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Homebuyers have a variety of financing options to consider. If you’re a current homeowner, a bridge loan and a home equity line of credit (HELOC) are two possible choices that let you use the equity in your home to finance your next home purchase.

But there are key distinctions in how these funds can be used, as well as pros and cons for each. Let’s take a closer look at how bridge loans and HELOCs compare.

What Is a Bridge Loan?

Bridge loans, sometimes referred to as swing loans, interim financing, or gap financing, are a short-term, lump-sum financing option that’s typically used to purchase a new home before the sale of an existing property.

If you’re figuring out how to buy and sell a house at the same time, coming up with a down payment on the new house when you haven’t yet received payment for your current house can be challenging. This is when a bridge loan could come in handy — by filling the gap in funding so you can secure your new home without having to make a sale-contingent offer or feel pressured to accept a low bid on your current home.

Borrowers typically approach bridge loans in one of two ways: A common scenario involves using a bridge loan to cover just the down payment and closing costs on a new home. Alternatively, borrowers can apply for a larger bridge loan — potentially up to 80 percent of the value of both properties. With this second approach, borrowers pay off the entire mortgage on their current home and apply the remaining funds toward closing on their new home.

When comparing a bridge loan vs. a HELOC, note that both financing options are often secured using an existing home as collateral. An important difference is that bridge loans aren’t meant to be used for long-term financing, as they come with relatively higher interest rates and loan terms between six months and a couple years.

Note: SoFi does not offer bridge loans. However, SoFi does offer home equity loans.

What Is a Home Equity Line of Credit?

A home equity line of credit, or HELOC, is a type of financing that leverages home equity to fund a variety of expenses. Borrowers can typically take out between 75% to 85% of their home equity — the value of their home minus the mortgage balance — with a HELOC.

A HELOC works much like a credit card, providing a revolving line of credit that can be drawn upon as needed. However, a HELOC offers lower interest rates than a credit card since it’s secured by an existing property.

When you consider a HELOC, there are two phases to keep in mind: the draw period and the repayment period. During the draw period, which often spans 10 years, borrowers can access available funds as needed while only having to pay interest on the amount that’s withdrawn.

Once the draw period ends, funds can no longer be withdrawn and the repayment period kicks in. Borrowers will need to make regular payments on the principal, plus interest, until the balance is paid off. On a HELOC with a 10-year draw period, borrowers can expect to have a 20-year repayment period. This extended repayment time frame is a notable distinction between a bridge loan vs. a HELOC.

You may have heard about a home equity loan, which also uses your home as collateral. When comparing a HELOC vs. a home equity loan, some key differences are that with the latter, funds are disbursed immediately as a lump sum and repayment begins right away. If you’re weighing a bridge loan vs. home equity loan, note that home equity loans usually have fixed interest rates and terms ranging from five to 30 years.

Recommended: Home Loan Help Center

Pros and Cons of Each Financing Option

Both bridge loans and HELOCs can provide quick and flexible financing. But each comes with its advantages and drawbacks.

Pros

Here’s a look at the benefits for each financing option.

Bridge Loan:

•   Quick access to funds for time-sensitive transactions

•   Avoids the need to make a sale-contingent offer on a new home

•   Could help buyers put 20% down and avoid private mortgage insurance

•   Faster processing than conventional mortgages

•   Often begin with more affordable, interest-only payments

HELOC:

•   Flexibility to draw on credit line whenever you need it

•   Lower interest rates than bridge loans

•   Interest is only charged on the funds you withdraw

•   Longer repayment period than bridge loans

•   Interest can be claimed as an itemized tax deduction if used for home improvements. (This tax benefit is slated to expire after 2025.)

Cons

Here are some potential disadvantages to consider when comparing a bridge loan vs. a home equity line of credit.

Bridge Loan:

•   Higher interest rate than other second mortgage options

•   Shorter repayment period than a HELOC

•   Often requires borrowers to also use the lender for their new home mortgage

•   Puts home at risk of foreclosure for missed payments

•   Limited borrower protections if sale of old home falls through

HELOC:

•   Typically have variable interest rates that are subject to change over the repayment period

•   Risk of running up balance quickly

•   Potential for large jump in payment amount when moving from the draw to the repayment period

•   Uses a home as collateral like a bridge loan

•   May include prepayment penalties for paying off the balance early

Is a Bridge Loan or HELOC Better for You?

It’s important to consider what you’ll be using financing for and your ability to repay the money you borrow when deciding whether a HELOC vs. bridge loan is a better bet. Situations that require funds over a longer period of time, or at different times, could be a good fit for a HELOC. Home renovations are a popular use for HELOCs, since the costs and timeline may be subject to change as the project unfolds. Funds from a HELOC may be used for other expenses like medical bills, tuition, or making a down payment if the line of credit provides sufficient funds. Note that these expenses are not eligible for a tax deduction.

A bridge loan, by comparison, is ideal for borrowers looking to buy and sell a home at the same time. Since bridge loans often start with interest-only payments, they can be an affordable option if borrowers can sell their old home soon after buying a new one. If there’s a good chance that the original residence won’t be sold for an extended period, it might be more cost-efficient to go with a home equity line of credit vs. a bridge loan.

Standard Qualifications and Requirements

Before you consider borrowing against your home equity and putting your property on the line, look closely at the qualifications and requirements. Both bridge loans and HELOCs require that borrowers have at least 20% equity in their home. Lenders factor in your creditworthiness for either loan, too. For a bridge loan, borrowers typically need a minimum credit score of 700, though some lenders may allow borrowers with lower scores. While it’s possible to qualify for a HELOC with a credit score of 620, this comes at a higher interest rate.

Requirements on how the funds are spent differs between the financing types. A HELOC offers greater flexibility in how the funds are spent, whereas bridge loans may be limited to the purchase of a new home while selling an existing property.

Application Process

Early on in the home-buying process, you’ll want to look into applying for financing. For either a bridge loan or a HELOC, you’ll need to provide documentation of homeownership, proof of income, mortgage statements showing you’ve been making on-time payments, and information on any existing debts. With either form of financing, lenders may require a home appraisal to determine the property’s market value, which is the basis for the loan or line of credit amount.

The application and underwriting processes for a bridge loan and HELOC are usually quicker than conventional mortgages, making them an ideal choice if a homebuyer needs to act fast.

Recommended: Mortgage Prequalification vs. Preapproval

The Takeaway

Both a bridge loan and a HELOC can provide quick access to financing to buy a home. There are pros and cons to each financing type, so it’s important to determine which works best for your financial situation. Remember that both financing options use your current home as collateral, meaning that lenders can foreclose on your house if you fall behind on payments.

FAQ

Can you pay off bridge loans and HELOCs early?

Yes, both types of financing can be paid off early. Note that some lenders may charge prepayment fees if you pay off a HELOC within the first few years of the repayment period.

What is the average interest rate on a bridge loan?

The interest rates on bridge loans are generally 2% higher than prime mortgage rates.

What happens if you take out a HELOC, but don’t use it?

You may have to pay an inactivity fee if you open a HELOC and don’t use it. Minimal withdrawal requirements are typically outlined in your HELOC contract.

Photo credit: iStock/MicroStockHub

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-Q324-007

If you have military experience, a loan from the U.S. Department of Veterans Affairs could help you take a giant step toward becoming a homeowner. VA loans come with a number of benefits — notably, they require no down payment. But first, you need to understand the VA loan pros and cons to make sure it’s the right choice.

What Is a VA Loan?

A VA loan is a federally guaranteed loan administered by the U.S. Department of Veterans Affairs. Even though the VA sets the basic eligibility requirements and guarantees the loan, borrowers actually apply to private lenders for these loans, after first obtaining a certificate of eligibility from the VA.

Definition of a VA Loan

What is a VA loan? It’s a type of mortgage designed to help improve access to home ownership for veterans, service members, reserve members, National Guard members, and surviving spouses. It comes with several noteworthy characteristics that make it attractive for homebuyers, like having no down payment requirement and limited closing costs.

Eligibility Requirements

In order to get preapproved for a VA loan, you must get a Certificate of Eligibility that ensures you meet the service qualifications. Here are the basic requirements for each type of borrower:

•   Veteran: Served at least 90 continuous days of active-duty service.

•   National Guard: Served at least 90 days of active duty (there are additional eligibility options if you served before August 2, 1990).

•   Reserve members: Served at least 90 days of active duty (there are additional eligibility options if you served before August 2, 1990).

•   Spouses: You’re the surviving spouse of a veteran or the spouse of a veteran who is missing in action or being held as a prisoner of war.

Lenders also evaluate your VA loan approval and mortgage amount based on your credit score, income, debt, and assets. The VA does not impose a minimum credit score requirement, although many lenders require a credit score of at least 620.

VA Loan Benefits

Are VA home loans good? They do come with a number of benefits. A big one is that there’s no down payment required. As long as your debt-to-income ratio can handle the mortgage payments, you can borrow up to the full sales price of the home with a minimal amount of cash at closing.

Pros of VA Loans

Here is what to think about as you weigh VA home loan pros and cons:

•   No down payment requirement: You don’t have to put down any cash on your home purchase. Conventional loans typically require at least 3% down for first-time homebuyers and FHA loans require 3.5% down for all borrowers.

•   No mortgage insurance: Other mortgages require that you pay private mortgage insurance when your down payment is less than 20%. There is no comparable fee with a VA loan.

•   Lower interest rate: Not only are VA loan interest rates usually lower than conventional loan rates, you can apply for a VA Interest Rate Reduction if rates drop after closing.

•   Flexible credit requirements: Lenders usually require a minimum credit score of 620. But technically, there is no minimum set by the government.

•   No use limits: You can get a VA loan multiple times throughout your life; in fact, there are no limits on how many times you can use one to buy a home.

Cons of VA Loans

In addition to these advantages, there are also some potential drawbacks of choosing a VA loan for your mortgage.

•   Funding fee: This is a one-time fee that is paid either at closing or rolled into your mortgage balance. The fee varies depending on how many times you’ve used the VA loan and the size of your down payment. For instance, a first-time VA loan borrower with a 0% down payment would pay a 2.15% funding fee.

•   Strict appraisal process: All mortgage lenders require an appraisal, but your appraiser must be VA-approved with this type of loan.

•   Property eligibility requirements: The home inspection must also meet VA-specific requirements, which means you can’t finance a major fixer-upper. For instance, it needs a working HVAC system, no lead paint, and adequate roofing, among other criteria.

VA Loans vs. Conventional Loans

When comparing a VA loan vs. a conventional loan, there are some significant differences to consider.

Down Payment Requirements

A VA loan has no minimum down payment requirement, while a conventional loan requires at least 3% down for first-time homebuyers. In the first quarter of 2024, the median home sales price was about $420,000. With a conventional loan on that amount, a first-time homebuyer would need a down payment of at least $12,600.

Credit Score Requirements

Although there’s no agency-mandated minimum credit score for VA loans, most lenders set a minimum of 620 — the same you’ll typically find with a conventional mortgage.

Mortgage Insurance

Although you may be required to pay a one-time funding fee with a VA loan, there’s no ongoing mortgage insurance like you may have to pay with a conventional mortgage.

Private mortgage insurance (PMI) is required with a conventional loan if your down payment is less than 20%. You may have a one-time, upfront payment at closing, or your PMI may be split up between up-front and monthly premiums that are rolled into your mortgage payment.

When to Choose a VA Loan

VA loans pros and cons may matter more or less depending on your personal situation. Some examples of when a VA loan may be the best choice include:

•   Buyers who don’t have cash for a down payment or want to preserve cash for other goals may want to go with a VA loan after they weigh VA home loan pros and cons.

•   Buyers who can’t make a 20% down payment (who would have to pay for private mortgage insurance if they obtained a conventional mortgage loan) might find a VA loan especially appealing.

Alternatives to VA Loans

Even if you’re eligible for a VA loan, it still makes sense to look at other options. Three other common types of mortgages include FHA loans (backed by the Federal Housing Administration), conventional loans, and U.S. Department of Agriculture loans.

FHA Loans

An FHA loan is another federally guaranteed mortgage with flexible credit requirements. To qualify for a minimum down payment of just 3.5%, you need at least a 580. But you can still qualify with a 500 credit score, as long as you pay at least 10% down.

With a lower down payment, you must pay a mortgage insurance premium. There is an upfront fee at closing, as well as a monthly fee. If your down payment is less than 10%, the fee stays on for the life of the loan unless you refinance to a new mortgage.

Conventional Loans

Some conventional mortgages allow for a down payment as low as 3% for first-time homebuyers, though others may require 5%. You must pay private mortgage insurance for down payments under 20%, but that fee usually drops off once you have 20% equity in your home. The credit requirements are usually a little higher with conventional loans.

USDA Loans

A USDA loan is designed for individuals looking to buy a home in a rural area. You can explore eligible properties on the USDA website. However, you also need to meet certain income limits based on your county and family size in order to qualify for this 0% down payment mortgage.

The Takeaway

Weigh VA loan pros and cons to make sure you choose the best mortgage for your personal financial situation. Among the things you’ll want to consider are your credit score and how much, if anything, you have saved for a down payment on a new home.

SoFi offers VA loans with competitive interest rates, no private mortgage insurance, and down payments as low as 0%. Eligible service members, veterans, and survivors may use the benefit multiple times.

FAQs

How hard is it to get a VA loan?

VA loans have more flexibility with application requirements compared to other types of loans, as long as you meet the military service requirements. There may also be additional restrictions on the type of home you buy, especially if you’re eying a fixer upper.

Are down payments required for a VA loan?

No, you may get a VA loan with no down payment, as long as your debt-to-income ratio suggests that you can make the monthly mortgage payments.

What credit score do I need for a VA loan?

The VA itself does not require a minimum credit score but most lenders look for a minimum credit score of 620 for VA loans.

Photo credit: iStock/sommart

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-Q324-005

To qualify for a mortgage, borrowers need a good credit score and sufficient savings for a down payment. A rent-to-own agreement is an alternative path to homeownership that involves renting a home with either the option or the requirement to buy the property by the end of the lease.

You probably haven’t seen many rent-to-own homes advertised on typical real estate sites, so you may be wondering, how do I find rent-to-own homes? And how does the process work? Here’s a closer look at how rent-to-own homes work, strategies for finding them, and tips for negotiating a rent-to-own agreement.

Understanding Rent-to-Own Homes

Rent-to-own homes, also known as lease-to-own homes, give renters a way to buy a home while living in it. If you’re on the fence about whether to buy or rent a home, this could potentially be a good option to try out a property and build up your finances before committing to homeownership.

Typically, the rent-to-own agreement outlines the duration of the lease, monthly rent, home sale price, and the option-to-buy fee. The latter effectively serves as security deposit for the renter’s right to buy the home at the end of the lease. This cost will likely be a minimum of 1% of the home price, and can often be applied toward the down payment later on.

With a rent-to-own arrangement, the monthly payment may include both rent that’s paid to the seller and a contribution toward a future down payment on the property, known as a rent credit.

There are two common types of agreements on rent-to-own homes: a lease-option agreement and a lease-purchase agreement.

A lease-option agreement grants some flexibility by allowing the renter to choose whether they ultimately buy the home when the lease expires. Both the home selling price and timeline for deciding to buy are included in the signed agreement, so it’s important to negotiate with the owner beforehand.

On the other hand, a lease-purchase agreement obligates the renter to buy the home at the end of the lease. Thus, it’s worth looking into mortgage preapproval beforehand to be prepared to obtain a home loan. Also make sure you can afford the purchase price outlined in the agreement. Completing a home inspection is good practice to identify any necessary repairs or expenses you would be on the hook for as the new owner.

Recommended: How Much Should You Spend on Rent?

Benefits of Rent-to-Own

A rent-to-own agreement can offer benefits for both the seller and homebuyer.

It can be challenging to save for a house while renting. A rent-to-own agreement can be structured to allocate a portion of rent toward a down payment each month, putting renters in a better financial position to buy their home. Making regular rent payments can also build up the renter’s credit score — a key factor lenders look at to determine mortgage qualification. Renters could save on moving costs, too, in the lease-to-own homes scenario, as they’ll already be inhabiting the home by the time they purchase it.

For the seller, a rent-to-own arrangement provides rental income from tenants who are motivated to pay on time and maintain the property. These agreements can also bypass real estate listing fees if structured as for-sale-by-owner. Additionally, sellers can lock in the sale price in the agreement, providing peace of mind and a clear picture of their return on investment when the property is sold.

Recommended: What Are the Different Types of Home Mortgage?

Potential Risks and Considerations

There are also some possible drawbacks to account for when pursuing a rent-to-own agreement.

On the buyer side, the combined cost of rent and contributing toward a future down payment can be steep. If a renter decides not to buy, they could lose out on the money paid toward the option fee and down payment. And if personal finances change and they fail to qualify for a mortgage or miss rent payments, the agreement could be canceled and they’ll forfeit their opportunity to purchase the property.

Changes in home value could be a potential risk for buyers and sellers alike. If the property drops in value, buyers could have trouble qualifying for a mortgage or be required to put more toward a down payment. For sellers, agreeing on a sale price one or more years prior to selling the home could mean missing out on a higher return on investment if the property value increases beyond what is set in the agreement.

Recommended: How to Get a Mortgage

Online Resources for Finding Rent-to-Own Homes

Looking to find legit rent-to-own homes but don’t know where to start? There are a variety of online resources to get started and narrow your search.

Dedicated Rent-to-Own Listing Sites

There are online portals and listing sites catering to prospective buyers looking for rent-to-own properties. Accessing these sites generally comes with a monthly cost, though there may be promotions for limited trials. Some popular sites include Hidden Listings, HomeFinder, and Rent-to-Own Labs, to name a few.

Real Estate Search Engines

Using a real estate search engine can help identify potential rent-to-own properties. Homes that are in foreclosure or listings that have been sitting on the market for a long time could be open to a rent-to-own agreement. Keep in mind that cold calling sellers about rent-to-own agreements can be a time-consuming approach.

Social Media and Online Forums

Aspiring homebuyers can broaden their search by looking for rent-to-own listings on online forums or specialty groups and pages on social media. These platforms enable buyers to take the initiative in making their own post that outlines the type of property and agreement they’re interested in.

When engaging on these channels outside your known network, practice extra due diligence in reviewing leads and opportunities to avoid rent-to-own scams.

Working with Real Estate Agents

Real estate agents may know how to find rent to own homes in your target area. Listing agents may have clients or contacts selling rent-to-own homes.

If you have a specific property in mind, a real estate agent could help negotiate the rent-to-own contract with the seller, although you’ll still want to consult a real estate lawyer to review the final agreement before you sign. Keep in mind that this may include commission versus pursuing a for-sale-by-owner situation.

Alternative Strategies for Finding Rent-to-Own Opportunities

There are other options that could help unearth rent-to-own homes: Spreading the word in your own personal network is a good place to start. And if you’re in an existing rental agreement or in the market for a new place to rent, asking about rent-to-own ahead of signing a lease could open up an opportunity with a landlord who may be looking to sell in the near-term.

There are real estate brokerages and companies that offer rent-to-own programs, too.

The Takeaway

The upfront cost of a down payment and credit requirements can be barriers to financing a home purchase. Rent-to-own homes offer another avenue for aspiring buyers to make homeownership a reality. There are multiple strategies buyers can implement to find a rent-to-own arrangement, including checking out online portals, contacting sellers directly, and working with a real estate agent or brokerage. When you’re ready to move forward with a rent-to-own arrangement or any home purchase, make sure you understand your home loan options.

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

Are there any risks involved with rent-to-own homes?

One potential risk with rent-to-own homes is paying an option-to-buy fee that may be non-refundable if you opt not to buy the property. If the property decreases in value between signing the agreement and applying for financing, the buyer may have trouble qualifying or have to put more money toward a down payment.

What are the requirements to qualify for a rent-to-own home?

The requirements to qualify for a rent-to-own home are negotiated with the seller, but may include an upfront option-to-buy fee, credit check, and demonstrating sufficient funds to cover rent.

What happens if you can’t buy the home after renting?

If you can’t buy the home after renting, you likely won’t be able to recoup any money you’ve already paid the seller, including the option-to-buy fee and rent credit.

Photo credit: iStock/Drazen Zigic

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-Q324-003

The average square footage of a house in the United States is 2,430 square feet, according to the National Association of Home Builders. That figure varies significantly from state to state, however, with averages ranging from 1,164 square feet all the way up to 2,800 square feet.

Average home sizes tend to be larger in areas where prices are lower and smaller in more expensive locales, though other factors also come into play. Understanding the average square footage of houses in your area can help you set realistic expectations for your house hunt and determine how much house you can afford.

Home Square Footage Trends in the U.S.

The size of homes in the U.S. has grown significantly over the past several decades. In 1949, the average square footage of a house for one family was 909 square feet. By 2021, it had almost tripled to 2,480 square feet, according to American Home Shield’s American Home Size Index.

One of the reasons behind expanding home sizes was American migration to the suburbs following World War II. During these years, new highways were built, demand for housing grew, and homeownership rose. People moved into bigger houses with more land outside the densely packed cities.

Overcrowding decreased at the same time. In 1950, 15.7% of U.S. homes were considered overcrowded. By 2000, the proportion had dropped to 5.7%. Today, older homes tend to have smaller floor plans, while more recent constructions are more spacious.

That said, home sizes have decreased slightly in the past few years due to rising interest rates and home prices. Home size was larger during the pandemic when interest rates reached historic lows and homebuyers were often looking for a house that could be home, workplace, and school all at once. Home sizes trended downward in 2022 and 2023 as housing became less affordable. (Learn more about how to save money for a house.)

Still, the mean square footage for new single-family homes was 2,430 square feet in the third quarter of 2023, a huge increase from the 909-square foot average of 1949.

States With the Largest Average Homes

The state with the largest homes on average is Utah, with an average home size of 2,800 square feet. Following Utah are other states in the Mountain West, including Colorado, Idaho, and Wyoming. This chart shows the 10 states with the largest average home sizes in the U.S., along with their median price per square foot.

States With the Most Expensive Cost per Square Foot

In states with a high cost per square foot, homes tend to be smaller on average. The smallest homes are in Hawaii, where the median price per square foot is nearly $744. New York has the next-smallest real estate, with a median price per square foot of more than $421. (New York City, however, has a median price of $1,519.57 per square foot.)

That said, home prices and size don’t always have an inverse relationship. California has some of the most expensive real estate in the country, but its home sizes average 1,860 square feet. Along with cost per square foot, some other factors that influence average home size include income levels and age of the homes.

This chart shows states with the highest median price per square foot, along with their average house sizes. If you’re looking to buy in a less pricey locale, consult a list of the best affordable places to live in the U.S.

Recommended: 12 Tips for First-Time Homebuyers

What to Consider When Buying a Larger Home

Buying a larger home might be appealing if you have a growing family and want space to spread out, but it could have downsides. These are some of the factors to consider before splurging on extra space:

More expensive maintenance costs

Not only may a larger home have a higher initial price tag, but it could also cost you more in maintenance costs. Home repair projects can easily cost thousands of dollars apiece, and prices only go up when you have more house to maintain. Before opting for a big home, consider what shape it’s in and any potential renovation costs. You could also do some research on the cost of services in your area to estimate future expenses.

More time to clean and organize

Larger homes take longer to clean and organize than smaller ones. You’ll have to purchase more furniture and spend more time on general upkeep. If you hire cleaners for your house, the cost of each visit will be higher if you have additional rooms that need cleaning.

Located farther from city center

Homes in and around a city are often smaller, while houses with more square feet and land are typically located outside of the urban center. This may not be ideal if you prefer to live near restaurants, theaters, and other urban activities. It could also be a downside if you work in the city and would have a longer and more expensive daily commute.

A bigger carbon footprint

A larger home will require more heat in the winter and air conditioning in the summer. Not only will your energy bills cost more, but your bigger house will use more resources and have a greater impact on the planet. Some newer constructions may offset this footprint with energy efficient features.

Recommended: Tips to Qualify for a Mortgage

How Much Square Footage Can You Afford?

Before starting the house hunt and the quest for a mortgage loan, it’s worth considering how much square footage you can afford. Even if you get preapproved for a mortgage of a certain amount, you might prefer a smaller loan with lower monthly costs to avoid over-burdening your budget. Many first-time homebuyers opt for a smaller starter home before eventually upsizing. One way to figure out how much house you can afford is with the 28/36 rule.

The 28/36 Rule

The 28/36 rule is a guideline that can help you estimate what price house you can afford. This rule suggests spending no more than 28% of your gross monthly income on housing costs and no more than 36% on all your debt combined, such as housing costs, car payments, and student loans.

Let’s say, for example, that your monthly gross income is $6,000. Using this guideline, you’d want to keep housing costs at $1,680 per month or lower. If you have other debts, you wouldn’t want to spend more than $2,160 on those debts and housing costs combined.

Key Reasons to Purchase a Smaller Home

Purchasing a smaller home can have several benefits, including:

•   Smaller mortgage: A smaller home may have a lower cost, so you might be able to put down a lower down payment and take out a smaller mortgage.

•   More affordable bills: With less square footage, you’ll have lower monthly bills when it comes to electricity, heating, and cooling. Plus, you won’t have to pay as much in property taxes.

•   Easier and cheaper maintenance: Smaller homes can be easier to clean and maintain, and you won’t have to spend as much on furniture and decorations.

•   Extra room in your budget for other goals: If you’re saving money on housing, you’ll have more money for other things, such as home renovation projects, travel, investing for the future, and dining out.

The Takeaway

The average home square footage in the U.S. is more than 2,000 square feet, but sizes have slightly decreased recently with rising costs and interest rates. Home sizes also vary greatly by state, with the average square footage in some states more than double that in others.

Before splurging on a big house, consider your budget carefully. Use the 28/36 rule to estimate how much house you can afford, and take your other financial goals into account when considering how much you want to spend on housing each month. With careful planning, you can find a house size that meets your needs without overstretching your budget.

FAQ

Are basements included in home square foot calculations?

Basements may or may not be included in home square foot calculations, depending on the state where you live and condition of the basement. If the basement is included, it generally must meet certain criteria for living space, such as having an entrance and exit point that leads outside the home.

How much square footage does a family of four need?

While everyone’s needs are different, one guideline for determining the ideal square footage for one’s family size is 600 to 700 square feet per person. For a family of four, that would be a home with 2,400 to 2,800 square feet.

Is the average house size in the U.S. increasing or decreasing?

The average house size in the U.S. increased significantly over the past 75 years from 909 square feet in 1949 to 2,430 square feet in 2023. However, the past couple of years have seen a slight decrease in house sizes due largely to rising interest rates and worsening affordability.

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SOHL-Q324-006

Many homebuyers finance their home purchase with a mortgage that’s paid back over a specific term, often 15 or 30 years. Borrowers may seek to pay off the loan ahead of schedule, a process known as mortgage curtailment, with the goal of saving on interest and getting out of debt.

Before you start making extra payments on your home loan, let’s take a closer look at curtailment mortgage meaning, its potential benefits, and factors to consider.

How Mortgage Curtailment Works

At a high level, curtailment in mortgage involves additional payments on the mortgage principal to reduce the length of the home loan and pay off a mortgage early. Monthly mortgage payments have four components: principal, interest, taxes, and insurance.

When you make your first mortgage payment, and for the initial portion of your loan, a greater share of the payment goes toward interest. As the principal balance gets paid off, less interest accrues and a greater share of the payment goes toward the principal. Mortgage curtailment speeds up this process by applying extra funds to the principal on top of the monthly payment. This is why it’s sometimes called “mortgage principal curtailment.”

The decision to curtail a mortgage is usually up to the borrower. Occasionally, mortgage principal curtailment can occur to refund overpayment of fees or during a cash-out refinance to bring the loan into compliance.

Recommended: The Mortgage Loan Process Explained in 9 Steps

Differences Between Curtailment and Prepayment

If you’re thinking about mortgage curtailment, you may also run across the term “prepayment,” a general term for making early payments on a loan. A mortgage prepayment could be a curtailment (in which you pay off some of the principal — but not all that you owe — early). Or it could be a complete prepayment of the loan, in which you pay off the entire amount of principal owed. So in short, curtailment is a form of prepayment and the terms are often used synonymously.

Benefits of Mortgage Curtailment

Paying off a home loan early with mortgage curtailment has its advantages. Notably, borrowers can potentially save thousands of dollars on interest by whittling away at the principal early.

Taking out a 15-, 30-, or even 40-year mortgage can be daunting. But chipping away at the principal with extra payments can shave years off the loan term. Besides offering peace of mind, getting out of mortgage debt frees up cash for other financial goals.

Putting more money toward the mortgage principal also builds home equity faster than making only your monthly payments. Greater home equity can increase net worth and boost the return on investment should you decide to sell your home. Additionally, homeowners can leverage their home equity for a variety of loans, whether for repairs and renovations or to purchase a new property before selling their home.

Calculating Mortgage Curtailment Savings

To understand how curtailment helps save money, let’s crunch the numbers with a principal curtailment mortgage example. Suppose a borrower has a $350,000 home loan with a 30-year term and 5.00% interest rate. If the homeowner made regular monthly payments, this would amount to $313,339 in interest over the life of the loan.

In this scenario, tacking on an extra $100 to the $1,804 monthly payment and applying that toward the principal would save $40,614 in interest and reduce the loan term by almost four years. Meanwhile, contributing an additional $400 to the principal each month would translate to $114,759 less in interest payments and paying off the mortgage in under 21 years.

Using a mortgage calculator can help estimate your monthly payment and how much interest you’d pay without mortgage curtailment.

Factors to Consider Before Curtailing

While curtailment can help save on interest and shorten the loan term, it’s important to take your personal financial situation into account. Any high-interest debt, such as credit cards, would be worth addressing first before allocating funds toward extra payments on a mortgage principal. It’s also good practice to have some cash reserves set aside for an emergency fund prior to curtailing a mortgage.

Here are some other factors to consider in the decision-making process.

Prepayment Penalties

Paying off a mortgage early can come with a cost — literally. Depending on the mortgage agreement, borrowers may be on the hook for covering a prepayment penalty, a fee imposed by the lender to offset the loss in interest income the lender will experience if a borrower prepays.

Different types of mortgages have varying terms and requirements. Reach out to your lender or check the fine print to see if prepayment penalties apply.

Opportunity Costs

Putting more money toward the mortgage principal is one way to increase wealth and get out of debt. But it’s worth considering the opportunity cost of mortgage curtailment versus using funds for other financial goals, such as retirement savings.

The money used for curtailment mortgage could potentially get a higher return on investment if invested in stocks, a Roth 401(k), or other retirement fund. When comparing how much interest you might save through mortgage curtailment vs. estimated earnings from investments, it’s important to factor in how much you expect the property to increase in value, as you will be building equity, not just saving on interest charges.

Tax Implications

Homeowners who itemize deductions on their tax returns can claim what they paid in mortgage interest, capped at a maximum of $750,000 in debt. The mortgage interest deduction also extends to home equity loans or lines of credit if the money borrowed is used for home improvements.

If total write-offs don’t exceed the standard deduction amount ($14,600 for single or married filing separately and $29,200 for married filing jointly), then an itemized deduction may not be worth it.

Strategies for Mortgage Curtailment

Borrowers have options for their mortgage curtailment strategy. Partial curtailment involves making additional payments (which might be monthly, or another frequency) on the loan principal. Borrowers still make regular monthly payments until the loan is paid off, but with each added payment, the mortgage amortization is updated to reflect the reduced principal balance. This approach offers flexibility for homeowners to adjust their extra payments based on their financial situation.

Alternatively, borrowers can pursue total curtailment to pay off the entire outstanding mortgage principal in one lump sum. Depending on how much you owe, this could require significant savings, or a windfall from, say, an inheritance.

Alternatives to Mortgage Curtailment

There are other ways to save on a mortgage that are worth looking into as you consider whether curtailment is right for you.

To take advantage of lower interest rates, homeowners can consider a home loan refinance. When doing so, choosing a mortgage term that’s shorter can save on interest payments over the life of the loan.

Borrowers who put less than 20% down on a house are required to pay private mortgage insurance (PMI) until they reach 20% equity. Making additional payments can put borrowers on a path to hitting 20% and getting out of PMI early, at which point they can decide if mortgage curtailment is a worthwhile long-term strategy.

Recommended: How to Get a Home Loan

The Takeaway

Mortgage curtailment involves making extra payments to reduce the principal on a home mortgage loan. Mortgage curtailment can reduce the total interest paid on a home loan as well as the loan term. It’s important to evaluate how curtailment impacts other financial goals, such as building up an emergency fund and saving for retirement, before making an extra payment on your home 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.

FAQ

What is the difference between mortgage curtailment and prepayment?

People often use the terms interchangeably, but curtailment curtails (shortens) the loan term and the amount of interest you’ll pay. Prepayment might mean making extra payments via curtailment or it could mean paying off the entire loan early.

How much can I save by curtailing my mortgage?

Total savings depends on the loan amount, repayment term, and the timing and amount of additional payments. For example, paying $100 extra each month on a 30-year, $350,000 loan with a 5.00% interest rate would save more than $40,000 in interest payments.

Will curtailing my mortgage affect my credit score?

Making additional payments each month will not affect your credit score. But paying off a mortgage in full reduces your length of credit history which could impact your credit score, although the interest savings might well be worth it.

Photo credit: iStock/kate_sept2004

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-Q324-010