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

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

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

How Cash-Out Refinancing Works

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

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

The Tax Implications of Mortgage Refinancing

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

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

Is a Cash-Out Refinance Taxable?

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

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

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

Requirements for Interest Deductions on a Cash-Out Refinance

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

How to Make a Cash-Out Refinance Tax-Deductible

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

Qualifying Home Improvements

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

•   Putting in a swimming pool

•   New fencing

•   New roof

•   New heating or cooling system

•   Installing efficient windows

•   Installing a home security system

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

Deductions for Adding a Home Office

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

How Home Offices Can Impact Your Taxes

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

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

Recommended: What to Know Before You Deduct Your Home Office

Tax Implications of a Cash-Out Refinance for Rental Property

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

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

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

Can You Deduct Your Mortgage Points?

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

Risks of a Cash-Out Refinance

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

Alternatives to a Cash-Out Refinance

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

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

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

Recommended: Home Equity Loans vs HELOCs vs Home Improvement Loans

The Takeaway

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

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

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

FAQ

Is cash-out refinance tax-deductible?

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

Do you pay taxes on a cash-out refinance?

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

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

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

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

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

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

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

Photo credit: iStock/Jun

^*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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

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

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

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

SOHL0623028

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

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

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

What Does a Personal Loan Include?

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

What Is a Cash-Out Mortgage Refinance?

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

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

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

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

Cash-Out Refinance vs Personal Loan: A Comparison

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

Home Equity and Collateral

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

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

Cost and Interest Rates

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

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

Speed of Approval and Funding

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

Loan Amount

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

Closing Costs and Loan Fees

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

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

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

Length of Repayment Period

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

Eligibility for Tax Benefits

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

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

The Takeaway

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

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

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

FAQ

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

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

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

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

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

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

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

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

Photo credit: iStock/urbazon

^*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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

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

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

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

SOHL0623027

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

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

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

•   The average salary for a mortgage loan officer

•   How a mortgage loan officer gets paid

•   The payment structure for mortgage loan officers

•   Earning potential, benefits, job prospects

What’s the Average Salary of a Loan Officer?

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

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

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

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

How Is a Mortgage Loan Officer Paid?

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

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

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

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

Payment Structure for MLOs

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

Mortgage Loan Officer Earning Potential

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

Mortgage Loan Officer Benefits

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

•   Medical

•   Dental

•   Vision

•   Retirement plans

•   Life insurance

•   Vacation time

•   Parental leave

•   Sick leave

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

Mortgage Loan Officer Job Prospects

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

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

Mortgage Loan Officer Pros and Cons

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

Pros

•   High salary potential

•   High commission and bonus potential

•   Can help individuals and businesses obtain financing for desired properties

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

Cons

•   Loan officers only offer financial products from their employer

•   Likely has no ability to adjust price

•   Lots of paperwork, regulation, and details

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

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

Recommended: First-time Homebuyer Programs and Loans

The Takeaway

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

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

FAQ

How is loan officer commission calculated?

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

How do you make money as a loan officer?

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

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

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

Photo credit: iStock/skynesher

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

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

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

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

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

SOHL0423008

The monthly cost of a $500,000 mortgage is $3,360.16, assuming a 30-year loan term and a 7.1% interest rate. Over the course of a year, you would pay $40,321.92 in combined principal and interest payments.

If you were to opt for a 15-year term instead, a $500,000 mortgage at an interest rate of 6% would cost you $4,219.28 per month, or $50,631.36 per year. (Generally speaking, 15-year terms feature lower interest rates than 30-year terms.)

As you can see, the monthly cost of a mortgage can vary widely depending on your terms; you’ll want to factor this in alongside the other short- and long-term costs of homebuying, like lender fees, property taxes, and maintenance. We’ll guide you through these expenses and how they factor into your budget.

Total Cost of a $500K Mortgage

The total cost of a $500K mortgage is $1,209,657.53 over 30 years at a 7.1% APR. Absent any late or pre-payments, this sums up to $709,657.53 worth of accrued lifetime interest.

When calculating your total costs, you’ll want to factor in other expenses like closing costs, as well as property taxes and insurance, which are incurred for as long as you own your home. We’ve categorized these expenses into upfront and long-term costs below.

💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you from start to finish.

Upfront Costs

Your average upfront closing costs will usually set you back 2% – 5% of the total purchase price on your home. The actual amount varies depending on your local tax rate and third-party fees. Closing costs typically include the following:

•   Abstract and recording fees: $200 to $1,200 and $125, on average, respectively

•   Application fees: up to $500

•   Appraisal fees: $300 to $400

•   Attorney fees: $150 to $400/hour

•   Home inspection fee: $300 to $500, on average

•   Title search and title insurance fees: $75 to $200

The other two major upfront costs include the earnest money deposit and your down payment on the house. Your earnest money deposit shows the seller that you’re serious about buying the home, while the down payment serves as security for your mortgage lender. Average down payments usually range from 3% – 20% of the home’s purchase price, based on most popular mortgage underwriting guidelines. Earnest money and the down payment differ from closing costs as you’ll recoup these, in the form of equity in your home, after closing.

Long-Term Costs

Long term costs on a home purchase include property taxes, homeowner’s insurance, and upkeep. Many lenders will simplify your annual payments by rolling taxes into escrow alongside your monthly mortgage payments. Homeowners who opt out of escrow will be responsible for making their own payments.

Property taxes can range from 0.5% – 3% or more of your home’s assessed value. Keep in mind that the assessed value isn’t the same thing as your home’s market value; instead, it is the value local tax assessors use for calculating property taxes.

Average homeowners insurance rates vary widely depending on your state of residence, policy terms, and the condition of your home. Policy rates are usually between $999 and $1,655, according to a study on home insurance policies conducted by Progressive.

Maintenance and upkeep costs are some of the most variable expenses you’ll face on your home. You may have to repair your roof or replace your water heater in some years, but in others, you may get lucky and avoid big expenses. It’s a good idea to set aside 1% – 2% of your home value annually to cover these projects if they pop up.

Estimated Monthly Payments on a $500K Mortgage

As noted above, your estimated monthly payment for a $500K mortgage will be $3,360.16, assuming a 30-year loan term and an interest rate of 7.1%. But this payment could range between $2,600 and $4,900 depending on your term and interest rate. It’s helpful to take a closer look at how these factors impact the monthly charge, as we have in the chart below.

Monthly Payment Breakdown by APR and Term

Assuming both 30-year and 15-year loan terms, we’ve broken down the monthly payment estimates for interest rates ranging from 5% – 8.5%. If you don’t see your rate below, try using our mortgage payment calculator to estimate your required monthly payment.

Recommended: The Cost of Living by State

How Much Interest Is Accrued on a $500K Mortgage?

A $500K mortgage with a 7.1% APR will accrue $709,657.53 worth of total interest over 30 years. A 15-year mortgage with the same loan balance and interest rate will accrue $313,985.44 in interest over the lifetime of the loan.

Interest accrues directly in relation to your outstanding loan balance, APR, and rate of repayment. The faster you repay your home loan, the less time interest has to accrue.

Additionally, larger loan balances will accrue more interest at any given rate, as larger balances mean a larger principal base on which interest is calculated. Similarly, higher interest rates accrue interest faster, as the APR multiple used to calculate your interest expense is greater for all loan balances.

💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls.

Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

$500K Mortgage Amortization Breakdown

It’s helpful to put monthly payments on a $500K mortgage in context by looking at an amortization schedule, which breaks down payments by interest and principal. In the example below of a 15-year, $500,000 mortgage at 6%, you can see that only $21,208.34 worth of principal was paid off after the first year, despite having made more than $50,000 worth of total payments. This is due to the front-weighted nature of amortizing loans.

Interest is calculated off the total principal amount of the loan outstanding. This means that your interest expense will be greater during the early years of home loan, when the remaining loan balance is greatest.

As time passes and principal is paid off, your interest expense will gradually decrease over time. This is why many homebuyers choose to contribute a larger down payment upfront to avoid having to pay more interest.

What Is Required to Get a $500K Mortgage?

To qualify for a $500K mortgage, you’ll need to ensure that you meet the income, credit, and down payment requirements, while still having enough leftover to cover additional long-term costs like taxes and home insurance.

While income requirements can vary by lender, a good rule of thumb to follow is the 28% rule, which states that your total housing costs should make up no more than 28% of your monthly gross income. This isn’t a hard and fast rule, but serves as a good indicator of whether you can afford your mortgage.

For example, if your $500K mortgage carried a 6% APR and a monthly payment of $2,997, and you had another $300 in monthly housing costs, you’d need a minimum gross monthly income of $12,000, or annual income of $144,000, to fall within the 28% rule.

You’ll also need a minimum credit score of 620 or higher to meet the lender’s credit guidelines. 620 is only the minimum bar to qualify according to mortgage lending guidelines, and your likelihood of approval may still be tenuous at this level.

In most cases you’ll want your credit score to be much higher; preferably 740 or more, to ensure you can qualify for the most competitive interest rates.

Finally, depending on the type of mortgage loan you obtain, you’ll need to provide a minimum down payment on the home. In many cases, this is 20% of the overall home value. For a $625,000 home with a $500,000 mortgage, a 20% down payment would be $125,000.

How Much House Can You Afford Quiz

The Takeaway

Committing to pay off a $500,000 mortgage loan is a significant decision. You’ll be on the hook for thousands of dollars a month in mortgage payments. Even slight variations in your interest rate can increase the lifetime cost of the loan by tens of thousands of dollars, so looking carefully at your mortgage’s total cost is important.

“Really look at your budget and work your way backwards,” explains Brian Walsh, CFP® at SoFi, on planning for a home mortgage.

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

FAQ

How much does a $500,000 mortgage cost per month?

The monthly cost of a $500,000 mortgage can vary widely based on your quoted interest rate and loan term. Assuming a 6% APR and 30-year term, a $500,000 mortgage would cost you a $2,997 monthly payment, without factoring in any taxes or insurance.

What credit score is required for a $500K mortgage?

A $500,000 mortgage would fall within the standard guidelines for conventional home loans in most cases. For a standard fixed rate mortgage, Fannie Mae requires a minimum credit score of 620.

Photo credit: iStock/andresr

*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.

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

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HR pros know that helping employees with debt, particularly student loan debt, is a key ingredient to building financial wellness in the workforce. With 44 million Americans carrying a total of 1.7 trillion in student debt, it’s the rare employer that doesn’t have a significant number of employees with substantial student loans.

Not surprisingly, many HR leaders are looking at how they may be able to help. In the Employee Benefit Research Institute’s 2022 Financial Wellbeing Survey, nearly three-quarters of employers said they currently offer or plan to offer student loan debt assistance or tuition reimbursement programs.

Despite the need and desire, implementing these benefits can be challenging. Recent legislative and executive actions concerning student loan repayment and forgiveness have been confusing. Employers are naturally wondering what role they should play in student debt repayment and what benefits can best help.

Here, we’ll look at two important student debt repayment benefits, how they work, and how they can best be implemented to attract and retain talented workers and enhance overall financial wellness among your employees.

Recommended: What Employers Need to Know About Student Loans in 2023

Student Loan Repayment Benefits

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, employers can contribute $5,250 annually per employee toward tuition reimbursement or student loan payments on a tax-exempt basis. That means employees won’t pay income tax on contributions made by their employers toward educational assistance programs, yet the employer also gets a payroll tax exclusion on these funds.

Employers can make the payments directly to their employees’ student loan servicers or lenders, or they can provide them to the employees themselves, who can then put them toward their student debt.

The CARES Act provision was set to expire at the end of December 2020, but Congress passed the Consolidated Appropriations Act before that happened, extending the tax break through the year 2025.

Here’s what to consider when offering student loan repayment benefits.

How Much Will You Offer?

The maximum allowed annually on a tax-exempt basis is $5,250 per employee but employers do not have to provide that much. Many organizations start with a $50 to $100 a month payment. Even this seemingly small amount can help employees save thousands of dollars in interest over the life of the loan if directed toward the principal.

The amount you’ll contribute likely depends on the overall costs you are willing to dedicate to this benefit. An employee survey or other demographic data can help you determine how many of your workers carry student debt and would likely qualify for this benefit, which can help you understand the cost. In addition, you may want to look at future hiring trends for the next several years to estimate the number of new employees likely to join the program.

Will You Tie Benefits to Tenure?

Some employers require a time commitment — such as three to five years at the company — in exchange for the student loan payments. Others may simply delay the benefit for new employees for six months or a year.

In determining the qualification surrounding your program, you’ll need to weigh the immediate need for student loan relief among your workers and your need for higher retention and recruiting rates.

Is Your Paperwork in Place?

A program document outlining the design of the student loan contribution plan that complies with IRS regulations is necessary to implement this benefit.

You’ll also need to make sure this benefit works with any other existing qualified education assistance programs you may offer, such as tuition reimbursement.

The $5,250 tax-exempt limit applies to all tuition programs. So, if an employee receives reimbursement for a certification class, for example, and is eligible for student loan forgiveness payment for their undergraduate degree, the total of the two benefits per year for that employee cannot exceed $5,250. Anything above that amount will be considered taxable wages.

Matching Contributions for Student Loan Repayment

The Secure Act 2.0, which President Biden signed into law late in 2022, is designed to encourage more American workers to save for retirement. The act also formally authorizes matching contributions for student loan repayment, allowing companies to match employees’ qualified student loan payments with contributions to their retirement accounts, including 401(k)s, 403(b)s, SIMPLE IRAs, and government 457(b) plans.

Many HR leaders see the benefit as a win-win for employees. It allows them to pay down student debt while still participating in retirement savings, hopefully starting at an early age. The provision also benefits employers looking to offer a creative benefit to retain and recruit workers, as it removes many of the preexisting legal barriers and administrative complexities that discouraged some companies from adopting a student loan repayment feature.

Here’s what to know about the matching contributions for student loan payments program.

The Rules Are (Mostly) the Same for All Matches

A student loan matching benefit must abide by all the rules of a traditional match. This means that the eligibility criteria, matching contribution rate, and vesting schedule you apply to matching contributions on student loan payments must be the same as those you apply to elective deferrals.

There is, however, one small difference: You are allowed to deposit the matching contributions to the employee’s 401(k) plan account less frequently than regular matching contributions, as long as you contribute at least annually.

Only Qualified Student Loan Payments are Eligible

Student loans must be qualified for repayments to be matched. That generally means any loans borrowed solely to pay for higher education expenses for the employee, their spouse, or a dependent. This includes refinanced student loans but not loans from a relative or retirement plan.

Loans eligible for repayment must have been used to pay for qualified education expenses including tuition, fees, books, supplies, equipment, and room and board for students enrolled at least half-time.

To receive a match, employees simply need to certify annually that they have made qualified student loan payments and the amount of these payments. Plan sponsors are allowed to rely on an employee’s certification and do not need to conduct an independent evaluation as to whether the payments meet all of the requirements to be qualified student loan payments.

Implementation Date

The match becomes available in 2024 for plan years starting after December 31, 2023. This gives employers some time to research employee needs and draft a plan. It also provides time for the IRS to offer some additional details on the implementation and administration of the matching provision.

Recommended: How HR Pros Can Ease The Return to Student Loan Repayment

The Takeaway

Benefits that can help ease the burden of student debt are important tools employers can utilize to recruit and retain talent and promote financial wellness among employees. This is especially important now that the payment pause implemented during the pandemic is ending and workers will once again be facing monthly student loan payments. Student loan repayment and matching contribution programs are two benefits employers may want to consider in this current environment.

SoFi at Work can help. We’re experts in the student lending space. With SoFi at work you have access to platforms and information that will help build the benefits you need to create a successful and loyal workforce.

FAQ

Are student loan payment benefits tax-exempt?

Yes, with some qualifications. The CARES Act allows employers to provide up to $5,250 annually per employee for student loan repayment on a tax-exempt basis through 2025.

Can employers offer student loan payment matches in retirement accounts?

Yes, a provision in Secure 2.0 (legislation signed into law in 2022) allows companies, starting in 2024, to match a worker’s student loan payment in the form of a contribution to their workplace retirement plan.

What are the advantages of student debt repayment benefits?

Student loan repayment benefits can help attract and retain talented workers. They can also increase productivity among your employees by reducing the stress created by burdensome student debt and boosting overall financial wellness.

Photo credit: iStock/insta_photos

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

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

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