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Hypothecation may not be a word you’ve heard before, but it describes a transaction you may have participated in. Hypothecation is what happens when a piece of collateral, like a house, is offered in order to secure a loan.

Auto loans and mortgages frequently involve hypothecation, since it allows the lender to repossess the car or house if the borrower is later unable to pay.

There are, though, some more subtle details to understand about hypothecation, particularly if you’re in the market for a home loan. Read on to learn about hypothecation loans.

Note: SoFi does not offer hypothecation. However, SoFi does offer home equity loan options.

What Is Hypothecation?

Hypothecation is essentially the fancy word for pledging collateral. If you’re taking out a secured loan — one in which a physical asset can be taken by the lender if you, as the borrower, default — you’re participating in hypothecation. (Hypothecation is also possible in certain investing scenarios. We’ll briefly talk about that later.)

As mentioned above, some of the most common hypothecation loans are auto loans and mortgages. If you’ve ever purchased a car, it’s likely you have (or had) a hypothecation loan, unless you paid the full purchase price in cash.

It’s important to understand that, just because the asset is offered as collateral, it doesn’t mean the owner loses legal possession or ownership rights of it. For instance, with an auto loan, the car is yours even though the lender might hold the title until the loan is paid off.

You also maintain your rights to the positive parts of ownership, such as income generation and appreciation. This is perhaps most obvious in the case of homeownership. Even if you’re paying a mortgage on your property, you still have the right to lease the place out and collect the rental income.

However, the lender has the right to seize the property if you fail to make your mortgage payments. (Which would be a bad day for both you and your renters.)

Why Is Hypothecation Important?

Hypothecation makes it easier to qualify for a loan — particularly a loan for a lot of money — because the collateral makes the transaction less risky for the lender.

For instance, hypothecation is the only way that most people are able to qualify for a mortgage. If those loans weren’t secured with collateral, lenders might have very steep eligibility requirements before they would pay out hundreds of thousands of dollars for a home on a piece of land!

Unsecured loans, however, are possible. A personal loan is a good example.

With an unsecured loan, you’re not at risk of having anything repossessed from you, and you can use the money for just about anything you want.

It’s a trade-off: Unsecured loans are riskier for the lender, so they tend to be harder to qualify for and to carry higher interest rates than secured loans.

On the other hand, if you compare a car loan and personal loan of equal length, you’ll likely be subject to a stricter eligibility screening to get the unsecured loan and pay more interest on it in the end.

Recommended: Smarter Ways to Get a Car Loan

Hypothecation in Investing

Along with hypothecation in the context of a secured loan for a physical asset, like a house or a car, hypothecation also occurs in investing — though usually only if you take on advanced investment techniques.

Hypothecation occurs when investors participate in margin lending: borrowing money from a broker in order to purchase a stock market security (like a share of a company).

This technique can help active, short-term investors buy into securities they might not otherwise be able to afford, which can lead to gains if they hedge their bets right.

But here’s the catch: The other securities in the investor’s portfolio are used as collateral, and can be sold by the broker if the margin purchase ends up being a loss.

TL;DR: Unless you’re a well-studied day trader, buying on margin probably isn’t for you and you should not worry about hypothecation in your investment portfolio. But you’ll want to know it can happen in investing, too.

Recommended: What Is Margin Trading?

Hypothecation in Real Estate

A mortgage is a classic example of a hypothecation loan: The lending institution foots the six-digit (or seven-digit) cost of the home upfront, but retains the right to seize the property if you’re unable to make your mortgage payments.

Hypothecation also occurs with investment property loans. A lender might require additional collateral to lessen the risk of providing a commercial property loan. A borrower might hypothecate their primary home, another piece of property, a boat, a car, or even stocks to secure the loan.

A promissory note details the terms of the arrangement.

Recommended: 31 Ways to Save for a Home

Is Hypothecation in a Mortgage Worth It?

Given the size of most home loans and the risk of losing the home, you may wonder if taking out a mortgage is worth it at all.

Even though any kind of loan involves going into debt and taking on some level of risk, homeownership is still usually seen as a positive financial move. That’s because much of the money you pay into your mortgage each month ends up back in your own pocket in some capacity…as opposed to your landlord’s bank account.

As you pay off a mortgage, you’re slowly building equity in your home. Homes have historically tended to increase in value.

More broadly, homeownership can help build generational wealth in your family.

A Note on Rehypothecation

There is such a thing as rehypothecation, which is what happens when the collateral you offer is in turn offered by the lender in its own negotiations.

But this, as anyone who lived through the 2008 housing crisis knows, can have dire consequences. Remember The Big Short? Rehypothecation was part of the reason the housing market became so fragile and eventually fell apart. It is practiced much less frequently these days.

The Takeaway

Hypothecation simply means that collateral, like a house or a car, is pledged to secure a loan. Mortgages are a classic example of hypothecation, and hypothecation is the reason most of us are able to qualify for such a large loan.

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
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.

SOHL-Q424-124

If the kitchen is the heart of the home, what does it say when yours is falling apart? Shabby fixtures, failing appliances, or a dysfunctional layout might have you daydreaming about a full gut reno — but how much does an average kitchen remodel cost? A minor kitchen update by DIY-savvy homeowners may come in around $7,000, while a major remodel can balloon to $50,000, or even $100,000+.

Before you begin your kitchen update, it helps to consider why you’re remodeling and whether it will add value to your home. We’ll help you scope out the average cost of a kitchen remodel — including cabinetry, countertops, and labor — and where you can save money without sacrificing function or design.

Factors Affecting Kitchen Remodel Costs

Before you start a kitchen remodel, it’s important to consider what you want to get out of it and what your return on investment (ROI) might be. You’ll also want to understand what factors can impact your costs so you know just how far your kitchen remodeling budget can go. Here are some factors to keep in mind:

Size of the Kitchen

The more square footage you’re remodeling, the more expensive the project tends to be. After all, you’re not only buying more materials (think cabinets, flooring, or tile), you’re also paying more in labor costs to have everything installed.

Scope of the Remodel

Generally speaking, the more extensive the work, the higher the price tag. For example, knocking down walls will set you back anywhere from $1,000 to $10,000. Want to relocate your sink? Expect to pay between $500 to $1,000. Compare that to the cost of smaller jobs, like replacing cabinet pulls (around $300) or adding new kitchen lighting ($100-$200 per fixture).

You may be interested in this story on the difference between a renovation vs. remodel.

Quality of Materials and Finishes

The average kitchen remodel cost can vary a lot depending on a few key items: cabinetry, countertops, and appliances. And the quality and type of materials of those items can have a significant impact on how much you’ll pay.

Take, for example, the cost of countertops, which is determined by the material. Typical materials include granite, marble, quartz, stainless steel, and butcher block wood. Granite, stainless steel, and butcher block are good budget options, ranging from $850 to $6,750 depending on the size of your kitchen. Marble and quartz command $1,500-$10,000.

Level of Customization

The more complex the design — and the more customized features you include — the more you’re likely to pay for a kitchen remodel. Consider cabinetry, which typically eats up 25% of a kitchen budget. There are three types of kitchen cabinet construction, each priced per linear foot:

•   Stock cabinets, the least expensive, run $100-$300 per linear foot.

•   Semi-custom are $100-$650 per linear foot.

•   Custom will set you back $500-$1,200 per linear foot.

Custom cabinets are made to order, based on your kitchen’s precise measurements, and are made of solid wood. Stock are ready-made and mostly constructed of engineered wood, and semi-custom are a hybrid of stock and custom.

Installation and Labor Costs

Labor is a major cost that can be hard to predict. But count on spending 20%-35% of your budget on contractors and installers. Your price will depend on where you live, how large your space is, and the features being installed.

Regional Variations in Kitchen Remodel Costs

Bargain hunters should be aware that some factors influencing budget are not within their control — like where in the U.S. you live. Homeowners on the West Coast generally pay more for materials and labor than in the South. Prices also tend to run higher in and around major cities. There are several reasons for this, including the cost of shipping materials to your area, local permits and fees, and your cost of living.

Notice how the overall costs vary by region, according to 2024 data from the home services website Angi.

Budgeting for Your Remodel

Deciding what your new-and-improved kitchen will look like is important, but so is figuring out how to pay for it. Here are some strategies to keep in mind:

Set a Realistic Budget Based on Your Goals

Money.com recommends spending between 10% and 15% of the value of your home on a kitchen remodel to get the best ROI. A major reno for a $400,000 home, then, would cost between $40,000 and $60,000.

Look for Ways to Save

In a full-scale kitchen remodel, new kitchen cabinets are typically the biggest expense, accounting for up to 40% percent of the project budget. If your cabinets are in good shape and fulfill your storage needs, refacing them can slash your bill. Refacing can mean either stripping and repainting or staining existing doors, adding stick-on veneers, or replacing the doors while preserving the cabinet shelves. Add new hardware for a more modern look.

You may also be able to trim some costs by doing simple things yourself: picking up items instead of paying for delivery, painting walls instead of paying contractors for the labor, or replacing your own backsplash.

Understand the Potential Return on Investment

The truth is you probably won’t recoup the total cost of a kitchen remodel in a home sale. According to Remodeling Magazine’s 2024 Cost vs. Value Report, the national average ROI for a minor remodel with mid-range materials is 96%. A major remodel with upscale materials, on the other hand, yields just a 38% ROI.

Clearly, the best bang for your buck will be less costly but visually impactful minor updates: replacing cabinets fronts, countertops, faucets, and lights, plus painting and perhaps new flooring. But if you want to change the layout or add all new appliances, you’re looking at five figures. More on that in a minute.

Consider a Loan to Help Cover Costs

It can be tempting to throw all your kitchen purchases on a credit card, but keep in mind that high-interest rates can inflate your renovation costs. These days, many homeowners are turning to a flexible personal loan to fund home renovations and remodels.

With home improvement loans, you receive a lump sum payment to cover your kitchen remodel cost. You can pay back the loan over a term of your choosing in equal monthly installments. The interest rate is determined by your credit history and credit score, but is typically lower than credit card interest.

Our Home Improvement Cost Calculator can give you an idea of how much you’ll need to borrow.

Maximize Value and ROI in Your Kitchen Remodels

Want to get the most bang for kitchen remodel buck? Here are a few places to start:

•   Choose durable, timeless design elements. Trends come and go, so to get the most mileage out of your remodel, stick with upgrades that can stand the test of time (and appeal to future buyers). If your budget allows, select a durable, classic countertop material like granite or marble, and opt for a neutral color palette and go-with-anything fixtures and handles.

•   Optimize layout and functionality. The kitchen isn’t just a natural gathering spot — it’s also a place for work. Whether it’s prepping meals or cleaning up afterward, a functional space is key. As your remodeling vision starts to take shape, be sure above all it enhances the workflow and offers you plenty of countertop and storage space.

•   Select energy-efficient appliances and fixtures. Sure, energy-efficient appliances and lighting use less energy and can lower utility bills. But they also have the added bonus of attracting potential eco-conscious buyers.

Choosing the Right Kitchen Remodeling Contractor

When you’re starting the home remodel process, it’s important to find a contractor you can trust. That means doing your research, speaking with and getting quotes from multiple contractors, and reaching out to their previous clients for referrals. You’ll also want to check licenses and certifications.

It’s also a good idea to request detailed project proposals and cost estimates to avoid any surprises. And when entertaining bids, remember that an experienced, in-demand contractor will likely charge more than less capable competitors, but will almost certainly be worth it.

Popular Kitchen Remodel Ideas

The Internet can be your best friend if you want to spruce up your kitchen but have no idea what to tackle first. As you’re browsing, keep an eye out for projects that will improve the functionality of the space and increase the value of your home.

Updating cabinets and countertops, for instance, can give your space a whole new look and provide more room for meal prep. Both upgrades also tend to deliver a high ROI.

Adding more functional storage solutions can make cooking more enjoyable and also make your home more attractive to potential buyers down the line. Similarly, adding or improving the lighting in your kitchen — or freshening up the fixtures — can also breathe new life into your space.

The Takeaway

The average kitchen remodel cost can vary widely from $7,000 to $50,000 or more, though you can get a fair return on your investment by spending between 6% and 10% of your home’s value. Your cost will depend on a number of factors such as kitchen size and whether you choose bargain, mid-range, or high-end materials and appliances. The major kitchen remodel cost drivers are cabinets, countertops, appliances, and labor. The good news is that the ROI for a smart, mid-range remodel is 96%.

When you’re ready to take the next step, there are various ways to finance the remodel, including a personal loan. Your credit history and credit score will help determine your interest rate, but it will likely be lower than the interest you’d pay on a credit card.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is a realistic budget for a kitchen remodel?

When setting your budget for a kitchen remodel, a good rule of thumb is to plan to spend between 6% and 10% of your home’s value.

Is $10,000 enough for a kitchen remodel?

On average, a kitchen remodel can cost as little as $7,000 or as much as $50,000 or more. With a budget of $10,000, you’ll likely have enough to cover a cosmetic refresh or even a more substantial upgrade for a small kitchen.

Is $30,000 enough for a kitchen remodel?

Depending on the size of your kitchen and the work you want to do, a budget of $30,000 should easily cover a mid-range remodel.

What is the most expensive part of a kitchen remodel?

Generally speaking, the most expensive line item in a kitchen remodel is the cabinets. Stock cabinets are the least-expensive option, typically running around $100-$300 per linear foot. Custom cabinets are the most-expensive option and cost around $500-$1,200 per linear foot.

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.

SOPL-Q424-058

Looking to get into a home but can’t qualify for a traditional mortgage? You may want to look at owner financing.

Owner-financed homes aren’t very common, but they have some benefits for unique buyer and seller situations. Owner financing bypasses a traditional mortgage when the seller takes on the role of lender, but seller financing comes with some risks.

Let’s take a deep dive into how owner financing works and when it could make sense.

What Is Owner Financing?

Owner financing, also known as seller financing, is a transaction in which the property owner takes on the role of lender by financing the sale to the buyer. Like the trading of homes, this type of transaction bypasses traditional mortgages (unless the purchase of the home is only partially owner-financed.)

The payments for buyers are typically amortized over 30 years for a smaller monthly payment, but there’s often a large balloon payment at the end of a shorter period of time (usually one to seven years). Owner-financed transactions operate on the belief that the buyer’s finances may improve over time or the property will appreciate to a point where the buyer can get a home loan from a traditional lender.

Note: SoFi does not offer owner financing at this time. However, SoFi does offer conventional mortgage loan options.

How Does Owner Financing Work?

Owner-financed homes work much like traditionally financed homes, but with the seller acting as the lender. The seller may (or may not) require a credit check, loan application, a down payment, an appraisal of the home, and the right to foreclose should the buyer default. Buyers and sellers will need to agree on an interest rate and length of loan.

The buyer and seller sign a promissory note, which contains the loan terms. They also record a mortgage (or deed of trust), and the buyer pays the seller. The buyer should also pay for homeowner’s insurance, taxes, title insurance, and other loan costs. It is typical to hire real estate professionals or lawyers to get more into the details of how to use a home contract in owner financing.

Pros and Cons of Owner Financing

For Sellers

Owner financing isn’t nearly as beneficial for sellers as it is for buyers, but there are still some upsides to consider along with the increased debt load and assumed risk.

For Buyers

There are advantages to buying a house for sale by owner, namely that a buyer can obtain housing sooner under owner financing. A buyer may also be able to lower the down payment needed and pay lower closing costs. But it’s also riskier than borrowing from a traditional mortgage lender. If, for example, buyers are unable to finance the balloon payment, they risk losing all the money they’ve spent during the loan term.

To reduce risk exposure in an owner-financed transaction, buyers may want to hire an attorney.

Example of Owner Financing

Bob and Vila want to purchase a large, forever home for their family. The purchase price of the home is $965,000, but Bob and Vila can only qualify for $815,000. Part of Bob’s income is from recent self-employment, which is not accounted for by the lender but will help the couple be able to afford the house.

For the remaining $150,000, the seller offers owner financing as a junior mortgage. The buyers will pay both a traditional mortgage lender as well as the seller in this type of owner financing.

Recommended: How Much Home Can I Afford?

Types of Owner Financing

Land contracts, mortgages, and lease-purchase agreements are a few ways to look at owner financing. Here’s how they work and how they’re different from a traditional mortgage.

Land Contracts

Because the title cannot pass to the buyer in owner financing, a land contract creates a shared title for the buyer and seller until the buyer makes the final payment to the seller. The seller maintains the legal title, but the buyer gains an interest in the property.

Mortgages

These are the different ways to structure a mortgage with owner financing.

•   All-inclusive mortgage. The seller carries the promissory note and the balance for the home purchase.

•   Junior mortgage. When a buyer is unable to finance the entire purchase with a lender on one mortgage, the seller carries a junior mortgage (or second mortgage) for the buyer. The seller is put in second position if the buyer defaults, so there is risk to the seller by doing a second mortgage.

•   Assumable mortgage. Some FHA, VA, and conventional adjustable-rate mortgages are assumable, meaning the buyer is able to take the seller’s place on the mortgage.

A mortgage calculator can help you get an idea of what purchase price you may be able to afford.

Lease-Purchase

In a lease-purchase arrangement, both parties agree on a purchase price. The potential buyer leases from the owner for an amount of time, usually one to three years, until a set date, when the renter has the option to purchase the property. In addition to paying rent, the tenant pays an additional fee, known as the rent premium.

It’s typical to see options that credit a percentage of the purchase price (often between 1% and 5%), rents, and rent premiums toward the purchase price. If the option to buy is not used, the buyer will lose the option fee and rent premiums.

They are also known as rent-to-own, lease-to-own, or lease with an option to purchase. They can be used when an aspiring buyer has a lower credit score and needs some time to qualify for traditional financing.

Steps to Structuring a Seller Financing Deal

If you’re thinking about finding a property with owner financing, consider taking these steps to help get you through the process.

1.    Hire a professional. Because owner financing bypasses traditional lending institutions, there’s a lot more risk involved. Hiring a real estate professional and an attorney can help you structure the deal to protect your interests.

2.    Find a property where the owner offers financing. An owner must be willing and able to offer seller financing to make this type of transaction happen. It’s difficult, which is why owner financing is more common between parties that know each other very well. It’s usually required that the property is owned free and clear of any mortgage. A few other ways to look for seller-financed properties:

◦   Asking your current landlord if they’re open to selling their property to you.

◦   Looking for real estate listings with phrases like “seller financing available.”

◦   Contacting the real estate agent for a home you’re interested in. If the home has been on the market a while and the conditions are right, the sellers may be open to this option.

◦   Finding a personal connection who is able to offer owner financing.

3.    Agree to terms. Because seller financing terms are so flexible, there are a lot of details that buyers and sellers need to work out, including:

◦   Sales price

◦   Amount of down payment

◦   Length of the loan

◦   Balloon payment amount

◦   Interest rate

◦   Structure of the contract (land contract, mortgage, or lease-purchase, as described above)

◦   Any late fees, prepayment penalties, and other costs the buyer is responsible for

4.    Complete due diligence. Buyers and sellers would be wise to do their due diligence as if it were a regular purchase. Sellers may want to examine a buyer’s credit, complete a background check, and confirm that buyers have obtained homeowner’s insurance and title insurance to move forward with the transaction. On the buyer’s end, a home inspection and appraisal may be warranted.

5.    Sign and file paperwork. Much like a real estate transaction, the contracts involved in owner financing arrangements can be pretty involved. Depending on how your financing is structured, you may have a promissory note, owner financing contract and addendums, and title paperwork. You’ll also want to be sure your promissory note and deed of trust are filed with the county recorder’s office. An attorney, if you hired one, should be able to complete this process for you.

Alternatives to Owner Financing

Traditional mortgage financing may work better for your individual situation.

•   FHA loans. FHA loans have a low down payment requirement and low closing costs and may be approved for homebuyers with lower credit scores. They are underwritten by the Federal Housing Administration. Even if you’ve had a bankruptcy, you may be able to get an FHA loan.

•   USDA loans. USDA loans are backed by the U.S. Department of Agriculture. Income must meet certain guidelines (as determined by geographic region), and the home purchased must be in an eligible rural area.

•   VA loans. Loans guaranteed by the Department of Veteran Affairs are geared toward eligible military members, veterans, National Guard and Reserve members and spouses. The favorable terms include a low down payment (or no down payment), lower closing costs, low interest rate, and the ability to use the VA for a home loan multiple times.

•   Conventional loans. A conventional loan simply means the financing is not insured by the federal government as it is with FHA, VA, or USDA loans. Fannie Mae and Freddie Mac provide the backing for conforming loans: those that have maximum loan amounts that are set by the government.

It’s a good idea to not take interest rates at face value but to compare APRs instead. The annual percentage rate represents the interest rate and loan fees, so even if, for instance, an FHA loan looks better than a conventional mortgage, based on just the rates, an APR comparison may tell a different story. A help center for mortgages can be a great resource for learning more about the mortgage and homebuying process.

Recommended: 18 Mortgage Questions for Your Lender

The Takeaway

With owner financing, the seller is the lender. Both buyers and sellers face upsides and downsides when the transaction involves owner-financed homes.

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

Why would an owner offer financing?

Owner financing broadens the pool of potential homebuyers, which might appeal to some homeowners. They may also appreciate having the opportunity to earn interest paid by the homebuyer.

What risks does owner financing have for buyer?

There are fewer consumer protections available to buyers who get owner financing, which is why it is recommended that buyers seek a lawyer’s help in reviewing any agreement. Buyers also risk paying a higher than usual interest rate.

Photo credit: iStock/KTStock

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.

SOHL-Q424-120

A qualified mortgage is a type of loan with certain more stable features that help make it more likely that a borrower will be able to repay their loan. This doesn’t necessarily involve more work for the borrower, but it does mean that lenders will take a deeper dive into a potential borrower’s finances. The lender will analyze factors such as a borrower’s ability to repay to better determine if the mortgage they applied for is considered affordable for them under the guidelines.

Created in an effort to clamp down on the excessive risk-taking in the mortgage industry prior to 2008, the rule is intended to protect consumers from harmful practices. However, it may also make it harder to qualify under certain loan programs.

How Qualified Mortgages Work

Qualified mortgages follow three basic tenets, outlined by the government’s Consumer Financial Protection Bureau (CFPB):

1.    Borrowers should be able to pay back their home loan.

2.    A qualified mortgage should be easier for the borrower to understand.

3.    The qualified mortgage should be a fair deal for the borrower.

Based on these ideas, the CFPB created stricter guidelines for loans that are not sold to Fannie Mae or Freddie Mac to ensure that borrowers could repay loans.

For these loans, there is a limit on how much of a borrower’s eligible income can go toward debt. In general, total monthly debts cannot exceed 43% of a borrower’s gross monthly income, a percentage referred to as a debt-to-income ratio (DTI). Limiting the amount of debt a borrower can take on makes the homebuyer a safer bet for banks and less likely to default on their mortgage. Keeping the loan within a reasonable DTI ensures that a borrower is not borrowing more money than they can repay.

Next, the loan term on a qualified mortgage must be no longer than 30 years. Once again, this is in place to protect the home buyer. A loan term beyond 30 years is considered a riskier loan because the extended term means longer payback and additional interest — both key considerations when it comes to how to choose a mortgage term.

In addition, a qualified mortgage is barred from having some other risky features, such as:

•   Interest-only payments: Interest-only payments are payments made solely on the interest of the loan, with no money going toward paying down the principal. When a borrower is only paying interest, they don’t make a dent in paying off the loan itself.

•   Negative amortization: With amortization, the amount of the loan goes down with each regular payment, as is illustrated when using a mortgage calculator. In the case of negative amortization, however, the borrower’s monthly payments don’t even cover the full interest due on the mortgage. The unpaid interest then gets added to the outstanding mortgage total, so the amount owed actually increases over time. In some cases, depending upon market conditions, a borrower could end up owing more than the home is worth.

•   Balloon payments: These are large, one-time payoffs due at the end of the introductory period of the loan, historically after five or seven years.

Additionally, qualified mortgages have certain limits on the points and fees that lenders are allowed to charge. A lender can only charge up to the following maximum fees and points on a qualifying mortgage; otherwise, it’s referred to as a high-priced mortgage, which carries additional guidelines:

•   For a loan of $100,000 or more: 3% of the total loan amount

•   For a loan of $60,000 to $100,000: $3,000

•   For a loan of $20,000 to $60,000: 5% of the total loan amount

•   For a loan of $12,500 to $20,000: $1,000

•   For a loan of $12,500 or less: 8% of the total loan amount

Alongside caps on points and fees, there are also limits on the annual percentage rate (APR) that can be charged on a qualifying mortgage. This threshold can vary depending on the loan’s size or type.

Lastly, lenders must verify a borrower’s ability to repay the loan, so they’re not immediately scrambling to figure out how to lower mortgage payments. The ability-to-repay rule encompasses different aspects of a borrower’s financial history that a lender must review. Specifically, a lender is likely to review items such as:

•   Income

•   Assets

•   Employment

•   Credit history

•   Alimony or child support, or other monthly debt payments

•   Other monthly mortgages

•   Mortgage-related monthly expenses (such as private mortgage insurance, homeowners association fees, or taxes)

Under some circumstances, however, lenders might not have to follow the ability-to-repay rule and the mortgage can still count as a qualified loan.

In addition to the protections provided to borrowers, the rule also grants lenders some protection. Qualified mortgages offer safe harbor to the lender if ability to repay rules were properly adhered to when qualifying the borrower(s) for the requested loan program. In these instances, borrowers can’t sue based on the claim that the institution had no basis for thinking they could repay their loans. The rules also make it harder for borrowers to buy more house than they can afford.

What Is a Non-Qualified Mortgage?

A non-qualified mortgage (non-QM) is a type of mortgage loan that does not meet the standards required for a qualified mortgage, outlined above.

However, a non-QM loan is not the same as the subprime loans that were available before the housing market crash. Typically, with a non-QM loan, lenders confirm that borrowers can repay their loans based on reasonable evidence. This can include verifying much of the same information as qualified mortgage loans, such as assets, income, or credit score.

Non-qualified mortgage loans allow lenders to offer loan programs that don’t necessarily meet the strict requirements of qualified mortgages. Because non-QM loans don’t have to adhere to the same standards, it means the underwriting requirements, like the qualified mortgage DTI limit, can be more flexible.

The upside is that this can provide eligible borrowers with more loan program choices. That being said, non-qualified loans can vary by lender, so borrowers who take this route should research their options carefully and take advantage of tools like a home affordability calculator to help ensure they don’t get in over their head.

Recommended: First-Time Homebuyer Guide

When Could a Non-QM Loan Be the Right Option?

While qualified mortgages have safeguards in place for both the lender and the borrower, in some circumstances, it can make sense for a borrower to choose a non-qualified mortgage.

Many lenders offer non-QM loan programs because they have more flexible loan features. In some instances, a borrower may opt for a non-QM loan because of property issues, such as a condo that doesn’t meet certain criteria or a certain property type.

This type of loan may be right for borrowers who can afford the mortgage but who don’t conform to additional qualified-mortgage requirements. Examples of borrowers who might seek a non-qualified mortgage are:

•   The self-employed: Borrowers with streams of income that might be difficult to document, like freelance writers, contractors, and others, might consider a non-qualified mortgage.

•   Investors: People investing in real estate properties, including flips and rentals, might choose to apply for a non-qualified mortgage. This could be because they need funding faster or have a challenging time proving income from their rental properties.

•   Non-U.S. residents: People who are not U.S. residents may find it challenging to meet the requirements for qualified mortgages because they may have a low or nonexistent credit score in the U.S.

While understanding the nitty-gritty of qualified mortgages vs. non-qualified mortgages might feel overwhelming, understanding the differences and other mortgage basics might make choosing the best loan fit for your needs easier. It’s important to do your research and ask lenders questions about the different loan programs available.

Recommended: How Does Mortgage Interest Work?

The Takeaway

A qualified mortgage must conform to strict guidelines that are designed to ensure that the borrower can pay back their loan. Qualified mortgages also have limits on the rates and fees lenders can charge. Qualified mortgages can provide peace of mind for both borrower and lender, but as always, it’s important to do your research and ask lenders questions about the different loan programs available.

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 not permitted in a qualified mortgage?

Qualified mortgages generally do not permit a debt-to-income ratio above 43% or a loan term longer than 30 years. There can be no negative amortization, balloon payments, or interest-only payments. Qualified mortgages are designed to help ensure that the borrower can successfully repay the loan.

What is the maximum DTI for a qualified mortgage?

The highest a borrower’s debt-to-income (DTI) ratio can be for a qualified mortgage loan is 43%.

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.

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A no-closing-cost refinance sounds divine, but it’s important to understand that you will either roll the closing costs into the new mortgage or exchange them for a slightly higher interest rate.

Because you’ll either fatten your loan principal or pay an increased rate, your monthly payments and total interest paid will likely be higher than if you had paid the closing costs with cash.

Still, a no-closing-cost refinance can help some homeowners make their finances more manageable. Read on to decide if a no-closing-cost refinance is right for you.

No-Closing-Cost Refinance: How Does It Work?

You know how they say that if something sounds too good to be true, it usually is? Well, that’s true in this case, too.

When you undertake a mortgage refinance, you’re taking out a whole new loan, hopefully with a lower rate or shorter term.

The costs to do so are usually 2% to 5% of the total loan amount. For a refinance loan of $300,000, for example, that is $6,000 to $15,000, a big pill to swallow if the costs are to be paid upfront.

A no-closing-cost refinance means you get to take out a new mortgage without paying closing costs out of pocket or you accept a higher rate for the new loan.

Let’s break it down.

Note: SoFi does not offer no closing cost refinance at this time. However, SoFi does offer refinancing options.

Closing Costs? What Closing Costs?

When a borrower signs mortgage documents, a variety of fees and expenses come along for the ride, which you probably remember from signing your mortgage the first time.

Right away or after a set number of months, depending on the kind of mortgage they have, homeowners can attempt to lower their mortgage rate and shorten their loan term with a refinance or, if they’re sitting on enough home equity, apply for cash-out refinancing. (While SoFi does not offer a no-closing-cost refinance at this time, we do offer traditional mortgage refinancing and cash-out refinancing.)

They may want to transition from an adjustable-rate mortgage to a fixed-rate mortgage — or a fixed-rate mortgage to an ARM.

Some may want to refinance their FHA or USDA loan into a conventional loan to get rid of mortgage insurance; others may be looking to refinance their jumbo loan.

If rates have fallen or if your creditworthiness has significantly improved since you took out your mortgage, those are among the signs it might be time for a mortgage refinance.

But there’s no free lunch when it comes to closing costs, even with a “no-closing-cost refinance.” The mortgage refinancing costs add up.

Here are expenses that might be rolled into the refinanced loan:

Lender fees. Borrowing money costs money! Your lender might assess an application fee, processing fee, credit report fee, and underwriting fee. Most but not all lenders charge an origination fee. Any points on the mortgage, aka discount points, may be rolled in.

Title insurance fees. A title search ensures that no one else can claim ownership of your home.

•   Appraisal fee. The home appraiser’s fee is usually charged early in the closing process, so you probably won’t be able to add it to the new loan

Other closing costs can’t always be rolled into the new loan. They include:

•   Prepaid property taxes

•   Homeowners insurance

•   Any homeowners association dues

If you compare no-closing-cost refinance offers, ensure that each lender is willing to cover the same items.

And be aware that a lender that will cover lender fees, third-party charges, and prepaid items will probably charge a higher rate.

The Cost of a ‘No-Cost Refinance’

Given the heft of closing costs, a no-cost refinance might be sounding better and better. But whether you opt to accept a higher rate or roll in the closing costs, you will likely still end up paying those costs over time.

And depending on their total expense, as well as the interest rate and mortgage term, closing costs can eclipse the savings you stand to gain by refinancing in the first place.

That’s why it’s important, given your anticipated new loan rate and term, to use a mortgage calculator and scour loan estimates you’ll receive after applying for a mortgage refinance to know the full amount you’ll pay over the life of the loan.

With any mortgage refinance that includes closing costs, it’s a good idea to look at the refinance break-even point: closing costs divided by the expected monthly savings. That will give you the number of months it will take to recoup the costs to refinance.

If a refinance adds $100 a month to your mortgage payment and your lender is covering $4,000 in closing costs, you’ll break even after 40 payments, or three years and four months.

Recommended: Mortgage Recast or Mortgage Refinance?

Pros and Cons of a No-Closing-Cost Refinance

So-called no-closing-cost refinances have upsides and downsides to consider.

Benefits of a No-Closing-Cost Refinance

•   This kind of refinance can help keep homeowners from owing a hefty bill all at once, making it possible to refinance if they don’t have a lot of cash on hand.

•   By rolling costs into a home loan, you can keep cash on hand to use for other purposes that may be more important to you.

•   If you opt for a higher rate, you won’t use up home equity on a no-closing-cost refinance.

Drawbacks of a No-Closing-Cost Refinance

•   The closing costs may be compensated for in the form of a higher interest rate, which can be costly over time.

•   If the closing costs are added to the principal loan balance, borrowers very likely will pay more interest over the life of the loan than they would have if they’d paid closing costs upfront.

•   If you are already close to a lender’s loan-to-value threshold, then adding in closing costs could push you to the very edge. You may even find that the new mortgage will require private mortgage insurance.

Recommended: Cash-Out Refinance vs. HELOC

Is a No-Closing-Cost Refinance Right for You?

If you stand to save money by refinancing your home — and if you’ll be in your home long enough that you’ll break even on the refinance — it might be worth footing the elevated interest rate or higher loan principal of a no-closing-cost mortgage refinance.

For those who don’t have the cash on hand to pay for closing costs upfront, this approach is the only feasible way to achieve a refinance at all.

If, however, you’re able to pay the closing costs upfront, doing so can help keep the loan less expensive over its lifetime.

The Takeaway

With a no-closing-cost refinance, closing costs are either added to the new mortgage or exchanged for a higher interest rate. A no-cost refinance can make refinancing possible for those who can’t pay the closing costs upfront, but it’s important to look at costs over the life of the loan and your plans as a homeowner to ensure that it makes financial sense.

FAQ

What is a free refinance?

“Free refinance” is just another name for a no-closing-cost refinance. While borrowers who choose this route will not pay closing costs, they may find that the costs are rolled into their loan, which can mean higher payments over the long term.

How much are refinance closing costs?

Refinance closing costs are typically from 2% to 5% of your loan amount — so your cost will depend on how much money you are borrowing. Lenders may have differing fee schedules, but 2% to 5% is a good rule of thumb.

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.

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