking on a large amount of student loan debt. There are also a variety of payment plans that can make repaying grad school debt easier on your budget after you graduate. Here’s what you need to know about student loan debt for graduate school.
What Is the Average Graduate Student Loan Debt?
If you’re thinking about applying to graduate school, you may be wondering how much you’ll need to borrow to cover your costs and whether or not it will be worth it.
On average, students leave graduate school with a student loan debt balance of $78,118 (from grad school alone). How much debt students rack up going to grad school, however, can vary significantly depending on the type of degree they pursue and the kind of school they attend. A doctoral degree generally costs more than a masters, for example, while attending a public, non-profit university is typically cheaper than going to a private, for-profit college.
Here’s a closer look at the average graduate school debt balance for different degrees obtained at different types of institutions.
• Master’s degrees: The average total student loan debt balance is $83,651 ($64,950 is just from graduate school).
• Master’s degrees from public schools: The average total student loan debt balance is $69,057 ($54,699 is just from graduate school).
• Masters degrees from private schools: The average total student loan debt balance is $91,168 ($72,776 is just from graduate school).
• PhDs: The average total student debt balance is $134,797 ($127,521 is just from graduate school).
• PhDs from public schools: The average total student loan debt balance is $115,759 ($106,297 is just from graduate school).
• PhDs from private schools: The average total student loan debt balance is $199,175 ($183,508 is just from graduate school).
💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
Exploring Options to Finance Graduate School
Grad students can finance their education with federal student loans, private loans, or a mix of both. Here’s a closer look at the different types of loans available for graduate school.
Federal Loans
Graduate students can take out two different types of federal loans.
Direct Unsubsidized Loans
You can borrow up to $20,500 each year in Direct Unsubsidized Loans for graduate school, and eligibility is not based on financial need. The interest rate for Direct Unsubsidized Loans for graduate students for 2023-24 is 7.05%, plus an origination fee of 1.057%.
If you borrowed federal funds for your bachelor’s degree, you may be subject to a total federal funding limit of $138,000 in Direct Loans, including the amount of your undergraduate degree. Graduate PLUS (and Parent PLUS loans) are separate from this amount.
Direct PLUS Loans
If Direct Unsubsidized Loans aren’t enough to cover your attendance costs, you can next turn to Direct PLUS Loans, which have a higher interest rate. You can borrow up to the full cost of attendance for each year, which is set by your university and includes expected living costs for the town or city you’ll be studying in.
Eligibility is not based on financial need, but a credit check is required. Borrowers who have an adverse credit history must meet additional requirements to qualify. The interest rate for 2023-24 is 8.05%, plus a 4.228% origination fee.
Private Loans
Students can also take out private student loans for graduate school. Indeed, if you’re applying for grad school when you already have a well-established credit history, you may be able to get a lower interest rate from private lenders than from the federal government. This could save you a significant amount of money over time, and also help you get out of debt faster.
You’ll want to keep in mind, however, that the government offers significant protections that can make federal student loan debt easier to manage, such as income-driven repayment plans and student loan forgiveness.
How to Minimize Graduate School Debt
If you are interested in attending graduate school but worried about being saddled with high debt payments after you graduate, here are some ways to make your advanced degree more affordable.
Tap Free Funding Options
Scholarships, fellowships, and grants are some of the best ways to pay for graduate school. You can ask your school about institutional awards and also search for professional organizations focused on the field you’re interested in to see if they offer graduate scholarships. In addition, some schools also offer tuition waivers or some monetary awards for students who serve as teaching assistants.
Ask Your Employer About Tuition Assistance
If you plan to continue working while attending graduate school part-time, it’s worth finding out if your employer offers a tuition assistance program. Some companies will cover all or a portion of their employees’ higher education expenses. There may, however, be some strings attached, such as staying in the company for a specific amount of time. Reach out to your HR department to find out whether your employer offers this benefit and, if so, what the requirements are.
Borrow Only What You Need
There are no subsidized loans for graduate school, which means you’ll need to pay for all the interest that accrues on your loans. With Graduate PLUS loans, you are able to borrow up to your school’s cost of attendance, which can include expenses like transportation and child care. However, that doesn’t mean you should access the maximum amount. It’s a good idea to tap savings and income before turning to loans to cover all of your costs. This can help minimize how much debt you have to repay after you get your degree.
Look Into Online or Accelerated Programs
Some schools charge the same tuition for online and on-campus programs, but others charge substantially less for online classes. Also, the faster you can get a degree, generally the less you will have to borrow to pay for it. A one-year MBA, for example, will typically cost significantly less than a two-year program.
Explore Your Repayment Options
Federal loans offer income-driven plans that can keep graduate loan payments manageable after you graduate if your income is low. If you pursue a career in public service or nonprofit, you may also qualify for Public Service Loan Forgiveness.
If you’re getting an advanced degree that will boost your earning power, keep in mind that you may be able to refinance your federal and private graduate school loans after you graduate at a lower rate. This could potentially translate to hundreds or thousands of dollars saved over the life of your loan. Refinancing can also allow you to remove a cosigner off of your student loans.
You can refinance both federal and private student loans, but keep in mind that refinancing federal loans with a private lender means giving up federal student loan protections such as income-driven repayment plans and PSLF. 💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.
The Takeaway
Most graduate students in the U.S. leave school with upwards of $78,000 in graduate school debt. Depending on what type of degree you pursue and where you study, you could end up with less — or more — than the average amount of graduate student loan debt.
If you’re interested in grad school but concerned about debt, keep in mind that you may be able to lower the cost of your degree by getting fellowships and grants, becoming a teaching assistant, tapping your employer’s tuition assistance, and considering an online or accelerated program. You may also be able to refinance your grad school loans at a lower rate after you graduate, making them easier to manage.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
If you’ve served in the military and need a mortgage, then a VA loan might be right for you, whether you’re buying a home or refinancing. Here’s what to know.
What is a VA home loan?
A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs and issued by a private lender, such as a bank, credit union or mortgage company. A VA loan can make it easier to buy a home because it typically doesn’t require a down payment.
Only qualified U.S. veterans, active-duty military personnel and some surviving spouses are eligible for VA loans. The 1944 GI Bill of Rights established the VA home loan program to help veterans get a foothold in civilian life after World War II.
You might find it helpful to go with a lender and a real estate agent who have experience working with VA borrowers. The home will be subject to a VA appraisal, and an experienced agent will help you avoid homes that won’t meet the minimum required standards.
How does a VA home loan work?
The VA’s guarantee means the government will repay the lender a portion of a VA loan if the borrower doesn’t make payments. This assurance reduces the risk for lenders, which makes it possible for them to offer favorable terms and require no down payment.
VA loan rates are typically lower than offers you’d find for conventional loans. The rate could be fixed, meaning payments will remain the same, or adjustable, meaning that payments could change over time. Adjustable-rate mortgages (ARMs) come with some risk, as you’ll pay more if rates rise.
If eligible, you can complete the VA mortgage application process through a lender of your choice. Many (but not all) lenders offer VA loans, and some lenders specialize in serving VA loan borrowers. It’s a good idea to apply with multiple lenders in order to compare rate offers.
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VA home loan eligibility
You’re an active-duty military member or veteran who meets length-of-service requirements (90 days of service during wartime or 181 days of service during peacetime).
You served in the National Guard or Reserve for at least six years, or served 90 days (with at least 30 of them being consecutive) in active duty under Title 32 orders.
You’re the surviving spouse of a service member who died while on active duty or from a service-connected disability and you have not remarried. Surviving spouses can retain eligibility if they remarried after the age of 57 and after Dec. 16, 2003. Spouses of prisoners of war or service members missing in action are also eligible.
You meet the lender’s requirements for credit and income. The VA doesn’t set a minimum credit score for VA loans, but lenders can set their own minimum standards. The lender will also consider your income and debts to evaluate your ability to repay the mortgage.
The property you want to buy meets safety standards and building codes and will be your primary residence. Borrowers are typically required to occupy the residence within 60 days, though this may be extended to 12 months under certain circumstances.
How to apply for a VA home loan
Obtain a certificate of eligibility: A VA certificate of eligibility shows a mortgage lender that your military service meets the requirements for a VA loan. A VA-approved lender can obtain the document for you, which is needed before the loan can close. You can also request the certificate from the VA online or by mail.
Find the right lender: Some VA lenders consider borrowers with lower credit, while others offer a larger variety of VA loan types. Get preapproved with more than one VA mortgage lender to compare their qualification requirements and mortgage rates. Preapproval is nonbinding, but it will give you an idea of what kind of mortgage you qualify for and how much you may be eligible to borrow. Getting preapproved also shows sellers that you are motivated to buy and can qualify for a mortgage.
Find a home: An experienced real estate agent can help you find a home that meets minimum property requirements regarding cleanliness, safety and structural soundness. After you work with your agent to make an offer, the mortgage lender will evaluate your finances and order a VA appraisal to make sure the home meets all the requirements. If your application and appraisal are approved, the final steps are to close on the loan and move into the house. The application process will be essentially the same as when you applied for preapproval, except now you’ll be applying with a specific property in mind.
Pros and cons of VA home loans
Like any type of loan, VA loans have their advantages and disadvantages. Borrowers who may benefit from a VA loan will have to contend with specific fees and eligibility requirements in exchange for features like low rates and no minimum down payment requirements.
Pros
No down payment or mortgage insurance required. Other loan types require down payments and can include an extra cost for mortgage insurance. FHA loans require mortgage insurance regardless of the down payment amount, and conventional loans usually require mortgage insurance if the down payment is less than 20%.
Lower rates. VA loans usually have lower rates than conventional mortgages.
Limited closing costs.Closing costs are the various fees and expenses you pay to get a mortgage. The Department of Veterans Affairs limits the lender’s origination fee to no more than 1% of the loan amount and prohibits lenders from charging some other closing costs.
VA loans can be assumed. This means that when you’re ready to sell your home, you have the option of allowing the buyer to take over your existing mortgage. This can be a selling point if your rate is lower than the current average mortgage rate.
Cons
VA loan funding fee. Although VA loans don’t require mortgage insurance, they come with an extra cost called a funding fee. The fee is set by the federal government and covers the cost of foreclosing if a borrower defaults. As of April 7, 2023, the fee ranges from 1.25% to 3.3% of the loan, depending on your down payment and whether it’s your first VA loan. You can pay the fee upfront or fold it into the loan.
Purchase loans are only for primary homes. You can’t use a VA loan to buy an investment property or a vacation home.
Not all properties are eligible. A VA-approved appraiser will evaluate the home you want to buy to estimate the value and make sure it meets minimum property requirements. Some fixer-uppers may not meet the VA’s minimum standards.
What is the VA loan limit?
The VA loan limit is the maximum amount you can borrow without having to make a down payment. In 2020, limits were eliminated for current members of the military and veterans who have access to their full VA loan entitlement. However, loan limits still apply to borrowers who already have a VA loan or have defaulted on a VA loan.
In 2024, the standard VA loan limit is $766,550 for a single-family home in a typical U.S. county, but it can run as high as $1,149,825 in high-cost areas. It’s possible to get a VA loan even if the home price exceeds the county limit, but you’ll be required to make a down payment. You can use NerdWallet’s search tool below to find the loan limit for your county.
Refinancing a VA home loan
You can refinance an existing VA loan with a standard (also called a “streamline”) refinance loan. This is formally called a VA Interest Rate Reduction Refinance Loan (VA IRRRL). Just as it sounds, the intention behind these loans is to change the rate of your VA loan, either by qualifying for a lower rate or by switching from an adjustable rate to a fixed rate.
Borrowers who want to access some of their equity or who want to convert their conventional mortgage to a VA loan may be interested in a VA cash-out refinance. This would involve taking on a larger loan, paying off your original mortgage, and pocketing the difference. It’s typically recommended that you use this extracted equity to finance wealth-building expenses, like renovations or repairs to the home.
Types of VA home loans
The VA loan program offers a variety of options, including purchase and refinance mortgages, rehab and renovation loans and the Native American Direct Loan. Here’s an overview.
How many times can you use a VA home loan?
Getting a VA loan isn’t a one-time deal. After using a VA mortgage to purchase a home, you can get another VA loan if:
You sell the house and pay off the VA loan.
You sell the house, and a qualified veteran buyer agrees to assume the VA loan.
You repay the VA loan in full and keep the house. Just once, you can get another VA loan to purchase an additional home as your primary residence.
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Frequently asked questions
What is a VA loan and how does it work?
A VA home loan is backed by the Department of Veterans Affairs, and it offers competitive interest rates with no minimum down payment. They’re offered by lenders such as banks, credit unions and mortgage companies to borrowers who meet the VA’s qualifications. These criteria include length-of-service requirements (with separate requirements for surviving spouses) and minimum standards for property. The lender will also have its own financial requirements, such as a minimum credit score and a maximum amount of existing debts.
How much does a VA loan let you borrow?
The maximum amount that you can borrow with a VA loan comes down to how much your lender is willing to approve. However, there is a ceiling for how much you can borrow with a 0% down payment if you already have an active VA loan or if you defaulted on a VA loan in the past. This figure is $766,550 in most areas and $1,149,825 in high-cost areas.
What is the minimum credit score for a VA loan?
There is no minimum credit score required by the Department of Veterans Affairs. However, individual lenders will have their own qualifying criteria. Borrowers with credit scores of 620 or higher will have an easier time getting approved.
Generally, you shouldn’t use a home equity loan or HELOC to buy a car.
Although they may offer longer terms and lower monthly payments, home equity loans currently carry higher interest rates than auto loans.
Because cars lose value over time, they’re not worth the risk of diluting your ownership stake in your home and risking foreclosure.
It might make sense to use home equity financing to buy a car and for another aim, like a big home improvement project.
The most common way to buy a new car is with a car loan, of course. But auto loans are not the only financing game in town. If you’re a homeowner, it might be tempting to tap into your equity to purchase those wheels, via a home equity loan or a HELOC, its credit-line cousin.
This approach, however, involves vastly different considerations than an auto loan. Here’s how to determine whether using a home equity loan to buy a car is the best option for you.
Should I use my home equity to buy a car?
Frankly, no. Avoid buying a car using home equity, if possible.
With a home equity loan, your home is the collateral for the debt. If you fall behind on repayment, the lender can foreclose on the home. Translation: You could lose it.
That goes for home equity lines of credit (HELOCs), too. Can you use a HELOC to buy a car? Sure. But should you? Probably not, and for the same reason: That line of credit uses your home as collateral, putting what’s likely one of your biggest assets at risk.
Generally, it’s best to tap your home equity if you’re going to spend the funds on projects or expenses that further your financial or professional well-being, such as renovating your house or paying college tuition. Because cars don’t hold their value well over time, it doesn’t make sense to tie your home up with financing for one — you’d be repaying a loan on an item that won’t be worth much when all is said and done. (In contrast, real estate generally appreciates over time, especially when money is spent to improve the property.)
Differences between home equity loans and auto loans
Auto loans
Home equity loans
HELOCs
Collateral required
Car
Home
Home
Typical repayment terms
2 to 5 years
5 to 30 years
10 to 20 years (after 5-10 year draw period)
Usual rate type
Fixed
Fixed
Variable
Repayment schedule
Monthly
Monthly
Monthly interest-only repayments during the draw period (usually the first 5-10 years); monthly payments during the repayment period
Fees
Origination fee (0.5-1% of loan amount); documentation fee
Closing costs (avg. 1% of borrowing amount)
Closing costs (avg. 1% of borrowing amount)
Home equity loans and auto loans are both types of secured debt: that is, they are backed by something that acts as collateral for the loan. While a car loan is secured by the car you purchase, a home equity loan is secured by your home. In both cases, if you fail to repay, the lender has the right to seize, respectively, the car or the house.
However, the repayment terms are very different: You could have as long as 30 years to repay a home equity loan, versus the typical two to five years associated with an auto loan. Depending on how much you borrow with the home equity loan, this longer timeline could mean you have much lower monthly payments compared to the payments on a five-year car loan.
Remember, however: A car is a depreciating asset. By the time you’re finished repaying a 15 or 20-year home equity loan or HELOC, your car won’t be worth nearly as much as what you borrowed (and paid in interest) to get it. A new car loses 23.5 percent of its value after about one year and 60 percent in the first five years, according to Edmunds.
If you’re hoping to save money on interest with a home equity loan, think again. While home equity loans did have lower interest rates compared to auto loans for some time, that trend has reversed. Now, many auto loan offers are lower or comparable to the rates on home equity products: As of December 2023, new car loan APRs were running more than a percentage point lower, on average, than home equity APRs.
In addition, you might need to pay closing costs for the home equity loan, which are typically 1 percent of the principal (though they can run you anywhere from 2 percent to 5 percent) — an expense you wouldn’t be on the hook for with an auto loan.
The pros and cons of using home equity to buy a car
Home equity loans and HELOCs were once more of a universal financing go-to, because their interest was tax-deductible — no matter what you used the funds for — provided you itemized deductions on your tax return. That changed with the Tax Cuts and Jobs Act of 2017. It decreed the interest could only be deductible if the loan went towards improving, repairing or buying a home; it also made itemizing deductions less feasible in general.
So now, there are more risks than rewards when it comes to getting a home equity loan for a car. That said, let’s look at the pros and cons of using a home equity loan vs. car loan to buy a vehicle.
Pros of using a home equity loan to buy a car
Longer term, lower payments: Home equity loans are structured in such a way that you can repay the money over a much longer period of time. Most car loans last between two and five years; a home equity loan lasts between five and 30 years. If you only borrow the amount you need for the car, this longer timeline might translate to lower monthly payments, all other things being equal.
Flexibility in using funds: If you take out a home equity loan or HELOC to buy a car, you don’t necessarily need to use all the money on your vehicle. If you take out $50,000 of your home’s equity, for example, you might use $20,000 to buy the car and $30,000 on a kitchen remodel. Since the larger chunk of money would go toward improving your home, money you’ll theoretically get back when you sell, this strategy makes better financial sense than using a home equity loan to buy a car alone. You might also be able to deduct the interest on the sum spent on the kitchen, if you itemize on your tax return.
Cons of using a home equity loan to buy a car
Decreased equity: By getting a home equity loan, you’re depleting some of your ownership stake, which has serious implications. For one, you might end up needing that equity in an emergency. For another, you might find you’ve taken on too much debt, in-between your first mortgage and the home equity loan. This could eat into your bottom line if you need or want to sell the home in the future (home equity loans must be repaid in full if a home is sold).
More onerous application: Applying for home equity financing is somewhat akin to taking out a mortgage and, in addition to your financials, the lender will consider the home’s value and the amount of your ownership stake. Bottom line: We’re talking weeks or even months for approval, vs. days with auto loans.
Foreclosure risk: If you can’t or don’t repay the home equity loan, you won’t lose the car, but you could lose your home — a much more important asset.
No financial gain: A car loses value over time, so, with a decades-long home equity loan term, you might be paying for an asset that isn’t worth much in the end. If your car is no longer usable, this could also put you in the unenviable position of repaying a home equity loan while financing a new vehicle.
Closing costs: Some home equity loans come with upfront closing costs. If you can afford to pay these, you might be better off putting some (or all) of those funds toward a down payment on an auto loan instead.
Bottom line on buying cars with home equity loans
It’s possible to use your home equity to take out a loan for a car, but it’s a risky move. With the interest rates on home equity loans and HELOCs creeping up, it makes more sense to compare auto loan offers first.
Of course, this assumes you’re taking out a home equity loan for a car purchase – and nothing else. If you plan to use only some of the funds to purchase a car and the rest for other, more investment-worthy aims — like, say, building a new garage to house those new wheels — it can still make sense to tap your equity.