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Mortgage life insurance, aka mortgage protection insurance, covers the balance owed on your home loan in the event of your death.

It’s meant to protect your loved ones from having to worry about monthly mortgage payments or being forced to move if they can’t continue making payments.

Whether you might need mortgage life insurance depends on your health history, whether you’re the sole earner for your family, and whether you already have a traditional life insurance policy.

How Does Mortgage Life Insurance Work?

Unlike standard life insurance, mortgage life insurance is designed to pay a death benefit (typically the mortgage balance) to the lender rather than to heirs. The lender pays off the mortgage loan. The length of the policy will be the mortgage term.

Mortgage life insurance is usually structured to match the declining balance on your mortgage and expires after your home is paid off. Depending on your age and mortgage size, the cost can be hundreds of dollars a month.

By contrast, term life insurance lasts for a set number of years and will pay a death benefit during that time to designated beneficiaries, who can use the lump sum however they want to. Term life tends to be the most affordable kind of life insurance. Note: SoFi does not offer mortgage life insurance. It does, however, offer term life insurance through a partnership with Ladder.

A term life insurance policy will charge fixed premiums for 10 to 30 years. Mortgage life insurance premiums may be fixed for only five years.

(By the way, mortgage life insurance is a totally different animal than private mortgage insurance. PMI is insurance you typically must purchase if you put less than 20% down on a conventional loan.)

Different Options for Mortgage Life Insurance

There are a few variations on how mortgage protection insurance can be structured. Here’s how the most common ones function.

Decreasing Mortgage Principal

A decreasing mortgage principal policy ties the payout benefit directly to the outstanding mortgage principal balance.

The policy payout will automatically account for the declining balance as you pay off your home loan over time, along with any extra payments you make.

This is the most common type of mortgage insurance policy.

Level

A level payout policy keeps the death benefit at the same amount over the term of the mortgage loan, no matter how much has been paid off. This means that any payments or prepayments of principal have no effect on the death benefit.

Because these mortgage insurance policies are structured more like traditional life insurance policies, they sometimes allow for the direct payout of excess benefits to beneficiaries.

Recommended: Home Loan Help Center

Mortgage Life Insurance Advantages

If you’re the sole breadwinner for your family, you might want to consider upsides of mortgage life insurance.

No Medical Exam

Unlike traditional life insurance, mortgage life insurance sellers don’t require a medical exam. This can help people qualify for mortgage life insurance when they might be rejected for traditional life insurance or find the quoted premiums too high.

You Can Add Riders

Home mortgage life insurance policies often allow you to tack on riders. A living benefits rider will allow you to directly access your policy’s benefits as a source of funds in the event you’re diagnosed with a terminal illness. This can be especially helpful when health insurance might fall short.

Another common add-on is a “return of premium” rider, which calls for returning a set amount of premiums paid if the policy ends without ever being used.

Some of these riders are also available for term life insurance policies.

Mortgage Life Insurance Drawbacks

If you’re in good health or prefer benefit payouts with no strings attached, you may want to give thought to some drawbacks of mortgage life insurance.

Expensive for Healthy Homeowners

Individuals who are in good health won’t be able to benefit from a cheaper rate on their mortgage life insurance policy. That’s because insurers do not factor medical exams into their premium calculation.

The lack of a medical exam means insurers must cover all their bases: People with a poor health history and those in good health will pay the same rates.

Decreasing Payout

While your monthly mortgage life insurance premiums will remain constant, the potential payout benefit will continue to decrease as you pay down your mortgage over time.

If there’s no mortgage left, there’s no payoff. Ouch.

The only way around this is to apply for a mortgage insurance policy with a level payout benefit, which ensures that the payout remains the same regardless of how much time is left on your mortgage. This may be more expensive than a typical decreasing mortgage balance policy.

No Flexibility

Mortgage life insurance policies pay out to the mortgage lender. Your loved ones won’t see any cash during this transaction, which isn’t ideal if you’d like them to have the money for other purposes like day-to-day living costs, college costs, or investing.

If flexibility of use for any benefit payout is important, you may be better served by traditional life insurance.

Difficult to Get Quotes

It’s hard to gather quotes for mortgage life insurance online, unlike other kinds of insurance. That’s a concern because prices can vary widely.

Recommended: How to Shop for a Mortgage

Is Mortgage Life Insurance a Good Idea?

Unless you’re having difficulty qualifying for a reasonable rate on a traditional life insurance policy because of poor health, term life insurance is likely to have lower premiums than mortgage life insurance and will provide a direct payout to beneficiaries.

For some homeowners, the benefit payout to the lender, not heirs, will be a dealbreaker. Others may be willing to accept this restriction because they either have health conditions that make it difficult to qualify for traditional life insurance or because they want to ensure that the payout is dedicated toward housing payments or, in a sense, mortgage relief.

You also may want to learn about putting your house in a trust, to protect your home if you become incapacitated and to avoid the probate process.

Note: SoFi does not offer mortgage life insurance. It does, however, offer term life insurance through a partnership with Ladder.

The Takeaway

Mortgage life insurance ensures that your mortgage will be paid off if you die. If mortgage protection insurance isn’t your cup of tea, it could be worth looking into term life insurance to protect your loved ones. And if you’re just starting out as a homeowner, due your research to find a home loan at the best possible rate and terms.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Does mortgage life insurance pay off the mortgage?

Yes. Mortgage life insurance offers enough coverage to pay off your mortgage if you were to die.

Is mortgage life insurance the same thing as mortgage protection insurance?

Yes. Most policies only pay out when the policyholder dies, but a few also cover a post-accident disability or a temporary job loss.

When is mortgage life insurance a good idea?

Mortgage life insurance could be a good idea for homeowners whose health conditions keep them from qualifying for term life insurance.

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Photo credit: iStock/Inside Creative House

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

SOHL-Q125-029

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When looking for a property to buy, you might consider a single-family detached home, a townhouse, a condo, a co-op apartment, or something else.

Let’s look at the pros and cons of buying a townhouse vs. a condo.

What Is a Townhouse?

At first glance, a townhouse might look like a typical house, but a closer look will show that it’s attached to at least one similar unit.

Townhouses are often found in urban areas where space is at a premium. They often come with a front or back yard. Owners own the inside and outside of their unit and the land it sits on.

The townhome community may have a homeowners association (HOA) and maintenance fees. You’ll want to make sure you understand the costs of the HOA and its rules before signing a contract and getting a home mortgage loan.

Benefits of Buying a Townhouse

There are at least three upsides to purchasing a townhouse.

Owner Rights

Because people who buy a townhouse own the land it’s on, they have more freedom in how to use the yard. A yard or patio can open possibilities for a grilling spot or dog or child play area.

They also have at least some freedom of choice about the appearance of the inside and outside of the structure, although HOAs may have rules about all of the above.

Price

In communities with high home prices, townhouses may be an affordable alternative for first-time homebuyers.

House hunters from millennial homebuyers to empty-nesters may also find a townhouse a sweet spot between a condo and a traditional detached home with yard.

Plus, because lots tend to be smaller than ones with detached homes on them, property taxes are usually lower as well.

Low Maintenance

Smaller yards mean less yardwork, ideal for busy people and those who are downsizing their home and responsibilities.

The townhouse complex may be gated and have security, and some have pools, gyms, and other shared recreational spaces whose maintenance is covered by homeowner fees.

Disadvantages of Buying a Townhouse

When you think of townhouse living, keep in mind the close quarters with neighbors and possible HOA fees and rules.

HOA

Townhouse communities are less likely to have an HOA than condominiums are, but if they do, the resident-led board will collect ongoing fees to cover common areas and any community perks such as a pool. The HOA will also enforce community rules.

Lack of Privacy

Because of the shared walls, a townhouse provides less privacy than a detached home (although it may offer more privacy than many condo buildings, where you may have a unit above and below yours). Townhouse living may therefore create some challenges for families with young children.

What Is an Apartment?

An apartment is a room or set of rooms within a building. In major cities, some people refer to buying a condo or co-op shares as buying an apartment.

Condo owners own everything within their unit and have an interest in the common elements. “Buying a co-op apartment” really means holding shares in the housing cooperative that owns the property.

Then there are people and companies that buy a multifamily property like an apartment building and rent out the units. An owner could decide to live in one of the units and serve as an on-site landlord.

Benefits of Living in an Apartment

Let’s look at some benefits of buying a condo or a co-op.

Low Maintenance

You won’t typically need to make many repairs, mow the grass, or paint. That’s covered by the monthly or quarterly fees you’ll pay.

Low Utilities

First, condos tend to be smaller than single-family homes, which can reduce the cost of heating and cooling the space, and take less electricity to keep it well lit.

HOA

If the building has an HOA (which may be called a condo or co-op association), the association will take care of property maintenance and enforcement of rules.

Disadvantages of Living in an Apartment

Apartment life can come with disadvantages, too. Here are a few.

Parking

You may or may not have a parking space set aside for you, and street parking isn’t always a given in busy locales. Even if you have a parking spot, if people come to visit, they may not easily find anywhere to park.

Noisy or Nosy Neighbors

If you appreciate quiet calmness, you may not find all you’d like in condo living. Neighbors are nearby and they can be noisy. If you’re in a crowded city, surrounding events can contribute to the jostling and noise.

Limited Space

If you’re used to living in a house, you could find a more compact apartment to be challenging as you try to fit in your belongings. Plus, apartments often lack yard space or a patio, which further limits the amount of space you have to use and enjoy.

Differences Between a Townhouse and an Apartment

When comparing apartment or condo vs. townhouse, keep in mind these differences.

Townhouse	Apartment/Condo
Single-family unit that shares one or more walls with another home	Room or rooms within a building
May have a small yard or patio	May be less likely to have outdoor space
Gives owner some control over how to change the exterior and use yard	Any exterior space is often shared and cared for by HOA
Can be more affordable than traditional detached homes in markets with high prices	Can also be more affordable than traditional detached homes
If there’s an HOA, fees are usually lower because owners are responsible for much of their own upkeep	If an HOA is in place, it will collect fees to cover most maintenance and condo fees can be higher than those for townhouses.
May not provide as much privacy as a freestanding house	May not provide as much privacy as a freestanding house
Thanks to the land ownership, financing is similar to a traditional mortgage	It can be harder to finance a condo than a townhouse

The Takeaway

Buying a townhouse or an apartment can give you many of the pleasures of homeownership with less of the associated upkeep. But there are unique qualities to each and potential downsides, too. Make sure you understand the role a homeowner’s association might play in any property you purchase before you make an offer and nail down your financing.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Do townhomes appreciate as much as houses?

In general, townhomes do not appreciate as quickly as single-family detached homes, thanks to the amount of land that comes with traditional stand-alone homes.

Are townhouses a bad investment?

In some circumstances, a townhouse may be a good investment. The price, current market conditions, and location are factors.

Are fees higher for a townhouse or condo?

Condo HOA dues are typically a lot higher than townhouse fees (if the townhouse community even has an HOA). Condo communities usually have many more amenities to maintain.

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Photo credit: iStock/Auseklis

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q125-023

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Did you know you can use a home loan for renovations? Renovation home loans cover the cost of purchasing and renovating a home. If you’re familiar with construction loans, renovation loans are similar. Also called “one-close” loans or renovation mortgages, renovation loans can offer buyers simplified financing for transforming a fixer-upper into an attractive, modernized home.

We’ll explain how to add renovation costs to your home loan. We’ll also cover other ways you can fund your home project, including ways to use your existing home equity to help you pay for renovations.

What Is a Renovation Home Loan?

A renovation home loan combines the cost of a home purchase and money for renovations in one mortgage. There’s only one closing and one loan when buying a new home or refinancing an existing home. The lender has oversight of the renovation funds, including the budget, vetting of the contractor, and disbursement of funds for renovation work as it is completed.

The borrower, their property, and their lender must all meet criteria set out by the remodel home loan program to qualify, which can present a challenge. Qualifying lenders in particular can be hard to find. That’s because most lenders must maintain a custodial account for the renovations over the course of an entire year, which requires extra work and resources. However, if you can find a lender that can handle the process, renovation loans can be a convenient way to improve a promising fixer-upper.

Types of Home Loans That Can Include Renovations

Most mortgages will not include renovations in the loan amount. Renovation mortgages are niche products serviced by a fraction of lenders. Buyers and properties must also meet certain requirements, which we’ll outline below.

There are several different types of home loans you can apply for that are eligible for adding renovation costs to the mortgage.

1. FHA 203K

An FHA 203(k) is a mortgage serviced by the Federal Housing Authority in which the cost of repairs is combined with the mortgage amount. It’s different from a traditional FHA loan that does not include improvement expenses, but qualifications (credit score, down payment, etc.) are very similar.

Interest rates and terms are also similar to what you see in a standard FHA loan. However, you can expect additional lender fees to cover the extra oversight needed on a renovation loan.

The amount you can borrow is equal to either the value of the property plus the cost of renovations or 110% of the projected value of the property after rehabilitation. Borrowers must use an FHA-approved lender for this type of mortgage.

Eligible properties must be one to four units. Repairs can include those that enhance the property’s appearance and function, the elimination of health and safety hazards, landscape work, roofing, accessibility improvements, energy conservation, and more. A limited 203(k) is also available for repairs costing $35,000 or less.

2. Fannie Mae HomeStyle

The Homestyle Renovation loan from Fannie Mae takes into account the value of the property after renovations are complete. The amount of allowable renovation money can equal 75% of the value of the property after renovations are complete.

In the world of home loans, the loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed. Many lenders limit your LTV to 80% to 85%.

A HomeStyle loan allows an LTV of up to 97%. This means it’s possible to put as little as 3% down. Some investment properties are also eligible for this type of loan. Renovations are eligible as long as they are permanently affixed to the property. Work must be completed within 15 months from the closing date of the loan.

3. Freddie Mac CHOICERenovation

The Freddie Mac CHOICERenovation program is virtually identical to the Fannie Mae HomeStyle program. This renovation loan is for buyers who want a loan with more flexibility than an FHA renovation loan.

Like HomeStyle, renovations that are permanently affixed to the property are eligible in one- to four-unit residences, one-unit investment properties, second homes, and manufactured homes. The maximum allowable renovation amount is 75% of the “as-completed” appraised value of the home — meaning the appraised value of the home before renovations but accounting for all planned changes. The maximum loan-to-value (LTV) ratio is 95% (97% for HomePossible or HomeOne loans).

The Freddie Mac CHOICEReno eXPress Mortgage is an extension of the CHOICERenovation mortgage. The CHOICEReno eXPress mortgage is a streamlined mortgage for smaller-scale home renovations. Renovation amounts are limited to 10% or 15% of the “as-completed” appraised value of the home. Borrowers need to work with an approved lender to apply for one of these programs.

4. USDA Purchase with Rehabilitation and Repair Loan

A USDA Purchase with Rehabilitation and Repair Loan assists moderate- to very-low-income households in rural areas with repairs and improvements to their homes. Buyers can secure 100% financing with this loan.

For very low-income borrowers, there’s a separate loan you can qualify for with a subsidized, fixed interest rate set at 1% with a 20-year term. This makes borrowing incredibly affordable.

To apply, you must have a household income that qualifies as low to moderate in your county per USDA standards. The property must be your primary residence (no investments), and rehab funds cannot be used for luxury items, such as outdoor kitchens and fireplaces, swimming pools and hot tubs, and income-producing features. Manufactured homes, condos, and homes built within the last year are not eligible.

5. VA Alteration and Repair Loan

The VA allows qualified service members to bundle repairs and alterations with the purchase of a home. As with all VA loans, 100% financing is available on these low-interest loans.

Alterations must be those “ordinarily found” in comparable homes. Renovations are also required to bring the property up to the VA’s minimum property standards.

The loan amount can include the “as completed” value of the home as determined by a VA appraiser. Leftover money from the home loan after renovations are complete is applied to the principal.

Note: SoFi does not offer the five types of home renovation loans on this list, although it does offer other types of FHA loans and VA add loans.

Home Style Quiz

Other Options for Financing Home Renovations

While a renovation home loan is a great way to finance a renovation, it’s not your only option for borrowing money for home improvements. Nor is it the most flexible. Alternative loans — such as cash-out refis, home renovation personal loans, and home equity loans -– may provide more flexibility.

Cash-out Refinance

A cash-out refinance is useful for those who already own their home. You replace your old mortgage with a new mortgage, and the equity (here, the “cash”) is refunded to you. You will have closing costs with a refinance, but you won’t have separate financing costs for the money you’re using for renovations.

Personal Loan

Personal loans are often used for a home remodel or renovation. Because the funds are not secured by your property, you’ll likely have to pay a higher interest rate. The bright side of funding this way means you won’t lose your home if you have a financial setback and need to stop paying back the loan.

This type of loan comes with a shorter repayment period, higher monthly payment, and lower loan amount. You can find these loans through banks, credit unions, and online lenders.

Home Equity Loan

A home equity loan is a secured loan that uses your home as collateral. That means the lender can foreclose on the home if you stop paying the loan, and so interest rates are typically lower. A home equity loan also comes with a longer repayment period than a personal loan.

Home Equity Line of Credit (HELOC)

A HELOC is a line of credit that lets homeowners borrow money as needed, up to a predetermined limit. As the balance is paid back, homeowners can then borrow up to the limit again through the draw period, typically 10 years. The interest rate is usually variable, and the borrower pays interest only on the amount of credit they actually use.

After the draw period ends, borrowers can continue to repay the balance, typically over 20 years, or refinance to a new loan.

Recommended: A Personal Line of Credit vs. a HELOC

Private Loan

A private loan is a loan made without a financial institution. Loans made from a family member, friend, or peer-to-peer source are considered private loans. Qualification requirements will depend on the individual or group lending the money. There are some serious drawbacks to obtaining funding from a private source, but these loans can help some borrowers in buying a home.

Government or Nonprofit Program

It is possible to finance the cost of remodeling with the help of government programs. Federal programs like the U.S. Department of Housing and Urban Development (HUD) have financing options for renovations, as do some state and local government agencies.

Recommended: What Is HUD?

The Takeaway

Homeowners have a lot of options for financing renovations, especially in an era when home equity is higher than ever before. Renovation home loans allow borrowers to purchase and renovate a property with one loan, but that’s not the only way you can remodel a fixer-upper. Some alternatives to renovation home loans include home equity loans, HELOCs, and personal loans.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

How do renovation mortgages work?

Home renovation loans are known for combining the cost of financing a renovation or remodel with the cost of purchasing the home into a single-closing transaction. Lenders calculate the amount to be borrowed based on the value of the home after renovations are complete.

Can you include renovation costs in a mortgage?

A home loan can include renovations, but you must work with your lender to be approved for specific renovation loan programs.

Can you add renovation costs to your mortgage?

You cannot add renovation costs to an existing mortgage, but you can refinance your mortgage with a cash-out refinance that provides you with funds you can use however you wish. You can also take out a home equity loan or open a home equity line of credit (HELOC) which would provide you with renovation money and would, technically, be a second mortgage.

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Photo credit: iStock/Hispanolistic

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q125-007

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An amortizing loan requires monthly payments that go toward the principal and interest for a set period of time. In the early years, payments go mostly toward the loan interest.

Amortizing loans are common in personal finance. If you have a home loan, auto loan, personal loan, or student loan, you likely have an amortizing loan.

Understanding how your amortizing loan works could be helpful if you’re thinking of refinancing, selling a car or house early, or getting rid of mortgage insurance. In this article, we’ll cover what is an amortizing loan, how does a fully amortizing loan work, and types of amortizing loans. We’ll also explain amortization schedules and calculators.

What Is an Amortizing Loan?

An amortizing loan is one in which the borrower makes monthly payments, usually equal, toward the loan principal (amount borrowed) and interest (the financing charge).

An amortization schedule shows borrowers how their payments are spread out over the full term of the loan. This mortgage calculator shows amortization over time for any given home mortgage loan value. (Move your cursor over it to see the breakdown of principal, interest, and remaining loan balance over time.)

Typically, early payments are largely directed at the interest, and later payments go toward the principal. Borrowers who make additional payments on the principal, especially early in the loan, can shave time off their repayment schedule and save on total interest paid.

Recommended: How to Pay Off a 30-Year Mortgage in 15 Years

How Does a Fully Amortizing Loan Work?

Borrowers who make payments on a fully amortizing loan consistently and on time can expect their loan to be paid off in the number of months or years originally discussed when taking out the loan.

Mortgage servicers use a complicated calculation to determine how much interest and principal you will pay at each stage of the loan in order to fully pay it off as scheduled.

While it’s not important for borrowers to understand the intricacies of the math, it is important to know that early payments largely cover the calculated interest and that payments closer to the end of the loan term will go more toward the principal.

Most lenders will provide an amortization schedule so you can track how the ratio of interest to principal changes over time.

Types of Amortizing Loans

Installment loans are typically considered amortizing loans. If you make a monthly installment payment to pay down a fixed amount of debt by a certain time period, you likely have an amortizing loan.

Mortgages

Most home loans — fixed-rate or adjustable-rate mortgages — are fully amortizing loans.

If you have a fixed-rate mortgage, you will make fixed monthly payments, whose principal and interest composition will change over the life of the loan. (Note that payments can fluctuate slightly based on homeowners insurance, changing property taxes, and the presence of mortgage insurance.)

With an adjustable-rate mortgage (ARM), you don’t have a complete amortization schedule to review upfront. Principal and interest amounts change at the end of the loan’s fixed-rate introductory period and every time the rate adjusts — once a year in the case of a 5/1 ARM. But the monthly payments are calculated to pay off the loan at the end of the term, which is usually 30 years.

Non-amortizing mortgages include interest-only loans and balloon mortgages: The principal does not get paid until the loan is due. Most lenders don’t offer non-amortizing mortgages.

Recommended: Guide to the Mortgage Loan Process

Auto Loans

A car loan is another type of amortizing loan. Terms are shorter than those of mortgages (which are commonly 30-year loans). With a mortgage, the loan is backed by the house; with an auto loan, the car that you are financing acts as the collateral.

Personal Loans

Borrowers take out personal loans for a variety of reasons: debt consolidation, emergency payments, or home improvements.

And for some, a dream wedding or vacation.

Because these are installment loans, they are considered amortizing loans.

Student Loans

Because student loans are not revolving — you borrowed a lump sum that you’re now making regular payments on — student loans are installment loans, and amortizing loans.

How does student loan amortization work? As with mortgages and auto loans, student borrowers pay more in interest at the start of the loan repayment term; in fact, some borrowers are only paying interest when they start repayment. Over the life of the loan, the balance will shift, and borrowers’ payments will largely be directed to the outstanding principal balance.

What Is an Amortization Schedule?

Lenders may provide borrowers with an amortization schedule, often in the closing paperwork for a house or car but also usually online in the loan account platform. The schedule, displayed as a table, demonstrates how your monthly payments are split between interest and principal over the life of your loan.

An amortization schedule typically shows you:

•   Month: Each month over the life of a loan appears as a table row. A 30-year mortgage will have 360 rows. These tables can get long!

•   Payment details: You’ll typically see how much your monthly payment is, but more specifically, the interest payment and the principal payment. This helps you to track how each changes over time.

•   Balance: This column shows what your remaining balance will look like after each monthly payment.

Your amortization schedule will include information about the amount borrowed, the terms of the loan, and the interest rate.

Your lender may also provide a helpful column that demonstrates how additional payments on your principal balance can affect your remaining payments.

Recommended: Historical 30-Year Fixed-Rate Mortgage Trends

How to Use an Amortization Calculator

Because amortization calculations can be difficult to understand, you may find it helpful to use an online amortization calculator, especially for a home or auto loan. Such calculators can help you visualize:

•   How much money you’ll spend in interest over the life of a loan

•   When you’ll hit important milestones, like 20% paid off for a home loan (that’s when you can typically ask to drop private mortgage insurance)

•   How different interest rates and loan terms can affect your payments (important if considering a refinance or a cash-out refinance)

•   How additional principal-only payments can affect your loan

What You Need to Know About Your Amortizing Loan

Since amortizing loans usually require fixed monthly payments over the life of the loan, you may feel like it’s something you don’t need to think about. You can simply put the loan on autopay for years and never give it a second thought. But there are several reasons you might want to think twice about your amortizing loan:

Refinancing

If you’re looking for a faster payoff or better interest rate, you may want to refinance your mortgage, auto loan, or student loans. Comparing your current amortization schedule with a proposed schedule with your new rate and terms can help you see if refinancing will actually save you money in the long run.

Short-Term Purchases

If you’re planning to buy a home but know you won’t live in it for long, it’s a good idea to review an amortization schedule (even if it’s an online estimate!) before making an offer.

Since you pay significantly more toward interest than principal at the beginning of most long-term loans, you won’t immediately build significant equity — and if you sell just a couple of years later, you may owe more than you make from the sale.

Recommended: How Rising Inflation Affects Mortgage Interest Rates

Mortgage Insurance

Borrowers usually must purchase private mortgage insurance (PMI) if they do not put 20% down on a conventional loan. Once you have reached 20% equity, you can ask to have the mortgage insurance removed, reducing your monthly payment. (PMI is typically terminated automatically when a borrower has gained 22% equity — when they reach a 78% loan-to-value ratio — and payments are current, or when the loan term has hit its midpoint.)

By using an amortization schedule, you can track when you’ll hit 20%. You may even want to make additional principal payments to reach that date earlier, thus saving you money over the life of the loan.

The Takeaway

With an amortizing loan, borrowers make regular payments consisting of principal and interest over a set number of years. In the early years, borrowers pay more toward the interest, but the balance shifts toward the principal over time. Home loans are amortizing, so it’s important to understand the payments and secure the best possible rate before signing on to your mortgage.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is amortization in a loan?

Amortization refers to a loan with regular monthly payments over the duration of that loan. Typically, the vast majority of initial payments goes toward the interest of the loan, with a small amount (if any) going toward the principal balance. Over time, payments are more significantly directed toward the principal balance.

What are amortized loan examples?

Amortized loans are common in everyday life. Examples of fully amortizing loans are mortgages, auto loans, personal loans, and student loans.

Can you pay off an amortized loan early?

You can pay off an amortized loan early. For a mortgage, it may be possible to schedule automatic principal-only payments in your lender’s platform; you may also be able to make manual one-time principal-only payments or request a full payoff quote. With shorter-term loans, like personal loans and auto loans, it is possible to pay off the loan early to save money on interest — but it might be better for your credit score to keep the loans open.

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Photo credit: iStock/nd3000

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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Mortgage bankers originate, sell, and service residential mortgages for consumers on behalf of the lender they work for. They also may provide escrow services. A mortgage banker plays a central role as people navigate the complexities of applying for a mortgage.

Mortgage bankers are often the first and last point of contact. Getting an interest rate and terms that work for your financial situation, as well as saves you money, is incredibly valuable.

What Is a Mortgage Banker?

An individual or an institution that originates, sells, or services a home mortgage loan can be considered a mortgage banker.

Individual mortgage bankers work for a single lending institution and help applicants sort through the different mortgage types. Mortgage bankers are also called mortgage lenders or mortgage loan officers when referred to in this way.

Customers who want help understanding mortgages or who have questions about mortgages can be assisted by mortgage bankers.

Mortgage bankers can get homebuyers on the right road with mortgage preapproval. They serve as the primary point of contact for buyers’ lending needs.

A mortgage banker can also be an institution, such as a bank, credit union, or other direct mortgage lender. When talking about a mortgage banker that services a loan, for example, it’s in reference to the institution.

A mortgage loan originator employed by a credit union, bank, or a subsidiary of a bank does not have to obtain a loan originator license. Nonbank mortgage loan originators must be licensed in the states where they do business and must be registered with the Nationwide Multistate Licensing System & Registry.

The licensing requirements were put in place after the mortgage meltdown of 2008 to protect consumers from predatory lending and to prevent fraud.

Recommended: Home Loan Help Center

Services Offered by a Mortgage Banker

At their core, mortgage bankers have the ability to create or sell a new mortgage loan. They also have the ability to service it once the loan closes. Here are the details of the mortgage banker’s role:

Originate Loans

Mortgage bankers originate loans, meaning they take an application and create a new mortgage for a residential home. Conforming loans are usually sold to Fannie Mae or Freddie Mac.

Sell Loans

Mortgage bankers sell loans so they can engage in more lending. If it’s a conventional loan, conforming loan, the sale typically goes to the government-backed enterprises, Fannie Mae or Freddie Mac. This increases lenders’ liquidity so they can originate more loans to more customers instead of carrying the amount of the loan on their books.

Service Loans

Once the mortgage has closed, the lender needs to be paid every month. This is what mortgage servicers do: They take on the day-to-day task of making sure your payment gets to all parties that need to be paid. Servicing loans is usually in reference to the mortgage banker as an institution, not the individual mortgage loan officer.

How Do Mortgage Bankers Make Money?

Individual mortgage bankers may make money from a salary, commission, or a combination.

Institutional mortgage bankers make money from origination fees, mortgage points, mortgage servicing, mortgage-backed securities, and the yield spread premium. The yield spread premium is how much money they make based on what they charge a customer relative to how much it costs to obtain that financing.

Differences Between a Mortgage Banker and a Loan Officer

Mortgage banker and loan officer, or loan originator: These terms are often used interchangeably.

However, while a mortgage banker can refer to both individuals and institutions, a loan officer is always an individual.

Differences Between a Mortgage Banker and a Mortgage Broker

In your research to get the best mortgage, you may have also come across mortgage brokers. Though applying for a mortgage will have the same requirements whether you go through a mortgage broker or a mortgage banker, a mortgage banker is different from a mortgage broker in who they work for and how they obtain your mortgage.

A mortgage banker works for a single lending institution that makes loans directly to consumers. The lending decision and underwriting are typically made at the bank level, which can streamline the process.

A mortgage broker works with many different lenders. This is helpful if you want to shop around and don’t have time to do the legwork or need to find a specialty loan not offered by all lenders.

Recommended: Mortgage Calculator

When Is It Better to Have a Mortgage Banker Than a Broker?

Your best bet for finding a home loan with terms most favorable to your financial situation is to shop around for a mortgage. A mortgage banker is closer to the lending process than a mortgage broker, but a broker has access to a greater number of lenders.

Be sure you’re comparing apples to apples on the mortgages offered to you by studying the loan estimate you’re given by each lender after applying. You should take into account both the interest rate and fees being charged for the loan.

The Takeaway

A mortgage banker can play a major role in getting you to the closing table with the right loan. By any name — mortgage banker, loan officer, loan originator — the person who guides you through the loan process is a key part of the home-buying journey.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What does a mortgage banker do?

A mortgage banker can originate, sell, and service loans for customers.

Is a mortgage banker similar to a mortgage broker?

Not really. A mortgage banker works for a single lender and makes loans directly to you. Mortgage brokers do not lend money but instead find a lender to work with their buyer.

How do you choose a mortgage banker?

Compare rates and terms from different lenders by getting prequalified for a mortgage. As you communicate with the mortgage banker at various lenders, consider the speed and clarity of communications and how knowledgeable the person seems to be and how much attention they pay to your needs.

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Photo credit: iStock/Lacheev

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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