Should I roll over my 401(k) to new employer?

Rolling over your 401(k) to your new employer may be a good idea if the new plan offers better investment choices or if consolidation leads to lower account fees. Another benefit is convenience — it’s easier to manage one account than two. That said, if control is most important to you, rolling over your 401(k) to an IRA may be the better option.

Financial Topics Archives | Page 8 of 808

Q: How long do you have to move your 401(k) after leaving a job?

You typically have 60 days from the date of distribution to roll over your 401(k) from your previous employer to an IRA or another employer’s plan. Otherwise, it will be considered a taxable distribution and may be subject to penalties. However, some 401(k) plans may have different deadlines for rolling over your funds, so check with your plan administrator for specific details.

Q: What happens if I don’t roll over my 401(k) from my previous employer?

You generally are not required to roll over a 401(k) from a previous employer to your new employer’s 401(k) or an IRA. However, some experts recommend rolling over a 401(k) to a single account to simplify your retirement investments.

Dec

2024

Guide to Transferring 401(k) to a New Job

By Jamie Cattanach | Budgeting & Goals, Growing Wealth, invest, Investing | No Comments

It’s easy to forget about an old 401(k) plan when changing to a new job. Some people may forget about it because the company that manages the 401(k)never reminds them. Others are aware of their old account, but they put off the rollover because they think it will be difficult to do.

But by not rolling over your 401(k), you might be losing some serious cash. Here are a few key reasons to prioritize a 401(k) rollover.

Key Points

• Rolling over a 401(k) may save an employee money if their new employer’s 401(k) plan or a rollover IRA charges lower fees.

• Rolling over a 401(k) to a new employer’s plan or into a rollover IRA might provide access to better investment options.

• There’s no requirement to roll over a 401(k) to a new employer’s plan, but consolidating 401(k) savings may make managing them easier.

• If an employee requests that the funds from a 401(k) rollover be sent to them directly, they have 60 days to send the funds to the new 401(k) plan or IRA account. If they miss the deadline, they may be taxed and have to pay a penalty, since the IRS generally considers this an early withdrawal.

• Some 401(k) plans offer financial services, such as financial advisor consultations, to help employees manage their plan.

3 Reasons to Transfer Your 401(k) to a New Job

Rolling over a 401(k) can have some significant benefits. Here are three main reasons to consider rolling over a 401(k):

1. You May Be Paying Hidden Fees

Certain fees go into effect when you open a 401(k), which typically include administrative, investment, and custodial fees.

Employers may cover some of these fees until you leave the company. Once you’re gone, that entire cost might shift to you. If the fees are high, rolling over a 401(k) to a plan with lower fees can be advantageous.

2. You Might Be Missing Out on Certain Types of Investments

If you aren’t happy with the investment options in your old plan and your new employer allows you to roll over your old 401(k), you might gain access to a broader range of investment vehicles that better aligns with your financial goals.

Just be aware that investments come with risk, so it makes sense to consider your personal risk tolerance when choosing investment options.

Also, if you leave your 401(k) where it is, you may forget about it and your portfolio may no longer have your desired asset allocation as you get older. It’s important to keep tabs on your investments to ensure they are on track and appropriate for your time horizon and goals.

3. You Could Lose Track of Your 401(k) Account

It’s more common than you might think for people to lose track of old 401(k) accounts. According to one estimate, there are more than 29 million forgotten 401(k) accounts in the U.S. By rolling over a 401(k) to a new plan, you’ll know where your money is.

Losing track of a 401(k) account is not necessarily the fault of an investor — it may simply be logistics. It’s harder and more time-consuming to juggle multiple retirement accounts than it is to manage one. Plus, if you change jobs several times throughout the years, you could end up with a few different 401(k) plans to keep track of.

Do You Have to Rollover Your 401(k) to a New Employer?

You aren’t required to roll over your 401(k) to a new employer’s plan. If you have more than $7,000 in the old 401(k) account, you can leave the funds where they are. But keep in mind that you will no longer be able to make contributions to the account. In fact, one reason you might want to roll over the money into an individual retirement account (IRA) is that you can make annual contributions. In 2024 and 2025, you can contribute up to $7,000 in an IRA, and those 50 and older can contribute up to $8,000.

What happens to your 401(k) when you leave your job and you have between $1,000 and $7,000 in your account? In that case, your former employer may not allow you to keep it there. Instead, they might roll over the 401(k) into an IRA in your name. If you have less than $1,000 in your 401(k), the employer will typically cash out the funds and send you a check for the amount.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

What to Do With Your 401(k) After Getting a New Job

When you get a new job, and you have a 401(k) from your previous employer, you have several options. As mentioned above, you can leave the money in your old employer’s 401(k) plan if you have more than $7,000 in the account. But if you have less than that in account, or you don’t like your old employer’s 401(k) plan, you can do one of the following:

Roll Over a 401(k) to Your New Employer’s Plan

If your new employer offers a 401(k) plan and you are eligible to participate, you can roll the money over from your old plan to the new plan. Consolidating your 401(k)s can help you manage all of your retirement savings in one place.

The process is usually simple. You can request that the 401(k) administrator at your old company move the funds into your new employer’s plan through what’s known as a direct transfer.

Roll Over a 401(k) to an IRA

An IRA is another option for your 401(k) funds. Rolling a 401(k) into an IRA can give you more control over your investment options, and you can do it through a direct transfer of funds from your old employer to a new IRA account you set up. Just keep in mind that IRAs don’t come with employer-provided benefits, such as matching contributions.

Recommended: IRA vs 401(k): What Is the Difference?

Cash Out Early

You can also choose to cash out your 401(k). However, if you’re younger than 59 ½, you will have to pay taxes on the money, and perhaps an additional 10% early withdrawal penalty.

Under some qualifying circumstances, the 10% fee may be waived, such as when the funds will be used for eligible medical expenses. But if there are no qualifying circumstances in your situation, think carefully about cashing out your 401(k) to make sure it’s the right choice for you.

What Happens to Your 401(k) if You’ve Been Fired?

If you’ve been fired, you will still have access to the funds you’ve contributed to the account as well as the fully vested employer contributions, known as the 401(k) vested balance.

And as long as you have more than $7,000 in the account, you’ll generally have the same options covered above — you can keep the 401(k) where it is, roll it over to your new employer’s plan, roll it over to an IRA at an online brokerage, or cash it out.

How Long Do You Have to Transfer Your 401(k)?

If you are rolling over your 401(k) to a new employer’s plan or into an IRA, you generally have 60 days from the date you receive the funds to deposit them into the new account. If you don’t complete the rollover within 60 days, the funds will be considered a distribution and they’ll be subject to taxes and penalties if you are under the age of 59 ½.

Advantages of Rolling Over Your 401(k)

Rolling over your 401(k) to your new employer’s plan may provide several benefits. Here are a few ways this option might help you.

One Place for Tax-Deferred Money

Transferring your 401(k) to your new employer’s plan can help consolidate your tax-deferred dollars into one account. Keeping track of and managing one 401(k) account may simplify your money management efforts.

A Streamlined Investment Strategy

Not only does consolidating your old 401(k) with your new 401(k) make money management more straightforward, it can also streamline your investments. Having one account may make it easier to coordinate your investment strategies, target your asset allocations, monitor your progress, and make any adjustments as needed.

Financial Service Offerings

Some 401(k) plans offer financial services, such as financial planner consultations to do such things as answer employees’ questions and help them with general financial planning. If your previous employer didn’t provide this and your new plan does, taking advantage of it may be helpful to you.

Disadvantages of Transferring 401(k) to a New Job

There are some potential drawbacks of rolling over a 401(k) to a new employer’s plan to consider as well. These may include:

• Loss of certain investment options: Your new employer’s plan may offer different investment options than your old plan, and you may lose some options you liked. The new plan might also offer fewer investment options, limiting your ability to diversify your portfolio.

• Increased fees: The new employer’s plan may have higher fees associated with it, which could eat into your investments over time.

• Possible delays: The process of rolling over your 401(k) can take time, which could cause delays in accessing your funds.

How to Roll Over Your 401(k)

So, how do you transfer your 401(k) to a new job? If you’ve decided to roll your funds into your new employer’s 401(k), these are the steps to take:

1. Contact your new plan’s administrator to get what’s known as the account address for the new 401(k)plan, and then give that information to your old plan’s administrator.

2. Complete any necessary paperwork required by your old and new employers for the rollover.

3. Request that your former plan administrator send the funds directly to the new plan. You can also have them send a check to you (it should be made out to the new account’s address), which you then give to the new plan’s administrator.

401(k) Rollover Rules

You may select a direct rollover, trustee-to-trustee transfer, or indirect rollover when rolling over your 401(k) to a new plan.

With a direct rollover, your old employer makes out a check to the new account address. Because the funds are directly deposited into the new account, no taxes are withheld.

With a trustee-to-trustee transfer, the old plan administrator sends the funds to the new plan via an electronic transfer.

With an indirect rollover, the check is payable to you, with 20% withheld for taxes. You’ll have 60 days to roll over the remaining funds into your employer’s plan or an IRA or other retirement plan.

Rolling Over a 401(k) Into an IRA

If you choose to roll your 401(k) funds into an IRA, the process is relatively straightforward. Here are the typical steps to take to roll over a 401(k) into an IRA:

1. Choose an IRA custodian: This is the financial institution that will hold your IRA account. Some popular choices include brokerage firms, banks, credit unions, and online lenders.

2. Open an IRA account: Once you have chosen an IRA custodian, you can open an IRA account. You will need to provide personal information such as your name, address, and Social Security number.

3. Request a 401(k) distribution: Contact the plan administrator of your old employer’s 401(k) and request a distribution of your account balance. You will need to specify that you want to do a “direct rollover” or “trustee-to-trustee” transfer to your new IRA account, since these are the most straight forward transfers.

4. Provide IRA custodian information: Give the 401(k) plan administrator the IRA custodian’s name, address, and account information, so they know where to send the funds.

5. Wait for the funds to be transferred: The process of transferring funds can take several weeks.

6. Monitor the account: Once the rollover is complete, check your IRA account to ensure that it has been funded and that the balance is correct.

7. Invest your funds: After the funds have been transferred to your IRA account, you can begin making investments with the money.

Your 401(k) plan administrator may have specific procedures for rolling over your account, so be sure to follow their instructions. Also, as noted above, there are some rules to follow, such as the 60-day rollover rule. It’s essential to abide by these to avoid penalties.

The Takeaway

There are benefits to rolling over a 401(k) after switching jobs, including streamlining your retirement accounts and making it easier to manage them. You may choose to roll over your 401(k) into a new employer’s plan, or into an IRA that you manage yourself, which could give you more investment options to choose from. Be sure to weigh the pros and cons of the different choices to help decide which one is best to help you save for retirement.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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FAQ

Should I roll over my 401(k) to a new employer?

It depends on your specific situation and goals. You might consider rolling over your 401(k) to your new employer if the new plan offers better investment choices or if consolidation leads to lower account fees. Another potential benefit is convenience — it’s easier to manage one account than two. That said, if control is most important to you, rolling over your 401(k) to an IRA, and having more investment options, may be the better choice for you.

How long do you have to move your 401(k) after leaving a job?

If the balance in your 401(k) is $7,000 or more, you can typically leave it there as long as you like. If your balance is $1,000 to $7,000, your former employer may not allow you to leave it there and instead might roll over the 401(k) into an IRA. If you have less than $1,000 in your 401(k), the employer will typically cash out the 401(k) and send you a check for the amount.

Once you initiate the rollover process, you typically have 60 days from the date of distribution to roll over your 401(k) from your previous employer to an IRA or another employer’s plan. Otherwise, it may be considered a taxable distribution and may be subject to penalties. This is primarily the case for indirect rollovers, but check with your plan administrator for specific details.

How do I roll over my 401(k) from my old job to my new job?

To roll over your 401(k) from your old job to your new job, you should contact the administrator of your new employer’s 401(k) plan and ask for the account address for the plan. Next, give the account address to your old plan’s administrator and ask them to transfer the funds directly to the new 401(k).

What happens if I don’t roll over my 401(k) from my previous employer?

Depending on the amount of money in your account, you don’t necessarily need to roll it over. If you have more than $7,000 in your 401(k), you can generally leave it with your old employer, as long as the plan allows it. But if you have less than $7,000 in your account, your employer may not allow you to leave it there. In that case, they might move it to an IRA for you, or send you a check for the money, if it’s less than $1,000.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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Dec

2024

Investing Checklist: Things to Do Before the End of 2022

Investing Checklist: Things to Do Before the End of 2024

By Samuel Becker | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

There are numerous things that investors can and perhaps should do before the clock strikes midnight on New Year’s Eve, such as maxing out retirement or college savings account contributions, and harvesting tax losses.

Read on to find out what should probably be on your investing checklist for the end of the year, what to consider tackling before your tax return is due in April, and how some simple moves this December can help set you up nicely for 2024 and beyond.

Key Points

• Investors should maximize their 401(k) contributions by the end of 2024. They can contribute up to $23,000 for the year, plus an additional $7,500 for those over 50. People 60 to 63 can contribute a higher catch-up limit of $11,250 in 2024.

• Tax-loss harvesting, a strategy to offset investment gains with losses and reduce tax burdens, should be considered before year-end if applicable.

• Contributing to a 529 college savings plan before the year ends can offer state tax deductions, depending on the state.

• Reviewing and updating estate plans and insurance policies is crucial to ensure they are current and accurate.

• Donating appreciated stocks to charity by December 31 can provide a tax deduction for the full market value of the shares.

End-of-Year vs Tax-Day Deadlines

Before diving into the year-end investing checklist, it’s important to remember that there are a couple of key distinctions when it comes to the calendar. Specifically, though the calendar year actually ends on December 31 of any given year, Tax Day is typically in the middle of April (April 15, usually). That’s the due date to file your federal tax return, unless you file for an extension.

As it relates to your investing checklist, this is important to take into account because some things, like maxing out your 401(k) contributions must be done before the end of the calendar year, while others (like maxing out contributions to your IRA account) can be done up until the Tax Day deadline.

In other words, some items on the following investing checklist will need to be crossed off before New Year’s Day, while others can wait until April.

7 Things to Do With Your Investments No Later Than Dec. 31

Here are seven things investors can or should consider doing before the calendar rolls around to 2025.

1. Max Out 401(k) Contributions

Perhaps the most beneficial thing investors can do for their long-term financial prospects is to max out their 401(k) contributions. A 401(k) is an employer-sponsored retirement account, where workers can contribute tax-deferred portions of their paychecks.

There are also Roth 401(k) accounts, which may be available to you, which allow you to preemptively pay taxes on the contributions, allowing for tax-free withdrawals in the future.

You can only contribute a certain amount of money per year into a 401(k) account, however. For 2024, that limit is $23,000, and those over 50 can contribute an additional $7,500, for a total of $30,500.

In 2025, the contribution limit rises to $23,500, with a $7,500 catch-up provision if you’re 50 and up, for a total of $31,000. However, in 2025, under the SECURE 2.0 Act, a higher catch-up limit of $11,250 applies to individuals ages 60 to 63.

So, if you are able to, it may be beneficial to contribute up to the $23,000 limit for 2024 before the year ends. After December 31, any contributions will count toward the 2025 tax year.

2. Harvest Tax Losses

Tax-loss harvesting is an advanced but popular strategy that allows investors to sell some investments at a loss, and then write off their losses against their gains to help lower their tax burden.

Note that investment losses realized during a specific calendar year must be applied to the gains from the same year, but losses can be applied in the future using a strategy called a tax-loss carryforward. But again, tax-loss harvesting can be a fairly complicated process, and it may be best to consult with a professional

3. Consider 529 Plan Contributions

A 529 college savings plan is used to save for education expenses. There are two basic types of 529 plans, but the main thing that investors should focus on, as it relates to their year-end investing checklist, is to stash money into it before January as some states allow 529 contributions as tax deductions.

There is no yearly federal contribution limit for 529 plans — instead, the limit is set at the state level. Gift taxes, however, may apply, which is critical to consider.

4. Address Roll-Over Loose Ends

Another thing to check on is whether there are any loose ends to tie up in regard to any account roll-overs that you may have executed during the year.

For example, if you decided to roll over an old 401(k) into an IRA at some point during the year, you’ll want to make sure that the funds ended up with your new brokerage or retirement plan provider.

It may be easy to overlook, but sometimes checks get sent to the wrong place or other wires get crossed, and it can be a good idea to double-check everything is where it should be before the year ends.

5. Review Insurance Policies

Some employers require or encourage employees to opt into certain benefits programs every year, including insurance coverage. This may or may not apply to your specific situation, but it can be a good idea to check and make sure your insurance coverage is up to date — and that you’ve done things like named beneficiaries, and that all relevant contact information is also current.

6. Review Your Estate Plan

This is another item on your investing checklist that may not necessarily need to be done by the end of the year, but it’s a good idea to make a habit of it: Review your estate plan, or get one started.

There are several important documents in your estate plan that legally establish what happens to your money and assets in the event that you die. If you don’t have an estate plan, you should probably make it an item on your to-do list. If you do have one, you can use the end of the year as a time to check in and make sure that your heirs or beneficiaries are designated, that there are instructions about how you’d prefer your death or incapacitation to be handled, and more.

7. Donate Appreciated Stocks

Finally, you can consider donating stocks to charity by the end of the year. There are a couple of reasons to consider a stock donation: One, you won’t pay any capital gains taxes if the shares have appreciated, and second, you’ll be able to snag a tax deduction for the full market value of the shares at the time that you donate them. The tax deduction limit is for up to 30% of your adjustable gross income — a considerable amount.

Remember, though, that charitable donations must be completed by December 31 if you hope to deduct the donation for the current tax year.

3 Things for Investors to Do by Tax Day 2025

As mentioned, there are a few items on your investing checklist that can be completed by Tax Day, or April 15, 2025. Here are the few outstanding items that you’ll have until then to complete.

1. Max Out IRA Contributions

One of the important differences between 401(k)s and IRAs is the contribution deadline. While 401(k) contributions must be made before the end of the calendar year, investors can keep making contributions to their IRA accounts up until Tax Day 2025, within the contribution limits of course.

So, if you want to max out your IRA contributions for 2024, the limit is $7,000. But people over 50 can contribute an additional $1,000 — and you’ll have until April to contribute for 2024 and still be able to deduct contributions from your taxable income (assuming it’s a tax-deferred IRA, not a Roth IRA).

The contribution limit remains the same in 2025 — $7,000, with the same $1,000 catch-up provision for those 50 and up. And some taxpayers may be able to deduct their contributions, too, under certain conditions.

2. Max Out HSA Contributions

If you have a health savings account (HSA), you’ll want to make sure you’ve hit your contribution limits before Tax Day, too. The contribution limits for HSAs in 2024 are $4,150 for self-only coverage and $8,300 for family coverage. People over 55 can contribute an additional $1,000. For 2025, the contribution limits are $4,300 for self-only coverage and $8,550 for family coverage. People aged 55 and up can contribute an additional $1,000 in both 2024 and 2025.

3. Take Your RMD (if Applicable)

If you’re retired, you may need to take a required minimum distribution (RMD) from your retirement account by the beginning of April next year, if it’s your first RMD. But if you’ve taken an RMD before, you’ll need to do so before the end of 2024 — so, be sure to check to see what deadline applies to your specific situation.

This generally only applies to people who are in their 70s (typically age 73 if you reach age 72 after December 31, 2022), but it may be worth discussing with a professional what the best course of action is, especially if you have multiple retirement accounts or if you have an inherited account.

The Takeaway

Doing a year-end financial review can be extremely beneficial, and a checklist can help make sure you don’t miss any important steps for 2024 — and set you up for 2025. That investing checklist should probably include things like maxing out contributions to your retirement accounts, harvesting tax losses in order to manage your tax bill, and possibly even taking minimum required distributions. Everyone’s situation is different, so you’ll need to tailor your investing checklist accordingly.

Also, it’s important to keep in mind that you may have until Tax Day in April to get some of it done — though it may be good practice to knock everything out by the end of the year. If you’re only beginning to invest, keeping this list handy and reviewing it annually can help you establish healthy financial habits.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Photo credit: iStock/dusanpetkovic

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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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Dec

2024

How to Leverage Home Equity to Pay Off Student Debt

By Becca Stanek | Family Finances, Home Ownership, Student Loans, student_loan | No Comments

If you’re finding your student loan debt difficult to manage, one option for tackling it is to leverage your home equity. It’s possible to do this through the student loan cash-out refinance program offered by Fannie Mae or through a general cash-out refinance.

Either option would allow you to use the excess value of your home to pay off student loan debt directly. Plus, because you would be consolidating your student loan debt into your mortgage, you’d have to make just one payment each month. You might also secure a lower interest rate than you had on your student loans.

Still, there are major downsides to consider before paying off student loans with home equity. For one, the student loan debt won’t actually go away — you’ll still owe that money. Additionally, you could lose access to student loan benefits and protections. And, if you aren’t able to stay on top of monthly payments, your home is on the line.

Key Points

• Leveraging home equity can consolidate student loans into a mortgage, potentially lowering interest rates and simplifying payments.

• Options include a student loan cash-out refinance or a home equity line of credit (HELOC).

• Risks involve losing student loan benefits, potential foreclosure, and debt becoming part of the mortgage.

• Consider credit score requirements and gather necessary documents before applying for refinancing.

• Weigh pros and cons, including interest rates, loan terms, and potential fees, before deciding.

Using a Student Loan Cash-Out Refinance to Pay Off Student Loans

With a cash-out refinance, you take out a new mortgage for an amount that exceeds what you currently owe. You then get the difference in cash, which you could then use to pay off your student loan debt.

One option for doing this is through Fannie Mae’s Student Loan Cash-out Refinance program, which is specifically designed to allow homeowners to use their home equity to pay off student loans. To qualify, borrowers must use the funds from the cash-out refinance to fully pay off at least one of their student loans. Additionally, it’s stipulated that this loan must belong to the individual who applied for the refinance.

For borrowers who don’t qualify for the Fannie Mae program, or who want to use their cash for costs other than student loan repayment, it’s also possible to get a general cash-out refinance through another lender.

Whether you go with Fannie Mae or another lender, there are typically certain requirements that a borrower must meet to qualify for a cash-out refinance. Generally, there are stipulations for credit score, debt-to-income ratio, and the amount of equity in the home after closing. As such, it’s helpful to determine before applying how much equity you have in your home.

Recommended: First-Time Homebuyer Guide

Should I Tap Into My Home Equity to Pay Off Student Loans?

Using the equity you’ve earned in your home to pay off your student loans may sound like an easy fix. But before you commit to refinancing, you’ll want to weigh the decision carefully. While it may make sense for some, a student loan cash-out refinance won’t work for everyone. Here are a few pros and cons to consider as you make your decision.

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Benefits of Paying Off Student Loans with Home Equity

Like most financial decisions, paying off your student loans with the equity you’ve earned on your home is a multifaceted decision. Here are some of the ways you could find it beneficial:

• You may be able to get a better rate. Securing a lower interest rate is potentially the most appealing reason to use the equity in your home to pay off student loans. As part of your decision-making process, consider reviewing mortgage options at a few different lenders. While reviewing rate quotes from each lender, do the math to determine if paying off student loans with home equity will truly reduce the amount of money you spend in interest. If there are any fees or prepayment penalties, make sure to factor those in. Keep in mind this isn’t the only way to get a better rate either — another option to explore is student loan refinancing.

• You may get more time to pay off your loan. When making your decision, also take into account the length of the mortgage term. The standard repayment plan for student loans is a 10-year term, unless you have already consolidated them, in which case you could have a term of up to 25 years. With a mortgage, term lengths can be as long as 30 years. Just keep in mind that while repaying your debt over a longer time period could lower monthly payments, it may also mean you pay more in interest over the life of the loan.

• You can streamline your payments. Another benefit is reducing the number of monthly payments you need to keep track of. Instead of paying your mortgage and each of your student loans, those bills will get consolidated into a single payment. Streamlining your payments could help you stay on top of your payments and make your finances a little bit easier to manage.

Recommended: Home Affordability Calculator

Downsides of Paying Off Student Loans with Home Equity

There are a few potential negatives that could impact your decision to pay off student loans with your home equity:

• You risk foreclosure. Using your home equity to pay off your student loans could potentially put your home at risk. That’s because you’re combining your student loans and mortgage into one debt, now all tied to your home. That means if you run into any financial issues in the future and are unable to make payments, in severe cases, such as loan default, your home could be foreclosed on.

• Your student debt won’t really disappear. When you use your home equity to pay off your student loans, you’ll still owe that debt. Only now, it’s part of your mortgage.

• You’ll lose access to student loan benefits and protections. When you do a student loan cash-out refinance, you’ll no longer be eligible for borrower protections that are afforded to borrowers who have federal loans. These benefits include deferment or forbearance, as well as income-driven repayment plans. If you’re pursuing student loan forgiveness through one of the programs available to federal borrowers, such as Public Service Loan Forgiveness, consolidating your student loan debt with your mortgage would eliminate you from the program. As such, it may not make sense to use the equity in your home to pay off your student loans if you’re currently taking advantage of any of these options.

• You could owe more than your home is worth. As you weigh your options, consider comparing the available equity in your home to the amount you owe in student loans. In some cases, you may owe more in student loan debt than you have available to use in home equity under the various loan guidelines. If you end up owing more than what your home is worth, that could make it tough to sell your home, as you’d need to add your own funds to repay your loan balance.

When It’s Time to Leverage Your Home Equity

Cashing in on your home equity isn’t as easy as withdrawing money from your checking account, but it’s also not as difficult as you might think. A good first step is to contact a mortgage lender, who will order an appraisal of your home and help you to get started on the paperwork.

This is also a good time to explore another way to leverage home equity to pay bills: a home equity line of credit (HELOC). When you take out a HELOC, you can borrow (and pay interest on) only as much as you need at a given time, up to a preapproved credit limit. A HELOC monthly payment calculator can be a useful tool as it will help you understand what monthly payments might look like if you follow this path. If you have a great rate on your existing mortgage and don’t want to refinance into a higher rate, a HELOC might be a good alternative.

It could also be a good idea to check your credit score. To secure a cash-out refinance, many lenders will likely require a credit score of 620 or higher. That being said, the minimum score required depends on many factors, such as credit, income, equity, and more. If you don’t meet the minimum FICO score requirement for your chosen program, you might want to try to improve your credit score before applying.

At the very least, you’ll likely need to gather necessary documents so you have them handy. Get together your latest tax filings, pay stubs, and bank statements. Lenders use those documents to evaluate whether you have the savings and cash flow to pay back a fatter mortgage, and they may ask for when you apply to refinance.

The Takeaway

When used responsibly, home equity can be a useful tool in helping to improve your overall financial situation — including using home equity to pay off student loans. While there could be upsides, such as streamlining payments and securing a better rate, it’s important to also weigh the drawbacks, like losing access to student loan protections and putting your home on the line. Depending on how much you owe on your student loans, a cash-out refi or a home equity line of credit (HELOC) might be a good way to settle some or all of your student loan debt and even consolidate multiple loans into one payment.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Is it smart to use home equity to consolidate debt?

It can be. If you can obtain a lower interest rate on a home equity loan, home equity line of credit (HELOC), or even a cash-out refinance, it could make sense to consolidate debt this way. And if you have multiple types of debt (student loan debt, credit card debt, for example), it might simplify things to have one monthly payment. But it does mean you would lose access to student loan forgiveness and forbearance benefits, and securing debt with your home does involve risk.

Is it a good idea to take out a home equity loan to pay for college?

While you can pay for college with a home equity loan, it might be better to find a student loan for that expense because if you are unable to make payments on your home equity loan, your property could be at risk.

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

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

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

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

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.

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

SOHL-Q424-143

Dec

2024

Overview: The History of the Federal Reserve

By Jody McMaster | mortgage, Terminology | No Comments

You may give little thought to the Federal Reserve, but the Fed looms large over your life as you borrow, save, spend, and invest.

The Fed’s mission is to control inflation and maintain maximum employment. The goals can be at odds with each other.

Let’s look at the Federal Reserve’s origin story and what the central banking system is currently up to.

Key Points

• Established to control inflation and maintain employment, the Federal Reserve was founded in 1913.

• The Fed influences personal finances by setting the federal funds rate, which can affect borrowing costs, among other things.

• Historical events like the Great Depression and Great Inflation underscore the Fed’s role in managing economic crises.

• Recent actions include rate hikes from 2022 to 2023 to combat inflation, followed by rate cuts in 2024.

• The Fed’s dual mandate aims for maximum employment and price stability, impacting decisions on interest rates and economic policies.

How It All Began

A secret meeting in 1910 on an island off Georgia laid the foundation for the Federal Reserve. After a series of financial panics and recessions in the Gilded Age, six men gathered at the Jekyll Island Club to write a plan to reform the nation’s banking system.

At that time, U.S. banks held large reserves of cash, but they were scattered. During a crisis, the reserves would be frozen. In addition, the supply of currency was inelastic and supplies of gold limited. And U.S. banks could not operate overseas.

The Panic of 1907 — a worldwide financial crisis surpassed only by the Great Depression — galvanized Congress, and particularly Senate Finance Committee Chairman Nelson Aldrich. In the fall of 1910, Aldrich and his Jekyll Island colleagues developed a plan for a central bank with 15 branches. The national body would set discount rates for the system and buy and sell securities.

Political wrangling ensued, but Congress passed, and President Woodrow Wilson signed the Federal Reserve Act in 1913. The bill resembled the Aldrich plan.

The law called for a central banking system with a governing board and multiple reserve banks. The hybrid structure endures.

A golden factoid: Banking panics before 1913 tested the mettle of Manhattan banks, but what is now the most influential of the 12 reserve banks, the Federal Reserve Bank of New York, is home to the world’s largest gold storage reserve, with about 500,000 gold bars owned by the U.S. government, foreign governments, other central banks, and international organizations.

The First Century of the Federal Reserve

Before the Fed was born, financial panics caused by speculation and rumors led to the call for a central banking authority that would support a healthier banking system.

World War I, 1914 to 1918

The Federal Reserve Board and the 12 reserve banks were just getting organized as war broke out in Europe. But once the nation entered World War I, the Fed quickly became a major player by supporting the U.S. Treasury’s war bond effort and offering lower interest rates to member banks when the proceeds were used to buy bonds.

The Fed also gave better interest rates to banks purchasing Treasury certificates. Lower rates led to increased borrowing by businesses and households, which stimulated economic growth. But the increased money supply eventually led to rising prices. When the war ended, the Fed took action to control that inflation.

Stock Market Crash of 1929

On Oct. 28, 1929, now known as “Black Monday,” the Roaring Twenties ended with a thud when the Dow Jones Industrial Average dropped nearly 13%. The market collapsed the next day. It was the most devastating stock market crash in U.S. history.

Many economists and historians blame the Fed for the crash because of its decision to raise interest rates in 1928 and 1929 to control over speculation (what today might be called “irrational exuberance”) in the stock market.

Leaders decreased the money supply starting in 1928 and pressured member banks in 1929 to rein in their loans to brokers and charge a higher rate on broker loans.

The Great Depression, 1929 to 1941

The deepest downturn in U.S. history lasted from 1929 to 1941. The contraction began in the United States and reverberated around the globe.

The banking panics in 1930 and early 1931 were regional, but in late 1931 the commercial banking crisis spread throughout the nation. The Fed’s efforts to contain the collapse were not enough, and the situation reached rock bottom by March 1933.

On March 6, 1933, President Franklin Roosevelt — who’d been inaugurated just two days before — announced a weeklong suspension of all banking transactions. Legislative intervention soon followed.

In 1933 the Glass-Steagall Act separated commercial and investment banking and gave the federal government and Federal Reserve enhanced powers to deal with the economic crisis, which led to the creation of the Federal Deposit Insurance Corp. and regulation of deposit interest rates. (At an FDIC-insured bank today, deposits are insured up to $250,000 per depositor, per institution, and per ownership category.)

The Banking Act of 1935 gave the Fed more independence from the executive branch; shifted power from the regional reserve banks to the Board of Governors, based in Washington, D.C.; and led to the modern form of the Federal Open Market Committee (FOMC), the Fed’s main monetary policymaking committee, which consists of the Fed governors in Washington and the presidents of the 12 regional banks.

World War II, 1941 to 1945

The Fed’s role during World War II was similar to its role in World War I. Its main mission became financing the war, and it helped the Treasury Department market war bonds in cooperation with commercial banks and businesses.

The reserve banks also reduced their discount rate to 1% and set a rate of half a percentage point for loans secured by short-term government obligations. During the war years, the Fed kept its eye on inflation by regulating consumer credit. It required large down payments and shorter terms on loans used to buy a variety of consumer goods.

Korean War, 1950 to 1953

At the start of the Korean War, inflation was a growing concern. But the Fed was once again under pressure — this time from the Truman administration — to help finance the war effort.

In February 1951, the Fed declared its independence in fiscal matters, and in March, the Treasury and the Fed announced that they had reached an accord on how they would handle “debt management and monetary policies” going forward.

The Great Inflation, 1970s and ’80s

Keeping inflation under control has always been an important role for the Fed, but in the 1970s, when the stock market slumped and the country found itself in an inflation crisis so deep it was known as the “Great Inflation,” it became a special challenge.

Check the history books and you’ll find plenty of finger-pointing. It was President Richard Nixon’s fault for disengaging from the gold standard. Or maybe it was the Fed’s fault for employing a confusing stop-go monetary policy that had interest rates going up, then down, then back up.

Then new Fed chairman, Paul Volcker, took over in 1979 and switched the Fed’s goal from targeting interest rates to targeting the money supply. It was painful. The prime lending rate (the rate banks offer their most creditworthy customers when they’re looking to take out a line of credit or a loan) skyrocketed to over 21% at one point.

Unemployment reached double digits in some months. The country went through two recessions. But eventually, prices stabilized.

And the federal funds rate hasn’t been in the double digits since the mid-1980s.

The Great Recession, 2007 to 2009

When a period in U.S. history is labeled “great,” it’s often anything but. During the Great Recession, home prices fell. Unemployment rose. Gross domestic product fell. And in 2008, the market crashed.

Home prices had peaked at the beginning of 2007, and the subprime mortgage market had been busy.

This recession was, for many Americans, the worst of times; they lost their jobs, their homes, and their confidence in the economy.

Enter the Fed, which started by tackling the slump with a traditional response: From September 2007 to December 2008, the Fed lowered the federal funds rate from 5.25% to zero to 0.25%, and FOMC policy statements noted that it would be keeping the rate at exceptionally low levels for a while. But it didn’t stop there.

In 2008 it also began its first round of quantitative easing, buying $600 million in mortgage-backed securities, and continued that effort in 2009. Also in 2008, President George W. Bush signed the $700 million Troubled Asset Relief Program into law. Two more rounds of quantitative easing started in 2010 and 2012 under President Barack Obama.

Recommended: Common Recession Fears and How to Cope

The Covid Crisis, the Fed, and Inflation

At the onset of the Covid-19 pandemic and resulting recession in 2020, making sure the U.S. economy did not fall into a prolonged recession became a higher priority than maintaining inflation at the Federal Reserve’s 2% target rate.

The Fed seeks to control inflation by influencing interest rates. When inflation is too high, the Fed typically raises its benchmark interest rate to slow the economy and tame inflation. When inflation is low, the Fed often lowers the federal funds rate — the interest rate that banks use when they lend money to one another overnight — to stimulate the economy.

After keeping the rate near zero, in March 2022, the Fed approved its first rate increase in more than three years. Between March 2022 and July 2023, the Fed raised rates eleven times, the fastest tightening campaign since the 1980s. The Fed held rates at 5.25% to 5.50% from July 2023 to September 2024. Then as the cuts seemed to achieve their goal, inflation slowed. Inflation, as evidenced by the Consumer Price Index (CPI), peaked in June 2022 and has improved since then. The most recent CPI data, for the 12 months ending in September 2024, showed inflation at 2.4%, close to the Fed’s 2% goal. Given this, in September 2024, the Fed decided it was time to begin cutting the rate. Some economists anticipate further cuts in 2025.

How the Federal Reserve Affects Your Finances

So how do the Fed’s decisions have an impact on you as an individual consumer? For one, banks base their prime rate on the federal funds rate; the prime rate is generally 3 percentage points higher. This rate in turn helps determine the rates that lenders offer their customers.

Fed rate hikes increase the cost of borrowing money for a mortgage or to pay for a car, or for carrying a credit card balance. Rate increases also create a more volatile stock market that could hurt 401(k) plans, increase the amount you earn on a CD, or affect what you might pay for a bond. (Fortunately there are some way to protect your money from inflation next time it rears its head. For example, if you can swing it, buying a house vs. being a renter may help protect you from inflation because you can lock in a fixed monthly payment long term. You can also read up on how to invest during a time of inflation.)

You may be scratching your head at why Fed rate cuts in the fall of 2024 didn’t immediately result in reduced interest rates on home mortgage loans. The short answer is that lenders look at multiple economic data points when they set rates, and the Fed’s action, while important, is not the only factor.

Prospective homebuyers may be wondering, is this a good time to buy a house? The answer is a very personal one, and chances are it won’t be found in scrutinizing the Fed’s movements. Emotions are also involved: Owning a home not only gives you a place where you enjoy living, but homeownership can help build generational wealth and some people may want to begin building that equity immediately, especially when future mortgage rates, like Fed rate cuts, are not within their control.

The Takeaway

If you’re planning a vacation, you might not want to tuck away a book on the history of the Federal Reserve. (Or maybe you will. No judgment.) The Fed has a dual mandate to aim for maximum employment and price stability, and it has historically raised interest rates as the antidote for rising inflation.

If you find yourself musing about buying a home soon, it’s important to look at the history of mortgage rates to put the current conditions into context, and it helps to read up on the benefits of homeownership.

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 prime rate?

The prime interest rate is the interest rate that banks charge the customers they consider to be the lowest risk — those who have a good credit history and are deemed least likely to default on a loan or miss payments.

What does the Federal Reserve do?

The Federal Reserve has several roles. It sets monetary policy, with a goal of maximum employment and stable inflation. It also regulates banks and other financial institutions. Its overall objective is to control risks to the economy and financial markets.

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOHL-Q424-133

Dec

2024

Home Equity Loans vs HELOCs vs Home Improvement Loans

By Janet Siroto | Family Finances, Home Ownership, personal_loan | No Comments

Maybe you’ve spent a serious amount of time watching HGTV and now have visions of turning your kitchen into a chef’s paradise. Or perhaps you have an entire Pinterest board full of super-deep soaking tubs that you’re dreaming about.

Either way, the home improvement bug has bitten you, and you’re hardly alone. In the U.S. $827 billion was spent on home improvement from 2021 to 2023, according to the U.S. Census Bureau American Housing Survey. For a bit more context, consider that the average American spent more than $9,542 on home improvement projects in 2023 — with spending up 12% over 2022. That’s a lot more than just buying a new bathroom sink.

While your home might be begging for some updates and improvements, not all of us have close to $10,000 stashed away in a savings account. For many people, realizing their home improvement goals means borrowing money. But how exactly?

Read on to learn about some of your options, including a home equity loan, a home equity line of credit (HELOC), and a home improvement loan. We’ll share the situations in which home equity loans, HELOCs, and home improvement loans work best so you can figure out which home improvement loan option is right for you.

Key Points

• Home equity loans, HELOCs, and personal home improvement loans offer different benefits for financing renovations.

• Home equity loans provide a lump sum with fixed interest rates, using home equity as collateral.

• HELOCs offer flexible access to funds up to a certain limit during a set period, with variable interest rates.

• Personal home improvement loans are unsecured, typically quicker to obtain, and may have higher interest rates.

• Choosing the right financing option depends on the borrower’s equity, the amount needed, and preferred repayment terms.

What’s the Difference Between Home Equity Loans, HELOCs, and Home Improvement Loans?

If you’ve figured out how much a home renovation will cost and now need to fund the project, the options can sound a bit confusing because they all involve the word “home.”

What’s more, you may hear the term “home equity loan” loosely applied to any funds borrowed to do home improvement work. However, there are actually different kinds of home equity loans to know about, plus one that doesn’t involve home equity at all.

So, before digging into home improvement loans vs. home improvement loans vs. HELOCs, consider the basics for each:

• A home equity loan is a lump-sum payment that a lender gives you using the equity in your home to secure the loan. These loans often have a higher limit, lower interest rate, and longer repayment term than a home improvement loan.

• A home equity line of credit, or HELOC, is a revolving line of credit that is backed by your equity in your home. It operates similarly to a credit card in that the amount you access is not set, though you will have a limit on how much you can access.

• A home improvement loan is a kind of lump-sum personal loan, and it is not backed by the equity you have in your home. It may have a higher interest rate and shorter repayment term than a home equity loan. What’s more, it may have a lower limit, making it well suited for smaller projects.

Worth noting: If you use your home as collateral to borrow funds, you could lose your property if you don’t make payments on time. That’s a significant risk to your financial security and one to take seriously.

Next, here’s a look at how key loan features line up for these options.

How Much Can I Borrow?

The sky isn’t the limit when borrowing funds. This is how much you will likely be able to access:

• For a home equity loan, you can typically borrow up to 85% of your home’s value, minus what’s owed on your mortgage. So if your home’s value is $300,000, 85% of that is $255,000. If you have a mortgage for $200,000, then $255,000 minus $200,000 leaves you with a potential loan of $55,000. You can do the math quickly with a home equity loan calculator.

• For a HELOC, you can often access up to 90% of the equity you have in your home, though some lenders may go even higher. In that case, you are likely to pay a higher interest rate. In the scenario above, with a home valued at $300,000 and a mortgage of $200,000, that means you have $100,000 equity in your home. A loan for 90% of $100,000 would be $90,000. As with other lines of credit, your credit score and employment history will likely factor into the approval decision. To figure out what payments might be on a HELOC, you can use a HELOC repayment calculator.

• For a home improvement loan, the amount you can borrow will depend on a variety of factors, including your credit score, but the typical range is between $3,000 and $50,000 or sometimes even more.

What Can the Funds Be Used for?

Interestingly, some of these funds can be used for purposes other than home improvement costs. Here’s how they stack up:

• For a home equity loan, you can certainly use the funds for an amazing new kitchen with a professional-grade range, but you can also use the money for, say, debt consolidation or college tuition.

• For a HELOC, as with a home equity loan, you can use the money as you see fit. Redoing your patio? Sure. But you can also apply the cash to open a business, pay for grad school, or knock out credit card debt.

• For a home improvement loan, there is often the requirement that you use the funds for, as the name suggests, a home improvement project, such as adding a hot tub to your property. In some cases, you may be able to use the funds for non-home purposes. Your lender can tell you more.

How Will I Receive the Funds? How Long Will It Take to Get the Money?

Consider the different ways and timing you may encounter when getting money from these loan options:

• With a home equity loan, you receive a lump sum payment of the funds borrowed. The timeline for getting your funds can be anywhere from two weeks to two months, depending on a variety of factors, including the lender’s pace.

• With a HELOC, you open a line of credit, similar to a credit card. For what is known as the draw period (typically 10 years), you can withdraw funds via a special credit card or checkbook up to your limit. It typically takes between two and six weeks to get the initial approval, but some lenders may be faster.

• With a home improvement personal loan, you receive a lump sum of cash. These tend to be the quickest way to get cash: It may only take a day or so after approval to have the funds available.

How Much Interest Will I Pay?

How much you pay to access funds for your project will vary. Take a closer look:

• For a home equity loan, you typically get a lower interest rate than some other loan types, since you are using your home equity as collateral. These are typically fixed-rate loans, so you’ll know how much you are paying every month. At the end of 2024, the average rate of a fixed, 15-year home equity loan was 8.49%.

• For a HELOC, the line of credit will typically have a rate that varies with the prime rate, though some lenders offer fixed-rate options. HELOCs may have lower interest rates than personal and home equity loans, but you will need a high credit score to snag the lowest possible rate.

• For home improvement loans, which are a kind of personal loan, rates vary widely. Currently, you might find anything from 6.99% to 36% depending on the lender and your qualifications, such as your credit score. These loans are typically fixed rate.

How Long Will I Have to Repay the Funds?

Repayment terms differ among these three options:

• For home equity loans, you will agree to a term with your lender. Terms typically range from five to 20 years, but 30 years may be available as well.

• With a HELOC, you usually have a draw period of 10 years, during which you may pay interest only. Then, you may no longer withdraw funds, and move into the principal-plus-interest repayment period, which is often 20 years.

• With a home improvement personal loan, your repayment terms are typically shorter than with the other options and will vary with the lender. You may find terms of anywhere from one to seven years or possibly longer.

Here’s how these features compare in chart form:

Feature	Home Equity Loan	HELOC	Home Improvement Personal Loan
Type of collateral	Secured via your home	Secured via your home	Unsecured
Borrowing limit	Typically up to 85% of home value, minus mortgage	Typically up to 90% or more of your home equity	Typically from $3,000 up to $50,000 or more
How funds can be used	For a variety of purposes	For a variety of purposes	Often strictly for home improvement
How funds are dispersed	Lump sum	Line of credit	Lump sum
How long to receive funds	Typically two weeks to two months	Typically two to six weeks	Often within days
Type of interest rate	Typically fixed rate and may be lower than other loans	Typically variable but some lenders offer fixed rate; rates vary	Typically fixed rate; rates vary widely
Repayment term	Typically 20 to 30 years	Typically 20 years after the 10-year draw period	Typically 1 to 7 years

Which Home Improvement Loan Option Is Better?

Now that you’ve learned about the features of these loan options, here’s some guidance on which one is likely to be best for your needs.

When Home Equity Loans Make Sense

Here are some scenarios in which a home equity loan may be a good choice:

• If you have significant home equity and are looking to borrow a large amount, a home equity loan could be the right move to access a lump sum of cash.

• If you want to have a long repayment period, the possibility of a 30-year term could be a good fit.

• When you are seeking to keep costs as low as possible, these loans may offer lower interest rates.

• A home equity loan can be a wise move when you need cash for other purposes, such as debt consolidation or educational expenses.

• Some interest payments may be tax-deductible, depending on how you use the funds, which could be a benefit of this kind of loan.

When HELOCs Make Sense

A HELOC may be your best bet in the following situations:

• You aren’t sure how much money you need and like the flexibility of a line of credit.

• You want to keep your payments as low as possible in the near future. HELOCs can usually be an interest-only loan during the first 10-year draw period of the arrangement.

• A HELOC can be a good fit for people who are doing a renovation in stages, and want to draw funds as needed versus all upfront.

• You need cash for something other than just home renovation, such as to pay down credit card debt or fund tuition.

• Depending on what you put the money toward, interest payments may be tax-deductible to a degree.

When Home Improvement Personal Loans Make Sense

Consider these upsides:

• These personal loans tend to have a straightforward, fast application process, and often have fewer fees, such as no origination fees.

• Home improvement loans are usually approved more quickly than other kinds of home loans.

• These loans can be a good way to borrow a small sum, such as $3,000 or $5,000 for a project you need to complete quickly (say, a bathroom without a functional shower).

• Home improvement loans can be a good option for new homeowners, who haven’t yet built up much equity in their home but need funds for renovation.

• For those who are uncomfortable using their home as collateral, this kind of loan can be a smart move.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

The Takeaway

Home improvement is a popular pursuit and can not only make daily life more enjoyable, it can also boost the value of what is likely your biggest asset. If you are ready to take on a renovation (or need to pay off the bills for the reno you already did), you’ll have options in terms of how to access funds.

Depending on your needs and personal situation, you might prefer a home equity loan, a home equity line of credit (HELOC), or a home improvement personal loan. Why not start by looking into a HELOC? A line of credit is a super-flexible way to borrow.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Can a HELOC only be used for repairs or renovations?

You can use the funds you draw from a home equity line of credit (HELOC) for pretty much anything you can think of. But if you are hoping to take advantage of a tax deduction for the interest you pay on your HELOC, it will need to be used to buy, build, or substantially improve a home.

Is a HELOC a second mortgage?

Yes, if you are still paying off the mortgage on your home, a home equity line of credit (HELOC) that is secured by that property would be considered a second mortgage. The same is true of a home equity loan.

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.

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

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

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.

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

SOHL-Q424-132

Guide to Transferring 401(k) to a New Job

3 Reasons to Transfer Your 401(k) to a New Job

1. You May Be Paying Hidden Fees

2. You Might Be Missing Out on Certain Types of Investments

3. You Could Lose Track of Your 401(k) Account

Do You Have to Rollover Your 401(k) to a New Employer?

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

What to Do With Your 401(k) After Getting a New Job

Roll Over a 401(k) to Your New Employer’s Plan

Roll Over a 401(k) to an IRA

Cash Out Early

What Happens to Your 401(k) if You’ve Been Fired?

How Long Do You Have to Transfer Your 401(k)?

Advantages of Rolling Over Your 401(k)

One Place for Tax-Deferred Money

A Streamlined Investment Strategy

Financial Service Offerings

Disadvantages of Transferring 401(k) to a New Job

How to Roll Over Your 401(k)

401(k) Rollover Rules

Rolling Over a 401(k) Into an IRA

The Takeaway

FAQ

Should I roll over my 401(k) to a new employer?

How long do you have to move your 401(k) after leaving a job?

How do I roll over my 401(k) from my old job to my new job?

What happens if I don’t roll over my 401(k) from my previous employer?

Investing Checklist: Things to Do Before the End of 2024

End-of-Year vs Tax-Day Deadlines

7 Things to Do With Your Investments No Later Than Dec. 31

1. Max Out 401(k) Contributions

2. Harvest Tax Losses

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

3. Consider 529 Plan Contributions

4. Address Roll-Over Loose Ends

5. Review Insurance Policies

6. Review Your Estate Plan

7. Donate Appreciated Stocks

3 Things for Investors to Do by Tax Day 2025

1. Max Out IRA Contributions

2. Max Out HSA Contributions

3. Take Your RMD (if Applicable)

The Takeaway

How to Leverage Home Equity to Pay Off Student Debt

Using a Student Loan Cash-Out Refinance to Pay Off Student Loans

Should I Tap Into My Home Equity to Pay Off Student Loans?

Turn your home equity into cash with a HELOC from SoFi.

Access up to 90% or $500k of your home’s equity to finance almost anything.

Benefits of Paying Off Student Loans with Home Equity

Downsides of Paying Off Student Loans with Home Equity

When It’s Time to Leverage Your Home Equity

The Takeaway

FAQ

Is it smart to use home equity to consolidate debt?

Is it a good idea to take out a home equity loan to pay for college?

Overview: The History of the Federal Reserve

How It All Began

The First Century of the Federal Reserve

World War I, 1914 to 1918

Stock Market Crash of 1929

The Great Depression, 1929 to 1941

World War II, 1941 to 1945

Korean War, 1950 to 1953

The Great Inflation, 1970s and ’80s

The Great Recession, 2007 to 2009

The Covid Crisis, the Fed, and Inflation

How the Federal Reserve Affects Your Finances

The Takeaway

FAQ

What is the prime rate?

What does the Federal Reserve do?

Home Equity Loans vs HELOCs vs Home Improvement Loans

What’s the Difference Between Home Equity Loans, HELOCs, and Home Improvement Loans?

How Much Can I Borrow?

What Can the Funds Be Used for?

How Will I Receive the Funds? How Long Will It Take to Get the Money?

How Much Interest Will I Pay?

How Long Will I Have to Repay the Funds?

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Student Loan
Refinancing

Personal
Loans

Online
Investments