SoFi

The growing cost of college means that parents or grandparents who intend to pay part or all of the tab for a child need to chart a course. A tax-advantaged 529 plan is one way to save for future education costs.

Although 529 plans have been around since 1996, many parents still aren’t sure how they work. Yet they are worth knowing about in detail.

Read on to get the full story on 529 plans and whether opening one is the right move for you.

529 Plan Basics

Also known as a qualified tuition program, a 529 plan allows a parent (or anyone else) to prepay a student’s college tuition or contribute to an education savings account.

Contributions are not tax-deductible at the federal level, but some states do offer a tax deduction for a state-specific plan. Distributions are tax-free if they are used for qualified education expenses for the beneficiary.

There are two kinds of 529 plans — named, by the way, for Section 529 of the federal tax code — and every state offers at least one. Learn the difference.

Prepaid Tuition Plan

A prepaid tuition plan allows you to prepay tuition and fees at certain colleges and universities at today’s prices for a child’s future educational needs. Such plans are usually available only at public schools and for in-state students. Only nine are accepting new applicants, and the funds saved are typically not able to be used for room and board.

The main benefit of a prepaid college plan is that you could save big on the price of college by prepaying before prices go up. And contributions are considered gifts, so deposits up to a certain threshold each year ($17,000 in 2023, or $34,000 for a married couple splitting gifts) qualify for the annual and lifetime gift-tax exclusion.

A few special-case guidelines to note:

•   If your child doesn’t attend a participating college or university, you will likely be able to use the funds you set aside at another school. Another option may be to transfer the plan to an eligible sibling. What if no one in the family plans on attending college? Most plans will refund your money, perhaps minus a cancellation fee.

•   If your state government doesn’t guarantee the plan, you may lose the payments you’ve made if the state runs into budget shortfalls.

•   Prepaid tuition plans may charge an enrollment fee and ongoing administrative fees.

•   Although most of the plans can’t be used for room and board, Florida Prepaid Plans, for example, offer a prepaid dormitory plan of two semesters of dorm fees for each year of state university coverage.

An alternative to the state-sponsored plans is the Private College 529 Plan, which has over 300 participating institutions nationwide.

Recommended: Private vs Public College

Education Savings Plan

The second type of 529 plan is an education savings plan. Here’s how it works:

•   You can contribute monthly, quarterly, or annually, or deposit a lump sum. Beyond parents making regular payments, 529 plans can be a clever way for the extended family to give a meaningful gift on birthdays or holidays. There is no limit on how much you can add yearly, but you’ll have to fill out gift tax Form 709 if you contribute more than the annual gift amount.

•   While contributions are not deductible on the federal level, many states provide tax benefits for saving in a 529 plan, such as deducting contributions from state income taxes or giving matching grants. Check your local tax laws to see if you qualify.

•   Once you contribute, you will likely have a range of investment options to choose from. These vary from state to state and may include mutual funds and exchange-traded funds (ETFs).

•   You may want to tailor your choices to the date you expect to withdraw the money — you can possibly be more aggressive if you have a longer timeline, but may sway more conservatively if you only have a few years. One option is to choose a target-date fund, which would automatically adjust your portfolio to become more conservative as your child’s college years approach. That usually means a greater share of stocks initially and more bonds and cash over time.

•   Money can be withdrawn tax-free from a 529 savings plan to pay for any “qualified higher education expense,” which includes tuition, fees, books, computers, and room and board.

•   You can make withdrawals as long as your child is enrolled at least half-time at an accredited school, regardless of where in the United States it is, and occasionally abroad. Parents can also withdraw up to $10,000 a year to pay for K-12 tuition expenses and for student loan repayment.

•   If you withdraw money for the above expenses, you won’t have to pay federal income tax, and often state income tax, on your earnings. If you withdraw the funds for other reasons, you’ll have to pay taxes, and you may or may not be able to avoid the 529 withdrawal penalty, a 10% federal tax penalty on the earnings.

•   Starting in 2024, families with leftover savings in a 529 college savings account may be able to roll it to a Roth IRA tax- and penalty-free. That is one of several retirement savings changes that are part of the Secure 2.0 Act.

One last note: It is possible to change the beneficiary of a 529 plan to another eligible family member. For example, you can switch to a younger child if your oldest got a scholarship. That’s another 529 account benefit to note.

How 529 Savings Plans Compare With Other Options

Why create any investment plan for your child? Time. By investing funds, 529 accounts give your money the chance to grow over time.

If you just leave your savings in cash or even a high-interest savings account, you may actually be losing money as the years go by, as it likely won’t keep up with inflation.

The 529 plan also has advantages when it comes to calculating financial aid. When you complete the FAFSA, the Free Application for Federal Student Aid, money in these accounts owned by either a dependent student or by a parent is considered a parental asset on the FAFSA. Approximately the first $10,000 won’t be counted toward the expected family contribution.

For more than that, only up to 5.64% of the amount saved counts when the government calculates the “expected family contribution” in deciding on the financial aid package. (For other student assets, up to 20% of the savings can count in the calculation.)

So while a 529 may slightly reduce financial aid, it will likely save more overall by reducing the number of federal or private student loans needed.

New rules affect grandparent-owned 529 plans. Distributions have counted as student income on the next year’s FAFSA, assessed at up to 50%. But starting with the 2023-2024 school year, grandparents’ 529 plan savings will have no impact on the student, which might incentivize parents to contribute to grandparent-owned plans instead of the other way around.

Now let’s look at some options.

Recommended: Financial Aid for Higher-Income Families

Coverdell Account

Like a 529 plan, a Coverdell account, also called an Education Savings Account (ESA), is a tax-advantaged savings account to pay for qualified education expenses.

Unlike a 529 account, total contributions from all sources to a Coverdell account cannot exceed $2,000 annually per beneficiary. Another difference is income limits: You can only use an ESA if your modified adjusted gross income is less than $110,000 (singles) or $220,000 (married couples filing jointly).

You can only make contributions until the child reaches age 18, and all funds must be withdrawn by the time the beneficiary reaches age 30. A 529 plan generally does not restrict the age of the beneficiary.

Basic Brokerage Account

Instead of a 529 plan, some families may favor a brokerage account, which affords the freedom to choose whatever investments they want and the ability to use proceeds for any need a young person has.

The main benefit of a 529 plan is that you don’t have to pay capital gains tax on any distributions used for qualified education expenses. Many families, however, pay a 0% long-term capital gains tax rate anyway. (Long-term capital gains apply to a security held for a year or more. The day-to-day increases or decreases in an asset’s value before it is sold are unrealized gains and losses.)

For 2023, married couples filing jointly with taxable income of $89,250 or less and single filers with $44,625 or less may qualify for the 0% long-term capital gains rate.

A 529 account, then, may be of greatest use to families that need an additional tax shelter.

Recommended: How to Reduce Taxable Income for High Earners

Traditional IRA

Withdrawals from a traditional IRA before age 59½ that are used for qualified higher education expenses are not subject to the 10% early distribution penalty — but you will still pay income tax on the distribution.

Money in a qualified retirement plan is not reported on the FAFSA, but distributions may be reported as untaxed income, and income is weighted much more heavily than assets for financial aid. Remember that a 529 savings plan will have a limited impact on the financial aid offer a student receives.

It is generally thought that retirement plans should be used for just that, and not for college expenses.

Roth IRA

With a Roth IRA, you can withdraw contributions tax- and penalty-free at any time, but distributions will be reported as untaxed income on the FAFSA, reducing eligibility for need-based financial aid.

You generally must be at least age 59½ and have had the Roth account for at least five years to withdraw earnings tax- and penalty-free. If you are under 59½, you may be able to avoid a penalty (but not taxes) if you withdraw earnings to pay for qualified education expenses.

Some people opt to max out their Roth IRA contributions and then invest additional money in a 529 plan.

UGMA and UTMA Accounts

You can open a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account on behalf of a child under age 18. The adult custodian controls the money, but gifts and transfers irrevocably become the property of the child.

As with a 529 plan, annual contributions to a UGMA or UTMA account are unlimited, and gifts below the annual gift threshold do not need to be reported to the IRS on gift tax Form 709.

Unlike college savings plans, there is no penalty if the account assets aren’t used to pay for college. Once the minor reaches adulthood, the money is turned over to the former minor, who can use the assets for college or anything else.

But custodial accounts have drawbacks when compared with 529 savings plans: The accounts offer no tax benefits when contributions are made. Earnings are subject to taxes. And a custodial account is counted as a student asset on the FAFSA and will weigh more heavily against financial aid eligibility than parents’ assets or assets held in a 529 account or an ESA.

Choosing a 529 Savings Plan

Every state offers a 529 savings plan, but not all are created equal. When trying to find the best 529 college savings plan, you may want to think about the tax benefits and the fees.

First, you may want to understand whether you qualify for a state income tax deduction or credit for your contributions, based on your state of residence and the plan. Check your state laws and consult a tax professional to learn more about your particular situation.

Some states, such as New York, only offer deductions to in-state taxpayers who use their plan. Other states, including Pennsylvania, allow residents to take a deduction regardless of which state’s plan they use.

Some states, like Indiana, offer income tax credits instead of deductions. And other states, such as North Carolina, don’t offer any deductions for 529 contributions.

The next thing you could consider are the fees associated with your plan, which could include enrollment fees, annual maintenance fees, and asset management fees. Some states let you save on fees if you have a large balance, contribute automatically, are a state resident, or opt for electronic-only documents.

The Takeaway

For many students, the cost of college can be eased with a tax-advantaged 529 savings plan. The accounts allow for tax-free growth of funds that can help dreams of affording higher education come true.

529 plans are still rarely used, though, whereas most college students take on loans to get through school. If savings and federal student aid don’t cover all the costs of college, a private student loan could be a solution.

Federal programs like income-driven repayment and deferred interest on some federal student loans do not apply to private student loans, but a private student loan can help fill gaps in need.

SoFi offers private student loans for undergrads, graduate students, parents, MBA and law students, and future health care professionals that come with competitive rates and no fees.

Check your rate on a student loan from SoFi, named a best private student loan company by U.S. News and World Report.

FAQ

Are 529 plans worth it?

A 529 plan can be a worthwhile college savings vehicle, depending on a family’s situation. If the student is definitely going to attend college and if the state of residence offers tax benefits for these savings, or a prepaid tuition plan, it can be a good option.

Why shouldn’t you invest in a 529 plan?

For some people, a 529 may not be the best option. If a family is unsure whether a child will attend college, lives where there aren’t state-level tax breaks for these programs, or thinks they can earn higher returns elsewhere, they might not want to open a 529 college savings plan.

Is a 529 plan better than a savings account?

A savings account offers more flexibility than a 529 college savings plan, but it won’t offer the tax advantages that a 529 does. With a 529 account, contributions will grow tax-free, and withdrawals for qualified education expenses are also not subject to taxes.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

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.

* The SoFi 0.25% autopay interest rate reduction requires you to agree to make your scheduled monthly payments by an automatic monthly deduction (ACH) from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The discount will not reduce the monthly payment; instead, the discount is applied to the principal loan balance and is intended to help pay the loan down faster. Enrolling in autopay is not required to receive a loan from SoFi.

SOIS0123002

Mortgages come with different loan terms, and a short 10-year mortgage could be beneficial for some borrowers vs. the common 30-year variety. It’s important to consider your personal finances and goals, since the mortgage length affects the interest rate and monthly payment.

This guide will compare the pros and cons of different mortgage lengths and explore how to get a 10-year mortgage term. Read on to learn if paying off a home loan in a decade is the right fit for you.

How Does a 10-Year Mortgage Work?

A homebuyer or refinancer chooses a mortgage term based largely on the monthly payment they can handle and how long they plan to keep the property. In general, the shorter the term, the higher the payment.

The term length isn’t the only differentiating factor among mortgages. There’s also the choice of fixed-rate vs. adjustable-rate mortgages.

With a 10-year fixed-rate mortgage, the interest rate is set for the life of the loan. Through mortgage amortization, the monthly payment on a fixed-rate mortgage stays the same (excluding changes in taxes or insurance if included in escrow payments), making it easy to budget years worth of housing costs.

The amortization schedule determines how the monthly payment is allocated between the principal and interest. Initially, payments primarily go toward interest. Near the end of the loan term, most of the payment will be on the loan principal, with minimal interest remaining.

Adjustable-rate mortgages (ARMs) work differently. A 10-year ARM has a fixed interest rate for 10 years, followed by a fluctuating interest rate until the loan is paid off.

You might see a 10/1 ARM or 10/6 ARM. With a 10/1 ARM, the interest rate is fixed for 10 years and then readjusted every year for the remaining term (usually 20 more years). A 10/6 ARM operates similarly but readjusts every six months rather than annually.

Recommended: How a 5/1 ARM Works

Reasons to Choose a 10-Year Mortgage

No two homebuyers or refinancers have the same financial goals and situation, but there are some common reasons for choosing a 10-year mortgage.

Borrowers may prefer a 10-year mortgage to save on total interest paid. This could be a good option for buyers with higher incomes who can afford larger monthly payments with money still left over for savings and other expenses.

When interest rates are low, homeowners with an existing 20- or 30-year mortgage might choose to refinance to a 10-year mortgage to get out of debt sooner and pay less interest. This scenario could be more beneficial if you plan to remain in your home longer, allowing time to recoup the closing costs of refinancing.

A shorter mortgage term can be helpful for people who are approaching retirement, too. Paying off a mortgage while you’re still earning a salary (and in less time) allows soon-to-be retirees to save money on interest payments. After 10 years, retirees can enjoy their paid-off house or sell the property to further pad their savings and downsize.

Pros of a 10-Year Mortgage Term

Considering a 10-year mortgage term? Here are some of the potential upsides of going with a decadelong mortgage term.

•   Faster Payoff: You’ll own your home outright in just 10 years.

•   Competitive Rates: 10-year mortgage rates are often lower than rates for mortgages with longer terms.

•   Less Interest Paid: A shorter mortgage term means less interest is accrued, and thus paid, over the life of the loan.

•   Building of Equity: Putting more money toward your mortgage right away can grow home equity faster, which can be borrowed against later for home improvements or other expenses.

Cons of a 10-Year Mortgage Term

Taking out a 10-year mortgage isn’t without its drawbacks. Here are some downsides to be aware of when considering this type of home loan.

•   Higher Monthly Payments: A condensed mortgage term comes with higher monthly payments, putting borrowers at risk if they lose a job or incur emergency expenses.

•   Risk of Becoming “House Poor”: Putting more money toward your mortgage could prevent you from achieving other financial goals, such as saving for retirement or college tuition.

•   Less of a Tax Deduction: Borrowers who use the mortgage interest deduction on taxes will only be able to do so for 10 years.

•   Less Property Choice: Buyers may qualify for a smaller loan amount with a 10-year mortgage than a longer-term loan, reducing the number of homes they can afford.

10-Year Mortgage vs 30-Year Mortgage: How They Compare

It’s helpful to compare mortgage options during the homebuying process. This means looking at different lenders and mortgage term lengths.

The 30-year fixed-rate mortgage is the most popular way to finance a home purchase, with 90% of mortgages lasting 30 years. It’s also the route most borrowers using first-time homebuyer programs take.

Let’s take a closer look at how 10-year mortgages and 30-year mortgages compare.

Interest Rates

Fixed-rate mortgages keep the same interest rate over the life of the loan, helping to make payments predictable.

Lenders use a variety of factors to calculate interest rates, such as credit score, down payment, and economic conditions. Generally speaking, paying the loan back in less time is viewed as less risky for the lender. Thus, 10-year mortgages typically come with lower interest rates than 30-year mortgages.

Monthly Payment

With fixed-rate mortgages, equal installment payments are collected each month by a mortgage servicer.

While 10-year mortgages often have lower interest rates, the monthly payment is significantly higher thanks to the condensed payment schedule. Put another way, the monthly payment for a 10-year mortgage is usually double that of a 30-year mortgage.

For example, a $300,000 mortgage at a fixed rate of 5% with a 10-year term would have a monthly payment of $3,182. Meanwhile, borrowing $300,000 at a fixed rate of 5% with a 30-year term would amount to a $1,610 payment each month. This calculation excludes property taxes, homeowners insurance, and any private mortgage insurance.

You can use this online mortgage calculator tool to estimate your monthly payment.

Getting Qualified

Your debt-to-income ratio (DTI), which is calculated by dividing your monthly debts by your gross monthly income, is an important indicator of your ability to repay the loan.

A DTI of 36% or less is recommended for homebuyers, though borrowers with a DTI of 43% may still qualify for a mortgage.

When applying for a 10-year mortgage, the larger monthly payment will increase your DTI, which could affect your ability to qualify, or at least how much you qualify for. Borrowers may qualify for a larger loan amount with a 30-year mortgage because the monthly payment is lower.

Should Inflation Affect Whether You Choose a 10-Year or Longer Mortgage?

Inflation has an impact on the cost of everything. Homebuyers and refinancers need to know that rising inflation affects mortgage rates.

Choosing a longer mortgage term with lower monthly payments can help safeguard a budget from the effects of inflation.

Most borrowers have the option of making extra principal payments, as their finances allow, to repay the loan faster and save on interest. The same ideas behind how to pay off a 30-year mortgage in 15 years apply to paying it off in 10.

Borrowers can also refinance to a 10-year mortgage later if rates are lower and they have the income to manage the higher monthly payment.

Recommended: Home Loan Help Center

The Takeaway

Opting for a 10-year mortgage can help pay off your home quicker and save money on interest. On the flipside, you’ll have to dedicate more of your budget to payments, potentially at the cost of retirement savings and investments.

Still weighing your options? Check out SoFi Mortgages. Qualifying first-time homebuyers can put just 3% down; others, as little as 5% down.

FAQ

Is 10 years the shortest mortgage you can get?

Borrowers may access mortgages with terms of less than 10 years by working with their bank or credit union, since they have more flexibility and an existing customer relationship to customize a loan.

Are there 50-year mortgages?

Though uncommon, 50-year fixed-rate mortgages exist. With such an extended term, borrowers will pay significantly more in interest over the life of the loan than shorter-term home loans.

Photo credit: iStock/fizkes

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

SOHL1022002

Opting to buy a used vehicle rather than the newest model on the lot can be a great way to save some money.

Used cars often cost significantly less than new cars. In addition, older cars are generally cheaper to insure (since they are worth less than new cars).

The process of shopping for, and financing, a used car, however, can feel intimidating. To demystify the process, we’ve got nine simple strategies that can help you find a reliable used car that fits your lifestyle and budget.

1. Setting a Budget for a Used Car

Before you start researching used cars, you may want to first think about how much you can afford to spend on a car and how you will pay for it.

If you will be paying cash, you may want to consider how much of your savings you can realistically put towards a car. If you don’t have quite enough, or the purchase would completely gouge your savings, you may want to spend a few more months saving up for a car.

If you will be getting a loan for the car, you’ll want to think about what would be a comfortable monthly payment.

One rule of thumb is to put at least 10% down and finance the car for three years. You may also want to try to keep your total monthly auto expenses no higher than 20% of your monthly take home pay.

You can use an online auto loan calculator to get a rough idea of how much you might need to spend each month on financing.

2. Getting Financing Before You Start Shopping

If you plan to get a loan to buy the car, it can be a good idea to get a pre-approved car loan from a bank, credit union, or another lender before you start shopping.

While you may opt to go with financing offered by a car dealership, having a pre-approved car loan offer in your back pocket can give you a great negotiating tool.

Dealers tend to mark up the interest rate to make a profit, but if you already have a deal in place, they will know they need to beat it in order to get your business.

Even if you’re going to buy a car through a private sale, having a pre-approved loan in place will allow you to jump on a great deal as soon as you find it.

Recommended: Buying a Car with a Personal Loan

3. Choosing Your Ideal Car

Now that you have a car buying budget in mind, you may want to look into what types of cars you can get for that money.

Do you need a truck, SUV, or sedan? You can save money outright by buying a smaller car and also down the line if it’s good on gas mileage.

If safety is a top priority, you may want to check out the Insurance Institute for Highway Safety Ratings to see which cars perform the best in crash tests.

You can also narrow the field by making a list of must-have features, and then searching for cars that have them using a search tool like Edmunds Car Finder .

Once, you’ve narrowed your list to three target models that you can research in more detail. You may also want to read reviews about the cars you’re interested in on sites like Kelley Blue Book and J.D. Power. .

Recommended: How to Save Up for a Car

4. Shopping for a Used Car

Once you know how much you can spend and what kind of car is going to be a good fit for you, you can actually begin shopping for a used car. There’s no need to start driving to car lots all over town–you can browse through tons of vehicles online.

Good places to look include: used car superstores like Carmax or Carvana, used car dealerships, as well as new car dealerships (which often also sell used cars, though not always at the lowest prices).

You may also want to look at listings from local private party sellers, which you can find on Craigslist, eBay Motors, Facebook Marketplace, and Nextdoor.com.

5. Researching the Car

Once you’ve pinpointed a vehicle you might want to buy, it can be a good idea to find out as much as you can about the vehicle’s history.

You can get a vehicle history report from a company like Carfax or Autocheck , which can tell you if the car has any red flags, such reported accidents or flood damage, as well as information on the car’s maintenance and service history.

To get a report, you’ll need to get the car’s vehicle identification number (VIN) or license plate number from the seller. There is typically a fee for running a report (around $25) but many dealers will provide the report for free.

You may also want to run the VIN number through the United States Department of Transportation Recalls site to check for any safety recalls. If there have been any recalls, it’s a good idea to make sure that the issue has been fixed.

6. Going for a Test Drive

It can often be helpful to try before you buy, especially when it comes to buying a car. A car dealership will typically let you take a few cars for a drive so you can get a sense of how they feel.

You may want to call ahead before visiting a dealership to make sure they have the car on the lot that you’re interested in so you can see it that day.

A private seller will also likely allow you to take the car for a brief spin to see how you like it.

Some things to consider when going for a test drive:

•   How well the car accelerates and corners.
•   If the breaks are responsive.
•   If there are any unusual noises or vibrations that could indicate a mechanical issue.
•   How well the car fits you–is there enough leg room? Can you comfortably reach all of the controls?

7. Inspecting a Used Car

Even if you’re far from a car expert, it can be a good idea to do a visual inspection of the car. Is the car’s body and paint in good shape? Are the lights all working? Are there signs of cracks or water inside the lights?

You may also want to turn on the air conditioning and heating, radio, and navigation system and make sure they are all working properly.

When examining the interior, you’ll want to make sure it is in decent condition and there aren’t any unpleasant smells–a moldy smell can indicate flood damage and cigarette smells can be hard to get rid of.

8. Getting a Mechanic to Inspect the Car

Unless you are buying a certified used car with factory warranty coverage from a dealership, you may want to consider getting a car you are close to buying inspected by an independent auto mechanic.

While this does involve an investment of some cash (typically $100 to $200), it can potentially save you from dealing with a costly repair soon after you buy the car.

The inspection report may also give you some bargaining power when haggling over the price of the car.

9. Negotiating the Price of a Used Car

It’s rare that you’re going to come across a used car price where the seller is unwilling to budge, even a little.

Before you negotiate a car deal, however, you’ll want to have all your research ready, including how much the average make and model car for a particular year goes for, and any concerns or issues that came up during your personal and professional inspection.

If you’re negotiating with a dealer, it can be a good idea to keep the focus on total cost of the car, rather than bring a trade-in or financing into the mix.

Dealers may want to merge all of the numbers into one deal, which can be confusing–and also make a not-so-good deal look better.

When discussing price at a dealership, you may also want to make sure you are talking about the out-the-door price, including all fees (so there aren’t any surprises).

The Takeaway

Buying a used car can be a smart buying decision. To make sure you get a car that suits your needs and budget, however, you’ll want to research your options, come up with a target price range, and line up financing before you shop.

When shopping for used cars, it’s a good idea to learn a car’s history, test drive the car, and also have it professionally inspected.

Knowing the value of the car in the open marketplace can help you negotiate a good price. If you don’t like the deal, there’s nothing wrong with walking away.

Saving up for a new (to you) set of wheels? You may want to consider opening a bank account online with SoFi.

SoFi Checking and Savings allows you to separate your savings from your spending, while still earning competitive interest on all your money.

And with SoFi Checking and Savings’s “vaults” feature, you can create different vaults for different goals, including a “car savings” vault.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

¹SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc’s service. Vehicle Identification Number is confirmed by LexisNexis and car values are provided by J.D. Power. Auto Tracker is provided on an “as-is, as-available” basis with all faults and defects, with no warranty, express or implied. The values shown on this page are a rough estimate based on your car’s year, make, and model, but don’t take into account things such as your mileage, accident history, or car condition.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi Money® is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member
FINRA / SIPC . SoFi Securities LLC is an affiliate of SoFi Bank, N.A. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
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.

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

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.

SOMN0421035

Land loans allow borrowers to purchase a piece of land, often with the intention of building a home there or developing it for business.

Because of the inherent risk to lenders, land loans can be challenging to find. The rate and required down payment are typically higher than those of a traditional mortgage loan, and the repayment term is often shorter.

Let’s dig into land loans and look at some alternatives.

What Is a Land Loan?

A land loan, also referred to as a “lot loan,” finances a piece of land. Borrowers may have plans to build a home or start a business on the land, but they might want to keep the plot for just fishing or hunting. Developers can also get land loans to build homes or businesses.

A land loan is different from a construction loan, which is typically a short-term loan to build or rehab a home. With a land loan, the borrower might not have immediate plans to develop the land or build the house.

A land loan can be more challenging to obtain because, unlike with traditional types of mortgage loans, there is no home to serve as collateral for the lender. Thus, lenders may have stricter requirements and higher rates attached to a land loan.

Types of Land Loans

The land loan rate and terms you get — and the down payment you’re required to make — may depend on the type of land you’re trying to buy.

Raw Land

Securing financing for raw land can be challenging. Raw land, also called unimproved land, is entirely undeveloped, meaning it lacks roads and electrical, water, and sewage systems.

To improve your chances of loan approval, it’s a good idea to have a comprehensive development plan to show lenders.

Of course raw land is generally cheaper than land that has been partially developed, but because it is virtually untouched, it is not possible to know what major issues await when you start development.

Recommended: How to Find a Contractor for Home Remodeling

Improved Land

Because improved land is developed with utilities and road access, lenders may be more willing to offer financing. But the land typically costs more than raw land.

How to Find Land Loan Lenders

Finding land loan lenders can prove to be more challenging than finding a lender for a traditional mortgage.

Potential land buyers can try these routes for securing financing:

•   Local banks and credit unions: If your personal bank doesn’t issue land loans or you’re struggling to find a big-name financial institution that offers them, you might have more luck with a local bank or credit union.

•   Online lenders: Searching online allows you to compare land loan rates from the comfort of your couch. It also means you can read reviews about the lenders before applying.

•   USDA loans for low-income borrowers: The U.S. Department of Agriculture offers Section 502 direct loans to help low- and very low-income individuals or households purchase homes or buy and prepare sites, including providing water and sewage systems, in rural areas. The rate is well under current market rates. The term is as long as 38 years. No down payment is required.

•   SBA loans: Business owners planning to use land for a business may qualify for a 504 loan through the U.S. Small Business Administration. The SBA and a lender issue loans for a combined 90% of the land purchase cost. The rate is based on market rates.

Recommended: What Is a USDA Loan?

What Are Typical Land Loan Rates and Terms?

Like any other loan, the interest rate will largely depend on your credit score. That said, land loan rates are typically higher than traditional mortgage rates, thanks to the inherent risk and only the land as collateral.

And the repayment term? A land loan from a bank often is a five-year adjustable-rate loan with a balloon payment at the end. Rarely you might find a 30-year fixed-rate loan through a financial institution in the Farm Credit System.

The Federal Deposit Insurance Corp. (FDIC) recommends loan-to-value (LTV) limits. Lenders may set down payment requirements even greater than the FDIC proposes, however.

•   For raw land, the FDIC advises a 65% LTV, meaning borrowers must put 35% down.

•   For land development, the FDIC recommends a 75% LTV, meaning borrowers must put 25% down.

•   For construction of a one- to four-family residence on improved land, the FDIC calls for an 85% LTV, meaning borrowers must put 15% down on the land loan.

If you don’t plan to develop the land, the rate and down payment could be steep.

If you do build a home on the land, you may be able to refinance the land loan into a traditional mortgage.

Alternatives to Land Loans

A land loan is not your only option when purchasing a lot. One of these alternatives to land loans may be a better choice for you:

Construction-to-Permanent Loans

If you plan to build a house in short order, this kind of loan could work. At first, you would make interest-only payments on the purchase price of the land. The loan then allows for draws until the house is done, usually 12 months from closing. The loan then converts to a permanent mortgage, sometimes with the same rate.

You may need to make a down payment of at least 20% of the total loan amount. The rate for construction loans in general is higher than a regular mortgage.

FHA, VA, and USDA single-close loans are also available to eligible borrowers.

Seller Financing

Though not as common as traditional financing, owner financing is when the current landowner acts as the lender. Also called a land contract, this type of financing does not involve a bank, credit union, or traditional lender.

While it can be beneficial for those who cannot secure a land loan, buyers have fewer consumer protections working in their favor.

Home Equity Loan or HELOC

If you have significant equity in your primary home, you may qualify for a home equity loan. Your home would serve as the collateral for the loan.

Similarly, you may be able to finance the land purchase with a home equity line of credit (HELOC) or a cash-out refinance.

How much home equity can you tap? Many lenders will let you borrow 85% of your home equity, the home’s current value minus the mortgage balance, but some allow more than that.

Personal Loan

Though personal loan rates may be higher than home equity products’ and you may need to pay off the loan in a shorter time, it might be possible to use a personal loan to finance your land purchase.

You’ll receive the funds quickly, and an unsecured personal loan requires no collateral.

What You Need to Know Before Applying for a Land Loan

Before applying for a land loan, it’s important to educate yourself about land development and to understand the details of the specific lot you’re interested in.

Survey

When buying a large plot of land, knowing the boundaries can be more challenging. Hiring a surveyor to mark the boundaries can be helpful before applying for the loan.

Recommended: Should I Lock My Mortgage Rate Today?

Utilities and Roads

Unspoiled land may be beautiful, but it can be difficult to develop. Understanding what utilities and roads are available — or how to make them available and how much it will cost to do so — is important before applying.

Zoning

When considering a land purchase, it’s a good idea to research any zoning restrictions in that area. Before purchasing land, you’ll want to know that you can actually build on it the way you envision.

Recommended: Tiny House Financing

The Takeaway

Land loans allow borrowers to purchase land to develop as they see fit. Because there is more risk involved for the lender, it can be challenging to find a land loan, and the rates and terms tend to be less favorable than those of typical mortgages.

A personal loan, cash-out refinance, home equity loan, or seller financing may also allow a land buyer to hit pay dirt.

SoFi offers fixed-rate personal loans from $5,000 to $100,000 and a cash-out refinance.

And SoFi brokers a home equity line of credit that allows qualified homeowners to access up to 95%, or $500,000, of their home’s equity.

FAQ

Is it hard to get a loan to buy land?

Getting a loan for a land purchase can be more difficult than getting a traditional mortgage. Fewer lenders offer land loans, and because there is more risk involved, they typically require a higher down payment, impose higher interest rates, and offer shorter repayment terms.

Are land loans higher interest?

Land loan rates are typically higher than traditional mortgage rates because there is no home to act as collateral for the lender. Interest rates may vary depending on credit scores and the down payment amount.

What is the first step to apply for a land loan?

First, research land loan lenders. Before applying, it’s also smart to devise a plan that shows the lender how you will develop the land, accounting for things like utilities, land boundaries, roads, and construction costs.

Photo credit: iStock/shapecharge

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

SOHL0922026

Navigating a small kitchen can be challenging, especially if you love to entertain or have numerous mouths to feed. If your snug cooking area needs an upgrade, you might be craving ways to create more elbow room and storage areas.

Fortunately, choosing from the buffet of small-kitchen remodel ideas can help you expand your culinary space without breaking the bank.

What Is the Average Size of a Small Kitchen?

Today, the average small kitchen is considered to be 70 square feet. Many apartments in big cities have kitchens of 50 square feet or less.

Isn’t that a shame? Not always. Unsurprisingly, millennial homebuyers, who have constituted the biggest share of buyers for years, are far less likely than baby boomers and Gen Xers to cook dinner at home.

A little kitchen might suit them fine, but they still may like the idea of zhuzhing it up.

10 Small-Kitchen Remodel Ideas on a Budget

You don’t need to demo a wall or take out a reverse mortgage to improve your cozy canteen.

At an average of $150 per square foot for both materials and labor, a homeowner might spend $10,500 for a 70-square-foot kitchen remodel. Some will spend much more, and some, much less.

Here are 10 small-kitchen remodel ideas on a budget that will work for most kitchen configurations.

1. Go for a New Backsplash

Installing a festive new backsplash can range from $10 to $95 per square foot. Stick with ceramic tile, brick, or tin for more affordable options than marble or glass.

Adding a backsplash with geometric patterns can make a small kitchen seem larger.

2. Install Open Cabinets and Shelves

Open cabinets and shelves offer a contemporary feel and a chance to display your favorite dishware. The look can also be a less expensive option than traditional cabinets while lending a sense of airiness to a once-cramped kitchen.

3. Change the Flooring

Installing a new floor can be an affordable way to revamp the look of your small kitchen. Vinyl kitchen flooring comes in a variety of snazzy colors and patterns, and costs between $1.85 and $3 per square foot, or up to $10 for high-end materials.

4. Paint With Light Colors

A fresh coat of paint can give an instant facelift to any small kitchen. But dark colors tend to absorb light and constrict the space. By choosing light colors, you can brighten and open up the room.

5. Add Style and Storage Above

Maybe you bought a starter home, and the kitchen isn’t all that.

Maybe downsizing your home seems like the thing to do, little kitchen and all.

Whatever the case, small kitchens generally need more storage space. Inexpensive stylish bins or decorative baskets on top of kitchen cabinets can help.

6. Hang a Ceiling Rack for Pots and Pans

Create vertical storage for your pots and pans with a rack hung from the ceiling. Moderately priced pot racks range from modern to rustic-chic in style.

7. Hang Your Kitchen Utensils

Carve out more room in your kitchen with a magnetic knife rack. Decorate a wall with your most-used wooden spoons and cutting boards.

8. Use the Space Under Your Cabinets

To free up more counter and cabinet space, install a paper towel holder or a wine rack underneath the upper kitchen cabinets. You could also add an extra shelf for spices or coffee mugs.

9. Opt for a Single Sink

If you have a small kitchen, you probably don’t want a sink eating up a big chunk of your counter space. Single butler sinks can provide plenty of depth for dishwashing and come in a variety of prices for the budget-conscious.

10. Choose Compact Appliances

Compact dishwashers are ideal for small kitchens and can cost less than standard size options. And if you are a one- to two-person household, a slimline refrigerator can be a great space saver; they come in fun colors and retro styles.

10 Small U-Shaped Kitchen Remodel Ideas

A U-shaped kitchen, also called C-shaped or horseshoe-shaped kitchen, can provide a great layout for small kitchen spaces, giving one or more chefs more room to maneuver.

Its open configuration offers functionality, but you can lose some storage and counter space.

Here are 10 small U-shaped kitchen remodel ideas to give you a little more whisking room.

1. Implement a Triangle Workflow

To maximize the layout in your small U-shaped kitchen, a triangle workflow plan can allow for the right amount of spacing between your sink, stove, and refrigerator.

Configure your three major “work” areas at adjacent countertops, ideally placing the fridge and the stove across from each other on the peninsulas, with the sink in the connecting, middle counter.

2. Create a Breakfast Bar

Try turning one of the lengths of your U-shaped kitchen into a breakfast bar/seating area. It only needs to be wide enough to hold a cup of morning joe and a cereal bowl, and deep enough to slide in some stools underneath.

3. Install a Window Over the Sink

A window over the kitchen sink is a fantastic way to bring the great outdoors into your U-shaped kitchen. The extra light provides breath to the space and a view while washing the dishes.

4. Get Depth With Contrasting Colors

While dark paint colors aren’t typically the best choice for a small U-shaped kitchen, there are ways to create space by using slightly darker shades.

For example, if you have white cabinets, painting the surrounding walls and backsplash area a light gray can give the illusion of depth.

5. Consider a Darker Countertop

If you have light-colored cabinets, the contrast of a rich brown or black marble countertop can trick the eye into seeing more depth.

6. Install Recessed Lighting

Hanging light fixtures can break up the flow in a small U-shaped kitchen, but recessed lighting can give a chic, streamlined look while increasing the amount of light in the room.

7. Make a Statement With a Black & White Contrast

White cabinets against black countertops and flooring can make a striking design statement while adding dimension. If you choose a reflective black paint or vinyl for the floor, it will give off an illuminating effect when the light hits it.

8. Designate a Wall of Cabinets

You can stretch the space and amount of storage by dedicating an entire wall to cabinets. You’ll lose some counter space but reduce clutter. Try extending the cabinets to the ceiling for an elongated effect.

9. Choose Glass for Your Cabinets

Glass panes on your kitchen cabinets can reflect light, creating the illusion of more space. Their transparency will make it easy for you and your guests to find cookware and wine glasses.

10. Ditch the Cabinet Hardware

If you are replacing your cabinets, consider a style with no handles or knobs. Doing so could offer a sleek, modern look that won’t cramp the design flow.

Ways to Finance a Small-Kitchen Remodel

If you don’t have the cash to pay for your renovations, there are several financing options to help you get that new kitchen sink without draining your savings.

Home Improvement Loan

A personal loan for home improvements allows you to receive a lump sum, often the same day, with no collateral required. You’ll repay the money, plus interest, in monthly installments.

An unsecured loan may come with a fairly high interest rate.

HELOC

If you have enough home equity, you may be eligible for a home equity line of credit (HELOC) by using your home as collateral. The rate will typically be lower than that of a personal loan or credit card. Plus, you’ll only make payments on the amount borrowed.

But HELOCs may come with closing costs, fees, and a minimum-withdrawal requirement. Most have a variable rate, which could eventually go up. Your home could be at risk if you default on a HELOC.

Still, when rates rise, so does the popularity of HELOCs.

Cash-Out Refinance

With a cash-out refinance, you can use the equity in your home to help redo your small kitchen. You would refinance your mortgage for more than you owe and use part of the difference to cover the project costs.

The downsides of a cash-out refinance? Your overall debt on your house will increase, and closing costs will typically be 2% to 5% of the loan amount.

Credit Card

If you have a 0% or low-rate credit card and can pay off the debt quickly, it could be a smart way to pay for a kitchen remodel while earning some travel miles. But a high-interest card could result in hefty monthly payments, and missing even one payment damages credit scores.

Recommended: Buying? Learn the Different Types of Mortgage Loans

The Takeaway

A small-kitchen remodel can increase the value of your home and raise your joy factor. You can put your little-kitchen project on the front burner with a range of financing options.

SoFi offers a fixed-rate personal loan with no fees as well as a cash-out refinance.

With a HELOC brokered by SoFi, you can access up to 95%, or $500,000, of your home equity to put toward your small-kitchen remodel and other home improvements.

FAQ

What is the average cost of remodeling a small kitchen?

The average cost of a small-kitchen remodel is $10,500, given an industry average of $150 per square foot for materials and labor and an average small-kitchen size of 70 square feet.

Can you remodel a small kitchen for $5,000?

A do-it-yourselfer can remodel a small kitchen for as little as $5,000 by painting the walls and existing cabinets, installing new hardware (or none at all), laying vinyl flooring, and buying white or black appliances instead of stainless.

What is the best layout for a small kitchen?

U-shaped kitchens are popular because they maximize cabinet and surface areas. If an island won’t fit, try a peninsular breakfast bar connected to the wall. In a narrow kitchen, aim for a double galley.

Can you update an old small kitchen?

Of course you can. Plan it, budget for it, and add about 20% for emergencies.

Photo credit: iStock/martin-dm

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

SOHL1122008