Home mortgage rates have soared during the economic recovery from the pandemic, but the swelling ranks ofhomeowners facing steep interest payments this year may find some relief based on how they file their tax returns.
Thanks to the mortgage interest deduction, filers who choose to itemize their tax returns rather than take the standard deduction can deduct the entirety of their home interest payments in addition to taking other write-offs.
Some tax experts say that’s likely to be a more attractive option to more tax filers this season.
Atiya Brown, a certified public accountant and owner of The Savvy Accountant, said mortgage holders with with higher interest rate payments are more likely to get the most favorable returns by itemizing them, rather than taking the standard deduction, a comparison that she shows her clients.
“I definitely think that a lot more people are going to see the difference,” Brown said.
She added that she expects more filers will seek professional help this season. Choosing to itemize mortgage interest means having to itemize other sections of the tax returns as well, Brown said, which can add enough complexity to require an accountant.
The upside of a high interest payment
The standard deduction is a specific dollar amount set each year by the IRS that filers can use to reduce their tax burden. It’s designed to save filers the time and resources often necessary to itemize deductions.
For the 2023 tax year, the standard deduction is $13,850 for single filers and $27,700 for married taxpayers filing jointly. But many homeowners could find the mortgage interest deduction a better option.
A single filer paying a 4% rate on a $500,000 home loan — equating to monthly interest payments of about $1,667, or $20,000 a year — could thus end up seeing substantial savings.
And many households are paying higher rates.
While mortgage rates have been falling since reaching a post-pandemic high of 7.8% last fall, the 30-year mortgage rate is currently still hovering above 6%.
Until the Tax Cuts and Jobs Act, passed by Republicans in 2017, the mortgage interest deduction could be applied to the first $1 million of the loan for a single flier and $500,000 for married couples filing separately.
Today, it only applies to the first $750,000 of a typical mortgage loan for single filers, or $375,000 for married couples filing separately. The change was meant to allow more people to take the standard deduction, which the TCJA also increased.
But the relevant portion of the law expires in 2025 and would cause the limit to go back up to $1 million — and there is no sign yet that Congress will keep the current limit, according to the Bipartisan Policy Center.
Kenneth Chavis IV, a senior wealth adviser at Versant Capital Management, said that while many new homeowners may not be used to itemizing their deductions, they are now more likely than ever to reap tax benefits from doing so, assuming many are among those living with higher mortgage interest payments.
“Interest rates have skyrocketed — but more people will be eligible for (more) mortgage interest deduction,” especially newer homebuyers, Chavis said.
What are the limitations?
Principal payments and down payments cannot be deducted on your taxes. Nor can closing costs, appraisal fees or insurance.
Mortgages on rental properties also cannot be deducted if they are not the filer’s primary residence.
And only the portion of a home used for living can be counted toward the deduction. In other words, you cannot double-dip if you plan to take any home office tax write-offs.
However, both late payment and pre-payment penalties are in many cases deductible.
The United States Congress passed new legislation extending a tax provision that allows homeowners to deduct the cost of mortgage insurance premiums from their federal income tax returns through 2010.
“This legislation has the potential to help thousands of low- and moderate-income Americans secure affordable mortgages that keep them in their homes and keep their communities strong,” Steve Smith, Chief Executive Officer of The PMI Group, Inc. and PMI Mortgage Insurance Co., said in a press release.
“The median home price in the United States today is over $200,000, which means borrowers would need to save more than $40,000 in order to make a traditional down payment of 20 percent. Making the cost of mortgage insurance tax deductible for qualified borrowers creates opportunities for more Americans to secure safe, predictable mortgage loans with a down payment of as little as 3 to 5 percent,” Smith added.
The cost of mortgage insurance first became tax deductible for transactions, such as home purchases and mortgage refinances, closed in 2007.
Borrowers with adjusted gross incomes below $100,000 were able to deduct 100 percent of their mortgage insurance premiums paid between January 1 and December 31, 2007, while families with incomes up to $109,000 were eligible for a partial deduction.
“On average, this annual tax break amounts to $350 per taxpayer. That’s cash in the pockets of hard working homeowners,” said Kevin Schneider, president of the U.S. mortgage insurance business for Genworth Financial, Inc, in a statement.
The legislation is part of the Mortgage Forgiveness Debt Relief Act of 2007 approved by both the U.S. House of Representatives and the U.S. Senate, and now goes to President Bush for final approval.
A growing number of older adults are in debt in retirement, according to the 2022 Survey of Consumer Finances from the Federal Reserve. Among people ages 65 to 74, the share with debt rose to 65% in 2022, up from 50% in 1989 (the first time this question was asked). For people 75 and over, 53% report holding debt in 2022 versus 21% in 1989. This is a big challenge, since people’s income in retirement is traditionally limited. But there are strategies for tackling your balance sheet later in life.
Take note: Not all debt is bad debt. “It’s not necessarily the worst thing to have,” says Jack Heintzelman, a certified financial planner in Boston. If it’s debt that earns you a tax deduction, he says, like a mortgage, it may be fine to hang onto it while you give your money elsewhere a chance to grow.
But if debt is straining your retirement budget or you’re paying a high interest rate, a pay-it-off plan is key. Here are some methods that can help.
Pick up side work
The traditional retirement model — work for 40 years and then quit forever — may not be the most appropriate approach anymore. Supplementing retirement savings and Social Security benefits with part-time earnings can make your money go further and help you pay off remaining debt.
For some people, consulting in their field is a natural step between full-time work and full-time play. Other people can monetize an interest or pick up hourly work a few days a week.
“We have a client who works in a music repair shop for part-time income,” says Colin Day, a CFP in St. Louis. “They get to explore their hobby while also getting some level of income.”
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Consider moving or downsizing
Your home is usually one of your biggest expenses, and if you live in a high-cost area, you might be paying high property taxes and maintenance costs, which eat into your ability to pay for other things.
Moving to a smaller home or to an area with a lower cost of living can free up room in your budget. You might also get better weather, to boot.
“We have a fair amount of clients who are moving from more northwestern states with a higher income tax and colder weather down to places like Florida,” says Crystal McKeon, a CFP in Houston, who notes that Florida has no state income tax and decidedly warmer weather.
Andrew Herzog, a CFP in Plano, Texas, recalls a client who’s considering moving to a smaller home that’s closer to his daughter, easier to maintain and potentially mortgage-free if he can sell his current house for a high enough price.
“Downsizing can absolutely work,” Herzog says. “It’s best when you do it for multiple reasons.”
Time your Social Security benefits
The Social Security equation — when to claim, when to wait — depends on your health, your marital status and your savings. But debt can also affect your plans.
Taking Social Security early might give you the income you need to get rid of your balances. “As long as I’m not blowing up my plan by drawing Social Security early, it could help sustain me by not having to draw down my investment assets,” Day says.
On the other hand, waiting to claim means you’ll have a higher Social Security check later — benefits increase by 8% per year after full retirement age until age 70. Depending on the type of debt, it may be better to wait until you can throw more money at it. Talk to a financial professional about the best option for you.
“I would do the calculations,” Herzog says. “That’s a pretty big asset for people when you’re older.”
Tap home equity — cautiously
If you have equity in your home, you might be able to get a home equity loan or line of credit to help you consolidate or pay down higher-interest debt. Take your time in considering this, however, since an inability to keep up with these payments puts your home at risk of foreclosure.
“You have much more to lose if you mess that up,” Herzog says.
Keep in mind, too, that the interest on a home equity line of credit is only deductible if you use it for home improvement-related expenses. And this is a better option for a one-time debt, not ongoing expenses.
“Those living expenses are just going to continue,” McKeon says. “Home equity loans should not be a first priority.”
This article was written by NerdWallet and was originally published by The Associated Press.
Pet insurance can be a literal lifesaver if your furry friend needs emergency surgery or expensive medical treatment, but the premiums can also put a dent in your budget. NerdWallet gathered quotes from 15 popular insurers and crunched the numbers to help you find the best cheap pet insurance.
We shopped on the insurers’ websites for accident and illness plans in five cities around the U.S. Sample pets were a medium-sized, mixed-breed dog and a domestic shorthair (mixed-breed) cat at ages 2 and 8. Each plan had a $250 deductible, $5,000 annual coverage limit and 80% reimbursement rate. Read our full methodology.
Keep in mind that the affordability of your own rates will vary based on where you live, how much coverage you want, and your pet’s breed and age. Companies that offered the cheapest rates in our tests may not be the best fit for you.
The best cheap pet insurance companies
Below are the five companies we recommend for affordable pet insurance. Click on the company name or keep scrolling for more details on each.
Figo: Cheapest for cats.
ASPCA: Best for younger pets.
AKC: Best for pets with pre-existing conditions.
Lemonade: Cheapest for dogs
Lemonade
Seamless online experience and quick claims, but limited policy options.
Pay vet directly
No
Scope of coverage
Average
Ability to customize plan
Average
Lemonade
Seamless online experience and quick claims, but limited policy options.
Pay vet directly
No
Scope of coverage
Average
Ability to customize plan
Average
Why we picked it: Lemonade offered some of the most consistently affordable rates for dog insurance in our tests. On top of low premiums, the company also has discounts for paying your bill annually rather than monthly and for insuring more than one pet. If you have another Lemonade policy (such as homeowners, renters or life insurance), you can save even more.
Lemonade stands out for its unique “Giveback” program, which donates a portion of company profits to charities chosen by policyholders. It also shines when it comes to claim processing. After you file your claim through the app, the company uses artificial intelligence to review and pay some claims right away. (Human adjusters review the rest.)
Average of sample monthly rates for dogs: $49.
Average of sample monthly rates for cats: $28.
Figo: Cheapest for cats
Figo
Extensive coverage, a variety of deductibles to choose from and generous reimbursement options.
Pay vet directly
No
Scope of coverage
Excellent
Ability to customize plan
Excellent
Figo
Extensive coverage, a variety of deductibles to choose from and generous reimbursement options.
Pay vet directly
No
Scope of coverage
Excellent
Ability to customize plan
Excellent
Why we picked it: Figo was the most affordable option for many of our sample cats, and its overall average cost was the lowest of all the companies we tested. Figo also offers discounts for insuring multiple pets or serving in the military.
One unique feature from Figo is a 100% reimbursement option. If you choose this level of coverage, the company will reimburse all your vet bills once you’ve met your annual deductible. (Most pet insurers offer reimbursement options from 70% to 90%.) We also like Figo’s Pet Cloud app, which can store your pet’s digital medical records and has a 24/7 vet telehealth line.
Average of sample monthly rates for dogs: $54.
Average of sample monthly rates for cats: $23.
MetLife: Best for older pets
MetLife
Customizable plans for dogs, cats and even other animals in some states.
Pay vet directly
No
Scope of coverage
Excellent
Ability to customize plan
Excellent
MetLife
Customizable plans for dogs, cats and even other animals in some states.
Pay vet directly
No
Scope of coverage
Excellent
Ability to customize plan
Excellent
Why we picked it: With affordable rates for older pets in our tests and no maximum age limit for enrollment, MetLife is a good bet for animals who’ve left the puppy or kitten stage far behind. Depending on where you live, MetLife may offer discounts for active-duty military, veterans, first responders, health care workers or people who work in animal care. You can also save money in the first year of your policy by buying your plan online.
MetLife’s plans cover treatment for arthritis, diabetes, periodontal disease and other ailments that may crop up for older pets. The company offers a wide range of deductible options to help you customize your policy and price.
Average of sample monthly rates for dogs: $49.
Average of sample monthly rates for cats: $29.
ASPCA: Best for younger pets
ASPCA
Generous coverage and multiple plan options, including an accident-only policy.
Pay vet directly
No
Scope of coverage
Excellent
Ability to customize plan
Average
ASPCA
Generous coverage and multiple plan options, including an accident-only policy.
Pay vet directly
No
Scope of coverage
Excellent
Ability to customize plan
Average
Why we picked it: ASPCA, which had competitive rates for the 2-year-old dogs and cats in our tests, will cover puppies and kittens over 8 weeks old. Insuring multiple pets can get you a 10% discount.
ASPCA offers some of the most comprehensive plans in the industry, with coverage included for dental diseases, behavioral issues, alternative therapies, prescription food and even microchip implantation. If you want your policy to help pay for your furry new friend’s spay or neuter surgery, you can add the Prime preventive care package.
Average of sample monthly rates for dogs: $61.
Average of sample monthly rates for cats: $29.
AKC: Best for pets with pre-existing conditions
AKC
Lots of ways to customize your coverage, but the basic plan lacks benefits many other companies include.
Pay vet directly
No
Scope of coverage
Good
Ability to customize plan
Excellent
AKC
Lots of ways to customize your coverage, but the basic plan lacks benefits many other companies include.
Pay vet directly
No
Scope of coverage
Good
Ability to customize plan
Excellent
Why we picked it: AKC wasn’t the cheapest option in our tests, but in many states it offers a perk that’s almost impossible to find at any price: coverage for pre-existing conditions. While many companies will pay to treat curable issues that have been symptom-free for six months or a year, they generally won’t cover chronic, incurable conditions that developed before you bought your pet’s policy. So if you enroll a pup with diabetes or a cat with kidney disease, most companies won’t cover treatment for these issues.
AKC is the exception. Once your pet has had a plan for 365 consecutive days, the company may cover its pre-existing conditions. (This coverage isn’t available in all states.) Other bonuses include a multipet discount and a 24/7 vet helpline.
Average of sample monthly rates for dogs: $60.
Average of sample monthly rates for cats: $38.
Other cheap pet insurance companies
Not sure if the companies above are right for you? See sample rates for more cheap pet insurance companies below.
Average of sample monthly rates for dogs
Average of sample monthly rates for cats
What determines your pet insurance cost?
Each company has its own formula for setting prices, but the following are some of the main factors that will likely influence how much you pay for pet insurance.
Where you live. If you’re in an area with a high cost of living, vet care may be expensive, too — and your premium will go up accordingly.
Your pet’s age. Just like humans, pets tend to develop more health issues as they age. Because older pets are more likely to need veterinary care, their pet insurance will generally cost more than it would for a puppy or kitten.
Your pet’s species and breed. Dogs tend to be more expensive to insure than cats, and certain breeds cost more than others. That’s because some breeds are more susceptible to health conditions such as trouble breathing, joint problems or heart issues.
The coverage you choose. Expect higher prices for more comprehensive plans offering things like unlimited annual payouts and 90% reimbursement for vet expenses. Adding wellness coverage to pay for annual checkups and vaccinations can also run up your costs. Some insurers charge extra to cover certain expenses such as exam fees or physical therapy.
How to find cheap pet insurance
The following tips can help you get the best possible rate for your pet insurance plan.
Shop around. We recommend getting quotes from at least three companies. Keep in mind that the lowest price may not offer the best value if it comes with a higher deductible or less coverage. (A deductible is the amount you need to pay before your insurer starts reimbursing you.)
Customize your coverage. Many insurers let you tweak your price by changing your deductible, adding or reducing coverage, or opting for a different reimbursement rate. For example, you can typically lower your premium if you choose to be reimbursed for only 70% of your vet expenses rather than 80% or 90%. You could also buy an accident-only policy, which will cover injuries like broken bones or snake bites but not illnesses like cancer.
Just be sure you’re comfortable with the tradeoffs you’re making to get a lower premium. The plan may be cheaper, but you’ll be on the hook for more of your pet’s vet bills.
Ask about discounts. Some companies offer savings if you insure more than one animal, serve in the military or buy multiple insurance policies (such as pet and homeowners insurance). You may also be able to save a few bucks by paying your premium in full once a year instead of in monthly installments.
Look for employer benefits. Some companies offer pet insurance at a discounted rate to their employees. Before you choose this option, however, check with the insurer to make sure you can maintain your pet’s coverage even if you leave your current job.
How to compare pet insurance plans
Aside from price, pet insurance plans vary in what they cover and how generously they’ll reimburse your vet bills. Here are a few key things to check before you commit to a pet insurance plan.
What’s covered — and what’s not
Most accident and illness plans cover things like cancer treatments or surgery if your pet gets hurt. But there are types of coverage you can’t always count on.
Say your pet develops periodontal disease and needs to have a few teeth pulled. Some plans will cover this expense; others won’t. Still others might cover it only if you’ve bought optional dental illness coverage. Learn more about pet dental insurance.
Plans may also vary in their coverage of prescription food and supplements, treatment for behavioral issues and rehabilitative therapies.
Finally, check whether your plan will cover vet exam fees. If you bring your pet in for a sick visit, some pet insurers will pay for medication and other treatment but won’t reimburse you for the exam fee.
Reimbursement
One of the most important things to know about a plan is how it will reimburse you for your vet expenses. A handful of companies can pay your vet directly, but in most cases you’ll need to settle the bill yourself and then file a claim for reimbursement.
Check how long it generally takes the companies you’re considering to process claims. Some do so in a matter of days, while others may take up to a month.
You’ll also want to make sure you’re comfortable with your plan’s coverage limit, deductible and reimbursement rate. These factors all work together to determine how much your plan will pay toward your vet expenses.
Say you have a $500 yearly deductible and $5,000 annual coverage limit with a reimbursement rate of 80%. If your dog needs a $2,000 surgery and you haven’t paid anything toward your deductible yet, your plan would cover $1,200. Here’s the math:
$2,000 – $500 deductible = $1,500.
80% reimbursement on the remaining $1,500 bill = $1,200.
You’d still have $3,800 left of your annual limit ($5,000 – $1,200) to spend on any other treatment your pet might need that year.
Waiting periods
There’s generally a waiting period between when you buy your policy and when your coverage begins. For instance, your pet’s illnesses might not be covered for the first 14 days. Some companies have extended waiting periods for certain issues such as knee injuries or hip dysplasia. Learn more about pet insurance waiting periods.
Reviews
NerdWallet has evaluated more than a dozen major pet insurance companies to help you compare your options. Read our pet insurance reviews to see our star ratings and get details about each insurer’s plans.
Chubb is a property and casualty insurance company that operates in 54 countries and territories. Its executive offices are in France, Singapore, Switzerland, the United Kingdom and the United States.
Besides property and casualty insurance, the company also offers personal coverage and supplemental health insurance, life insurance and travel insurance. Chubb travel insurance is underwritten by ACE Property and Casualty Insurance Co.
What does Chubb travel insurance cover?
Depending on what type of coverage you’re looking for, Chubb offers several different travel insurance options. It offers annual policies as well as single-trip plans for trips to domestic and international destinations.
Coverage ranges across:
Chubb travel insurance plans
Three single-trip travel insurance plan options are available: Travel Basics Plus, Travel Essentials Plus and Travel Choice Plus.
These are comprehensive travel insurance plans that include medical coverage as well as trip protections, such as trip delay, baggage delay and baggage loss.
Here’s how coverage varies across the plans.
Travel Basics Plus
Travel Essentials Plus
Travel Choice Plus
Trip cancellation
100% of the trip cost (with a $100,000 limit).
100% of the trip cost (with a $100,000 limit).
100% of the trip cost (with a $100,000 limit).
Trip interruption
100% of the trip cost (with a $100,000 limit).
150% of the trip cost (with a $150,000 limit).
150% of the trip cost (with a $150,000 limit).
Trip interruption – return air only
Trip delay
$100 per day, with a $500 maximum.
$150 per day, with a $750 maximum.
$200 per day, with a $1,000 maximum.
Missed connection
Baggage delay
Baggage loss
$750 (with a $50 deductible).
Emergency medical
$15,000 (with a $50 deductible).
Emergency evacuation and repatriation
$1 million.
Accidental death and dismemberment
Preexisting medical conditions waiver
Must be purchased within 21 days after your initial trip payment.
Must be purchased within 21 days after your initial trip payment.
Must be purchased within 21 days after your initial trip payment.
All three plans offer an optional car rental collision coverage add-on that covers up to $35,000 (with a $250 deductible). This add-on includes damage caused by collision, vandalism or weather and does not include theft.
Chubb single-trip plan cost
Below is how much a 35-year-old traveler from Utah would pay for travel insurance for a 10-day trip to Argentina valued at $2,500.
The least expensive of the options, the Travel Basics Plus plan will set you back $124.62. The Travel Essentials Plus policy comes in at $150.73 and provides more coverage. The most expensive plan, Travel Choice Plus, costs $215.13 and includes the most coverage with higher limits.
All plans include a $7 policy fee.
Chubb multi-trip/annual travel insurance
Chubb also offers multi-trip or annual travel insurance plans to those who take multiple trips per year. Three policies are available: Travel Basics 365, Travel Essentials 365 and Travel Choice 365.
Below are the coverage limits for annual travel insurance plans offered by Chubb.
Travel Basics 365
Travel Essentials 365
Travel Choice 365
Trip cancellation
Trip interruption
Trip delay
$150 per day, with a $750 maximum (kicks in after five hours).
$150 per day, with a $1,000 maximum (kicks in after five hours).
$150 per day, with a $1,500 maximum (kicks in after five hours).
Missed connection
$500 (kicks in after three hours).
$1,000 (kicks in after three hours).
Baggage delay
$150 per day, with a $300 maximum (kicks in after 12 hours).
$250 per day, with a $500 maximum (kicks in after 12 hours).
$250 per day, with a $1,000 maximum (kicks in after 12 hours).
Baggage loss
Emergency medical
Emergency evacuation and repatriation
$1 million.
Accidental death and dismemberment
Car rental collision damage waiver
$35,000 (with a $250 deductible).
$35,000 (with a $250 deductible).
Security evacuation
Chubb annual plan cost
Below is how much a 35-year-old traveler from Utah would pay for an annual travel insurance policy from Chubb.
The most affordable option of the three, the Travel Basics 365 plan, will set you back $141. The Travel Essentials 365 policy will set you back $233, and the Travel Choice 365 policy costs $449.
Which Chubb travel insurance plan is for me?
If you’re seeking coverage for one trip: Look into the single-trip travel insurance plans, such as Travel Basics Plus, Travel Essentials Plus and Travel Choice Plus.
If you’re traveling extensively: For travelers who take multiple trips per year or who are constantly on the road, an annual plan, such as Travel Basics 365, Travel Essentials 365 and Travel Choice 365, will provide a more economical solution.
If you hold a travel rewards credit card: Take a look at your card’s benefits guide and determine what kind of trip protections, if any, are offered by your credit card. Pick a travel insurance plan with perks that don’t overlap with what is already covered.
How to get a quote from Chubb
To get a quote from Chubb for an individual or family travel policy, start on it’s website. Decide whether you need a single-trip plan or an annual plan, and click on “Get a quote.”
Select between a domestic or an international policy and confirm that you’re a U.S. resident and at least 18 years old by checking the respective box. Enter your travel destination, state of residence, travel dates, the initial trip deposit date and the number of travelers.
Then provide a couple of more details, such as the primary traveler’s age and the cost of the trip.
The quotes for each plan will be displayed on the next page.
For an annual policy, select your state of residence from the dropdown menu, pick a coverage start date, enter the traveler’s age and click “Get quote.”
What isn’t covered by Chubb travel insurance?
Like most insurance providers, Chubb publishes a list of exclusions to its coverage. Below are some of the situations not covered by Chubb travel insurance:
Intentional self-inflicted injuries or suicide.
Normal pregnancy or elective abortion.
Participation in professional athletic events.
Mountaineering.
War, acts of war or participating in a civil disorder, riot or resurrection.
Operating or learning to operate an aircraft.
Being under the influence of drugs or narcotics.
Traveling for the purpose of securing medical treatment.
Traveling against a physician’s recommendation.
Is Chubb travel insurance worth it?
If you look online, Chubb travel insurance reviews are mixed, but they also include car, home and business insurance, not the company’s travel insurance branch specifically.
In any case, before you purchase a plan, we recommend not only comparing prices but also reading policy terms to make sure you understand what’s covered so your claim will be accepted should you need to file one.
How to maximize your rewards
You want a travel credit card that prioritizes what’s important to you. Here are our picks for the best travel credit cards of 2024, including those best for:
To rent or not to rent? That is a very personal question: This rent vs. buy calculator can help.
Both the cost of rent and U.S. home prices soared during the pandemic. After historically high home prices and rising mortgage interest rates in 2023, the rent vs. buy calculator now favors renters for the first time in decades. But just barely.
Paying a mortgage builds home equity. That’s the difference between the current value of the home and the amount of money paid in, minus any liens on the property. When a homebuyer sells, they pocket any surplus, after expenses. For years, home ownership has been a way to build individual and generational wealth.
Paying rent doesn’t build equity. But that doesn’t mean it’s a waste of money, despite what some financial gurus might try to tell you. Home prices are high and the availability of affordable properties hit an all-time low in 2023. So renting is a smarter financial decision for many U.S. residents right now.
The rent vs. buy calculator
Personal finances and the national housing market aren’t the only things to consider. The rent vs. buy calculator includes many variables. They vary from person to person and year to year.
Age, lifestyle, career outlook and financial risk tolerance matter. Where you want to live both factor into the decision. Take a look at Redfin’s rent vs. buy calculator to evaluate which option makes more sense for you.
Reasons to rent in 2024
Many renters will benefit from extending their lease into 2024. Here are six reasons why renting is a good choice right now.
Renting is more affordable in most markets
Redfin reports that buying a home costs 25 percent more than renting in 2023. In fact, last year was the most expensive year for home prices in Redfin’s records. A buyer making the country’s median wage would need to pay 41.4 percent of their income for a home. That’s well above the 30 percent recommended by experts.
Record high home prices were only part of the issue. High interest rates and low inventory kept home prices elevated through the end of 2023
In contrast, nationwide rent prices actually fell late last year. According to the December Rent Report, rent prices dropped .57 percent month-over-month. Rates were also down 2.09 percent from December 2022.
In cities, the price difference between buying and renting is even steeper. It was more expensive to buy a home than to rent one in all but four major metropolitan areas in May 2023.
Renting costs less upfront
Purchasing a home is a major financial investment. Buyers typically need a 20 percent down payment to secure a mortgage. When housing stock is low, they may also need to offer more than the asking price. They might also need to compete in bidding wars or be able to pay a percentage in cash to secure the house they want.
Renting is more cost-effective for many. A typical apartment lease includes a security deposit. Rents get this security deposit back when they move out if there’s no damage, outstanding fees or rent owed. Fees for parking spaces or having pets in the apartment added. A rent calculator can help determine your budget.
Fewer monthly costs
It’s usually cheaper month to month as well. Business Insider reports that U.S. homeowners pay a median of $2,690 each year in property taxes. Property taxes, mortgage interest and home repair costs are tax deductible. But these costs add up.
Renter’s insurance is almost always cheaper than homeowner’s insurance. NerdWallet states that the average price for renter’s insurance in the United States is $148 a year. That breaks down to just $12 per month. The same outlet reports that homeowner’s insurance typically costs $1,820 a year. Rates vary state to state.
A lease may also include some (or all) utilities. This means fewer bills to pay and a more predictable household budget.
No repairs or maintenance
A homeowner has to pay for emergency expenses like a broken water heater or a new roof out of their own pocket. They also have to file their own insurance claims. Then they need to make any necessary repairs – or hire professionals to do so. But renters can pass these responsibilities on to their landlord or property manager.
In addition, renters don’t need to stress about lawn care, landscaping, or snow removal either. That saves a lot of time, stress, and money over the course of a lease.
As a bonus, many rentals offer communal amenities. These can include workspaces and lobbies, rooftop patios and grills, pools and playgrounds. Residents can also enjoy perks like gyms, dog wash stations or bike storage. Residents get all the benefits without membership fees or maintenance.
Renting is flexible
Building home equity is an investment with higher upfront costs. So experts recommend that residents stay in their home for at least five years to break even. But high housing costs and high interest rates mean that reaching the break-even point may take even longer.
To recoup their investment, homeowners need to commit to staying in one place for years. Homes usually appreciate in value, but there’s no guarantee homeowners will turn a profit..
Renting is best for people who need flexibility. Applying for a mortgage requires a stable job and regular and predictable paychecks.
People planning a major career change may be better off renting for now. The same goes for people facing job insecurity. Going back to school, retirement or caregiving can also influence income. A renter can re-evaluate before signing a year-long lease. Homeowners are tied to a 15- or 30-year mortgage.
You can try before you buy
Renting is a great way to explore different neighborhoods, home types and amenities. Location is the one thing about a home that buyers can’t change. So it’s smart to rent in a neighborhood before committing to a mortgage. Or you could experiment with the best of both worlds with a rent-to-own home.
Renting can also allow residents to experience different house types. They can experience living in apartments, townhomes, duplexes and single-family homes).
Reasons to buy in 2024
Renting is a smart option for many. But there are certain instances when the rent or buy calculator favors purchasing a home instead.
More homes mean lower prices for buyers
Housing experts say that the number of homes available will increase in 2024. More housing stock means home prices could tick downward. That’s a plus for buyers.
Lawrence Yun, National Association of Realtors (NAR) chief economist, predicts that 1.48 million new housing projects will begin in 2024. That number includes 1.04 million single-family units.
Interest rates should stabilize or drop
Mortgage interest rates have been holding steady for the last several weeks. Rates hovered around the 7 percent mark for 30-year fixed rate mortgages and just over 6 percent for 15-year fixed rate mortgages. That’s down from last year’s high.
“Many of the factors that made 2023 the least affordable year for homebuying on record are easing,” said Redfin Senior Economist Elijah de la Campa. “Mortgage rates are under 7 percent for the first time in months, home price growth is slowing as lower rates prompt more people to list their homes, and overall inflation continues to cool. We’ll likely see a jump in home purchases in the new year as buyers take advantage of lower mortgage rates and more listings after the holidays.”
But it’s important to note that these available properties are at the high end of the market. Affordable housing numbers remain historically low.
More options in key metros and affordable markets
More housing stock and lower interest rates will help push home prices lower. Housing experts predict certain markets will rebound first.
“Metro markets in southern states will likely outperform others due to faster job increases,” says Yun, NAR chief economist. “While markets in the Midwest will experience gains from being in the most affordable region.”
The takeaway
Choosing whether to rent or buy is a personal decision that depends on many factors. For many U.S. residents, renting is a more affordable and flexible option right now, but investing in a home is never a bad idea.
Check out houses and apartments for rent.
Looking to buy? See homes for sale here.
Alicia Underlee Nelson is a freelance writer and photographer. Her work has appeared in Thomson Reuters, Food Network, USA Today, Delta Sky Magazine, AAA Living, Midwest Living, Beer Advocate, trivago Magazine, Matador Network, craftbeer.com and numerous other publications. She’s the author of North Dakota Beer: A Heady History, co-host of the Travel Tomorrow podcast and leads travel and creativity workshops across the Midwest.
If you’re considering a loan on a home you own outright, it’s important to note that when you own your home without any current mortgage, its entire value is equity.
You can utilize this equity by securing a loan against the home’s worth. Multiple mortgage loan options are available, such as a cash-out refinance, home equity loan, or HELOC.
To make the most informed decision, delve deeper into each option and discover which suits your needs best.
Check your loan options. Start here
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Can I get a loan on a house that’s paid for?
Yes, you can get a loan on a home you own outright through a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.
A home equity loan allows you to borrow a fixed amount of money using your home as collateral and pay it back with interest over a set term. A HELOC, on the other hand, works like a credit card where you can borrow money as you need it up to a certain amount, and pay it back with interest.
When you take out a home equity loan or a HELOC, the lender will determine the amount of equity you have in your home and use that as collateral for the loan. The amount of equity you have is determined by the difference between the current value of your home and the outstanding balance on your mortgage
Cash-out refinancing allows you to borrow up to 80% of your home’s appraised value. You’ll repay the loan via monthly payments, just like you did before you paid off your mortgage balance
Keep in mind that taking out a loan on a paid-off house puts your home at risk if you are unable to make payments. If you default on the loan, the lender may foreclose on your home to recoup their losses.
So, before taking out a home equity loan, or HELOC, make sure you can comfortably make the monthly payments and understand the risks involved.
Verify your eligibility. Start here
Home equity loans for a paid-off house
Getting a loan on a house you already own lets you borrow against the value of your home without selling.
The type of loan you’ll qualify for depends on your credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), and other factors. But assuming your personal finances are in good shape, you can likely choose from any of the following loan options that we summarized above.
Check your loan options. Start here
1. Cash-out refinance
Cash-out refinancing typically involves applying for a new mortgage to replace an existing one and borrowing cash from your home equity. When you already own your home outright, you aren’t paying off an existing mortgage. So most or all of the loan will come to you as a lump sum of cash.
You can typically borrow up to 80% of your home’s value using a cash-out refinance. However, with the VA cash-out refi, you could potentially get up to 100% of your home’s value. But only veterans and active-duty service members have VA loan eligibility.
Refinancing requires a home appraisal to measure your home’s market value. Unless your home is worth over $1 million, in which case you may be able to get an appraisal waiver. You’ll also pay closing costs, ranging between 2% and 5% of your loan balance.
You can pay closing costs out of pocket, or your lender might be willing to cover part of them in exchange for a higher interest rate. Alternatively, you could roll the closing costs into your loan balance.
Cash-out refinancing typically requires a credit score of at least 620. But a higher score (720 and up) will earn you a lower mortgage rate and help you save on interest costs.
2. Home equity loan
Another option is a home equity loan. As with a cash-out refinance, the amount you can borrow is based on your home’s value. Your loan terms will also depend on your credit score.
Homeowners can typically borrow up to 80% of their home’s equity with a home equity loan, which is also known as a second mortgage. However, some smaller banks and credit unions may allow you to pull out up to 100% of your equity.
Once approved, you’ll receive the entire loan amount in cash to use as you wish. Then you’ll repay the loan with interest by making monthly payments.
Home equity loans have higher interest rates than refinancing but lower interest rates than credit cards or personal loans. Since it’s an installment loan with a fixed interest rate, you’ll also have a fixed monthly payment.
Many lenders set their minimum credit score for a home equity loan between 620 and 700.
Verify your home equity loan eligibility. Start here
3. Home equity line of credit (HELOC)
A home equity line of credit is similar to a home equity loan. But rather than receiving a lump sum of cash, borrowers can draw from a line of credit as needed.
Home equity lines of credit often have a draw period of 10 years, meaning you can borrow from the credit line and repay it as often as you want within that time frame. After the draw period ends, there’s typically a repayment period of up to 20 years, during which you cannot borrow from the HELOC and must repay any outstanding balance with interest.
Check your HELOC options. Start here
A HELOC is a revolving account, like a credit card, so the amount borrowed determines your monthly payment. HELOCs usually have variable interest rates.
How to choose a loan on a home you own outright
Although you have several options when getting a loan on a home you own outright, the right mortgage depends on your specific goals. Here’s how to choose the best loan for your financial situation.
Talk to a lender about your mortgage options. Start here
You need cash to buy another property. You can purchase a new property with the aid of a cash-out refinance or a home equity loan. Both loans give you a lump sum payment up front and let you extend the fixed repayment term over a longer period of time. HELOCs can have higher interest rates and variable rates, leaving you with less certainty about your future rate and monthly payments HELOCs can have higher interest rates and variable rates, leaving you with less certainty about your future rate and monthly payments
You want to make home improvements. Home equity loans and HELOCs can be used to improve your home by making renovations or repairs. A home equity loan is great for a single project, while a HELOC is better for completing several projects over many years. You can also use a cash-out refi, but if you extend your loan term, you may pay more in interest over the life of the loan. This could make it harder for you to pay off your mortgage and add value to your home.
You want to consolidate high-interest debts. A cash-out refinance is a way to use home equity to pay off high-interest debts, such as credit card debt or personal loans. It can be a smart way to save money on interest, but it has risks, such as a risk of foreclosure and using a long-term asset, the value of your real estate, to pay for shorter-term needs
Regardless of the type of loan you choose, request quotes from at least three mortgage lenders to compare interest rates, discount points, and upfront fees. This will help you get the best deal.
Pros and cons of getting a loan on a home you already own
Leveraging a fully paid-off home for a loan comes with its own set of benefits and drawbacks. Here’s what you should consider before opting for a home equity loan.
Verify your home equity loan eligibility. Start here
Pros
Enjoy cost-effective borrowing. Home loans, when taken against a fully-owned property, typically offer more competitive interest rates than personal loans or credit cards. This is due to the house acting as a guarantee. Moreover, when opting for a new loan like a refinance, the associated closing expenses might be on the lower side
Unlock most of your home’s value. With no existing liens on your property, such a loan lets you access a large part of your equity. Lenders find this arrangement favorable, knowing you’ve successfully cleared a first mortgage. It’s important to keep in mind that the property’s valuation and your credit history will still determine the loan amount
Benefit from fixed-rate repayments. Such home loans usually come with fixed interest rates, ensuring consistent monthly outflows throughout the loan’s tenure
Flexibility in how you use your money. The loan amount can be channeled into various needs, be it home refurbishments, debt clearance, or any significant expenditure
Potential tax benefits. If the loan amount is reinvested into property enhancements, the interest might be deductible, giving it an edge over other financial products like personal loans or credit cards
Cons
Your property is on the line. If you default on the home equity loan repayments, you risk losing your fully owned home to foreclosure
It might cost more than other home loans. Generally, home equity loans have steeper interest rates compared to refinancing options and Home Equity Lines of Credit (HELOCs), making them potentially pricier
Be prepared for closing costs. Typically, these can range from 2% to 5% of the loan value, adding to the overall cost
Repayment terms might be rigid. Unlike some other options, such as HELOCs, which offer flexibility in repayment and re-borrowing, home equity loans have a fixed repayment schedule
Risk of the loan exceeding the property value. If you secure a loan on a home you own outright prior to a downturn in the property market, you might find yourself owing more than the property’s worth
3 things to consider before getting a loan on a home you already own
Considering taking a loan on a home you own outright? It’s an important decision with several facets to consider. Let’s delve into three key aspects:
1. Do you really need the liquidity?
What’s your primary motivation for tapping into equity? If you’re planning significant home improvements that could enhance its market value, that’s a strategic approach.
However, if the goal is to address other debts or make purchases that won’t hold their value, exercise caution. You wouldn’t want to jeopardize your home without good reason.
2. How much do you need to borrow and for how long?
The size of your loan will directly determine your monthly commitments. When considering a larger loan amount, it’s important to evaluate the monthly payments, interest rate, and the loan’s lifespan. If you’ve been enjoying a mortgage-free status for a while, it’s worth reflecting on whether you’re ready to recommit to a long-term debt.
3. Are you financially stable?
A few things to consider here. First, ensure that the monthly payments of the new loan align with your budget without overstretching. You should also ensure the offered rate is competitive and aligns with current market rates.
Lastly, always consider if there might be more suitable alternatives. Sometimes, continuing to save or exploring other financing avenues might be more beneficial.
Remember, leveraging your home’s equity is a significant step, and it’s essential to make decisions that resonate with your long-term goals and financial well-being.
How to get a loan on a home you own outright
Getting a home equity loan on home you own outright can be a smart financial decision, allowing you to tap into the equity you’ve built. It can be used for various purposes, such as home improvement, debt consolidation, or funding a significant purchase.
Verify your home equity loan eligibility. Start here
Here is a step-by-step guide on how to obtain a home equity loan on a fully paid-off house:
Determine your needs: Before applying for a home equity loan, identify why you need the loan and how much you want to borrow. Keep in mind that borrowing more than you need might lead to increased costs and interest rates.
Calculate your equity: Equity is the difference between your home’s current market value and any outstanding debts secured by the property. Since your house is paid off, your equity is equal to the current market value of your home. You can calculate your home’s equity using online tools or consulting a local real estate agent.
Check your credit score: A good credit score is essential for obtaining a home equity loan with favorable terms. Check your credit report for any errors and take steps to improve your credit score, if necessary, by paying off outstanding debts and ensuring timely bill payments.
Shop around for lenders: Research various financial institutions, including banks, credit unions, and online lenders, to find the best home equity loan terms and interest rates. Compare loan offers and choose the one that best suits your needs.
Gather necessary documents: Prepare the required documentation, including pay stubs, W-2 forms, bank statements, and tax returns.
Apply for the loan: Fill out the loan application and provide the required documentation. The lender will review your application and determine whether you qualify for the loan.
Close the loan: If you are approved for the loan, you will need to sign the loan documents and pay any closing costs or fees associated with the loan.
Once the loan is closed, you will receive the loan proceeds in a lump sum, which you can use for any purpose. Remember that you will be required to make monthly payments on the loan, and failure to do so could result in foreclosure on your home.
Alternatives to getting a loan on a home you own
Mortgages on your current home aren’t always necessary when buying a second home, vacation home, or investment property.
Verify your eligibility. Start here
“You may already have enough savings for a down payment without tapping into your equity,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Before getting a loan on a home you own outright, look into mortgage loans that allow low down payments. Home buyers should consider the following types of loans.
Conventional loans
If you’re buying a new home to use as your primary residence, conventional loans allow financing with as little as a 3% down payment. You could qualify with a credit score as low as 620.
At least a 10% down payment is required for a vacation home, 20% to avoid private mortgage insurance, and 20-25% for a rental or investment property.
Check your conventional loan eligibility. Start here
FHA loans
FHA loans require only a 3.5% down payment, allowing FICO scores as low as 580. You cannot use an FHA loan to purchase a vacation home or an investment property. But you can use one to buy a multi-unit property with up to four units, live in one of the units, and rent out the others.
Check your FHA loan eligibility. Start here
VA loans
VA loans are the best option for eligible veterans and service members due to their low mortgage rates, lack of mortgage insurance, and no down payment. However, they can only be used for a vacation or investment home when buying a multi-unit property with up to four units. You can also use a VA loan to buy a second home, but only if the second home becomes your primary residence.
Check your VA loan eligibility. Start here
Interest rates for a second home
If you’re using cash from your equity to buy another home, make sure you understand how interest rates work on a vacation home, second home, and investment property.
Check your loan options. Start here
Since the new home won’t be your primary residence, you can expect a slightly higher mortgage rate. This rate increase protects the lender because these properties have a higher risk of default. That’s because mortgage lenders know that in the event of financial hardship, homeowners prioritize paying the mortgage on their primary home before a second home or investment property.
But although you’ll pay a higher rate when buying a second home, shopping around and comparing loans can help you save. To see the impact of higher mortgage rates, you can experiment with a mortgage calculator.
FAQ: Loan on a home you own outright
How do you get a loan on a home you own outright?
To obtain a loan on a home you own outright, you can approach a financial institution or lender and apply for a home equity loan, HELOC, or cash-out refinance. The process typically involves an assessment of your property’s value, a review of your credit history, and verification of your income sources. Once approved, you can use your home as collateral to secure the loan.
What does it cost to get a loan on a house you own outright?
The costs associated with getting a loan on a house you own outright can vary based on the lender and the type of loan. Common expenses include appraisal fees to determine the home’s value, origination fees, title search fees, and potential closing costs. If you’re considering a reverse mortgage, there might be additional fees and insurance costs involved.
How much can you borrow against a house if you owe more than it’s worth?
If you owe more on your home than its current market value, you’re in a situation known as being u0022underwateru0022 on your mortgage. In such cases, borrowing additional funds against your home can be challenging. Lenders typically want the home’s value to exceed the loan amount to minimize their risk. However, some government programs might assist homeowners in this situation, but a reverse mortgage might not be an option unless there’s sufficient equity in the home.
What is the maximum amount I can borrow against a home that I own outright?
Typically, for home equity loans, lenders allow you to borrow up to 80-90% of your home’s value. But the maximum amount you can borrow against a home you own outright depends on several factors, including the home’s appraised value, your age (especially if considering a reverse mortgage), current interest rates, and lender-specific guidelines.
Should you mortgage the house you own?
Owning your home outright provides a valuable equity cushion, and it’s exciting when you no longer shoulder the burden of monthly mortgage payments. The good news is that you don’t have to sell your home to access your equity.
Using a cash-out refinance, home equity loan, or home equity line of credit, homeowners can pull cash from their equity and use the money for many different purposes.
Make sure you understand the pros and cons of each type of financing and choose the best one for you based on your specific goals.
Time to make a move? Let us find the right mortgage for you
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.
Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket.
Home improvement loans let you finance the cost of upgrades and repairs to your home.
Some — like the FHA 203(k) mortgage — are specialized for home renovation projects, while second mortgage options — like home equity loans and HELOCs — can provide cash for a remodel or any other purpose. Your best financing option for home improvements depends on your needs. Here’s what you should know.
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What is a home improvement loan?
A home improvement loan is a financial tool that allows you to borrow money for various home projects, such as repairs, renovations, or upgrades.
Unlike a secured loan like a second mortgage, home improvement loans are often unsecured personal loans, meaning you don’t have to put up your home as collateral. You get the money in a lump sum and pay it back over a predetermined period, which can range from one to seven years.
Now, you might be wondering how this is different from a home renovation loan. While the terms are often used interchangeably, there can be subtle differences.
Home improvement loans are generally more flexible and can be used for any type of home project, from installing a new roof to landscaping. Home renovation loans, on the other hand, are often more specific and may require you to use the funds for particular types of renovations, like kitchen or bathroom remodels.
How does a home improvement loan work?
So, you’ve decided to spruce up your home, and you’re considering a home improvement loan. But how does it work? Once you’re approved, the lender will give you the money in a lump sum. You start repaying the loan almost immediately, usually in fixed monthly installments. The interest rate you’ll pay depends on various factors, including your credit score and the lender’s terms.
Be mindful of additional costs like origination fees, which can range from 1% to 8% of the loan amount. Unlike a credit card, where you can keep using the available credit as you pay it off, the loan amount is fixed. If you find that you need more money for your project, you’ll have to apply for another loan, which could affect your credit score.
Home improvement loan rates
Interest rates for home improvement loans can vary widely, generally ranging from 5% to 36%. Your credit score plays a significant role in determining your rate—the better your credit, the more favorable your rate. Some lenders even offer an autopay discount if you link a bank account for automatic payments.
You can also prequalify to check your likely interest rate without affecting your credit score, making it easier to plan for the loan purpose, whether it’s a new kitchen or fixing a leaky roof.
So, whether you’re dreaming of solar panels or finally fixing up your master bedroom, a home improvement loan can be a practical way to finance your projects. Just make sure to read the fine print and understand all the terms, including any potential autopay discounts and bank account requirements, before you apply.
Types of home improvement loans
1. Home equity loan
A home equity loan (HEL) is a financial instrument that lets you borrow money using the equity you’ve built up in your home as collateral. The equity is determined by subtracting your existing mortgage loan balance from your current home value. Unlike a cash-out refinance, a home equity loan “issues loan funding as a single payment upfront. It’s similar to a second mortgage,” says Bruce Ailion, Realtor and real estate attorney. “You would continue making payments on your original mortgage while repaying the home equity loan.”
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This kind of loan is particularly useful for big, one-time expenditures like home remodeling. It offers a fixed interest rate, and the loan terms can range from five to 30 years. You could potentially borrow up to 100% of your home’s equity.
However, there are some cons to consider. Since you’re essentially taking on a second loan, you’ll have an additional monthly payment if you still have a balance on your original mortgage. Also, the lender will usually charge closing costs ranging from 2% to 5% of the loan balance, as well as potential origination fees. Because the loan provides a lump-sum payment, careful budgeting is necessary to ensure the funds are used effectively.
As a bonus, “a home equity loan, or HELOC, may also be tax-deductible,” says Doug Leever with Tropical Financial Credit Union, member FDIC. “Check with your CPA or tax advisor to be sure.”
2. HELOC (home equity line of credit)
A Home Equity Line of Credit (HELOC) is another option for tapping into your home’s equity without going through the process of a full refinance. Unlike a standard home equity loan that provides a lump sum upfront, a HELOC functions more like a credit card. You’re given a pre-approved limit and can borrow against that limit as you need, paying interest only on the amount you’ve actually borrowed.
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While there’s more flexibility because you don’t have to borrow the entire amount at once, be aware that by the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender can be permitted to change the terms over the loan’s life. This can reduce the amount you can borrow if, for instance, your credit goes down.”
The pros of a HELOC include minimal or potentially no closing costs, and loan payments that vary according to how much you’ve borrowed. It offers a revolving balance, which means you can re-use the funds after repayment. This kind of financial instrument may be ideal for ongoing or long-term projects that don’t require a large sum upfront.
“HELOCs offer flexibility, and you only pull money out when needed, within the maximum loan amount. And the credit line is available for up to 10 years, which is your repayment period.” Leever says.
3. Cash-out refinance
A cash-out refinance is a viable option if you’re considering home improvements or other significant financial needs. When opting for a cash-out refinance, you essentially take on a new, larger mortgage than your existing one and then pocket the difference in cash.
This cash comes from your home’s value and can be used for various purposes, including home improvement projects like finishing a basement or remodeling a kitchen. However, the money can also be used for other things, like paying off high-interest debt, covering education expenses, or even buying a second home. Importantly, a cash-out refinance is most beneficial when current market rates are lower than your existing mortgage rate.
Check your eligibility for a cash-out refinance. Start here
The advantages of going for a cash-out refinance include the opportunity to reduce your mortgage rate or loan term, which could potentially result in paying off your home earlier. For instance, if you initially had a 30-year mortgage with 20 years remaining, you could refinance to a 15-year loan, effectively paying off your home five years ahead of schedule. Plus, you only have to worry about one mortgage payment.
However, there are downsides. Cash-out refinances tend to have higher closing costs that apply to the entire loan amount, not just the cash you’re taking out. The new loan will also have a larger balance than your current mortgage, and refinancing effectively restarts your loan term length.
4. FHA 203(k) rehab loan
The FHA 203(k) rehab loan is backed by the Federal Housing Administration that consolidates the cost of a home mortgage and home improvements into a single loan, which makes it particularly useful for those buying fixer-uppers.
Check your eligibility for an FHA 203(k) loan. Start here
With this program, you don’t need to apply for two different loans or pay closing costs twice; you finance both the house purchase and the necessary renovations at the same time. The loan comes with several benefits like a low down payment requirement of just 3.5% and a minimum credit score requirement of 620, making it accessible even if you don’t have perfect credit. Additionally, first-time home buyer status is not a requirement for this loan.
However, there are some limitations and downsides to be aware of. The FHA 203(k) loan is specifically designed for older homes in need of repairs, rather than new properties. The loan also includes both upfront and ongoing monthly mortgage insurance premiums. Renovation costs have to be at least $5,000, and the loan restricts the use of funds to certain approved home improvement projects.
According to Jon Meyer, a loan expert at The Mortgage Reports, “FHA 203(k) loans can be drawn out and difficult to get approved. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.”
5. Unsecured personal loan
If you’re looking to finance home improvements but don’t have sufficient home equity, a personal loan could be a viable option. Unlike home equity lines of credit (HELOCs), personal loans are unsecured, meaning your home is not used as collateral. This feature often allows for a speedy approval process, sometimes getting you funds on the next business day or even the same day.
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The repayment terms for personal loans are less flexible, usually ranging between two and five years. Although you’ll most likely face closing costs, personal loans can be easier to access for those who don’t have much home equity to borrow against. They can also be a good choice for emergency repairs, such as a broken water heater or HVAC system that needs immediate replacement.
However, there are notable downsides to consider. Unsecured personal loans generally have higher interest rates compared to HELOCs and lower borrowing limits. The short repayment terms could put financial strain on your budget. Additionally, you may encounter prepayment penalties and expensive late fees. Financial expert Meyer describes personal loans as the “least advisable” option for homeowners, suggesting that they should be considered carefully and perhaps as a last resort.
6. Credit cards
Using a credit card can be the fastest and most straightforward way to finance your home improvement projects, eliminating the need for a lengthy loan application. However, you’ll need to be cautious about credit limits, especially if your renovation costs are high.
You might need a card with a higher limit or even multiple cards to cover the costs. The interest rates are generally higher compared to home improvement loans, but some cards offer an introductory 0% annual percentage rate (APR) for up to 18 months, which can be a good deal if you’re sure you can repay the balance within that time frame.
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Credit cards might make sense in emergency situations where you need immediate funding. For longer-term financing, though, they’re not recommended. If you do opt for credit card financing initially, you can still get a secured loan later on to clear the credit card debt, thus potentially saving on high-interest payments.
How do you choose the best home improvement loan for you?
The best home improvement loan will match your specific lifestyle needs and unique financial situation. So let’s narrow down your options with a few questions.
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Do you have home equity available?
If so, you can access the lowest rates by borrowing against the equity in your home with a cash-out refinance, a home equity loan, or a home equity line of credit.
Here are a few tips for choosing between a HELOC, home equity loan, or cash-out refi:
Can you get a lower interest rate? If so, a cash-out refinance could save money on your current mortgage and your home improvement loan simultaneously
Are you doing a big, single project like a home remodel? Consider a simple home equity loan to tap into your equity at a fixed rate
Do you have a series of remodeling projects coming up? When you plan to remodel your home room by room or project by project, a home equity line of credit (HELOC) is convenient and worth the higher loan rate compared to a simple home equity loan
Are you buying a fixer-upper?
If so, check out the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with your home purchase loan. Just review the guidelines with your loan officer to ensure you understand the disbursement of funds rules.
Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a more straightforward process.
“The only time I’d recommend the FHA203(k) program is when buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options as well.”
Do you need funds immediately?
When you need an emergency home repair and don’t have time for a loan application, you may have to consider a personal loan or even a credit card.
Which is better?
Can you get a credit card with an introductory 0% APR? If your credit history is strong enough to qualify you for this type of card, you can use it to finance emergency repairs. But keep in mind that if you’re applying for a new credit card, it can take up to 10 business days to arrive in the mail. Later, before the 0% APR promotion expires, you can get a home equity loan or a personal loan to avoid paying the card’s variable-rate APR
Would you prefer an installment loan with a fixed rate? If so, apply for a personal loan, especially if you have excellent credit
Just remember that these options have significantly higher rates than secured loans. So you’ll want to reign in the amount you’re borrowing as much as possible and stay on top of your payments.
How to get a home improvement loan
Getting a home improvement loan is similar to getting a mortgage. You’ll want to compare rates and monthly payments, prepare your financial documentation, and then apply for the loan.
Check home improvement loan options and rates. Start here
1. Check your financial situation
Check your credit score and debt-to-income ratio. Lenders use your credit report to establish your creditworthiness. Generally speaking, lower rates go to those with higher credit scores. You’ll also want to understand your debt-to-income ratio (DTI). It tells lenders how much money you can comfortably borrow.
2. Compare lenders and loan types
Gather loan offers from multiple lenders and compare costs and terms with other types of financing. Look for any benefits, such as rate discounts, a lender might provide for enrolling in autopay. Also, keep an eye out for disadvantages, including minimum loan amounts or expensive late payment fees.
3. Gather your loan documents
Be prepared to verify your income and financial information with documentation. This includes pay stubs, W-2s (or 1099s if you’re self-employed), and bank statements, to name a few.
4. Complete the loan application process
Depending on the lender you choose, you may have a fully online loan application, one that is conducted via phone and email, or even one that is conducted in person at a local branch. In some cases, your mortgage application could be a mix of these options. Your lender will review your application and likely order a home appraisal, depending on the type of loan. You’ll get approved and receive funding if your finances are in good shape.
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Home improvement loan lenders
When considering a home improvement loan, it’s necessary to explore various lending options to find the one that best suits your needs. The lending landscape for home improvement is diverse, featuring traditional banks, credit unions, and online lenders. Each type of lender offers different interest rates, loan terms, and eligibility criteria.
It’s advisable to prequalify with multiple lenders to get an estimate of your loan rates, which generally doesn’t affect your credit score. This way, you can compare offers and choose the most favorable terms for your renovation project.
Among the popular choices in the market, Sofi and LightStream stand out for their competitive rates, easy online application, and customer-friendly terms. Both are equal housing lenders, ensuring they adhere to federal anti-discrimination laws. In addition to these, other lenders like Wells Fargo and LendingClub also offer home improvement loans with varying terms and conditions.
How can I use the money from a home improvement loan?
When you do a cash-out refinance, a home equity line of credit, or a home equity loan, you can use the proceeds on anything — even putting the cash into your checking account. You could pay off credit card debt, buy a new car, pay off student loans, or even fund a two-week vacation. But should you?
It’s your money, and you get to decide. But spending home equity on improving your home is often the best idea because you can increase the value of your home. Spending $40,000 on a new kitchen remodel or $20,000 on finishing your basement could add significant value to your home. And that investment would be appreciated along with your home.
That said, if you’re paying tons of interest on credit card debt, using your home equity to pay that off would make sense, too.
Average costs of home renovations
Home renovations can vary widely in cost depending on the scope of the project, the quality of the materials used, and the region where you live. However, here’s a general idea of what you might expect to pay for various types of home renovations.
Renovation Type
Average Cost Range
Kitchen Remodel
$10,000 – $50,000
Bathroom Remodel
$5,000 – $25,000
Master Bedroom Remodel
$1,500 – $10,000
New Roof
$5,000 – $11,000
Exterior Paint
$6,000 – $20,000
Interior Paint
$1,500 – $10,000
New Deck
$15,000 – $40,000
Solar Panel Installation
$15,000 – $25,000
Window Replacement
$5,000 – $15,000
The information is based on data from HomeGuide.com and is current as of August 2023.
Please note that these are just average figures, and the actual costs can vary. For instance, a high-end kitchen remodel could cost significantly more, especially if you’re planning to use custom cabinetry and high-end appliances. Similarly, the cost of a new deck can vary depending on the size and type of materials used.
Home improvement loans FAQ
Check home improvement loan options and rates. Start here
What type of loan is best for home improvements?
The best loan for home improvements depends on your finances. If you have accumulated a lot of equity in your home, a HELOC, or home equity loan, might be suitable. Or, you might use a cash-out refinance for home improvements if you can also lower your interest rate or shorten the current loan term. Those without equity or refinance options might use a personal loan or credit cards to fund home improvements instead.
Should I get a personal loan for home improvements?
That depends. We’d recommend looking at your options for a refinance or home equity-based loan before using a personal loan for home improvements. That’s because interest rates on personal loans are often much higher. But if you don’t have a lot of equity to borrow from, using a personal loan for home improvements might be the right move.
What credit score is needed for a home improvement loan?
The credit score requirements for a home improvement loan depend on the loan type. With an FHA 203(k) rehab loan, you likely need a good credit score of 620 or higher. Cash-out refinancing typically requires at least 620. If you use a HELOC, or home equity loan, for home improvements, you’ll need a FICO score of 680–700 or higher. For a personal loan or credit card, aim for a score in the low-to-mid 700s. These have higher interest rates than home improvement loans, but a stronger credit profile will help lower your rate.
What is the best renovation loan
If you’re buying a fixer-upper or renovating an older home, the best renovation loan might be the FHA 203(k) mortgage. The 203(k) rehab loan lets you finance (or refinance) the home and renovation costs into a single loan, so you avoid paying double closing costs and interest rates. If your home is newer or of higher value, the best renovation loan is often a cash-out refinance. This lets you tap the equity in your current home and refinance into a lower mortgage rate at the same time.
Is a home improvement loan tax deductible?
Home improvement loans are generally not tax-deductible. However, if you finance your home improvement using a refinance or home equity loan, some of the costs might be tax-deductible.
Disclaimer: The Mortgage Reports do not provide tax advice. Be sure to consult a tax professional if you have any questions about your taxes.
Shop around for your best home improvement loan
As with anything in life, it pays to compare all your options. So don’t just settle on the first loan offer you find.
Compare lenders, mortgage types, rates, and terms carefully to find the best loan for home improvements.
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