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Expect to pay 2% to 5% of the new mortgage amount in closing costs when you refinance your mortgage.

If you have sufficient equity in your home and you’re tempted by a rate-and-term refinance or a cash-out refi, here’s what you need to know.

What Is the Average Cost to Refinance a Mortgage?

Refinancing isn’t free, because you’re taking out a new home loan and paying off your current one, and doing so brings on a host of costs, though not as many as purchase loans incur.

The main difference between average closing costs for refinances vs. home purchases is that owner’s title insurance and several inspection fees common for purchases are not typically required for refinances, according to ClosingCorp, a provider of residential real estate closing cost data and technology. But there is evidence that fees have been creeping up in recent years. From 2021 to 2023, median total loan costs for home mortgages increased by over 36%, according to the government’s Consumer Financial Protection Bureau.

Common Mortgage Refinance Fees

Some fees to refinance are flat fees that vary by lender. Other fees are based on a percentage of the loan amount.

Then there are recurring closing costs like homeowners insurance and property taxes. Six months of property taxes are usually due at closing.

Here are common fixed closing costs, though in some cases, a borrower may not need an appraisal.

And here are common percentage-based closing costs. Not all borrowers will need mortgage insurance (PMI or MIP: private mortgage insurance for conventional loans, and mortgage insurance premium for FHA loans).

PMI is usually needed for a conventional loan exceeding an 80% loan-to-value ratio.

An FHA loan can be refinanced to another FHA loan or to a conventional loan if the borrower meets credit score and debt-to-income requirements for a nongovernment loan.

USDA and VA loans can also be refinanced.

Are You Eligible to Refinance?

Most mortgage lenders want a homeowner to have at least 20% equity in the house in order to refinance, although those numbers are not universal.

What is home equity? Here’s an example. If your home is worth $350,000 and the current mortgage balance is $250,000, you have $100,000 in equity. The loan-to-value ratio is 71% ($250,000 / $350,000). This scenario fits the parameters of many lenders for a refinance to take place.

You’ll typically need a minimum FICO® credit score of 620 to refinance a conventional loan and 580 to refinance an FHA loan. A score of 740 or above often ushers in the best rates.

Besides credit score, lenders normally review recent credit applications, on-time payments, and credit utilization.

Check to see if your current mortgage has a prepayment penalty. These days they’re fairly rare.

Recommended: 7 Signs It’s Time for a Mortgage Refinance

Benefits of Refinancing a Mortgage

The most common type of refi is a rate-and-term refinance, when you take out a new loan with a new interest rate or loan term (or both). Some people will choose a mortgage term of less than 30 years when they refi, if they can manage the new monthly payment.

Then there’s cash-out refinancing, which provides a lump sum to the homeowner.

In general, refinancing may make sense if interest rates fall below your current mortgage rate. Here are some times when a mortgage refinance could be beneficial.

If You Can Break Even Within a Suitable Time Frame

Calculate how long it would take to recoup the closing costs. Find the break-even point by dividing the closing costs by the monthly savings from your new payment.

Let’s say refinancing causes a payment to decrease by $100 a month. If closing costs will be $2,500, it would take 25 months to recoup the costs and start to see savings.

If you plan to sell the house in two years, refinancing may not be the right strategy. If you intend to stay long term, it may be an idea to explore.

If You Can Reduce Your Rate Even a Smidge

You might read or hear that refinancing is worth it if you can reduce your mortgage rate by 1% or 2%. But for a big mortgage, a change of just a quarter of a percentage point, or half of one, could result in significant savings, especially if you can minimize lender fees.

Again, consider the break-even point and how long you plan to keep the home.

You’d Like to Tap Home Equity

With a cash-out refinance, a percentage of your equity can be issued in a lump sum for any purpose. You will need to have at least 20% equity remaining after the transaction.

Be aware that the higher loan amount of a cash-out refinance usually results in higher closing costs.

(If your main goal is to access cash and not to change your rate or term, a home equity loan or home equity line of credit may be less expensive than paying the closing costs on a cash-out refinance.)

An ARM’s Teaser Rate Is Appealing

Refinancing a fixed-rate mortgage to an adjustable-rate mortgage could make sense for a homeowner who plans to move before the ARM’s initial rate adjustment.

A 5/1 ARM, for example, will come with a rate for five years that is lower than that of most fixed-rate mortgages.

In other rate environments, it could make sense to refinance an ARM to a fixed-rate mortgage.

You Want to Reduce Your Repayment Term

Some people may decide to enjoy a lower rate and shorten their mortgage term, say from 30 years to 15. Monthly payments may well go up, but a lower rate and a shorter term mean paying much less over the life of a loan.

The amortization chart of this mortgage calculator shows how much interest may be saved.

You’d Like to Get Rid of FHA Mortgage Insurance

FHA loans come with the mortgage insurance premium (MIP) that costs the typical borrower $850 per year for every $100,000 borrowed. Unless you put down more than 10%, you must pay those premiums for the life of the loan. The only way to get rid of the MIP is to get a new mortgage that isn’t backed by the FHA.

Tips to Lower the Cost of a Mortgage Refinance

When preparing to refinance, the most important action is to shop around.

Comparison Shop and Try to Negotiate

You need not apply for a refinance with just your current lender — and doing so would be a missed opportunity, the Consumer Financial Protection Bureau notes. Then again, your current lender may offer loyalty incentives.

Apply with as many lenders as you wish; you’ll receive a loan estimate from each. Compare the costs, including those of the lender’s preferred vendors.

Ask potential lenders which fees can be discounted or waived. Remember, each lender wants your business.

Typical non-negotiable closing costs found under Section B of each loan estimate include credit reports and appraisals.

Keep Your Credit Shipshape

Having at least a “good” credit score can help you get a more attractive rate, and if your credit score has improved since the initial mortgage was taken out, that could be a reason to refinance all by itself.

A good FICO score on the credit rating scale of 300 to 850 falls in the range of 670 to 739. VantageScore®, a competitor developed by Experian, Equifax, and TransUnion, considers a score between 661 and 780 good.

If your credit profile could use some polishing, consider ways to build credit over time.

Use the Same Title Insurance Company

Save money on the lender’s title insurance policy by asking for a reissue rate from the title insurance company that was used for the original loan.

Consider a Streamline Refi for Government Loans

If you have an FHA, USDA, or VA loan, you may want to see if you’re eligible for an FHA Streamline, USDA Streamlined Assist, or VA Interest Rate Reduction Refinance Loan. The programs charge a lower mortgage insurance fee than regular government refinance programs and usually do not require an appraisal.

Think About a ‘No-Closing-Cost Refi’

A no-closing-cost refinance allows borrowers to roll the closing costs into the mortgage or accept a slightly higher interest rate on the new loan.

Rolling the closing costs into the refinance loan will increase the principal and total interest paid. But if you’re going to keep the loan for more than a few years, this move could be worth it.

Accepting a slightly higher rate could work for borrowers who can skip the upfront payment and who plan to keep their new loan for only a few years.

Recommended: Guide to Buying, Selling, and Updating Your Home

The Takeaway

Refinancing your mortgage could cost anywhere from 2% to 5% of the loan amount but might make financial sense if you are able to capture a lower interest rate, shorten your payment term (and thus lower the amount of interest you pay), or escape paying a mortgage insurance premium on an FHA loan. To contain costs, always compare offers from multiple lenders and don’t forget to include both interest and closing costs (and fees) in your calculations.

SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.

FAQ

Is refinancing your mortgage free?

No. A whole new loan must be approved and processed.

Is refinancing a mortgage worth the closing costs?

It might be. You’ll want to calculate your break-even point: Divide your closing costs by whatever your monthly savings will be to find the number of months it will take you to break even. Beyond that point, the refinancing benefits kick in.

Is it worth refinancing to save $100 a month?

Refinancing to save $100 a month could be worth it if you plan to keep your home long enough to cover the closing costs. Divide your closing costs by 100 to calculate how many months it will take you to break even.

Will refinancing cost me more in the long run?

If you get a new 30-year mortgage several years into your original 30-year loan, you are, in essence, lengthening the term of your loan, and that can cost you. It makes more sense to shorten the term to 20 or 15 years.

Is it cheaper to refinance with the same bank?

Your lender might offer a slightly lower rate, but it’s a good idea to still see what competitors are offering by comparing loan estimates.

Can you negotiate closing costs when refinancing?

Yes. Many lender fees and third-party vendor fees are negotiable. On each loan estimate, Section A lists the lender charges. Try to negotiate the lowest total lender charge, keeping the rate in mind. And third-party fees in Section C are negotiable.

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.

*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.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q424-125

When you’ve decided on a house to buy and entered into escrow, you can expect to receive a preliminary title report. The report will verify ownership and reveal any lurking issues that will not be covered under a subsequent title insurance policy.

This is an important step: When you’re buying a home, the preliminary title report gives you the chance to remove or eliminate problems before you close on the property. This can help you avoid any legal headaches that arise from those issues.

Here’s a look at how to read these documents and what kind of information you can expect to find in them, including what is a preliminary title report, how to read a preliminary title report, what is a title report vs. title insurance, and more.

Title Insurance 101

First, you’ll need to understand what title insurance is. A title is the set of legal rights you have to a property once you buy it. A clear title is the goal, meaning you want the property to be free of liens and other ownership claims. You may have qualified for a mortgage, but you will need to resolve any title issues in order to get to the closing.

Title insurance protects both buyers and lenders against any problems with a title when ownership of a property transfers from one person to another. During or after a sale, if there is a title dispute, the insurance company may be responsible for paying certain legal damages. If you don’t have title insurance, you could be responsible for any issues that crop up.

There may be two forms of title insurance involved in a sale. If you are borrowing money to buy a home, you may purchase lender’s title insurance, which protects the lender. Owner’s title insurance, less common, is usually purchased by the seller to protect the buyer.

Reading a Preliminary Title Report

When you receive the preliminary title report, look for the following information:

Owner of Record

The preliminary title report will start with the name of the owner of record. If you’re buying a home, this should be the seller’s name. If it isn’t, that’s a major red flag, and you should let your escrow or title officer know.

Statement of Vesting

Next, the report will lay out the extent of the current owner’s interest in the property. The fullest type of ownership, and the most common, is known as “fee simple” or “fee.” This means a person wholly owns a piece of land and all the real estate on it.

There may be other types of ownership that will show up in this section. For example, you might see a leasehold estate, which gives a tenant exclusive rights to use a property owned by someone else for a set period of time.

Legal Description

The legal description details the property location, lot size, boundaries, and any easements or encroachments.
For condominiums and planned unit developments, the legal description might include common areas, parking, storage, and easements that convey.

A plot map, which shows how land is divided into plots, may be included as well to show the general location of a property.

Exceptions

Exceptions will be listed numerically and are matters that your title insurance policy will not cover. They may include:

•   General tax issues. Are there unpaid taxes? Property taxes will show up as the primary “lien” and as due or paid in full. Property taxes must be paid for the property sale to go through. And tax classifications could affect the new owner. For instance, if land is classified as agricultural, there could be penalties for withdrawing from that classification.

•   Assessments. Are there delinquent water or sewer bills owed to the city that need to be paid before closing?

•   Encumbrances. These might include liens from creditors or lenders, or liens for the payment of federal taxes or assessments. They might also include liens against a property because of back-due child support or spousal support. Are there loans against the property you weren’t aware of, such as additional mortgage loans?

•   Covenants, conditions and restrictions, also known as CC&Rs. These are rules that homeowners must follow in a planned community or common interest development. They might determine whether you are allowed to park on the street, what kind of fence you can put up, or what color you can paint your house.

•   Easements. An easement is the right another party has to the property you’re interested in buying. For example, neighbors may have a right of way that allows them to access their property through yours. Or a utility company might have the right to install, access, or maintain equipment on the property, such as power lines or cable.

•   Other issues. There are other matters that may appear on the preliminary title report, such as bankruptcies or notices of action, which are court proceedings that are underway and involve the property.

The transfer of property is subject to these exceptions unless they are dealt with by the seller before the sale.

If any liens or encumbrances crop on your preliminary title report, you have the chance to clear them before the sale goes through. Together with your real estate agent you can work with the sellers and their agent to clear the title before you take it on.

If you have any questions about your preliminary report, you can contact your real estate agent, an attorney, or your escrow or title officer.

Standard Exceptions and Exclusions

In addition to the list of exceptions that are particular to the home you want to buy, there are standard exceptions and exclusions that a title insurance policy won’t cover.

Building codes and restrictions are exempt from title insurance coverage, as are zoning restrictions or other regulations for how land can be used in certain areas.

Sometimes a building is subject to zoning restrictions. For example, it may be in a historical district that restricts how a buyer can develop the property.

Recommended: How to Make an Offer on a House

How to Get a Title Report for a Property

As part of the homebuying process, your lender will likely require a preliminary title report and title insurance.

In many cases, the seller will request the title report from a title company once an escrow account is opened. The seller includes this information as part of their disclosure package.

Recommended: Mortgage Pre-Qualification vs. Pre-Approval: The Differences

Title Report vs. Title Insurance

As mentioned above, once you open escrow, an order is placed with the title company to produce your preliminary title report. The company will assemble and review records having to do with the property you want to buy. The title report will give you insights into whether the property has, say, any liens on it or other issues.

Title insurance, on the other hand, is indemnity insurance. It protects both lenders and homebuyers from enduring financial loss if there were any defects in a property’s title. (Title insurance is different from homeowners insurance and you’ll need both.)

Limitations of the Preliminary Title Report

Be aware that the preliminary title report only shows the matters that the title company will exclude from coverage when and if a title insurance policy is issued.

It is not a complete picture of the condition of the property. And it may not even list all of the liens and other encumbrances that may affect the title of the property.

The Takeaway

Think of a preliminary title report like a background check on a home, revealing tax, lien, or ownership poltergeists lurking. Knowing how to read a preliminary title report helps prevent spooky surprises. It’s an important step in getting to the closing table and moving into your new home.

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

Who should order the preliminary title report?

It is usually the seller’s responsibility to order the preliminary title report as part of their disclosures about the property. Work with your real estate agent to make sure the title report has been ordered to keep moving smoothly toward your closing date.

What could a preliminary title report reveal?

A title report will show who owns the property and could reveal liens, covenants, easements and other restrictions on the property. This gives you and the seller an opportunity to clear these up before the sale goes through.

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

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

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

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

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

This article is not intended to be legal advice. Please consult an attorney for advice.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOHL-Q424-134

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.

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

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

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

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

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOHL-Q424-122

A dead cat bounce refers to an unexpected price jump that occurs after a long, slow decline — and typically just before another price drop. In other words, the price jump isn’t “live” and typically doesn’t last.

The danger can be that the apparent rebound might create a false sense of value, momentum, or optimism. That said, some investors may be able to take advantage of a dead cat bounce to create a short position. Unfortunately, it’s usually hard to identify a dead cat bounce until after the fact.

Nonetheless, investors may want to know some of the signs of this price pattern, as it can help them gauge certain market movements.

What Is a Dead Cat Bounce?

The phrase “dead cat bounce” comes from a saying among traders that even a dead cat will bounce if it’s dropped from a height that’s high enough.

Thus, when a security or market experiences a steady decline and then appears to bounce back — only to decline again — it’s often dubbed a dead cat bounce.

What can be puzzling for investors is that the bounce, or “recovery”, doesn’t have a rhyme or reason; it’s merely part of a short-term market variation, perhaps driven by market sentiment or other economic factors.

Knowing the Specifics

If you’re learning how to invest in stocks or invest online, bear in mind that a dead cat bounce is not used to describe the ups and downs of a typical trading day — it refers to a longer-term drop, rebound, and continued drop. The term wouldn’t apply to a security that’s continuing to grow in value. The spike must be brief, before the price continues to fall.

It’s also important to point out that this financial phenomenon can pertain to individual securities such as stocks or bonds, to stock trading as a whole, or to a market.

Why It Helps to Identify This Pattern

Even for experienced traders or short-term investors using sophisticated technical analysis, it can be difficult to identify a dead cat bounce. Sometimes a rally is actually a rally; sometimes a drop indicates a bottom.

The point of trying to distinguish whether the rise in price will continue or reverse is because it can influence your strategy. If you have a short position, and you anticipate that a rally in stock price will end in a reversal, you may want to hold steady.

But if you think the rally will continue, you may want to exit a short position.

Example of a Dead Cat Bounce

To illustrate a dead cat bounce, let’s suppose company ABC trades for $70 on June 5, then drops in value to $50 per share over the next four months. Between Oct. 7 and Oct. 14, the price suddenly rises to $65 per share — but then starts to rapidly decline again on Oct. 15. Finally, ABC’s stock price settles at $30 per share on Oct. 16.

This pattern is how a dead cat bounce might appear in a real-life trading situation. The security quickly paused the decline for a swift revival, but the price recovery was temporary before it started falling again and eventually steadied at an even lower price.

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Historical Dead Cat Bounce Pattern

There are countless examples of the dead cat bounce pattern in stocks and other securities, as well as whole markets. One of the most recent affected the entire stock market during the COVID-19 pandemic.

The U.S. stock market lost about 12% during one week in February 2020, and appeared to revive the following week with a 2% gain. But it turned out to be a false recovery, and the market dipped back down again until later in the summer.

What Causes a Dead Cat Bounce?

A dead cat bounce is often the result of investors believing the market or security in question has hit its low point and they try to buy in to ride the turnaround. It can also occur as a result of investors closing out short positions.

Since these trends aren’t driven by technical factors, that’s why the bounce is typically short-lived — usually lasting a couple of days, or maybe a couple of months.

4 Signs of a Dead Cat Bounce

Although a dead cat bounce is typically not reflective of a stock’s intrinsic value, the dramatic price increase may tempt investors to jump on an investment opportunity before it makes sense to do so.

The following typical sequence of events may help an investor correctly identify a dead cat bounce as it might occur with a specific stock.

1. There is a gap down.

Typically the stock opens lower than the previous close, usually a significant amount like 5% (or perhaps 3% if the stock isn’t prone to volatility).

2. The security’s price steadily declines.

In a true dead-cat-bounce scenario, that initial gap down will be followed by a sustained decline.

3. The price sees a monetary gain for a short time.

At some point during the price drop, there will be a turnaround as the price appears to bounce back, close to its previous high.

4. A security’s price begins to regress again.

The rally is short, however, and the stock completes its dead cat bounce pattern with a final decline in price.

Dead Cat Bounce vs. Other Patterns

How do you know whether the pattern you’re seeing is really a classic dead cat bounce versus other types of movements? Here are some clues.

Dead Cat Bounce or Rally?

One way to assess a dead cat bounce with a particular stock is to consider whether the now-rising stock is still as weak as it was when its price was falling. If there’s no market indicator as to why the stock is rebounding, you might suspect a dead cat bounce.

Dead Cat Bounce or Lowest Price?

Since investors are looking for opportunities to profit, they try to find investment opportunities that allow them to buy low and sell high.

Therefore, when assessing investment opportunities, a successful investor might try to recognize emerging companies, and buy shares of a stock while the price is low, and before other investors get wind of a potential opportunity.

Since companies go through business cycles where stock prices fluctuate, pinpointing the lowest price point might be hard. There’s no way to know if a dead cat bounce is really happening until the prices have resumed their descent.

Dead Cat Bounce or Bear Market Bottom?

Investors may also confuse a dead cat bounce for the actual bottom of a bear market. It’s not uncommon for stocks to significantly rebound after the bear market hits bottom.

History shows that the S&P 500 often sees substantial gains within the first few months of hitting bottom after a bear market. But these rallies have been sustained, and thus are not a dead cat bounce.

Investing Strategies to Avoid a Dead Cat Bounce

For investors who want a more hands-on investing approach — meaning active investing vs. passive — it’s generally better to use investing fundamentals to evaluate a security instead of attempting to time the market (and risk mistaking a dead cat bounce for an opportunity).

Investors who are just starting may want to consider building a portfolio of a dozen or so securities. Picking a few stocks allows investors to monitor performance while giving their portfolio a little diversification. This means the investor distributes their money across several different types of securities instead of investing all of their money in one security, which in turn can help to minimize risk.

Active investors could also consider selecting stocks across varying sectors to give their portfolio even more diversification instead of sticking to one niche.

Investors with restricted funds might consider investing in just a few stocks while offsetting risk by investing in mutual funds or exchange-traded funds (ETFs).

For investors who would prefer not to execute an active investing strategy alone, they can speak with a professional manager. Working with a professional manager may help the investors better navigate the intricacies of various market cycles.

Limitations in Identifying a Dead Cat Bounce

As noted several times here, a dead cat bounce can’t really be identified with 100% certainty until after the fact. While some traders may believe they can predict a dead cat bounce by using certain fundamental or technical analysis tools, it’s impossible to do so every single time.

If there were a way to accurately predict market movements or different patterns, people would always try to time the market. But there are no crystal balls in investing, as they say.

The Takeaway

With 20-20 hindsight, investors and analysts can clearly see that an individual security or market has experienced a steady drop in value, a brief rebound, and then a further drop — a phenomenon known as a dead cat bounce.

Unfortunately, though, it can be too hard for most investors to distinguish between a dead cat bounce and a bona fide rally, or the bottom of a given market or security’s price. Still, knowing what to look for may help investors make more informed choices, especially when it comes to making a choice around keeping or closing out a short position.

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