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If you like paying fewer property taxes, you’ll like the Homestead Exemption. A Homestead Exemption, sometimes also called a primary residential exemption, is where you only pay property taxes on a portion of your home’s market value. Eligibility for the Homestead Exemption is usually dependent on the home being used as your primary residence.

To understand more about what the Homestead Exemption is and how it could affect your taxes, we’re covering the bases, including what a homestead exemption is and how it works, automatic vs. declared homestead exemptions, who qualifies for a homestead exemption, how to file for a homestead exemption, and which states have homestead exemptions.

By the end, you should have a better idea of how to reduce your taxes with the homestead exemption if it isn’t already applied to your property.

What Is Homestead Exemption?

To clarify, there are two different scenarios that are both described as the Homestead Exemption.

1.    A homestead exemption can refer to a reduction in taxes offered when the property is used as a primary residence.

2.    A homestead exemption can also describe the amount of equity in a home legally protected from creditor liens. Read up on homestead exemption rules by state if you want to better understand this protection.

Both require the owner to live in the property as their principal residence, but they differ from there. The first applies to taxes and the second protects a homeowner’s equity from creditors during adverse life events. The first is the more common application and is the focus of this article.

How Does a Homestead Exemption Work?

At a very basic level, how a homestead exemption works goes something like this:

1.    You live in the home as your primary residence.

2.    Apply for the homestead exemption (if your taxing entity doesn’t automatically apply it). Be sure to include all required documents.

3.    Receive a discount on your property taxes as determined by your taxing entity. The discount can be a percentage or a set dollar amount. If you have a home mortgage loan on your primary residence, remember that if your property taxes are included in mortgage payments, your mortgage servicer will pay this for you from your escrow.

4.    Continue receiving the Homestead Exemption. It renews automatically for most taxing entities.

Recommended: Best States to Retire in for Taxes

Automatic Homestead vs Declared Homestead

Automatic vs. declared homestead refer to two different things.

•   Automatic. Many taxing entities may automatically apply the Homestead tax exemption when you purchase the home. If you do need to apply for the Homestead Exemption, you usually only need to do it once. It’s typically renewed annually after your first application.

•   Declared. A Declaration of Homestead is a legal document homeowners can file with their taxing entity to protect their home from creditors.

Who Qualifies for a Homestead Exemption?

Generally, homeowners who live in the home as their principal residence may qualify for the Homestead Exemption. Corporations or other entities that own properties do not qualify for the Homestead Exemption. If you have helped a family member purchase a home through a family opportunity mortgage, talk with a tax preparer about whether this property is eligible for the homestead exemption given that it is technically considered owner-occupied.

Other requirements may include:

•   Have all your vehicles registered in the county where you want a Homestead Exemption

•   Not have a Homestead Exemption for any other property

•   Send in the Homestead Exemption application by the deadline

Examples of a Homestead Exemption

The amount of the exemption varies depending on your taxing entity. Here are a couple of examples of how the homestead exemption works in Texas and Florida.

•   In Texas, you may qualify for a $40,000 exemption. If your home is valued at $300,000 for tax purposes, you’ll only pay taxes on $260,000.

•   In Florida, you can receive up to a $50,000 exemption. If your home is valued at $400,000 for tax purposes and you qualify for the homestead exemption, you’ll only be taxed on $350,000 of market value.

Limitations of the Homestead Exemption

You cannot have a homestead exemption on more than one property. Also, if you move and plan on keeping the home as a rental property, it won’t qualify for the exemption. The homeowner bears the responsibility for notifying the taxing entity and it’s possible that the taxing entity can place a Homestead Tax Lien on your home.

How to File a Homestead Exemption

In many cases, you’ll be sent paperwork from your local taxing entity for the homestead exemption (usually your county assessor). If they do not, you can find the forms for filing for a homestead exemption on your local tax assessor’s website. Information that you can expect to provide includes:

•   Name

•   Property address

•   Identification, such as a driver’s license

•   Social Security number

•   Car registration (this is to help prove residency)

Recommended: First-Time Homebuyer Programs

States With Homestead Tax Exemptions

Most states offer some form of homestead exemption or credit. Only New Jersey and Pennsylvania do not offer an exemption at all.

Pros and Cons of Homestead Exemption

If you’re able to qualify for the homestead exemption, it will reduce the tax on your property and may help make your home more affordable. This is a huge benefit and makes the pros and cons of the homestead exemption a very short list.

Pros

•   Reduces the amount of property taxes paid

Cons

•   You may need to file paperwork by a deadline

•   Second homes don’t qualify for the homestead exemption

Recommended: Pros and Cons of Buying a Starter Home

The Takeaway

The tax break you get with the Homestead Exemption could be substantial. If you qualify for it, make sure that you’re getting it. Be aware of when you need to file paperwork (if at all), and what you need to include with your application to ensure you’re paying the proper property tax rate for those living in it as their primary residence.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How much is the homestead tax credit in Iowa?

The homestead tax credit for Iowa is equal to the tax levy on the first $4,850 of value.

How much does homestead exemption save in Georgia?

The amount saved in Georgia for the homestead exemption varies by county. The city of Decatur has an exemption amount of 50% while Fulton County and Atlanta offers $30,000 off assessed value on the County taxes, $2,000 off on the school taxes, and, if the resident is in the City of Atlanta, an additional $30,000 exemption for city operations, parks, and schools.

How does the Indiana homestead exemption work?

Homeowners in Indiana can qualify for a deduction of 60% of the property’s assessed value or a maximum of $45,000, whichever is less.

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Photo credit: iStock/fizkes

*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.

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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When you miss qualifying for a mortgage, you may be wondering if you have any options for buying a home. One avenue you might be researching is how does lease-to-own work?

Lease-to-own, also known as rent-to-own, is a way to begin the process of purchasing a property by renting it first. The main benefit of lease-to-own is that it allows the tenant time to build up credit and savings. It also grants the tenant time to see if the area and neighborhood are a good fit for their needs. We’re here to break it all down for you so you can decide if a lease-to-own agreement makes sense for your situation.

What Is Lease-to-Own?

A lease-to-own is an agreement between a landlord and a tenant that gives the tenant the right to buy the property after a specified amount of time. A portion of the rent paid may accumulate and be used for a down payment in the purchase transaction (the portion of rent held for the buyer is also known as “rent credit”).

Buyers may want to learn more about what is a lease-to-own agreement for a number of reasons, such as an inability to qualify for a traditional mortgage. The lease period allows the buyer to:

•   Build their credit

•   Save for a larger down payment

•   Increase their income

•   Try out the neighborhood

How Does Lease-to-Own Work?

The first step in entering into a lease-to-own agreement is to find a lease-to-own property. Since a lease-to-own agreement is a contract directly between a buyer and a seller, buyers need to find sellers who are willing to enter this type of arrangement. It can be difficult, since most sellers prefer a conventional sales arrangement. With lease-to-own, the seller continues to carry the mortgage while collecting rent from the buyer. (After a period of time, the buyer will have the option to purchase and will seek a home mortgage loan of their own to help pay for the property.)

To find a lease-to-own home, try one of these ideas:

•   Use a real estate agent. Some agents specialize in rent-to-own programs and may be able to help you negotiate a lease-to-own contract with a seller or point you in the direction of a local program.

•   Search a database. Some websites list homes that may be available for lease-to-own. You may be able to find these homes on websites such as HomeFinder.com, ZeroDown.com, or Renttoownlabs.com.

•   Find a lease-to-own program. Some homes may be offered as part of a program similar to first-time homebuyer programs. In Home Partners of America or Divvy, for example, you find a home, the organization buys it, and then you sign a one-year lease (which can be renewed). At the end of the lease, the buyer agrees to purchase the property.

•   Look for “For Sale By Owner” yard signs or online advertisements. A lease-to-own agreement may be worked out directly with the owner of the property.

Once you’ve found a property, you’ll need to ask for documentation that the seller truly owns the property and is up to date on property taxes and mortgage payments. Sometimes would-be buyers enter an agreement only to find that the house is in foreclosure.

If everything checks out, the buyer and the landlord will sign a Lease Purchase Agreement. A Lease Purchase Agreement is more complex than either a lease or a real estate purchase contract — it’s a contract where the lease agreement is tied to a purchase contract. What that means is once the lease period ends, the buyer agrees to purchase the property for a price set at the beginning of the contract. (Some deals are Lease Option Agreements, in which the buyer has the option to purchase the property but also has the flexibility to walk away; you can hire a real estate attorney to help you create the contract that best suits your needs.)

The buyer puts down a deposit, which can be used to secure the option to purchase the property at a later date.

Later, after the lease period comes to a close, the Purchase Agreement is executed. The buyer must first find financing to buy the property at the previously agreed-upon price. It may also be possible to renew the lease for another year if the buyer doesn’t have the credit or down payment requirements ready.

In the purchase contract, there’s typically a fair amount of rent credit that the buyer can use toward the down payment on the home if they’re able to move forward with financing.

Recommended: What Is a Duplex? Features, Pros and Cons

What Is a Lease Purchase Agreement?

Let’s dig deeper into what a lease-purchase agreement actually is. A Lease Purchase Agreement is a real estate contract consisting of two parts: a lease agreement and a purchase contract. In a Lease Purchase Agreement, a buyer leases a property with the intent of purchasing it down the road. At the end of the lease agreement, the buyer must secure funds, usually with a mortgage, to purchase the property.

Lease-to-own agreements are structured contracts that include the following:

•   Names of parties

•   Beginning and end date

•   Option money fee

•   Amount of purchase price

•   Amount of rent credit (25%-30% of the rent is typical)

•   Exclusions/inclusions of personal property (such as a washer and dryer)

Lease Purchase Agreements require the buyer to purchase the property in the future. A breach of one agreement voids the other. In other words, if the buyer breaks the lease agreement (such as by missing rent payments), they may not be able to purchase the property.

Recommended: Is Investing in Single-Family Homes a Good Idea?

How to Structure a Lease Purchase Agreement

Since a Lease Purchase Agreement is complicated, it needs to be structured to delineate terms and responsibilities clearly. Some examples include:

•   Determine dates and length of contract. A Lease Purchase Agreement should have clear beginning and end dates and should spell out what should happen at the end of the lease agreement. Some experts recommended a year or less.

•   List what the option fee is. The Lease Purchase Agreement will clearly disclose what the fee, if any, is for entering into the Lease Purchase Agreement.

•   Determine how the rental agreement will work. You’ll have a lease contract that looks much like any other lease agreement when you’re a renter. Your landlord, the seller, may require a deposit, for example, and have guidelines for how the property is to be used. If the property is a condo, there may be bylaws that govern whether you can be in a lease-to-own agreement with the owner. There could also be restrictions on whether you can rent out an extra room while you are a tenant, or whether you can use the property as an Airbnb.

•   Set the future purchase price. A Lease Purchase Agreement will include the home’s future purchase price. Properties can appreciate and renters may want to be sure they’re not going to pay a price that increases every year. Since you are locking in a price, it would be wise to have a home inspection just as you would a home you might purchase outright. After all, if the house has a serious flaw, that could be costly to repair and could affect its value — and in some agreements, the leaseholder is responsible for upkeep.

•   Decide on how much of the rent will go towards the purchase price. This is negotiated between the buyer and seller. It is also known as “rent credit.” Sellers should be wary of allowing too much rent credit as this could allow legal issues to creep in.

•   Clarify roles on home upkeep. In a lease-to-own situation, it’s less clear what party is responsible for maintenance and repairs. Be sure to spell this out in the contract before you sign. Tenants planning to become owners should be wary of making improvements that could become the property of the landlord.

•   Seller should continue paying taxes and insurance. As the seller is still the owner, they should be responsible for taxes and insurance.

Pros and Cons Of a Lease Purchase Agreement

There are some pros and cons to consider if you’re looking at a Lease Purchase Agreement.

Pros

•   Provides a path to homeownership for buyers who might not qualify for a mortgage or have a down payment

•   Locks in the purchase price with a contract

•   Allows the buyer time to build up credit

•   Gives a buyer time to increase income

•   Helps buyers save for a down payment

•   Makes it possible for the buyer to “test out” the neighborhood

•   Ability to earn rent credit or rent equity to go toward the down payment

Cons

•   Buyer may have higher monthly rent or upfront fees

•   Buyer could lose their deposit, option fee, and rent equity if the purchase doesn’t work out

•   Buyer may not qualify for a mortgage when the contract is up

•   House could be in bad shape

•   Seller could be a scammer who doesn’t own the home, is behind on taxes, doesn’t keep the home in good repair, or is in danger of being foreclosed on

The Takeaway

For a lease-to-own situation to make sense, you’ll want to look at the fine print. Consider the fees, interest rate, terms, rental contract, and property condition. If you need to get into a house ASAP and don’t have the right credit score or down payment, then a lease-to-own agreement might make sense. If the terms of a lease-to-own contract are not favorable enough for your situation, see what it takes to get back on track towards qualifying for a 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.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is it a good idea to lease-to-own?

Whether or not a lease-to-own program is worth it is highly dependent on an individual’s situation. It’s a great idea for those who want to build up their credit, need time to save more money for a down payment, or want to see if the area is really one they want to live in, but you’ll want to do your research on the property and work with an attorney to ensure your rights are protected in the agreement.

What is the downside to lease-to-own?

If the lease-to-own arrangement doesn’t work out, or if the property owner fails to pay property taxes or make their mortgage payments, you may risk losing your deposit, down payment, and any equity you’ve earned with your rental payments.

What is the difference between lease-to-own and lease?

With lease-to-own programs, the renter may have the obligation (or an option) to purchase the property at the end of the contract. Also, it’s common for part of the money you pay in rent to accumulate toward your purchase price. None of this applies with a standard lease agreement.

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Photo credit: iStock/PeopleImages

*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 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.

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

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Of all the details that come across your plate when you’re buying a home, one of the questions you might be asking is, “How does buying a house affect taxes?” The short answer? Buying a home could reduce your overall tax liability if you itemize deductions and pay a large amount of mortgage interest.

There are other conditions that need to be met, and it is possible that the amount of taxes you owe will stay the same. Of course, it’s always best to consult with a tax advisor for your individual situation.

To give you a general idea about how buying a home in 2023 affects taxes, we’ve compiled everything you need to know about how tax breaks work, what you can deduct, what you can’t deduct and whether or not it will make sense to itemize deductions.

Does Buying a House Help With Taxes?

It’s possible that buying a house can help with taxes — but only for tax filers who itemize their deductions. In 2020, the most recent year with data available, more than 87% of Americans took the standard deduction rather than itemizing. This signals that it may be unlikely you’ll have enough deductions for itemizing to make sense. Of course, if it can reduce your taxes, it’s worth looking into.

You might also be wondering, “How does buying a house in cash affect taxes?” If you don’t have a mortgage, you’re not paying interest, so you’re not able to take the home mortgage interest deduction. But you’re still able to deduct property taxes if you itemize. Remember to consider this even if your property taxes are part of your mortgage payments.

How Do Homeowner Tax Breaks Work?

Tax breaks start as programs passed into law and funded by the U.S. Congress. However, it is up to individual homeowners to find and file the correct paperwork to take advantage of these tax breaks.

Tax breaks come to homeowners as either tax credits or tax deductions.

Recommended: First-Time Homebuyer Programs

The Difference Between Tax Deductions and Tax Credits

The difference between a tax deduction and a tax credit is where it lies on IRS form 1040 and how much it reduces your final tax bill or refund. This will make more sense after we explain each.

Deductions On IRS Form 1040, deductions are compiled before being subtracted from your income. This is done before tax is calculated, so having deductions can reduce the overall amount of tax you owe. But because a deduction comes before tax is calculated, the reduction in tax liability is generally less than if the amount of tax owed was directly reduced by a credit (though this depends on the amount of each).

Credits Credits are subtracted from the amount of tax you owe. If you don’t owe tax but are instead receiving a tax refund, credits can increase the amount of money coming your way from the IRS. Generally speaking, credits put more money back in your pocket. You may have heard about a first-time homebuyer tax credit. A bill was introduced in 2021 that would have provided for this benefit, but as of June 2023 it had not passed into law.

Deductions are more common; however, with the revamp of the tax code in 2017 with the Tax Cuts and Jobs Act, the standard deduction was increased substantially and fewer people find the need to itemize. Nevertheless, it’s probably a good idea to add “keep track of possible tax deductions” to your list of New Year’s financial resolutions.

What Are the Standard Deduction Amounts for 2023?

It’s important to know the standard deduction amounts so you know if taking the home mortgage loan interest deduction will make financial sense for you.

•   For single filers: $13,850

•   For head of household: $20,800

•   For married people filing jointly: $27,700

If the amount of mortgage interest you pay is far below the threshold for choosing the standard deduction, you may not be able to find enough deductions for itemizing to make sense. The increased standard deduction in 2017 made this especially true, but there are certain scenarios where you should still itemize deductions.

Recommended: What Is a Gift Tax Return and When Is It Due?

Who Should Itemize Deductions

You should itemize deductions if the amount of your deductions is more than the standard deduction. If you have any of the following situations, you may have enough qualified deductions for itemizing to make sense.

•   If you have large medical or dental expenses that are not paid for by an insurance company

•   If you paid a large amount of interest on your mortgage

•   If you donated large sums to charity

•   If you can claim a disaster or theft loss

•   If you cannot take the standard deduction

•   If you can qualify for large amounts of the “other itemized deductions” found on the IRS forms

It’s hard to say if your individual situation will make sense for itemizing deductions. It may be worth it to consult with a tax professional.

Which Home Expenses Are Tax Deductible?

When you’re looking for home expenses that are tax-deductible, the IRS defines it very narrowly. The costs that are deductible include:

•   State and local real estate property taxes up to $10,000

•   Home equity loan interest if you used the funds from a home equity loan on your property

•   Mortgage interest deduction up to defined limits:

◦   For loans taken out after December 15, 2017: You can deduct home mortgage interest on the first $750,000 of debt (for married couples filing jointly) or the first $375,000 of debt for a married person filing separately.

◦   For loans taken out prior to December 15, 2017: You can deduct home mortgage interest on the first $1,000,000 of debt (for married couples filing jointly) or the first $500,000 for separate filers.

Which Home Expenses Are Not Tax Deductible?

Most home expenses, unfortunately, are not tax deductible. These include things to budget for after buying a home. The IRS specifically outlines these living expenses that cannot be claimed as a deduction:

•   Utility expenses, like gas, water, electricity, garbage, sewer, internet, etc.

•   Home repairs

•   Insurance

•   Homeowners association or condo fees

•   Cost of domestic help

•   Down payment and earnest money

•   Closing costs

•   Depreciation

Potential tax deductions are one thing to factor into your financial considerations as you think about whether you are ready to buy a home, but they certainly aren’t what should be driving your decision to make a purchase.

How Much House Can You Afford Quiz

The Takeaway

It is possible for the amount of tax you owe to be lower after you become a homeowner — but only with certain conditions met. You’ll want to do the math and compare what your taxes will look like when you itemize deductions vs. when you take the standard deduction. That will be the best way to tell how buying a house will affect your taxes.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is the tax break for buying a house in 2023?

If you itemize deductions on your federal return, you can claim a deduction for your mortgage interest paid on a home bought in 2023, along with state and local taxes paid in 2023.

Will my tax return be higher if I bought a house?

While there are a lot of factors that go into a tax return, generally speaking, if the deductions that come from homeownership reduce your tax liability compared to previous years while all other factors remain the same, then you should owe less (or even get money back).

What are the major tax changes for 2023?

For tax years 2022 and beyond, you can no longer claim mortgage insurance premiums as a deduction. Beyond the tax deductions that come with homeownership, major changes to taxes for 2023 include reduced amounts to the child tax credit, earned income tax credit, and the child and dependent care credit.

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Photo credit: iStock/marchmeena29

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

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

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

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

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For most Americans, mortgages are a necessary part of life. Without them, we couldn’t afford the homes where we start a life and perhaps a family. To pay for that cost, you likely need a mortgage.

However, the cost of a mortgage goes well beyond the amount of the loan. There are both upfront and ongoing costs that will be a factor in the cost of the mortgage. In this article, we will look closer at a $400,000 mortgage and what the monthly cost might look like.

Total Cost of a $400K Mortgage

To determine the total cost of a $400,000 mortgage, we must consider more than just the $400K price tag. Upfront and ongoing costs are involved, which are factors in what you ultimately pay.

💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for up to 90 days while you search for the perfect place to call home.

Upfront Costs

There are several upfront costs related to your mortgage. Common upfront costs include:

•   Closing costs: From mortgage origination fees and application fees to home inspection and appraisal, you must pay closing costs upfront. These are generally equal to 3% to 6% of the home principal amount.

•   Down payment: Different mortgage types have different down payment requirements. However, depending on the mortgage type, you might be able to put as little as 3% down. First-time homebuyers can sometimes put less down.

•   Property taxes: You may have to pay at least some money toward property taxes at the outset. For example, you might be required to pay six months’ property taxes.

Long-Term Costs

Long-term costs will likely be the largest cost associated with your home purchase. Here are some long-term costs to consider:

•   Mortgage payments: This is the monthly payment against the loan that financed the home purchase.

•   Home maintenance: Homeowners often do work on their homes, from the purely aesthetic to the absolutely necessary. However, these projects can be costly.

•   Property taxes: In most states, you must pay property taxes to your state or municipality. Property taxes can run into the thousands per year.

•   Homeowners insurance: Homeowners insurance isn’t a huge expense, relatively speaking. But the average cost of Progressive’s homeowners policy is between $83 and $138 per month.

Estimated Monthly Payments on a $400K Mortgage

The monthly payment on a $400K mortgage won’t always be the same. Certain factors like the down payment, annual percentage rate (APR), and term will affect how much you pay per month.

For instance, suppose you have a fixed 30-year $400K mortgage at 5% APR. In this case, your monthly payment would be $2,147. If you have a fixed 15-year $400K mortgage at 4.5% APR, your monthly cost would be $3,059. Keep in mind that these estimates don’t include escrow costs. There are also different types of mortgages, such as fixed and adjustable-rate. Your loan repayment may vary significantly depending on the type.

Monthly Payment Breakdown by APR and Term

Certain factors affect how much you pay per month on your mortgage. The biggest factors are typically your APR and mortgage term. Generally, a higher APR increases your monthly payment, as does a shorter repayment term. Use a mortgage calculator to estimate your monthly payment. Here are a few examples of how these calculations may vary depending on the APR and term:

Interest rate	15-year term	30-year term
3%	$2,762	$1,686
3.5%	$2,859	$1,796
4%	$2,958	$1,909
4.5%	$3,059	$2,026
5%	$3,163	$2,147
5.5%	$3,268	$2,271
6%	$3,375	$2,398
6.5%	$3,484	$2,528

How Much Interest Is Accrued on a $400K Mortgage?

As mentioned, the interest accrued on a $400,000 mortgage depends on several factors. However, the most important are the mortgage term and the APR. Generally, a shorter repayment term will result in higher monthly payments but less interest overall. For example, when comparing a 15-year vs. 30-year mortgage, we see that the 15-year mortgage results in less interest, despite higher monthly payments.

Fifteen-year mortgages often have lower APRs than 30-year mortgages as well. A lower APR also means you pay less interest. However, 15-year mortgages typically have much higher monthly payments than 30-year mortgages.


💡 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.

$400K Mortgage Amortization Breakdown

Once approved for a fixed-rate mortgage, you typically pay the same amount each month. However, most of the money you pay will go toward interest in the first few years. Eventually, you can expect to pay more toward the principal than interest. For instance, here is an example of a 30-year $400,000 mortgage with a 6% APR:

Year	Beginning balance	Interest paid	Principal paid	Principal paid
1	$400,000.00	$23,866.38	$4,912.05	$395,087.95
2	$395,087.95	$23,563.41	$5,215.01	$389,872.94
3	$389,872.94	$23,241.76	$5,536.66	$384,336.28
4	$384,336.28	$22,900.27	$5,878.15	$378,458.13
5	$378,458.13	$22,537.72	$6,240.70	$372,217.43
6	$372,217.43	$22,152.81	$6,625.62	$365,591.81
7	$365,591.81	$21,744.16	$7,034.27	$358,557.54
8	$358,557.54	$21,310.30	$7,468.13	$351,089.42
9	$351,089.42	$20,849.68	$7,928.74	$343,160.67
10	$343,160.67	$20,360.65	$8,417.77	$334,742.90
11	$334,742.90	$19,841.46	$8,936.96	$325,805.94
12	$325,805.94	$19,290.25	$9,488.17	$316,317.76
13	$316,317.76	$18,705.04	$10,073.38	$306,244.38
14	$306,244.38	$18,083.74	$10,694.69	$295,549.69
15	$295,549.69	$17,424.11	$11,354.31	$284,195.38
16	$284,195.38	$16,723.80	$12,054.62	$272,140.76
17	$272,140.76	$15,980.30	$12,798.13	$259,342.63
18	$259,342.63	$15,190.94	$13,587.49	$245,755.14
19	$245,755.14	$14,352.89	$14,425.53	$231,329.61
20	$231,329.61	$13,463.16	$15,315.27	$216,014.34
21	$216,014.34	$12,518.55	$16,259.88	$199,754.47
22	$199,754.47	$11,515.67	$17,262.75	$182,491.71
23	$182,491.71	$10,450.94	$18,327.48	$164,164.23
24	$164,164.23	$9,320.54	$19,457.88	$144,706.35
25	$144,706.35	$8,120.42	$20,658.00	$124,048.35
26	$124,048.35	$6,846.28	$21,932.14	$102,116.21
27	$102,116.21	$5,493.56	$23,284.87	$78,831.34
28	$78,831.34	$4,057.40	$24,721.03	$54,110.31
29	$54,110.31	$2,532.66	$26,245.77	$27,864.55
30	$27,864.55	$913.88	$27,864.55	$0.00

What Is Required to Get a $400K Mortgage?

Getting a $400K mortgage usually requires sufficient income and a large enough down payment. The average down payment is 13%. If your income is on the low end, you might be able to make up for it with a larger down payment. Likewise, having a higher income may help if your down payment is small.

It may help to use a housing affordability calculator. This will give you a rough estimate of what you can afford based on your income, monthly expenses, and your down payment.

Your credit score can also be important when applying for a $400K mortgage. Credit scores help lenders determine how likely you are to repay your debts. Thus, a higher credit score can increase your approval odds. There is no definite rule, but a credit score of at least 620 can help when applying for a conventional loan. If you want to learn more about this process, there are mortgage resources that can help.

“If you have multiple debts, you want to make your minimum payments so you don’t hurt your credit score,” Kendall Meade, a Certified Financial Planner at SoFi said. “If you have cash left over after that, you should develop a strategy for which debts to pay off first,” she suggested.

How Much House Can You Afford Quiz

The Takeaway

Buying a home is the largest purchase most Americans make in their lifetime. Many costs come with buying a home, including upfront costs like a down payment and ongoing costs like monthly mortgage payments. Your mortgage payment is likely to be the largest monthly expense you have, and it can vary widely depending on the APR and mortgage term. On a $400,000 mortgage, the monthly payment could range from $1,600 to $2,600, as you can see above.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How much house can I afford on a $120,000 salary?

How much house you can afford depends on several factors, and salary is just one of them. You must also consider your mortgage interest rate, down payment, and other debts. If you have $40,000 for a down payment, spend $3,500 per month (not including rent), and your APR is 4.5%, you can afford a home up to about $400,000.

How do you calculate monthly mortgage payments?

To calculate monthly mortgage payments, you must know the loan amount, interest rate, and loan term. The easiest way to calculate your payment is to plug these numbers into an online mortgage calculator.

What is the average total monthly mortgage payment?

The national median monthly mortgage payment in the United States is $1,964 as of February 2023, according to the Mortgage Bankers Association.

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Photo credit: iStock/MihailDechev

*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.

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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.

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

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If you’re planning to buy a higher-priced home, you may be looking to finance your purchase with a jumbo loan. And you’re probably also wondering about the difference between a jumbo and a conventional loan.

A jumbo loan is necessary to purchase a home where the loan amount is above the conforming loan limit values set by the Federal Housing Finance Agency (FHFA). Conforming loan limits change every year. For 2023, the limit for a single-unit property is $726,200 for most counties across the U.S. In high-cost areas, this amount increases to $1,089,300.

If you’re buying a home below this amount, you can finance with a traditional, conventional, conforming mortgage, or perhaps through one of several first-time home buyer programs. But if you need a mortgage that goes above the conforming loan limit, you’re going to be looking at a jumbo loan, so it’s time to get familiar with how to qualify and how the costs compare to other loans.

Recommended: The Cost of Living by State

What’s the Difference Between Jumbo and Conventional Loans?

Here’s a surprise: There isn’t really a difference between a jumbo and a conventional loan. Jumbo loans are conventional. “Conventional” simply means that a loan isn’t backed by a specific government agency such as the Federal Housing Administration (FHA), United States Department of Agriculture (USDA), or U.S. Department of Veterans Affairs (VA).

Many people get tangled up in the terminology. While jumbo loans are conventional, they are not “conforming.” Though the terms conventional and conforming are often used interchangeably (and mistakenly), a conforming loan is one that falls within the FHFA limits, meaning the lender can sell it to Fannie Mae and Freddie Mac to increase its liquidity. (Again, in 2023, the amount is $726,200 for most areas in the U.S., but can go up to $1,089,300 for high cost of living areas. If you’re wondering about your specific region, have a look at the conforming loan levels by state.)

💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.

A jumbo loan exceeds these limits and is, thus, non-conforming. So when you’re comparing jumbo loans against other loans, you’re really comparing non-conforming loans against conforming loans. Other differences that affect borrowers are summarized in the table below:

	Conforming Loan	Jumbo Non-conforming Loan
Loan amount	Below $726,200 for most areas, $1,089,300 for high-cost areas	Above $726,200 for most areas, above $1,089,300 for high-cost areas
Loan type	Fixed or variable rate	Fixed or variable rate
Down payment	Can be as low as 3%	Usually 10% or more
Credit score	660+	700+
Income requirements	Lower income requirements	Higher income requirements. For example, a payment on a $726,200 mortgage at 6.7% interest would be $4,969. In order for your payment to not exceed 28% of your monthly income (the margin of safety, you would need to make $17,746 per month or $212,952 per year.
Cash reserves or assets	Not required	6 to 12 months may be needed
How the loan is backed	Backed by Fannie Mae and Freddie Mac	Not backed by Fannie Mae or Freddie Mac

How to Qualify for a Jumbo Loan

Requirements for jumbo loans are more stringent than those for other types of loans. Because these types of mortgages can’t be sold to Fannie Mae or Freddie Mac, the lender takes on more risk should the borrower default.

These requirements include:

•   Debt-to-income (DTI) ratio. You need plenty of income to qualify for a jumbo loan. Qualified mortgages require a DTI of 43% or lower.

•   High credit score. Lenders want to be sure you’ll repay the loan, especially since it’s a much larger amount. A credit score of 700 or above is recommended.

•   Assets. Lenders look for cash that can be used to pay the mortgage. To be safe, you may want to put aside enough money to cover the mortgage for 6 to 12 months.

What to Know About Jumbo Loan Mortgage Rates

Prospective jumbo loan borrowers often wonder, “Are jumbo loan rates higher than other loans?” Jumbo conventional loans don’t automatically have higher interest rates and can be competitive with conforming conventional loan interest rates. They fluctuate with market conditions. Sometimes, they’re even lower than conventional loan interest rates.

You may be able to check your jumbo loan rate with your lender before submitting a full application.

Jumbo Loan Closing Costs

With a larger loan amount, you can also expect jumbo loan closing costs to be higher. While many closing costs are fixed, there are others that are larger due to percentage-based compensation closing costs.

Should I Choose a Jumbo Mortgage?

If you have the option to choose between a jumbo loan vs. a conforming loan, (such as when you have enough money to reduce the principal loan amount so that it qualifies as a conforming loan), you’ll want to ask yourself if it’s worth it to put down the extra money to qualify for a conforming conventional loan. There are some specific scenarios where a jumbo loan vs. a conforming loan makes sense.

💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

When to Choose a Jumbo Mortgage

Borrowers who should consider jumbo mortgages:

•   If you’re looking for a luxury home

•   If you’re buying a vacation home

•   If you live in a high-cost area

•   If you have a great credit score

•   If you have a strong DTI ratio

•   If you have plenty of income

When to Choose a Conventional Mortgage

Borrowers who should consider conventional mortgages:

•   If you have moderate income

•   If you’re looking for a moderately priced home

•   If the mortgage amount is below the conforming loan limits

•   If you need a down payment lower than 10%

•   If your cash reserves after your down payment will be limited

If you’re close to the conforming loan limits, you may also want to consider a piggyback mortgage. If you’re able to obtain a piggyback loan, you may be able to buy your home with a conventional, conforming mortgage instead of a jumbo loan.

How it works: A piggyback loan allows you to take a second loan to “piggyback” off the first mortgage with the purpose of lending you enough money to avoid a jumbo mortgage or the PMI that comes with a down payment less than 20%. It’s essentially a second mortgage, and you’ll be making a second payment to cover it.

The Takeaway

When it comes to whether or not to choose a jumbo loan, the decision may be made for you based on the price of the home you want to buy. Mortgages above the conforming loan limit need jumbo loan financing. If you want a conforming, conventional loan, you’ll need to get a mortgage below $726,200 for most areas in the U.S. and $1,089,300 for high cost of living areas.

When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.

SoFi Mortgage Loans: We make the home loan process smart and simple.

FAQ

Are jumbo rates higher than a conventional mortgage?

Jumbo rates fluctuate with market conditions. They may be on par with rates of loans that fall within the limits for conforming loans set by the Federal Housing Finance Agency (so-called conforming loans). Sometimes, they’re even lower.

What is the downside of a jumbo mortgage?

Possible downsides of a jumbo mortgage include requirements for a higher down payment, higher credit score, more cash reserves, and a higher monthly payment because of the higher home price.

Do jumbo loans have PMI?

Private mortgage insurance is not always required on jumbo loans. Whether or not PMI is needed will depend on your lender and the size of your down payment.

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Photo credit: iStock/courtneyk

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

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

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

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