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The term “first-time homebuyer” may sound really specific, but it isn’t nearly as limiting as you might think. Even if you’ve owned a home before, you still may be eligible for many first-time homebuyer assistance programs.

That’s good news if you’re hoping to take advantage of benefits like down payment and closing cost help, which could make a real difference in the type of home you can afford — or whether you can afford a home at all.

Read on to find out how you can be a first-time homebuyer twice and how to make the most of any benefits that might be available to you.

First-Time Homebuyer Qualifying Factors

If you’ve never owned a home before, you’re obviously a first-time homebuyer. But other criteria also can factor into whether you qualify for first-time homebuyer status and can benefit from assistance programs.

When are you considered a first-time homebuyer again? The U.S. Department of Housing and Urban Development (HUD) says a former homeowner may still qualify if you meet one of these criteria:

You Haven’t Owned a Principal Residence for Three Years

Even if only one spouse qualifies under this scenario, both spouses would be considered first-time homebuyers.

It’s Your First Home as a Single Parent

If you’re a single parent who has only previously purchased a home with a former spouse while still married, you qualify as a first-timer.

You’re a Displaced Homemaker

If you are a displaced homemaker who doesn’t or didn’t earn wages from outside employment and has only ever owned a home with a spouse, you would be considered a first-time homebuyer.

Your Last Home Was Detached

If you’ve owned a primary residence that wasn’t permanently attached to a foundation according to applicable building regulations (such as a mobile home when the wheels are in place), you qualify.

Your Home Was Out of Compliance

If you have only owned a home that didn’t comply with state, local, or model building codes, and could not be brought into compliance for less than the cost of constructing a permanent structure, you can claim first-timer status.

State, local, and private first-time homebuyer programs may have their own qualifying criteria, so it can be a good idea to check out all the rules before starting the application process.

Recommended: First-Time Homebuyer Guide

Is It Smart to Be a First-Time Homebuyer Twice?

Finding a home — and figuring out how to afford a down payment on your first home — can be especially challenging in today’s market, while prices are still high and mortgage rates are rising. But if you’re eligible for one of the many assistance programs created to help first-time buyers, you may be able to improve your chances of (literally) getting your foot in the door.

Many states, cities, and community organizations provide assistance in the form of grants or forgivable second loans that can help with the down payment on your home and/or closing costs. Some of these down payment assistance programs only offer support to those who fall under an income cap. But, according to a report from the Urban Institute, up to 51% of potential homebuyers residing in the U.S. metropolitan areas studied would qualify for some form of home down payment assistance. Some private lenders also offer lower low-interest mortgage loans on conventional loans and other benefits to qualifying first-time homebuyers. And, of course, there are several longstanding federal programs that may offer more lenient income and credit score requirements, smaller down payments, and lower mortgage rates. So it can be a good idea to investigate all the opportunities available to you — and to your spouse if you’re married.

Note: At SoFi, a member cannot be claimed as a first-time home buyer twice.

Benefits of Using an FHA Loan

Whether this is the first time you’ve considered purchasing a home, or you’re a returning first-time homebuyer, you may want to look into the benefits provided through the Federal Housing Authority (FHA) loan program.

The FHA isn’t a lender, so it doesn’t make loans directly to borrowers. Instead, it insures loans made by HUD-approved private lenders. If a property owner defaults on the mortgage, the FHA will pay the lender’s claim for the unpaid principal balance.

Because lenders are taking on less risk with an FHA-insured loan, they can offer more flexible eligibility requirements, lower down payment amounts, and lower closing costs than a buyer might get with a conventional loan. For example, if you have a FICO® credit score of 580 or higher, you may qualify for an FHA loan with just 3.5% down. And even with a score between 500 and 579, you still could be able to get a loan with 10% down.

FHA loans also may offer lower interest rates than comparable conventional mortgages, which could be an important consideration if mortgage rates keep rising in 2023.

Are There Drawbacks to an FHA Loan for First-Time Homebuyers?

FHA loans can be appealing to first-time buyers who are struggling to come up with a down payment, or who have a low debt-to-income ratio or other problems qualifying for a mortgage. But, a potential downside is that the mortgage insurance premiums borrowers typically must pay to get and keep an FHA loan may end up being more expensive than the private mortgage insurance required for a conventional home loan. Here’s what those costs can look like when you compare MIP versus PMI:

•   Homebuyers with a conventional mortgage can expect to pay an annual premium for private mortgage insurance (PMI) until they have at least 20% equity in their home. (If you make a down payment of 20% or more, PMI isn’t required.) PMI costs can vary based on the type of mortgage you get, your loan-to-value ratio (LTV), your credit score, and other factors, but generally, the annual premium is 0.5% to 1% of the total loan amount.

•   FHA borrowers, on the other hand, are required to pay two separate mortgage insurance premiums (MIP). One premium is paid upfront at closing and is 1.75% of the loan amount. The other premium is based on the amount, length, and loan-to-value (LTV) ratio of the mortgage and is usually paid annually for as long as you have the FHA loan. If you put down at least 10%, you may have the FHA MIP removed after 11 years of payments — but unlike PMI on a conventional loan, there is no equity cutoff for MIP.

As you research different lenders and types of loans, you may want to keep these costs in mind. Remember: Mortgage insurance, whether MIP or PMI, protects your lender, not you, if you default on your payments. You still could ruin your credit or lose your home to foreclosure if you fall behind, so it’s important to keep your payments as manageable as possible.

Other First-Time Buyer Options

FHA loans are a popular borrowing option, but there are many other first-time homebuyer programs that could help you manage your costs, including programs offered by your state or city, or through local charitable organizations. Your real estate agent or lender may be able to help you find a program that’s appropriate for your situation. You also can find information through your state housing finance agency or HUD.

Other federal programs that you may want to consider include:

Freddie Mac Home Possible Mortgages

The Federal Home Loan Mortgage Corporation, known as Freddie Mac, offers the Home Possible mortgage program to help low-income borrowers who hope to purchase their own home. Because the program is backed by Freddie Mac, approved lenders can accept a smaller down payment from qualifying buyers, and some qualifications and terms may be more flexible than with a conventional mortgage.

Fannie Mae HomeReady Mortgages

The Fannie Mae Home Ready Mortgage is another path to homeownership for low-income borrowers. Creditworthy buyers may find lenders are more flexible with their terms and qualifications because these loans are backed by Fannie Mae.

Department of Veterans Affairs (VA) Loans

With a VA-backed home loan, the Department of Veterans Affairs guarantees a portion of the loan you obtain from a private lender. And because there’s less risk for the lender, you may receive better terms. Service members, veterans, and eligible surviving spouses may be eligible for this assistance.

US Department of Agriculture (USDA) Loans

The USDA offers both direct and backed loans to assist very low, low- and moderate-income buyers who want to buy a home in an eligible rural area. Usually, no down payment is required. And more areas of the country are eligible for USDA-loan status than you might imagine.

HUD Good Neighbor Next Door Program

Eligible law enforcement officers, teachers, firefighters, and emergency medical technicians may find housing help through HUD’s Good Neighbor Next Door program. Through this program, certain single-family HUD properties in designated revitalization areas are available for sale to public service workers at 50% off the list price.

Recommended: How Much House Can I Afford?

The Takeaway

If you can qualify for one of the many assistance programs available to first-time homebuyers (even if you’ve owned before), you may be able to significantly reduce the daunting down payment and closing costs that can come with purchasing a home. Or you may qualify for a loan with a lower interest rate.

While you’re considering your options, though, keep in mind that you won’t necessarily have to come up with a 20% down payment if you decide to go with a conventional loan.

FAQ

Can I be a first-time homebuyer again?

Yes, under certain circumstances, you may qualify as a first-time homebuyer even if you’ve owned a home before. You may be eligible for many first-time buyer programs, for example, if you haven’t owned a home in three years.

Can I get an FHA loan twice?

Yes, you can apply for an FHA loan even if you’ve had one before. But you usually can’t have more than one FHA loan at a time.

As a first-time homebuyer, am I required to make a 20% down payment?

No. A first-time homebuyer may be able to qualify for a mortgage with as little as 3% down.

Photo credit: iStock/FG Trade Latin

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.

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You’ve saved for a down payment, and you’re ready to cover closing costs. But do you have enough cash and assets to cover your mortgage reserves?

Lenders sometimes require mortgage reserves from home buyers in order for the loan to be approved at application and then funded on the day of closing. But what are mortgage reserves, and how much might you need to have set aside? Below, we’ll review what assets qualify as mortgage reserves and when you might need them.

What Are Mortgage Reserves?

Mortgage reserves are the cash and other assets that home buyers can access in the event they need help covering their mortgage payments for a set number of months. Such reserves are a kind of fail-safe in the event a buyer is laid off or otherwise loses a revenue stream.

In some cases, lenders require you to prove you have such reserves before funding your home mortgage loan. Requirements can range from as little as one month of reserves (i.e., all your mandatory housing costs for a month) to six months or more.

Luckily for home buyers, lenders consider more than just the money in your checking and savings accounts as mortgage reserves. Cash and assets that can be classified as mortgage reserves include:

•   Money in a deposit account (not only checking and savings, but also money market accounts and certificates of deposit)

•   Stocks and bonds

•   Trust accounts

•   Cash value in a life insurance policy

•   Vested retirement funds, such as money in 401(k)s and IRAs

Keep in mind that money in your savings account that you’ll use for the down payment and closing costs does not count toward your mortgage reserves. Mortgage reserves are money and assets that you will have access to after closing.

Still crunching the numbers on your dream home? Use our mortgage calculator to understand just how much you might spend.

Recommended: What Is a Bank Reserve?

Do All Types of Mortgages Require a Reserve?

Not every borrower will need mortgage reserves when buying a home. Requirements depend on the type of mortgage you’re applying for, as well as your overall financial picture (credit score, debt-to-income ratio, and size of your down payment, for instance).

The table below breaks down potential mortgage reserve requirements by loan type:

Why do these requirements vary? Lenders may have different rules depending on whether a government agency is guaranteeing the loan, or whether the home will be your primary residence or if it’s an investment property.

Lenders may also have stricter mortgage reserve requirements if you’re making a small down payment, you have a high debt-to-income ratio, or if your credit score is too low (typically anything below a 700 credit score can warrant larger reserves if the borrower is making a down payment of less than 20 percent).

Recommended: Tips to Qualify for a Mortgage

Tips for Building Your Mortgage Reserves

Saving up for a down payment can be challenging on its own, but cobbling together enough cash reserves for a mortgage loan can make it even tougher. Here are some tips for building your home loan reserves:

Decrease Spending

Take a good, hard look at your budget to figure out how to stop spending money that you could be saving. Common culprits include dining out, streaming services, cups of coffee on your way to work, and memberships and subscriptions. Determine what you can cut out of your life — just for now — to reduce your monthly spending.

You may also be able to lower your utility bills by making some simple, eco-friendly updates in your current home. Also consider carpooling or using public transportation to reduce fuel costs, and raise your deductible on your car insurance to get a lower monthly premium. Finally, clip coupons and look for deals when shopping for groceries.

Use a Certificate of Deposit

If you know you’ll be buying a home within a few years, store some savings in a certificate of deposit (CD). Though the money is less liquid than funds in a savings account, it still counts toward your mortgage reserves and a CD may offer a higher interest rate, so your money will grow faster.

Set Aside a Chunk of Your Income

When you get each paycheck, intentionally move some into a high-yield savings account that’s earmarked for your mortgage reserves. (You can also do this when saving for the down payment on your home.)

Automatically setting aside some of your income for a specific purpose can make it a lot easier to resist the temptation to spend it on other things, like clothes and vacations.

Take Up a Side Gig

If you’ve cut all the expenses you can and you’re still coming up short, think about how you can earn more money. You can always ask for a raise at work, but you may have more luck taking on a side hustle to earn extra income. That doesn’t always mean getting a second job — there are passive income ways to build wealth.

Boost Your Retirement Contributions

Mortgage reserves don’t have to be money in your bank account. Retirement contributions to IRAs and 401(k)s (if vested) also count toward your reserves, and these may grow faster than money in a high-yield savings account, depending on how the market is doing.

Even better, if your employer matches contributions to a 401(k), that’s an easy way to quickly increase your mortgage reserves. And it’s free money!

What Happens If You Don’t Meet the Mortgage Reserve Requirements?

Mortgage reserve requirements are called that for a reason: They’re required. Just like the down payment and closing costs, you will absolutely need your mortgage reserves if your lender asks for them in order to have your mortgage loan funded. You’ll be asked to note these assets on a mortgage application.

If the lender discovers prior to the closing that you don’t have the reserve for the mortgage, the lender can back out.

The Takeaway

Depending on your credit score, down payment, the type of property you’re purchasing, and the type of mortgage loan you’re looking for, you may need to have mortgage reserves set aside to get approved. Mortgage reserves are cash and assets you can use to cover your housing costs for a set number of months if something happens and you suddenly can’t afford 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.

FAQ

What is the difference between cash reserves and mortgage reserves?

Mortgage reserves are a type of cash reserves. Cash reserves broadly refers to money set aside for short-term needs and emergencies, like sudden job loss; cash reserves can get you through a set number of months’ worth of expenses.

Mortgage reserves are specifically money set aside to cover housing costs for a set number of months and may be required for some home loans.

Can I use retirement savings as mortgage reserves?

Retirement savings can count toward your mortgage reserves. If you’re using 401(k) funds in the total calculation, they must be vested.

How long do I need to maintain mortgage reserves?

How long you need to maintain mortgage reserves depends on the type of mortgage loan you’re using and factors like your credit score and debt-to-income ratio. Typical conventional loan reserve requirements are two months of mortgage reserves after closing, but it’s possible to need up to six months of reserves for a conventional mortgage.

Can I use gift funds for mortgage reserves?

You can use gift funds for mortgage reserves for an FHA loan, as well as certain other loans with some restrictions. Gift funds refers to money or assets donated to a home buyer, usually from a loved one, without the expectation of repayment.

Photo credit: iStock/FilippoBacci

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

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

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.

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.

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A cash-out refinancing loan is treated differently by the IRS than a traditional mortgage. Although you receive a lump sum of cash, cash-out refinancing is considered a form of debt restructuring, and you do not pay taxes on the cash you receive.

With cash-out refinancing, you cash out a percentage of the equity that you have accrued in your home and replace your existing mortgage with one with a higher principal. You can use the cash for any reason, such as consolidating debt, paying for home renovations, or unexpected medical expenses.

Here’s what you should know about cash-out refinancing and the tax implications.

How Cash-Out Refinancing Works

When you refinance your mortgage, you cash out equity. Equity is the difference between your current mortgage balance and the value of your home today. Let’s say your home is worth $300,000 and the balance on your mortgage is $150,000, you have $150,000 in home equity.

A lender typically requires you to keep at least 20% of the value of your home in equity. In the above case, you would leave $60,000 in equity and have $90,000 to cash out. Your mortgage lender would also charge around 1% in closing costs.

The Tax Implications of Mortgage Refinancing

A cash-out refinancing loan is treated differently by the IRS than a traditional home loan because it is considered a form of debt restructuring. You do not pay tax on the money you receive in cash, and you might also be able to deduct some of the interest you pay on that cash from your taxes.

Here’s a closer look at the tax implications of a cash-out refinancing loan.

Is a Cash-Out Refinance Taxable?

Because the IRS considers a cash-out refinance to be a form of debt restructuring, the cash you receive is considered a loan, not income, and is not taxed. In addition, you could receive additional tax benefits depending on how you spend the money you receive.

If you use the cash to increase the value of your home, such as putting on a new addition or replacing your heating or cooling system, you can claim the interest that you pay on the loan as a tax deduction.

Before you do this, however, consult a tax professional to make sure that the work qualifies. Simple repairs like painting or general maintenance do not qualify for tax deductions. You will also have to keep meticulous records and save receipts documenting what you spend so that you can prove your case when you file your taxes.

Requirements for Interest Deductions on a Cash-Out Refinance

Capital improvements to a property that increase its value will qualify for an interest deduction. Examples could include a new addition, a security system, or a new swimming pool. General maintenance and repairs will not qualify, nor can you deduct the interest you pay on the loan if you spend the money on a vacation, medical bills, or credit card debt.

How to Make a Cash-Out Refinance Tax-Deductible

Below is a list of home improvements that qualify for the interest deduction.

Qualifying Home Improvements

•   Renovating or adding on an addition, such as a garage or a bedroom

•   Putting in a swimming pool

•   New fencing

•   New roof

•   New heating or cooling system

•   Installing efficient windows

•   Installing a home security system

Improving your property’s value means you can also save money if you sell your home. Capital home improvements count toward the total amount you spent on the property and can potentially lessen your capital gains tax liability when you sell your home.

Deductions for Adding a Home Office

Adding a home office to your home is a capital improvement that qualifies for the interest deduction on a cash-out refinancing loan. There are also additional potential tax benefits to adding a home office for small businesses or the self-employed.

How Home Offices Can Impact Your Taxes

You can deduct the interest on your cash-out refinancing loan if you use the money to add a home office, because it will increase the value of your home and is considered a capital improvement. If you are a business owner or self-employed, you could also qualify for the home office deduction on your federal taxes.

The home office deduction is a benefit that allows you to claim a percentage of what you pay on your loan as a business expense. You must use the designated office space for business purposes only, and it cannot be used as a spare bedroom or family space or it will not qualify. Also, your home office must be the primary place where you conduct business.

Recommended: What to Know Before You Deduct Your Home Office

Tax Implications of a Cash-Out Refinance for Rental Property

Rental income is considered personal income by the IRS. If you use the capital from a cash-out refinance to improve or repair a rental property, the expenses are tax-deductible. Also, interest, closing costs, and insurance paid on a rental property can be deducted from your income as business expenses.

What Are the Limitations for Interest Deduction with a Cash-Out Refinance?

For the 2022 tax year, single filers and married couples filing jointly could deduct mortgage interest up to $750,000. Married taxpayers who file separately could deduct up to $375,000 each. (The limit is higher for debts incurred prior to December 16, 2017: $1 million or $500,000 each for married couples filing separately.)

Can You Deduct Your Mortgage Points?

Mortgage points, also known as discount points, are fees you pay a lender upfront so that you can pay a lower interest rate on your loan. One point is equal to 1% of your mortgage loan. With a cash-out refinance, you cannot deduct the money you paid for points in the year you refinanced until after 2025. But you can spread out the cost throughout the loan. That means if you accumulate $2,500 worth of mortgage points on a 15-year refinance, you can deduct around $166 per year throughout the loan.

Risks of a Cash-Out Refinance

Cash-out refinancing is a risk. You are taking on a larger loan than your original home mortgage, which means that your monthly mortgage payment will increase unless interest rates are lower than when you applied for your current mortgage. If your payments are higher and you can’t keep up with them, you could be at greater risk of foreclosure.

Alternatives to a Cash-Out Refinance

Two financing alternatives that also use equity in your home are a home equity loan or a home equity line of credit (HELOC).

A home equity loan is a second mortgage for a fixed amount that you repay over a set period while keeping your original loan. The payments include interest and principal, just like a traditional mortgage, but the interest rate may be higher than a primary mortgage. This is because the primary lender is paid first in the event of foreclosure, so the secondary lender takes on more risk.

A home equity line of credit (HELOC) is also a second mortgage but with a revolving balance. That means you can borrow a certain amount, pay it back, and then borrow again. As with a credit card, your payments are based on how much you use from the line of credit, not on the available credit amount. If you don’t need to borrow a large sum, this might be a cheaper option than cash-out refinancing because a HELOC tends to have a lower interest rate.

Recommended: Home Equity Loans vs HELOCs vs Home Improvement Loans

The Takeaway

Cash-out refinancing is a way to access the equity in your home and use it to pay for expenses, though it does mean taking on increased debt. The cash from this type of mortgage refinancing can be used any way you like, such as to pay for home renovations, college, or unexpected medical expenses.

When you opt for cash-out refinancing, your original mortgage is replaced by a larger mortgage. If interest rates are lower than when you took out your original mortgage, your monthly payments may go down, but it will take you longer to pay off the loan. Depending on how much cash you need, you can also consider a HELOC or a home equity loan to obtain the money you need.

Turn your home equity into cash with a cash-out refi. Pay down high-interest debt, or increase your home’s value with a remodel. Get your rate in a matter of minutes, without affecting your credit score.*

FAQ

Is cash-out refinance tax-deductible?

Some of the interest you pay on a cash-out refinancing loan might be tax deductible if you use the money to make capital improvements on your home and you keep meticulous documentation to prove it. It’s best to consult with a tax professional to make sure the improvements you do on your home qualify for the deduction.

Do you pay taxes on a cash-out refinance?

No. The funds you receive from cash-out refinancing are not subject to tax because the IRS considers refinancing a form of debt restructuring, and the money isn’t categorized as income.

How do I report a cash-out refinance on my tax return?

You don’t need to report the cash you receive from a cash-out refi as income, so the refi would only show up if you record the interest you are paying on the new mortgage on an itemized return.

What are the tax implications of a cash-out refinance on a rental property?

Rental income is taxed as personal income by the IRS. The good news is that if cash from a refinancing is used to improve or repair a rental property, the expenses are tax-deductible. Also, closing costs, interest, and insurance paid on a rental property may also be deductible from your income as business expenses.

How does the timing of a cash-out refinance affect my taxes?

As long as you meet the requirements for capital improvements, you can deduct the interest paid on your refinanced loan every year that you make payments throughout the life of your refinance loan. So, if you refinance your mortgage to a 15-year term, you must spread your deductions over the 15 years. However, you can only deduct the interest you pay each year, and the amount of interest paid will become less as the loan matures and you pay more toward the principal.

Photo credit: iStock/Jun

^*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.

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.

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.

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Choosing the right loan can save you anywhere from hundreds to thousands of dollars in costs. So it pays to consider your options before you decide what type of loan you really need.

A personal loan might come with an origination fee and a relatively high interest rate, but a cash-out refinancing loan will entail considerable closing costs. Timing is another concern. If you need funds quickly, a cash-out refinancing loan is probably not an option because approval can take weeks, whereas a personal loan can deliver funds within days.

Here’s a look at the factors to consider when deciding between a personal loan vs. a cash-out refinance. We’ll examine what both types of loans are, why one might be preferable over the other, and offer a side-by-side comparison of the two types of loans so you can make an educated decision.

What Does a Personal Loan Include?

A personal loan is typically an unsecured loan offered by a bank, credit union, or online lender. An unsecured loan is usually not backed by collateral, which means the lender will charge a higher interest rate to cover the cost of their risk. When a personal loan is approved, the borrower receives cash into their bank account, often within one business day, and pays a monthly payment that includes some of the principal and the interest due. The funds from a personal loan can be used for any purpose.

What Is a Cash-Out Mortgage Refinance?

A cash-out mortgage refinance is a type of secured loan that a borrower obtains by using their home as collateral. If you default on the payments, the bank or lender can repossess or foreclose on your home. There is less risk for the lender if the loan is backed by collateral, so the interest rates are lower.

With a cash-out mortgage refinance, the loan amount has to be large enough to pay off your existing mortgage and provide you with a certain amount of cash. So, it’s likely to be a large loan.

To determine whether or not you qualify for a cash-out mortgage refinance, a lender will look at your income, employment, debt, property value, and credit history. These factors will also help decide your loan terms, should you qualify. As with a personal loan or a home mortgage loan, you will make monthly payments that include some of the principal and the interest due. There are no restrictions on how you use the money with this loan either.

💡 Quick Tip: There are two basic types of mortgage refinancing: cash-out and rate-and-term. A cash-out refinance loan means getting a larger loan than what you currently owe, while a rate-and-term refinance replaces your existing mortgage with a new one with different terms.

Cash-Out Refinance vs Personal Loan: A Comparison

If you’re contemplating the repercussions of taking out a mortgage refinance loan compared to a personal loan, critical factors to consider are collateral, interest rates, how quickly you will have access to funds, and closing costs. Below is a side-by-side comparison of the main factors likely to influence your decision.

Home Equity and Collateral

Deciding whether to take out an unsecured personal loan or a secured cash-out refinancing comes down to how much equity you have in your home, how quickly you need the funds, and which type of loan will be cheaper. Making the right decision requires understanding the interest rates and terms you would qualify for with each type of loan. Also know that you risk losing your home if you choose cash-out refinancing but fail to make the payments.

To refinance your home and take cash out with a loan, a lender will require you to keep 20% equity, which limits your new loan amount to 80% of your home’s appraised value. A personal loan puts no limits on the amount you can borrow, except for those dictated by the bank.

Cost and Interest Rates

The cost of a loan, whether a personal or home loan, is largely determined by interest rates. The interest rate you receive on a mortgage loan vs. a personal loan will depend on whether you meet or exceed the minimum credit score for a personal loan, as well as on your income and the loan amount.

Personal loans, because they are unsecured, have higher interest rates than home loans. Credit card financing could be an option, but credit cards are typically even more expensive. People often use a personal loan or a cash-out refinance to consolidate debt and pay off credit cards.

Speed of Approval and Funding

How soon you receive funding varies significantly between the two types of loans. The application for a personal loan is often completed online, and if you are approved for a mortgage, you could receive funding within days, sometimes as fast as one business day. The home mortgage loan application process requires significant documentation, such as underwriting, an appraisal, and legal documents, and can take weeks.

Loan Amount

The loan amount for a personal loan varies. Some banks will offer loans as low as $600 or as high as $100,000. Most lenders set a minimum around $5,000 and a maximum around $50,000. Cash-out refinancing home loans, however, tend to be much larger, and they depend on your equity and the value of your home. As noted above, you can typically take out a new loan for up to 80% of the value of your home.

Closing Costs and Loan Fees

Many personal loans have a relatively small origination fee and no closing costs. The fees for any loan will depend on the lender. But you can bet on a fee in the range of 0 to 5% for a personal loan.

Mortgage loans tend to be much larger, and closing costs and fees can range from 3% to 6% for a cash-out refinancing loan. The originator of the home loan charges fees to cover origination, document processing, and underwriting.

As an example, if you needed to borrow $10,000, you might pay around $500 in fees for a personal loan. If you chose cash-out refinancing, you’d have to borrow $10,000 plus the amount of your mortgage balance. If your mortgage balance is $150,000, you’d pay closing costs on $160,000, which could be as much as $5,000.

Length of Repayment Period

Repayment terms for a home refinancing loan will be longer than the terms for a personal loan because the loan amount will be higher. The repayment period for a personal loan is typically from one to five years. Home loan terms range from 15 to 30 years. A few lenders will offer a 10-year term.

Eligibility for Tax Benefits

You might be eligible for tax benefits for a cash-out refinancing loan. It’s worth noting that a borrower doesn’t need to report cash received from a cash-out refinancing loan as income, because it is considered a form of debt. You might also be able to deduct your interest if you used the cash to make improvements to your home, but you will need to keep receipts and records to show the work that you did. A tax professional can help you determine if you qualify for this benefit.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

The Takeaway

If you need funds and are trying to decide between a personal loan or a cash-out refinancing loan, the main factors to consider are how much money you need, how soon you need it, and how much you can afford to spend each month to pay off the loan.

Personal loans are typically the best option if you want to borrow a few thousand or less and you need the funds quickly. On the other hand, a cash-out refinancing loan is best if you want to borrow a larger amount and spread the payments over a longer period. With both options, your credit score will drop if you miss payments, and with a cash-out refinancing loan, you also risk your home falling into foreclosure if you cannot meet your monthly payment obligations.

Turn your home equity into cash with a cash-out refi. Pay down high-interest debt, or increase your home’s value with a remodel. Get your rate in a matter of minutes, without affecting your credit score.*

FAQ

Can I use a personal loan or a cash-out refinance to pay off my mortgage early?

You can use personal loans and cash from a refinancing to pay for anything you like. People often use both types of loans to pay off credit card debt or student loans, or to fund home improvements, because the interest rates and total cost of the loan might be a cheaper option.

How do I determine if the terms of a personal loan or a cash-out refinance are right for me?

To decide whether to use a personal loan or to refinance, consider your priorities. For example, a mortgage refinancing would be better if you want lower monthly payments spread out over a longer period. If you only want to borrow a few thousand dollars, a personal loan would be better because there are no closing costs. Also, consider if you want to use your home as collateral.

Can I get a personal loan or a cash-out refinance if I am self-employed?

Yes, as long as you can document a regular and reliable source of income and meet other qualifications set out by the lender, being self-employed shouldn’t affect your ability to qualify for a personal loan or a cash-out mortgage refinancing loan.

What are the consequences of missing a payment on a personal loan or a cash-out refinance?

Missing payments on a personal loan will cause you to incur late fees and may reduce your credit score significantly. The same is true if you miss payments on a refinance loan, however in this case you could also be at risk of foreclosure if you miss payments repeatedly.

Photo credit: iStock/urbazon

^*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.

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.

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.

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Imagine this: You’re staring at your closing documents and you’re trying to figure out where all your fees are going. Oddly, you can’t find the amount that your mortgage officer is paid. How is that? How does a loan officer get paid if it’s not there in the closing documents?

It’s not a mystery, but it’s not exactly clear how their compensation works, either. The short version? There are a couple of places where the mortgage loan officer could be paid: from the origination fees on the front end or from the cost of the mortgage itself on the back end.

It’s important to know where your money is going, so we’re here to help. In this article, we’ll discuss:

•   The average salary for a mortgage loan officer

•   How a mortgage loan officer gets paid

•   The payment structure for mortgage loan officers

•   Earning potential, benefits, job prospects

What’s the Average Salary of a Loan Officer?

A mortgage loan officer, or mortgage loan originator, makes an average of $63,380 per year according to the Bureau of Labor Statistics.

It’s worth noting, however, that the Bureau of Labor Statistics includes other types of loan officers in that category, such as those who originate auto or personal loans. They also do not differentiate between a loan officer and a loan processor.

In contrast, data from Indeed.com shows the average mortgage loan officer salary at $181,344. Glassdoor.com also estimates the total average salary of a mortgage loan officer in the neighborhood of $217,593, with $153,554 in base pay and $64,040 in additional pay from cash bonuses, commissions, and profit sharing.

Since the pay for mortgage loan officers is usually commission-based, it’s easy to see why average numbers can vary so widely.

How Is a Mortgage Loan Officer Paid?

A mortgage banker or other mortgage loan officer is typically paid after your home mortgage loan has closed and funded. They’re often paid on commission, meaning a percentage of the loan amount will go to the mortgage loan officer. This amount can come from one of two places: either the loan originator (like the bank or mortgage seller), or from a loan origination fee paid by the borrower. (Laws do not allow for payment to come from both sources.)

If the commission comes from the lender rather than the borrower, you won’t see it in your closing documents. This is why you probably won’t know how much the lender is getting paid from your transaction.

It’s also possible that the mortgage loan officer’s pay comes primarily from a salary instead of a commission. This is more common with larger lenders, such as banks, credit unions, and other financial institutions.

Either way, the money paid to the mortgage loan officer comes from the lender’s profits. A lender’s profits, in turn, come from origination fees, income from interest, income from mortgage servicing, and proceeds earned from secondary mortgage market sales.

Payment Structure for MLOs

Mortgage loan officers may be paid entirely on commission, a combination of salary and commission, or a salary. Bonuses or incentives may also be paid out. Their pay is usually incentivized by how good they are at closing home mortgage loans.

Mortgage Loan Officer Earning Potential

Mortgage loan officers have high earning potential. As noted previously, compensation can exceed $200,000.

Mortgage Loan Officer Benefits

Benefit packages for mortgage loan officers tend to be very comprehensive, but can vary depending on the different types of mortgage lenders. This can include:

•   Medical

•   Dental

•   Vision

•   Retirement plans

•   Life insurance

•   Vacation time

•   Parental leave

•   Sick leave

You may also see flexible schedules, bonuses, wellness benefits, company retreats, and more on the menu of benefits offered to a mortgage loan officer.

Mortgage Loan Officer Job Prospects

The U.S. Bureau of Labor Statistics expects employment of mortgage loan officers to rise 4% between 2021 and 2031. This is an average rate of growth; however, the BLS does note that the decline of bank branches and increase in technology is expected to slow the growth for mortgage loan officers.

Recommended: Mortgage Brokers vs Direct Lender: What’s the Difference?

Mortgage Loan Officer Pros and Cons

The job of a mortgage loan officer has some serious earning potential, but there are also some drawbacks to the job as well.

Pros

•   High salary potential

•   High commission and bonus potential

•   Can help individuals and businesses obtain financing for desired properties

•   Regular, consistent schedule (though may work more than 40 hours on occasion)

Cons

•   Loan officers only offer financial products from their employer

•   Likely has no ability to adjust price

•   Lots of paperwork, regulation, and details

•   High barrier to entry-level jobs, such as a bachelor’s degree or related work experience

•   Opportunity for employment and commission payments are affected by market conditions

Recommended: First-time Homebuyer Programs and Loans

The Takeaway

Mortgage loan officers are an important part of the homebuying process for many buyers. Their knowledge is invaluable and can help guide you in the right direction. How much they get paid usually depends on how many mortgages they originate throughout the year. Top earners can earn $200,000 or more.

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.

FAQ

How is loan officer commission calculated?

Loan officers either earn commission from an origination fee or from the lender. The mortgage loan officer can’t receive compensation both ways, as this is considered illegal as per Regulation Z of the 2010 Dodd-Frank Act.

How do you make money as a loan officer?

Loan officers make money by closing loans, and, as there is often some type of commission structure in place, loan officers who close more loans generally make more money.

What does a mortgage loan officer do on a daily basis?

Mortgage loan officers process loan applications, interviewing applicants and analyzing loan documents to determine an applicant’s eligibility for a loan. They also calculate debt-to-income (DTI) and loan-to-value (LTV) ratios to make sure the numbers for the borrower and the property are within the guidelines set by the lender. Additionally, they spend time looking for new prospective customers and attending closings.

Photo credit: iStock/skynesher

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

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

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.

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.

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