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As painful as it can be to see interest rates top 7.00% when they hovered over 2.00% in late 2020, waiting for them to come down again could bite would-be homeowners. Although today’s rates mean homebuyers can expect to spend more on interest over their loan’s lifetime, they’re actually close to the 50-year average — and besides, if they plummet again, the market will once again be flooded by buyers who have been sitting on the sidelines.

Still, interest rates are a big deal when it comes to how much home you can comfortably afford — and the ongoing health of your personal finances. In an April 2024 survey of 500 would-be homebuyers, SoFi found that 45% were concerned about mortgage costs — it was one of the top concerns of prospective homeowners. One in 10 people surveyed said difficulty securing a mortgage was the biggest homebuying challenge they were facing. In this article, we’ll walk through a little bit of mortgage rate history and context, as well as offering ways to decide whether you’re ready to buy or not, regardless of the market.

Why Are Mortgage Rates So High?

Since Americans just witnessed a historic mortgage interest rate drop in 2020, today’s 7.00% and 8.00% rates seem astronomical. (And, to be fair, coupled with a median national home sales price over $400,000, they can pack a powerful punch: After interest, a 30-year mortgage could easily cost twice the amount of the loan.)

Still, it’s important to remember that when you look at the big picture, today’s rates are actually not that big a deal. Yes, they’re the highest they’ve been since the year 2000, but they’re about on par (or slightly under) the rates buyers saw in the 1990s — and less than half of the 17.00% and 18.00% interest rates buyers paid in the early 1980s.

The rise and fall of mortgage rates is tied to complicated economic factors, including inflation, the Federal interest rate, and the yield of 10-year Treasury bonds. It’s not totally predictable, but one thing’s for sure: It will continue to undulate over time. What’s more, attempting to time the market to purchase a house might not be the best financial move, even if it does save you money on interest.


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

How Low Will Mortgage Rates Drop This Year?

While no one can fully predict the future, experts do weigh in with their predictions for the mortgage interest rate. In 2024, projections suggest a mortgage interest rate drop to about 6.00%, or slightly lower — but still, we’re likely to stay far from the 2.00% and 3.00% free-for-all we saw a few years ago.

How Your Interest Rate Impacts Your Buying Power

So how much do interest rates really impact how much house you can afford? Glad you asked! Let’s do some math.

Say you’re going to buy a $400,000 home — which is just a little less than the U.S. median sale price right now. You’ve saved up a 20% down payment, or $80,000, and plan on taking out a 30-year mortgage.

With a fixed interest rate of 7.00%, your monthly payment would be about $2,129 per month, before additional costs like homeowners insurance and property taxes. At 6.50%, that payment goes down to $2,023, and at 6.00% it drops to $1,919. (So a percentage point drop equates to $210 per month in savings, or $2,520 per year.)

However, it’s over the long term that interest really has the opportunity to add up. In the exact same scenario, over the 30-year lifetime of the loan, you’d pay approximately the following amount in total interest:

•   7.00%: $446,428

•   6.50%: $408,142

•   6.00%: $370,682

As you can see, just a single percent difference can save you nearly $100,000 in the long run. So while it’s not possible to perfectly time the market, it is worth shopping around for the lowest possible interest rates you can qualify for.

(Keep in mind, too, that you can always pull your own customized numbers using a mortgage calculator.)


💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.1

Should You Wait to Buy a Home?

The question of whether you’re ready to buy a home — or if it makes more sense to wait — is one that depends on far more than the going market interest rate. Here are some ways for first-time homebuyers to decide what might be the right move, right now.

Reasons to Buy

These are good reasons to consider going ahead with the homebuying process, high interest rates or no:

•   You’re financially (and emotionally) ready. Your credit score is in tip-top shape, you’ve saved up a down payment, and you’re planning to stay in your new home for at least five years — which means you could feasibly refinance once interest rates drop substantially and still break even on closing costs. (A home affordability calculator can help you figure out just how much house you can reasonably afford.)

•   The market looks good to you. These higher interest rates mean the housing market is moving far more slowly than it used to, so the amount of available inventory may give buyers who are ready to buy more time to shop around and find something they really like. This dynamic can also drive home prices down, creating more value for you as the property appreciates over time.

•   It’s time to move. Regardless of the housing market, life goes on — and if you’re expanding your family or relocating, you may not have a choice about moving. If the opportunity is presenting itself and you’re financially ready, this could be a great time to get started on building equity and generational wealth as a homeowner.

Reasons to Wait

On the other end of the spectrum, there are some good reasons to wait on buying a home, even when interest rates are low:

•   You’re not financially (or emotionally) ready. If a monthly mortgage payment would leave you cash-poor, you don’t have a substantial emergency fund saved up, your job security is in question, or you’re not quite sure you’re ready to commit to a given locale, buying a home might not be the right move for you — yet.

•   You can’t get prequalified by a mortgage lender. Perhaps you’re in a decent amount of debt or have an iffy credit history. If you can’t qualify for a loan right now, take the time to work on those factors and get ready for the future.

•   The market looks meh to you. If you can’t find a home you like, you probably shouldn’t buy one. After all, it’s a major investment — and while we’re not suggesting you have to wait for an absolutely perfect house to come along, you should be happy with your purchase!

Should Interest Rates Influence Your Decision?

While interest rates are of course a relevant factor for would-be homeowners, so long as you’re financially prepared and planning on staying in your new home for at least a few years, higher interest rates shouldn’t deter you. After all, you can always refinance once rates drop.

The Takeaway

Waiting for interest rates to drop can be a bit like waiting for Godot: You might get stuck in the in-between. If your finances are in shape and you’ve found your dream home, now could still be the right time to take the leap and become a homeowner.

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

FAQ

Is it better to wait for interest rates to go down?

Not necessarily. While lower interest rates can subtly lower a monthly mortgage payment — and save buyers potentially hundreds of thousands of dollars over the lifetime of a loan — it’s not the only factor to consider if you’re otherwise ready to buy a home. (Plus, qualified buyers can always refinance their purchase down the line when rates drop again.)

Will 2024 be a good year to buy a house?

It’s probably as good a year to buy as any. Many experts expect interest rates to drop a bit this year, from between about 7.00% and 8.00% to somewhere between 5.50% and 6.50%. And it’s unlikely that interest rates will plummet back down to 2.00% or 3.00% as they did a few years ago.

What month is the best time to buy a house?

November and December tend to be favorable times to buy a home for buyers looking for the best deal possible. That’s because the holidays and winter weather may keep some buyers from shopping during this time, which means sellers might be more motivated to make a deal. You won’t get to see your new home in the height of its summer beauty for months — but you’ll get to find out whether it’s well insulated!

Photo credit: iStock/Andrii Yalanskyi

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 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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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.

SOHL-Q324-107

The difference between the assessed vs. appraised value of your home is more about who is doing the estimating and less about the actual value of your home. The assessed value is what your taxing entity (typically your local government) believes the property is worth. That number is used to determine how much property tax you owe. The appraised value is what an independent appraiser believes the property is worth. The appraised value (vs. the assessed value) more closely aligns with the market value of the home. An appraisal is usually done when you’re in the process of buying, selling, or taking out a loan against a property. 

As far as it concerns you and your money, a mistake in either of these values could have you unfairly paying more for your home. But don’t worry — we have you covered. We’ll examine the differences between assessed vs. appraised value and how each will affect your finances. 

Defining Assessed Value and Appraised Value

Let’s have a closer look at the definition of assessed value vs. appraised value:

Assessed value. The assessed value of your property is the value determined by your local taxing authority. The assessed value is used to determine how much you’ll pay in taxes. It is typically updated once a year. 

Appraised value. The appraised value is an independent evaluation of a property’s fair market value based on the sales price of comparable properties recently on the market, as well as on the home itself. If you need to borrow money for a home loan, an appraisal will be required by the lender. It’s ordered by the lender and paid for by the buyer. Appraisals are used by lenders to determine:

•   How much the home is worth

•   What interest rate the lender can give you

•   What down payment may be required

•   Whether or not you’ll be approved for the loan

At a glance, the major differences between assessed and appraised value can be summarized as follows:

How Assessed Value Is Determined

Tax assessors determine the assessed value based on records of the value of your home when it last changed hands. They also look at a property’s size, location, age, condition, features, and comparable properties to come up with this number. Once the assessor determines the home’s value, any exemptions (discounts for one reason or another) are applied to your taxes from there. The assessed value is used to calculate property taxes each year.

For example, the state of Utah allows counties to exempt 45% of the home’s market value and tax on the remaining 55% for properties that serve as primary residences. A home with a $500,000 market value would be taxed at 55% of the value, or $275,000.

Recommended: How to Get a Home Loan

The Role of Local Tax Assessors

Property taxes are the main source of revenue for many government services, such as schools, police, and fire departments. The amount of property tax owed is determined by local tax assessors, who can use mass appraisal techniques for property evaluations of entire neighborhoods. Tax notices are typically sent out yearly with the changes in value and resulting change in tax owed. 

Note: Taxation can be complex and different for each local area. A common misconception is that taxes increase when your home value increases, which isn’t always the case. Taxing entities set the rates and may not be able to change the taxation rate unless it falls inside the bounds of tax laws. Moreover, if you have made significant improvements on your home since you purchased it, the assessed value may not reflect those changes. Sometimes local governments send property owners surveys to try to capture that information, asking them to disclose, say, new HVAC systems or newly finished basements.

Assessment Ratios and Frequency

The tricky part with taxes is homeowners typically don’t pay tax on the full market value of the home. They only pay taxes on the assessed value, which is a percentage of the market value. The percentage that you pay is called the assessment ratio — the percentage of your property value that is taxed. Assessments are typically updated yearly to reflect changing market values. 

The Appraisal Process, Explained

The appraisal process is different from the assessment process and is often seen during a home purchase or sale. It looks something like this:

1.    Get preapproved by a mortgage lender. You want to get preapproved so you’re pretty sure of the loan amount you could qualify for. You want to know your numbers in case you get thrown a curve ball with the appraisal, which affects how much the lender is willing to loan to you.

2.    Start shopping for a home in your budget — and one that you feel is worth what the seller is asking. One of the top questions when you’re shopping for a home should be, “Will this home appraise for the amount the seller is asking?” A low appraisal could mean the lender won’t approve the loan for the full amount you’ve requested and you may have to make up the difference out of pocket in order to purchase the home.

3.    Find a home and make an offer. The offer will typically include the contract with financing terms. This is important when it comes to the appraised value because if the contract allows for a financing contingency, then you may be able to exit the contract with your earnest money intact if the home appraises for significantly less than you agreed to pay.

4.    Send the real estate purchase contract over to the lender. If the seller accepts your terms and signs the contract, you’ll send over the contract to your lender. They’ll start processing the loan, which includes ordering an appraisal. 

5.    The appraiser will assess the property. Most appraisals ordered by the lender usually require an in-person inspection of the property, but it’s also possible that a desktop appraisal may be acceptable. A home appraisal waiver may also be possible. 

6.    Go through underwriting and close the loan. The loan will continue to move through underwriting and to the closing table if everything, including the valuation from the appraisal, meets the lender’s underwriting criteria. 

Factors Influencing Appraised Value

While the appraisal itself is an opinion of the price of the home, there are some key factors that influence it. Some of the things that hurt home appraisals (or help them) include:

•   Market conditions. What are other homes in the area selling for? How does your home compare with others in the area?

•   Size. Does the home have more square footage, garage space, or extra storage space? 

•   Location. Is the property in a desirable area? Are there nearby features, such as a golf course, that make the home more valuable? Is it in a well-regarded school district?

•   Age. How old is the property and how has it been maintained? 

•   Property condition. Are the structural components updated or in good condition? Has the property been recently renovated?

•   Landscaping and curb appeal. Is the site well kept and appealing?

•   Number of bedrooms and bathrooms. The number of bedrooms and bathrooms plays a large factor in the appraised value of the home. 

•   Heating and air conditioning. How is the home heated and cooled? Are the systems efficient? Outdated?

An appraisal is different from a home inspection, which you may also have when purchasing a property, and the appraiser and inspector will be looking at slightly different things. 

Recommended: Home Appraisal 101

Impact on Property Taxes and Home Purchases

Appraisals vs. assessments affect property values differently. Assessments will determine how much tax you’re charged. Appraisals affect how much money the lender is willing to loan you on a home purchase. 

But they aren’t the last word on what a home is worth. One issue that can arise in a high-demand, low-inventory housing market is appraisals not coming in high enough for the loan — the so-called appraisal gap. Housing prices can rise faster than comparable sales data reflects. As noted above, when an appraisal is low, you may need to make up the difference with your own personal funds. Renegotiating with the seller or finding another property are other options in this situation. 

The Takeaway

The key thing to remember with assessed value vs. appraised value is to keep your eye on the purpose of the valuation. What will the numbers be used for? A lower assessed value translates into lower taxes. A lower appraised value can affect how large a mortgage a lender will approve and, thus, a buyer’s ability to purchase a home. 

If you’re concerned about the value of a property, either because you’re making a purchase or because you are considering a home loan or a refinance, talk to a lender. The lender will be able to walk you through your options and answer any questions you have about the appraised value vs. assessed value of the home and how it affects your money. 

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

FAQ

How often is a property’s assessed value updated?

Assessed property values are typically updated yearly. 

How do improvements affect assessed and appraised values? 

Each year, you’ll see an updated number from your tax assessor, which is usually adjusted based on fluctuating market conditions. Tax assessors can adjust the number based on any known improvements, but they’re not required to take a close look at your property every year. In many states, physical inspections only happen every five years, so you may not see an immediate increase in taxes unless you report improvements.

Are assessed values public information?

Assessed values are considered public information. When a property changes ownership, the information is recorded with your county. Information you could see in these records includes the name and address of the owner, a description of the property, the value of the property, land and improvements, how taxes are distributed to the different taxing units, how much tax is paid and the date tax is paid. 

Photo credit: iStock/jimfeng

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 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.

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.

^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.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q324-008

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

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

Home Square Footage Trends in the U.S.

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

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

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

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

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

States With the Largest Average Homes

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

States With the Most Expensive Cost per Square Foot

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

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

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

Recommended: 12 Tips for First-Time Homebuyers

What to Consider When Buying a Larger Home

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

More expensive maintenance costs

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

More time to clean and organize

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

Located farther from city center

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

A bigger carbon footprint

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

Recommended: Tips to Qualify for a Mortgage

How Much Square Footage Can You Afford?

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

The 28/36 Rule

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

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

Key Reasons to Purchase a Smaller Home

Purchasing a smaller home can have several benefits, including:

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

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

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

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

The Takeaway

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

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

FAQ

Are basements included in home square foot calculations?

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

How much square footage does a family of four need?

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

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

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

Photo credit: iStock/years

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 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.

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.

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.

SOHL-Q324-006

You’ve found it: your dream home. And it’s dreamy enough that you’ve put in an offer. But then the appraiser comes back with its report — and the figure is substantially lower than the agreed-upon sales price. This difference is what’s known as an appraisal gap.

An appraisal gap can certainly be a major inconvenience in the homebuying process — but fortunately, there are options, including renegotiating with the seller or walking away from the sale entirely. Below, we’ll outline everything you need to know about appraisal gaps, including ways to deal with them.

Why Would an Appraisal Gap Occur?

An appraisal gap happens when the appraised value of the home you intend to buy is lower than the agreed-upon purchase price.

It’s possible that you’re in a hot real estate market, and buyers competing for homes are engaging in bidding wars that push up home prices beyond their material value. Even if you weren’t engaged in a bidding war yourself, the seller’s price might reflect a rapid rise in local market prices.

Or maybe the seller simply overestimated when setting their asking price. While a seller’s market increases the chances of an appraisal gap, sometimes they just happen — no matter what’s going on in the real estate market in your area. The property valuation the seller used to price the house may simply be different from the appraiser’s estimate.

Impact of Appraisal Gaps

Obviously, spending more on a home than it’s worth has a variety of consequences, both on the buyer’s finances and on the home purchase process itself. Here’s a closer look.

Effects on Home Purchase

If you’re like most Americans — and especially first-time homebuyers — chances are you’re planning to use a mortgage loan to purchase your home. But lenders don’t typically approve mortgages for more than the home’s fair market value. (In fact, it was probably your lender that required the home appraisal that showed the appraisal gap in the first place, for precisely this reason.)

Obviously, this means an appraisal gap could cause trouble for those trying to qualify for a mortgage by lowering the amount the bank is willing to lend and increasing the amount of cash the buyer needs on hand to successfully make the purchase.

Even if you could successfully take out a loan for more than the home’s appraised value, you’d be starting your purchase with negative equity, which would substantially lengthen the time frame it would take to start building wealth in your home.

Financial Implications

Along with hitches in the homebuying process, an appraisal gap could have substantial financial implications, too. For example, you may need to dig up additional cash in order to cover the gap — or crack your knuckles and head back to the table to renegotiate with the seller.

In some circumstances, an appraisal gap might even cause you to walk away from the deal entirely — potentially leaving your earnest money (typically 1% to 2% of the purchase price) on the table. The specifics depend on the wording in your purchase contract, which we’ll come back to in just a minute.

What to Do if an Appraisal Gap Occurs

If you’re facing an appraisal gap, there are a few different ways to resolve it.

Renegotiate with the Seller

So long as you’re not contractually bound to cover an appraisal gap by an appraisal gap coverage clause in your contract, you may be able to renegotiate a new purchase price with the seller — one that lines up better with the home’s appraised value.

Cover the Gap Yourself

Perhaps the most straightforward way to resolve an appraisal gap is to simply pony up. Of course, this “simple” fix isn’t necessarily easy for every buyer, given that appraisal gaps can be on the order of tens of thousands of dollars — on top of all the other expenses that come up at the closing table. If you take this route, you might start by asking the seller to meet you in the middle, with each of you covering half the amount.

Dispute the Appraisal

It may be a hassle — and it may not result in any changes — but you could also ask your lender for a review of the appraisal to ensure the value was correctly calculated. You can make a reconsideration of value (ROV) request with your lender. An ROV lets you explain more about why you think the home is worth more than the original appraisal states, including any additional or updated information. You might even get a new appraisal done if your lender will allow it, but it would likely be an additional expense out of your pocket. If you had an appraisal waiver the first time (in which an automated tool is used to estimate the home’s value) you might request an in-person appraisal. But be warned that a second appraisal could return a home value that is higher or lower than your first appraisal.

Cancel the Contract

Finally, of course, if the appraisal gap is simply too much to bear, you can always walk away. Be forewarned, however: If you cancel without an appraisal gap contingency in your contract, you may lose the earnest money you’ve put on the table.

Preventing Appraisal Gaps

Which of the above options are available to you will depend, again, on your purchase contract, which may have an appraisal gap contingency or appraisal gap coverage clause written into it.

•   An appraisal gap contingency is a section of the purchase agreement that gives the buyer the right to walk away from the deal if an appraisal gap occurs, without losing the earnest money.

•   An appraisal gap coverage clause, on the other hand, states that the buyer is responsible for covering an appraisal gap. But it can also be used to cap how much of an appraisal gap you’re willing to cover as the buyer. For instance, it may say that you agree to cover an appraisal gap of up to $20,000 — but if the difference climbs beyond that, you have the right to walk away without financial penalty.

Writing in an appraisal gap coverage clause can be a useful tool in a seller’s market, when you’re bidding against other would-be purchasers. It can help ensure you don’t spend more than you can afford. On the other hand, if you’re unwilling to foot the bill of any appraisal gap whatsoever — even if it makes you a slightly less competitive buyer — consider adding an appraisal gap contingency to your contract.

The Takeaway

An appraisal gap — the difference between the appraised value of the home you’d like to buy and the agreed-upon purchase price — can be a fly in the home-purchase ointment. But not everything is lost, particularly if you have your purchase contract written in a way that circumvents the problem in the first place. If necessary, prepare to negotiate and possibly spend more out of pocket to complete your home purchase.

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

FAQ

Who is responsible for covering an appraisal gap?

It depends. If there’s an appraisal gap coverage clause in the purchase contract, the buyer is likely responsible for covering an appraisal gap — though only up to specified limits. (Appraisal gap coverage clauses are common in competitive markets, where sellers have more leverage.) However, if your contract includes an appraisal gap contingency, you may be able to take the seller back to the table and renegotiate a lower purchase price — or walk away from the sale entirely.

Can a low appraisal be challenged or appealed?

Yes. If you think the home has been valued at a lower price than is accurate, you can put in what’s called a reconsideration of value (ROV) request with your lender. An ROV gives you the opportunity to explain more about why you think the home is worth more than the original appraisal states, including any additional or updated information. However, it’s no guarantee that the appraisal gap will close 100% — or at all.

How common are appraisal gaps in the home-buying process?

Appraisal gaps don’t happen in the majority of sales — but they’re not uncommon, either. It’s somewhat more likely that an appraisal gap will happen in a hot real estate market, when multiple bids from prospective buyers could push the purchase price up beyond the home’s fair market value.

Photo credit: iStock/andresr

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 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 article is not intended to be legal advice. Please consult an attorney for advice.

SOHL-Q324-018

If you’re planning to sell an investment property or your own home this year, it’s important to be aware of the potential impact capital gains tax could have on your bottom line. Otherwise, you could end up with less money than you thought to put toward your next real estate purchase or another financial goal.

Fortunately, there are strategies that can enable sellers to avoid capital gains tax on real estate, either by legally deferring or avoiding paying taxes altogether on their real estate gains. Read on for some basic info on how the capital gains tax works and how you might be able to minimize the tax burden after a successful sale.

Understanding Capital Gains Tax on Real Estate

Selling a piece of real estate for more than you paid is usually something to celebrate — but don’t party too hard just yet. If the value of the property has increased substantially, you may have to make a hefty payment to the IRS to cover the capital gains tax on your profit.

The amount you might be taxed on your sale can depend on a few different details, including how long you owned the property, if it was your primary residence when you sold it, how much you made on the sale, and your household income that year. Here are some factors to consider:

Short-Term vs. Long-Term Capital Gains

The length of time you owned the property before selling it will determine whether your profit is a short-term or long-term capital gain. That could make a significant difference in how, and how much, it’s taxed — as well as in how to avoid capital gains tax on real estate sales.

•   If you sell the property after owning it for only a year or less, for example, the profit is considered a short-term capital gain, and you’ll be taxed at your ordinary income tax rate for the year you made the sale.

•   If you sell after holding the property for more than a year, on the other hand, the profit is considered a long-term capital gain, which makes it subject to preferential capital gains tax rates.

Long-Term Capital Gains Tax Rates

Whether you’re selling your primary residence or an appreciated investment property, the tax rate (0%, 15%, or 20%) that applies to your long-term capital gain will be based on your taxable income and filing status that year. Here’s what the rates look like for 2024:

Potential Exemptions

Before you start calculating (and stressing out about) what you might owe, however, it’s important to note there are exemptions that might help you reduce or even avoid paying taxes on your capital gains. These include the “home sale exclusion,” which can be used by homeowners who are selling their primary residence, and the “1031 exchange,” which allows investors to defer the taxes on a real estate sale by reinvesting their profit into a similar property. Here’s a look at how each strategy might benefit you, depending on your specific circumstances.

Deferring Capital Gains Tax with a 1031 Exchange

A 1031 exchange (named for Section 1031 of the Internal Revenue Code) allows those who invest in real estate to defer the tax obligation on a property they’ve sold by using the proceeds to replace it with a similar, or “like-kind,” property. This is how it works:

Qualifying for a 1031 Exchange

The property used as a replacement in a 1031 exchange must meet three basic requirements:

•   It must be a long-term investment. The property can’t be a quick “flip.” And it can’t be your personal home.

•   It must generate income while you own it through rental or some other use. You can’t buy the property and just hold onto it with a plan to sell it later.

•   It must be of the same “character and class” as the property it’s replacing. The replacement property doesn’t necessarily have to be used for the same purpose as the one that’s been sold, though. As long as both properties are used as investment properties that earn income, they generally can qualify as a like-kind exchange.

Deadlines and Rules

You can make a direct swap with another property owner to complete a like-kind exchange — if you can find the right property for your purposes. More often, though, sellers use a qualified intermediary (QI) to facilitate a “delayed” exchange. With this type of transaction, proceeds from the sale of your original property go directly to the QI to hold in escrow, and you must find and purchase a replacement property within a preset timeline following two main deadlines:

•   The 45-Day Rule: Within 45 days of closing on the original property, you must designate a replacement property — or properties — in writing to the QI; and

•   The 180-Day Rule: You must close on the new property within 180 days of selling the original property.

These two periods run concurrently, so you may want to find a real estate agent who can help you locate a new property before you complete the sale of the old one. Make sure you’re familiar with how to get a mortgage loan and the different types of mortgage loans before you begin the process of closing on the original property, and line up a home mortgage loan for the new property, should you need one.

Reverse Exchanges

You also may choose to do a reverse exchange, using those same 45- and 180-day deadlines, and still qualify for the 1031 tax deferral. In this case, you would transfer a qualifying replacement property to an intermediary, identify a property you already own that you want to sell, and complete the sale within 180 days of closing on the new property.

Reporting a 1031 Exchange to the IRS

You must notify the IRS of the 1031 exchange by submitting Form 8824 with your tax return for the year the exchange took place. It’s important to hold on to financial documents and keep good records, including descriptions of the properties involved, closing dates, and other details of the transaction. (Because this can be a complicated process to complete and report, you may want to consult with a tax professional before proceeding.)

Recommended: Investment Property Mortgage Rates

Saving on Taxes with the Home Sale Exclusion

Investors aren’t the only ones who can benefit from a tax break when selling a property for a profit. A tax provision known as the Section 121 Exclusion, or “home sale exclusion” allows homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence. Here are some basics that can help you determine if you qualify.

Ownership and Use Tests

To use the home sale exclusion, you typically must meet these requirements:

•   You must have owned and used the home as your primary residence for at least two of the five years leading up to the date of the sale. The two years don’t have to be consecutive.

•   The home must qualify as your primary residence. For example, it should be the address used on state and federal IDs, voter registration, filing taxes, and utility bills. And you can only claim this exclusion once every two years.

Calculating the Taxable Gain

Here’s an example of how the home sale exclusion might work. Let’s say, Joe, who is single, buys a house for $200,000 and sells it three years later for $500,000. His profit is $300,000; but after applying his $250,000 exclusion, Joe would pay capital gains tax on only $50,000 of the profit.

Depending on what Joe’s taxable income is in the year he makes the sale, he could pay a capital gains tax rate of 0%, 15%, or 20% on this reduced amount.

Other Strategies to Minimize Capital Gains Tax

The 1031 exchange and home sale exclusion are two popular methods for minimizing the tax on real estate capital gains. But there are other strategies you may also want to consider to reduce the tax blow to your bottom line.

Installment Sales

If you make a large profit on your property sale and want to spread out your capital gains tax liability over a period of several years, you may want to look at the benefits of receiving installment payments from the buyer instead of a lump sum. With this method, you would pay capital gains tax only on the portion of the gain you receive each year until the property is paid off.

Let’s say you’re an older couple hoping to sell your home and downsize to a less expensive home purchase or a rental in retirement. Or maybe you’re a young couple planning to sell your home in a high-priced city in order to move to a less expensive location so one of you can stop working and stay home with the kids. An installment sale would allow you to reduce your upfront tax burden and could provide a reliable income stream when you make this big life change.

Tax-Loss Harvesting

Tax-loss harvesting is another popular option for reducing long-term capital gains. Here’s an example of how it might work:

Let’s say you made a big profit on a real estate deal, but you also suffered a large loss on a long-term investment held in a taxable investment account. You may be able to use (or “harvest”) that loss to offset some of the gains from your successful property sale. Or, if you have long-term investments that aren’t doing as well as you’d like, you might choose to sell them for less than you paid and use the loss to help offset your taxable gain.

If it turns out your loss is more than your gains, you also may be able to reduce your ordinary income by up to $3,000 in that tax year. And you can carry forward any remaining loss — up to $3,000 per year — to future tax years.)

Charitable Donations of Real Estate

If your list of financial goals includes charitable giving, donating real estate directly to a qualifying charitable organization — instead of selling it, paying capital gains tax, and then donating the profits — could help you maximize the amount of your gift. You also may be able to claim a tax deduction equal to the fair market value of the property during the tax year when the gift was made, which could significantly reduce your tax burden. With this strategy, both you and your favorite charity could benefit.

Recommended: Real Estate Listing Terms Decoded

Planning for Capital Gains Tax in Real Estate Investing

Navigating capital gains tax in real estate can be complex, which means planning is a must. Here are a few things to keep in mind whether you’re hoping to sell a property (or properties) this year or in the future.

Record-Keeping and Cost Basis

One of the best ways to reduce your capital gains tax is to make the most of all the reductions the IRS allows. But you’ll have to back up any costs you claim. So holding on to financial documents you receive while you own the property is imperative — including the original closing documents from your purchase, receipts from any major improvements you made, the real estate purchase contract and the closing documents from the sale. As a general rule, it’s smart to track home-improvement costs for any materials and labor that increase the value of the property (in other words, not general upkeep expenses).

This information will help you determine your property’s cost basis (or adjusted cost basis if you made major improvements), which is the value that will be assigned to your home or real estate investment for tax purposes.

Seeking Professional Advice

Another way to make sure you’re getting every tax break you can when you sell your property is to work with a financial professional who’s experienced in real estate taxation. This could help you keep more of your money after the sale and avoid making a misstep that could lead to an expensive IRS penalty.

The Takeaway

Understanding how to avoid capital gains on real estate, and doing some proactive planning, could make a big difference to the bottom line of a successful property sale. And the more money you can keep in your own pocket, the more you’ll have to put toward your other financial goals — including buying your next home or investment property.

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

FAQ>

What qualifies as a like-kind property for a 1031 exchange?

A “like-kind” exchange doesn’t mean the old and new properties have to be exactly the same size or in the same neighborhood. But the net market value and equity of the replacement property must be the same as, or greater than, the property that’s been sold — and it must be in the U.S. The properties also should have a similar purpose (selling one rental property and acquiring another, for example).

Are there any time limits for 1031 exchanges?

Yes, there are two main deadlines you’re required to meet to successfully complete a 1031 exchange. First, within 45 days of closing on the original property, you must designate at least one replacement property in writing to a qualified intermediary. Next, you must close on the replacement property within 180 days of selling on the original property. These two time periods run concurrently.

Can you use a 1031 exchange for a primary residence?

A primary residence typically doesn’t qualify for a 1031 exchange. The properties involved must be used as an investment or for business.

Photo credit: iStock/gorodenkoff

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 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.

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.

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

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