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If you’re planning a winter open house, you might think there’s not much you can do to boost your curb appeal. In summer, you can clean up the lawn, add new plants, and set out an Adirondack chair in a cool color. But in the depths of winter, it may feel hopeless. However, there’s actually a lot you can do to boost your curb appeal for a winter open house.

How to Prepare for an Open House

No matter the season, there are some things that hold true: You always want your home to give off a great first impression. Whether it’s raining, snowing, or sunny, that means cleaning up the lawn, tidying the driveway, and doing other basic maintenance.
In winter, you may face some additional challenges. Let’s look at 15 things you can do that help with a winter open house, so you can sell your current abode, free up funds for your next home purchase, secure a mortgage loan, and get moving!

1. Start at the Front Door

No matter what the weather is doing, you can always spruce up your front door. There are still plenty of people buying a home in the winter, and you can give those folks a stunning first impression of your house. It will greet potential buyers before they ever step inside. A fresh welcome mat and a charming wreath or decorative array of pine cones can go a long way in this regard. You can also do some basic cleaning no matter what the season. Tidiness can give you more of an edge than you might imagine, and it’s a truly affordable way to improve your home — it doesn’t take a home equity line of credit to pay a local teenager to help you clean out the garage!

2. Find Plants that Work in Winter

You might think you can only refresh the garden in summer and spring, but there are several plants that thrive in colder weather, depending on where you live. Holly is a popular choice that adds color all winter. Another idea is to grab some pots of mums from your local supermarket or garden center to bring some greenery to the front door area on the day of your open house.

3. Don’t Forget the Birds

It isn’t just plants that are surprisingly hardy in winter. If you have birds in spring and summer, they may be around in winter, too. Hanging a bird feeder can entice them to flit about your yard, which will charm visitors. If you already have bird feeders for the warmer months, prepare for the open house by adding seeds.

Recommended: Mortgage Calculator with Taxes and Insurance

4. Know the Trends

You don’t have to go it alone when trying to figure out how to prepare for an open house. Look up the current housing market trends by city. This can show you not only what’s selling, but perhaps why it’s selling. See what other sellers are doing to improve their curb appeal. Take a look at the listings and let them inspire you.

5. Turn on the Lights

You can use outdoor lighting to not only make your home more attractive, but also safer. You don’t want prospective buyers stumbling through the late-afternoon dark or approaching nervously because they are unsure if the house is open. Add more lighting if you can. You can line a pathway with lights, for example, for both safety and aesthetics.

6. Check the Gutters

In winter, the gutters can take a beating. Make sure you clean out snow, leaves, and other debris that tends to build up during bad weather. Overstuffed gutters just aren’t a good look.

7. Clean the Walkways

A winter open house shouldn’t require snow shoes. Make sure the walkways to and from the house are clean and clear. Shoveling snow isn’t fun, but it will make a much better impression when buyers pull up in front of your house.

8. Don’t Hide Those String Lights

You might think that you have to prepare for an open house by hiding all the holiday lighting, but string lights can add a stylish touch to your home. Don’t go overboard like something out of “National Lampoon’s Christmas Vacation,” but do think about having some in the front of your house, whether around the front door or on some shrubs by the entryway.

9. Put on a Fresh Coat of Paint

There’s no wrong season for a fresh coat of paint. If you get the opportunity and have the budget, try painting your entry area — or your entire home if you’re in a warm part of the country. It can make your home look crisp and well cared for.

10. Paint Your Front Door a Bright Color

Don’t have the time or budget to repaint the whole house? Even just painting the front door can add a fresh splash of color that boosts your home’s curb appeal. Some colors to consider: bright red, like the color of an English double-decker bus, or sunny yellow. (Don’t forget to track your costs if you do more than routine maintenance, as they may help offset capital gains tax on the sale of your home.)

11. Make Sure the House Number Is Visible

When it comes to curb appeal, you also have to think about the literal curb. Is your house number visible from the street? If not, consider updating those numbers to make them visible and chic.

12. Spruce Up the Mailbox

While you’re looking at your house numbers, why not reconsider your mailbox as well? Perhaps you get a brand-new one, or give your current one a fresh coat of paint, so it pops.

13. Do a Quick Roof Fix-Up

Maybe you’ve lived with a few broken or missing roof shingles or tiles for so long, you hardly notice them. Sorry to say, prospective buyers may well zero in on them the second they walk up your front path. After all, a new roof is among the more costly repairs a buyer will encounter. It’s wise to get those repaired before you welcome your home shoppers.

Recommended: What Are the Most Common Home Repair Costs?

14. Refresh Your Landscaping

Applying a layer of mulch (after the first few hard frosts) can help protect plants from winter’s chill and make your landscaping look tidy and clean.

15. Use Fake Plants

You don’t have to be 100% authentic with your decorations. Topiaries shaped like trees or grapevine balls can make your porch more appealing. And they’ll likely stand up to any weather winter can throw at them. And when winter is over, simply store them away.

The Takeaway

You might feel discouraged at first when wondering how to maximize curb appeal for an open house in winter. But it’s a lot easier than it seems. There’s no point trying to fake spring or summer flowers, so opt for cleaning up, some greenery (real or artificial), some lighting, and perhaps a pop of color. Then sit back and wait for the buyers to come, so you can move on to a new home of your own.

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.

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FAQ

What is the best day of the week to host an open house?

Saturday open houses often conflict with family activities, such as sports games, but Sunday may conflict with religious observation. Which of these is the lesser problem depends on the property you are selling, the community you live in, and the type of house you are selling. A real estate agent experienced in your local market will likely have the best advice on whether Saturday or Sunday is a better day for your specific property.

Is winter a bad time to sell a house?

Winter is traditionally considered a slow season for home sales, but if you are ready to put your home on the market, don’t let the time of year hold you back. You may find there is less competition from other properties, and that real estate agents have more time and attention for your property. If the market is less busy, you may also be able to close on the sale faster.

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Photo credit: iStock/Korisbo

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

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The average FICO® credit score in America is 717, as of October 2023. And as of May 2024, the average VantageScore® is 702. Both scores are considered to be in the good range and could help a borrower qualify for favorable loan and line of credit terms.

As you’re comparing your own credit score to the national average, it helps to understand how scores are calculated and how these three digits could impact your financial health and long-term goals. Here, learn more about credit scores and some steps you can take to build yours.

How Do Average Credit Scores Compare by State?

While there’s a national average credit score, there are also state numbers that vary a bit. The chart below shows the average credit score by state as of the third quarter of 2023, according to Experian®.

State	Average Credit Score
Alabama	692
Alaska	722
Arizona	713
Arkansas	696
California	722
Colorado	731
Connecticut	726
Delaware	715
District of Columbia	715
Florida	708
Georgia	695
Hawaii	732
Idaho	729
Illinois	720
Indiana	713
Iowa	730
Kansas	723
Kentucky	705
Louisiana	690
Maine	731
Maryland	716
Massachusetts	732
Michigan	719
Minnesota	742
Mississippi	680
Missouri	714
Montana	732
Nebraska	731
Nevada	702
New Hampshire	736
New Jersey	725
New Mexico	702
New York	721
North Carolina	709
North Dakota	733
Ohio	716
Oklahoma	696
Oregon	732
Pennsylvania	723
Rhode Island	722
South Carolina	699
South Dakota	734
Tennessee	705
Texas	695
Utah	731
Vermont	737
Virginia	722
Washington	735
West Virginia	703
Wisconsin	737
Wyoming	724

Why Do I Have More Than One Credit Score?

As mentioned, the chart above shows FICO scores, which are used in 90% of lending decisions. But that’s not the only credit score you have. The other is called VantageScore. You’ll find different credit scores for two main reasons. First, they are competitors in this category, and each one calculates credit scores differently.

The other reason you might see a different credit score is due to the fact that FICO has different credit scoring models based on what the lender is looking for (mortgage, auto, credit card). In addition, FICO also releases credit score updates, or versions, of their credit-scoring model, similar to an Apple or Microsoft software update.

Here’s an example of what FICO scores you might see and the purpose they serve. (Note: You will see that the numbering does not always go sequentially; for instance, there isn’t a FICO Bankcard Score 6 or 7 in use.)

FICO credit-scoring model	Purpose
FICO Score 2 FICO Score 5 FICO Score 4	Mortgage lending
FICO Bankcard Score 9 FICO Bankcard Score 8 FICO Bankcard Score 5 FICO Bankcard Score 4 FICO Bankcard Score 3 FICO Bankcard Score 2	Credit card lending
FICO Auto Score 9 FICO Auto Score 8 FICO Auto Score 5 FICO Auto Score 4 FICO Auto Score 2	Auto lending
FICO Score 9 FICO Score 8	General
FICO Score 10 FICO Auto Score 10 FICO Bankcard Score 10 FICO Score 10T	Newly released scoring models

As you can see, there are many scoring models currently in use. But your score likely won’t vary drastically with the different versions.

What Is a Good Credit Score Range?

Technically, a good credit score range is between 670 and 739, according to FICO, the original provider of credit scores. (For VantageScore, the good range runs from 661 to 780.) But if you’re casually talking about what a “good” credit score is, anything above 670 is considered good. A score of 850 is the maximum credit score and is considered excellent or exceptional.

If you are curious about what the starting credit score is, you’ll find two different answers: the lowest credit score and the first credit score you get. The lowest credit score is 300, but that’s not where you’ll start. If you take out your first loan and make on-time payments, for instance, you’ll get your first credit score about six months later. Chances are, your consistent payment history will bump it up closer to the 500-700 credit score range. A score lower than that would likely reflect bad marks on your credit report.

Where Can I Check My Credit Scores?

If you are wondering how to check your credit score without paying, there are a number of resources available for you:

•  Your bank or credit card issuer: You’ll often see a free credit score — and sometimes a full credit report — supplied by your bank or credit issuer located in your online account. Be sure to check if the credit score is supplied by VantageScore or FICO, as the numbers can be different.

•  Nonprofit credit and housing counselors: You may be able to get help accessing your credit score through nonprofit agencies.

•  Credit score service: You may be able to pay to monitor your credit score with various companies. Usually, there are more services they can offer in addition to monitoring your credit score to make it worth your while.

Checking your credit score can help you see where you are, if there are any errors on your report, and whether you might address areas that are dragging your score down.

What Affects Your Credit Scores?

What affects your credit score is related to how well you manage credit. Credit scoring models were developed as a way to help lenders evaluate how risky it is to lend you money based on how you have handled credit to date.

There are different ways lenders gain insight into how you manage credit with the credit scoring model, which is further broken down into categories. That said, key facets of your credit score (which are detailed below) include such aspects as whether you pay on time, how much you owe, the mix of ways in which you’ve accessed credit, and the length of time you’ve been using credit, among others.

Credit Score Factors by Percentage

The breakdown of factors contributing to FICO credit scores is 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% credit mix. Here’s how they work.

Payment History: 35%

Payment history captures your past behavior of making payments on time or not. It also includes whether or not any of your accounts have fallen into delinquency. In other words, if you have a long history of paying on time, that can contribute positively to your credit score.

Amounts Owed: 30%

Most financial experts believe that you should only use 30% of your credit limit. Ten percent is better still. Using too much of the credit available to you is seen as a sign of risk to lenders, and it’ll pull down your score. Learning how to lower credit card utilization may help build your score.

Length of Credit History: 15%

When you have a short credit history, you are something of an unknown quantity to lenders. Those who have been accessing credit for a significant period of time have proven how well they can handle this aspect of their finances. That is why a longer credit history can positively impact your score.

If you are just starting out on your credit journey, you will likely need to manage your payments well for several months in order to start building your credit score.

New Credit: 10%

This factor reflects whether you have been seeking additional credit recently. Applying for a lot of new credit in a short period of time is typically seen as risky to lenders. They may see it as a sign that you’ll be overextended and have financial trouble ahead. For this reason, it’s best to limit the amount of credit you apply for.

Credit Mix: 10%

Credit mix refers to the different types of credit accounts you have. This includes installment accounts (such as auto loans, personal loans, and mortgages) and revolving credit accounts (such as credit cards and HELOCs). Good management of a mix of credit shows lenders you can be responsible with different types of credit.

What Information Credit Scores Do Not Consider

You might also be curious to know what doesn’t affect your credit score. FICO lists the following as factors that do not affect your FICO Score:

•  Where you live

•  Salary and employment

•  Age and sex

•  Color, ethnicity, race, or national origin

•  Marital status

•  Religion

•  Receipt of public assistance

•  Child or family support obligations

•  Interest rate being charged on another card

•  Any information not found on your credit report (such as your bank account details)

•  Whether or not you’re participating in credit counseling of any kind

•  Nonbankruptcy public records

How the VantageScore Is Calculated

Now that you know all about the FICO scoring system, consider how VantageScore is determined. The VantageScore calculation breakdown is a little different from FICO. The following breakdown is based on VantageScore 4.0, the most recent model released in 2017:

•  Payment history: 41%

•  Depth of credit: 20%

•  Credit utilization: 20%

•  Balances: 11%

•  Recent credit: 6%

•  Available credit: 2%

In this model, payment history is the biggest driver of your credit score, much like it is with FICO. But the weights and calculations are different from FICO’s, so it’s natural to see a different score when the credit score provided to you is a VantageScore instead of a FICO score.

Recommended: What Is a FICO Score? FICO Score vs Credit Score

Why There Are Different Credit Scores

The first credit score was the FICO score, launched in 1989 with the leading credit bureaus to help them evaluate a consumer’s creditworthiness. (FICO, incidentally, is an acronym for Fair Isaac Corporation.) The VantageScore was launched in 2006, a joint venture among the big three credit bureaus, Equifax®, Experian®, and TransUnion®.

Different lenders use different scoring models, and once they’ve committed to a version of the scoring model, it’s not easy to change. Each individual lender chooses when to update to new scoring models released by FICO or VantageScore.

One auto lender may use FICO® Auto Score 9 while another lender may use FICO® Auto Score 8. One credit card company may show you a VantageScore while another shows you a FICO score.

To sum up, the reason you see different credit scores is due to three main factors: different providers (VantageScore vs FICO) with different credit scoring models and different versions.

Why Having a Good Credit Score Is Important

A good credit score can benefit your financial life. Here’s how:

•  Better loan rates: You may be able to secure a better interest rate on your loan.

•  Easier to get a loan: A better credit score can help you qualify for a loan.

•  Better insurance rates: You likely won’t pay as much for car insurance when you have a good credit score.

•  Easier to get an apartment: If you apply for an apartment, your landlord may look favorably on a good credit score.

•  Higher credit limits: A better score can help you be approved for a higher credit limit, which can help with your credit utilization ratio.

•  Better rewards: You may be able to qualify for the premium travel cards and rewards programs with good credit.

•  No security deposit for utilities: If you’re setting up utilities, your credit is typically checked. If you have a good credit score, the deposit may be waived.

How to Build Your Credit Scores

It’s not uncommon to need to build your credit score before applying for financing. Doing so can help your chances of being approved as well as possibly secure competitive terms.

•  Check your credit report for errors. Any information that is incorrect, such as dates or amounts, can be disputed.

•  Set up autopay. Your payment history makes up 35% of your FICO credit score, so you want to get your bills paid on time, every time. Putting your bills on autopay helps make this task a snap.

•  Consolidate credit card debt. Replacing credit card balances with a personal loan can help improve your credit utilization ratios and get the debt paid off with the regularity that an installment loan brings.

•  Use a money tracker app. Technology is incredible for facilitating money decisions. It can be helpful for seeing your income, spending, saving, investing, planning, credit score monitoring, and more. A good starting point: See what tools your financial institution offers.

Recommended: Why Did My Credit Score Drop After a Dispute?

What to Do If You Don’t Have a Credit Score

If you don’t have a credit score yet, don’t stress: There are plenty of ways to start building your credit. Here are some strategies to consider:

•  Become an authorized user. Being added to another credit card account (like a parent’s) can build credit history.

•  Get a secured credit card. A secured credit card requires a deposit in exchange for a line of credit. When you pay it off on time, you’ll build a positive credit history.

•  Take out an installment loan. It may be possible to build credit history with an installment loan. Auto loans are an example of an installment loan that often advertise possible loan approvals with little to no credit history. In some cases, you may need a cosigner to get the loan approved.

•  Consider a credit-builder loan. You may want to look at credit-building loans, which can benefit people who don’t have a credit score (or have a low credit score). They usually require a deposit or paychecks be automatically deposited to the account to qualify.

Recommended: How Long Does It Take to Build Credit?

Why Your Credit Score Changed

At times, you’ll see your credit score change, and it might worry you. Here are some common reasons why your credit score may have changed.

•  Too many credit inquiries. Don’t apply for too much credit in a short period of time. This can look like risky behavior on your part (say, like you are strapped for funds), and your score will likely decrease.

•  Late payment. If your payment is more than 60 days past due, it may show up on your credit report, and when it does, you may see a noticeable drop in your credit score.

•  Maxed out a card. When your credit utilization ratio increases (how much credit you’re using relative to how much is available to you), you’ll typically see a decrease in your credit score.

•  Paid off an account. It might seem illogical, but when you pay off a loan and close the account, your credit score may go down. This is because you’re decreasing the credit available to you and shortening the length of your credit history, both of which can pull down your credit slightly. But don’t panic — your score will usually recover quickly.

•  Collection account, bankruptcy, foreclosure, or other derogatory mark: Your credit score may decrease drastically if there’s negative information in your credit report. These kinds of marks can stay on your credit report for seven to 10 years.

Monitor Your Credit Report and Score

Monitoring your credit score and report can help keep you on track to reach your financial goals. This is especially true if you are focused on building your score to a certain level (say, if you plan to apply for a mortgage in the near future).

There are a lot of smart tools you can use to monitor your credit report and score, as well as budgeting and spending apps that can help you manage your money more effectively and pay down debt

The Takeaway

The average credit score in America is 717 using the FICO system, while the average VantageScore is 702. Knowing the factors that comprise a credit score, how the different scoring systems compare, and where your score stands can be helpful information. You can check your score and empower yourself with the knowledge to build it so you have access to the best lending terms possible.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

How many Americans have an 800 credit score?

According to data collected by credit reporting agency Experian, 22% of Americans have a credit score of 800 or greater.

How common is a 750 credit score?

Approximately 25% of American have a credit score in the 750 range, according to data collected by credit reporting agency Experian.

Does anyone have a 900 credit score?

It’s impossible to have a 900 credit score, as both FICO and VantageScore models only go as high as 850.

What is the riskiest credit score?

Lenders may see a borrower with a “poor” credit score as a high risk. Poor credit scores fall between 300 and 579.

What is the most respected credit score?

While lenders use both VantageScore and FICO and consider them reliable, FICO is used in 90% of lending decisions.

What is a good credit score to buy a house?

Borrowers with higher credit scores are often in a better position to secure favorable rates on a home loan. Generally speaking, lenders require a credit score of at least 620 to buy a house with a conventional mortgage, though requirements vary based on the type of loan you’re pursuing.

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

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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For many homeowners who need cash in short order, a second mortgage in the form of a home equity loan or home equity line of credit is a go-to answer. A second mortgage can help you fund everything from home improvements to credit card debt payoff, and for some, a HELOC serves as a security blanket.

You can probably think of many things you could use a home equity loan or HELOC for, especially when the rate and terms may be more attractive than those of a cash-out refinance or personal loan.

Just know that you’ll need to have sufficient equity in your home to pull off a second mortgage.

What Is a Second Mortgage?

A second mortgage is one typically taken out after your first mortgage. Less commonly, a first and second mortgage may be taken out at the same time in the form of a “piggyback loan.”

Your house serves as collateral.

An “open-end” second mortgage is a revolving line of credit that allows you to withdraw money and pay it back as needed, up to an approved limit, over time.

A “closed-end” second mortgage is a loan disbursed in a lump sum.

It’s not called a second mortgage just because you probably took it out in that order. The term also refers to the fact that if you can’t make your mortgage payments and your home is sold as a result, the proceeds will go toward paying off your first home mortgage loan and then toward any second mortgage and other liens (if anything is left).

How Does a Second Mortgage Work?

A home equity line of credit (HELOC) and a home equity loan, the two main types of second mortgages, work differently but have a shared purpose: to allow homeowners to borrow against their home equity without having to refinance their first mortgage.

Rates

HELOCs may have lower starting interest rates than home equity loans, although HELOC rates are usually variable — fluctuating over time.

Home equity loans have fixed interest rates.

In general, the choice between a fixed- vs variable-rate loan has no one universal winner.

Costs

Home equity loans and HELOCs come with closing costs and fees of about 2% to 5% of the loan amount, but if you do your research, you may be able to find a lender that will waive some or all of the closing costs.

Some lenders offer a “no-closing-cost HELOC,” but it will usually come with a higher interest rate.

Example of a Second Mortgage

Let’s say you buy a house for $400,000. You make a 20% down payment of $80,000 and borrow $320,000. Over time you whittle the balance to $250,000.

You apply for a second mortgage. A new appraisal puts the value of the home at $525,000.

The current market value of your home, minus anything owed, is your home equity. In this case, it’s $275,000.

So how much home equity can you tap? Often 85%, although some lenders allow more.

Assuming borrowing 85% of your equity, that could give you a home equity loan or credit line of nearly $234,000.

After closing on your loan, the lender will file a lien against your property. This second mortgage will have separate monthly payments.

Types of Second Mortgages

To qualify for a second mortgage, in addition to seeing if you meet a certain home equity threshold, lenders may review your credit score, credit history, employment history, and debt-to-income ratio when determining your rate and loan amount.

Here are details about the two main forms of a second mortgage.

Home Equity Loan

A home equity loan is issued in a lump sum with a fixed interest rate.

Terms may range from five to 30 years.

Recommended: Exploring the Different Types of Home Equity Loans

Home Equity Line of Credit

A HELOC is a revolving line of credit with a maximum borrowing limit.

You can borrow against the credit limit as many times as you want during the draw period, which is often 10 years. The repayment period is usually 20.

Most HELOCs have a variable interest rate. They typically come with yearly and lifetime rate caps.

Second Mortgage vs Refinance: What’s the Difference?

A mortgage refinance involves taking out a home loan that replaces your existing mortgage. Equity-rich homeowners may choose a cash-out refinance, taking out a mortgage for a larger amount than the existing mortgage and receiving the difference in cash.

Taking on a second mortgage leaves your first mortgage intact. It is a separate loan.

To determine your eligibility for refinancing, lenders look at the loan-to-value ratio, in part. Most lenders favor an LTV of 80% or less. (Current loan balance / current appraised value x 100 = LTV)

Even though the rate for a refinance might be lower than that of a home equity loan or HELOC, refinancing means you’re taking out a new loan, so you face mortgage refinancing costs of 2% to 5% of the new loan amount on average.

Homeowners who have a low mortgage rate will not benefit from a mortgage refinance when the going interest rate exceeds theirs.

Pros and Cons of a Second Mortgage

Taking out a second mortgage is a big decision, and it can be helpful to know the advantages and potential downsides before diving in.

Pros of a Second Mortgage

Relatively low interest rate. A second mortgage may come with a lower interest rate than debt not secured by collateral, such as credit cards and personal loans. And if rates are on the rise, a cash-out refinance becomes less appetizing.

Access to money for a big expense. People may take out a second mortgage to get the cash needed to pay for a major expense, from home renovations to medical bills.

Mortgage insurance avoidance via piggyback. A homebuyer may take out a first and second mortgage simultaneously to avoid having to pay private mortgage insurance (PMI).

People generally have to pay PMI when they buy a home and make a down payment on a conventional loan of less than 20% of the home’s value.

A piggyback loan, or second mortgage, can be issued at the same time as the initial home loan and allow a buyer to meet the 20% threshold and avoid paying PMI.

Cons of a Second Mortgage

Potential closing costs and fees. Closing costs come with a home equity loan or HELOC, but some lenders will reduce or waive them if you meet certain conditions. With a HELOC, for example, some lenders will skip closing costs if you keep the credit line open for three years. It’s a good idea to scrutinize lender offers for fees and penalties and compare the APR vs. interest rate.

Rates. Second mortgages may have higher interest rates than first mortgage loans. And the adjustable interest rate of a HELOC means the rate you start out with can increase — or decrease — over time, making payments unpredictable and possibly difficult to afford.

Risk. If your monthly payments become unaffordable, there’s a lot on the line with a second mortgage: You could lose your home.

Must qualify. Taking out a second mortgage isn’t a breeze just because you already have a mortgage. You’ll probably have to jump through similar qualifying hoops in terms of home appraisal and documentation.

Common Reasons to Get a Second Mortgage

Typical uses of second mortgages include the following:

•   Paying off high-interest credit card debt

•   Financing home improvements

•   Making a down payment on a vacation home or investment property

•   As a security measure in uncertain times

•   Funding a blow-out wedding or other big event

•   Covering college costs

Can you use the proceeds for anything? In general, yes, but each lender gets to set its own guidelines. Some lenders, for example, don’t allow second mortgage funds to be used to start a business.

The Takeaway

What’s the point of a second mortgage? A HELOC or home equity loan can provide qualifying homeowners with cash fairly quickly and at a relatively decent rate. If you prefer not to have a second mortgage, you may want to explore a cash-out refinance, which is another way to put some of your home equity to use.

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

Does a second mortgage hurt your credit?

Shopping for a second mortgage can cause a small dip in an applicant’s credit score, but the score will probably rebound within a year if you make on-time mortgage payments.

How much can you borrow on a second mortgage?

Most lenders will allow you to take about 85% of your home’s equity in a second mortgage. Some allow more.

How long does it take to get a second mortgage?

Applying for and obtaining a HELOC or home equity loan takes an average of two to six weeks.

What are alternatives to getting a second mortgage?

A personal loan is one alternative to a second mortgage. A cash-out refinance is another.

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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.

^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.

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One of the top tax benefits available to real estate investors is depreciation, the income tax deduction that comes from spreading out the cost of a property over the time that you use it and deducting a portion of its cost each year. Cost segregation, in turn, is a tax strategy that can be used to accelerate depreciation deductions — so it’s definitely worth knowing about.

Keep reading for a look at how cost segregation in real estate works and if this often-overlooked planning tool might make sense for you.

Definition of Cost Segregation

Cost segregation is a tax planning tool used by businesses and those who invest in real estate to accelerate depreciation deductions on certain parts of their properties.

Basic Concept

Instead of using just one or two categories (or asset classes) to calculate the depreciation on a property for income tax purposes, cost segregation separates the property into multiple categories, some of which have shorter depreciation periods. This allows property owners to claim a larger portion of their depreciation deduction sooner, which can lower their tax liability and increase their cash flow. (Remember to consider the full list of possible tax strategies as an investment property owner, including offsetting rental income with deductions such as the mortgage interest deduction.)

Purpose in Real Estate Investing

For real estate investors, depreciation is typically divided into two categories: building and land. Land doesn’t depreciate for tax purposes, but buildings do. Generally, residential buildings are depreciated over a 27 1⁄2-year period, according to IRS requirements, and nonresidential buildings are depreciated over a 39-year period.

Because the depreciation period on a building is so long, the yearly deduction owners get doesn’t necessarily amount to significant savings. Though the depreciation deduction adds up over time, it can take a while for an owner to realize the tax benefit. Some owners paying for a property with a home mortgage loan may think about exploring cost segregation to capture tax benefits to counteract those monthly payments. (They may also want to read up on how to avoid capital gains taxes on real estate.)

Cost segregation analysis puts additional categories beyond land and building into the mix, which means some parts of the property (certain fixtures, site improvements, or equipment, for example) may be depreciated over a shorter period of time (typically five, seven, or 15 years). This can give owners the ability to take larger deductions sooner, which can result in substantial tax savings, potentially accelerating the return on investment and boosting the overall financial performance of the investment.

Recommended: Amortization vs. Depreciation

How Cost Segregation Works

Cost segregation analysis requires identifying and reclassifying building components into categories that have shorter depreciation periods for tax purposes. This can allow real estate investors to accelerate the depreciation deductions for these specific items and lower their tax liability earlier in their ownership of the property.

For example, plumbing fixtures, furniture, equipment, and other components that aren’t permanently attached to the building could potentially be classified as personal property and depreciated over five years instead of 27½ or 39 years. Site improvements (such as landscaping, paving, and fencing) could be classified as land improvements and depreciated over 15 years. These tighter timelines can allow an owner to take advantage of available tax breaks sooner rather than later.

Recommended: Buying a Foreclosed Home

Cost Segregation Study Process

Usually, the first step in deciding if and how to use cost segregation is to hire a financial firm (preferably one with expertise in engineering and tax law) to perform a cost segregation study on your building and its systems. What is a cost segregation study? Your team will:

•   Analyze your property to determine which components can be separated into categories with shorter depreciation periods.

•   Use documentation — such as home inspection reports, a recent property appraisal that shows how much the house is worth, closing documents from the property sale, and other relevant records — to inform and support their decision-making.

•   Prepare a report that shows you how much you might save on taxes by implementing a cost segregation strategy.

You can then use this information for tax planning and preparation purposes.

Benefits of a Cost Segregation Study

The goal of cost segregation is to reduce your tax liability so you can put that money back into your business, perhaps with improvements or by taking out another investment property mortgage. But a cost segregation study may offer other advantages, as well. Here’s a breakdown of the benefits a professional cost segregation analysis may provide:

•  Increasing tax savings by reducing the depreciation period for certain assets.

•  Increasing cash flow and improving the overall return on investment by accelerating depreciation deductions.

•  Improving asset management and offering a more accurate accounting of the property’s assets and their value.

•  Finding other potential tax credits and incentives.

•  Ensuring compliance with tax laws and IRS regulations.

Types of Properties Suitable for Cost Segregation

Cost segregation could be a useful strategy for a wide range of real estate investments. But it can be especially well-suited to properties that have specialized equipment, systems, or a significant number of other assets that could be reclassified to a shorter depreciation period, such as:

•  Commercial real estate like retail spaces, office buildings, and warehouses

•  Rental properties, including multifamily residential buildings

•  Resorts and restaurants

•  Medical facilities

When Should You Consider Cost Segregation?

Timing can be an important factor when considering a cost segregation strategy. You can order a study at any time, but it may be particularly useful if you’re the owner of a newly constructed building, a recently remodeled or renovated property, or a newly acquired property. This way you can use the information when you file your tax return and maximize the tax savings at a time when you need it most.

Cost Segregation Methods

There aren’t any established requirements for the preparation of cost segregation studies, but according to the IRS, six of the most common approaches include:

•  Detailed Engineering Approach from Actual Cost Records: Uses actual records — blueprints, specifications, contracts, job reports, and other construction documents — to determine costs.

•  Detailed Engineering Cost Estimate Approach: This is similar to the approach above, but it uses estimated instead of actual costs.

•  Survey or Letter Approach: Contractors and subcontractors are contacted to provide information on the cost of specific assets that they installed on a particular project.

•  Residual Estimation Approach: This is a shortened method for which only short-lived asset costs are determined. The total amount of these asset costs are subtracted from the total project cost.

•  Sampling or Modeling Approach: This method uses a model (or template) to analyze multiple facilities that are nearly identical in construction, appearance, and use.

•  Rule of Thumb Approach: This approach generally uses little or no documentation and is based instead on the preparer’s “experience” in a particular industry.

Working with Cost Segregation Professionals

You may find it helpful to use an online calculator to help you estimate how much you’ll save on taxes and to decide if it’s worth proceeding with a cost segregation strategy. But when it’s time to do the actual study, it’s generally not a DIY job. (According to the IRS’s Cost Segregation Audit Technique Guide, the No. 1 element of a quality study is “Preparation by An Individual with Expertise and Experience.”)

Engineering firms, tax advisory firms, construction cost consultants, and some large accounting firms often have a team of specialists that perform this type of work. Or you may be able to find a cost segregation firm that focuses exclusively on providing cost segregation studies.

Costs Associated with Cost Segregation

The price of a cost segregation study may vary significantly depending on several factors. But you can expect to pay anywhere from $5,000 to $30,000 or more based on the size of the property, the assets being analyzed, location of the property, the level of detail in the study, whether the work is done in person or remotely, and the experience and reputation of the firm doing the work. It can be helpful to do some comparison shopping and to get quotes from the firms you think could be the best fit for your goals.

Once you’ve estimated the costs involved, you can decide if the tax and other potential savings are worth the time, effort, and money that will go into a cost segregation study.

IRS Guidelines and Regulations

According to the Cost Segregation Audit Technique Guide, to meet IRS expectations, a taxpayer should submit a “quality cost segregation report” supported by a “quality cost segregation study.” The guide provides an in-depth look at what it takes to meet those expectations and the legal and legislative precedents that got us where we are today. And it stresses that taxpayers must be able to substantiate their asset classifications and depreciation deductions.

The Takeaway

Cost segregation is a complex tax deferral strategy that allows real estate investors to lower their tax bills earlier in their ownership by reclassifying certain parts of their property to shorter depreciation periods. This can help them free up money sooner for reinvestment or other purposes.

You may want to talk to a financial professional about whether cost segregation would benefit you, and how to find the right team to get the process started.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How much can I save with cost segregation?

Several factors can go into determining how much you could save with cost segregation, including the cost of your property, whether you have assets that can be reclassified to a shorter depreciation period, and how much your cost depreciation study costs.

Is cost segregation only for new properties?

A cost segregation may be more efficiently executed for a new property or one that’s been recently renovated. But by using a “look-back” study, the strategy could also be used on a property that you’ve owned for several years.

How long does a cost segregation study take?

It could take the firm you hire one to two months to complete your cost segregation study, depending on the size of your property and how helpful you can be with providing the information and documentation they require.

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Photo credits: iStock/

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.

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

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You’ve probably used an Automated Valuation Model (AVM) without even realizing it. When you open up your favorite real estate site, type in a street address, and instantly see an estimate of what the property is worth, you can thank an AVM. This data tool, which has proliferated in recent decades, uses software, algorithms, and existing information to calculate an estimated value for a given piece of property.

AVMs may have made it easier to estimate the sale price of a house you have your eye on, but they have their limitations, too. Below, we’ll dive into how AVMs work, how they’re used — and when you might still need to rely on a human appraiser.

What Is an AVM?

Pinning down how much a home is worth is a process known as property valuation — and has historically been a job for human property appraisers. But as computers proliferated and software evolved, eventually, AVMs were created. They’ve been around for a while now: Zillow launched its Zestimate product, which functions on an AVM, in 2006. It’s now possible to get a basic understanding of what your home is worth in mere seconds.

How AVMs Work

AVMs allow big companies like Zillow — as well as lenders, real estate agents, and shoppers — to get a quick estimate of a home’s value at a glance. These software products use a matrix of existing data (more on that below) to spit out a good guess as to what a home might be worth.

AVMs are also helpful because they’re updated in real time based on ever-changing market factors. For instance, if one property on a block sells for a higher price than expected, that sale price will begin factoring into the AVMs for the other homes on the block as soon as the information is public. In other words, the information is far more dynamic and constantly up-to-date than a human appraiser could offer with a single study.

Recommended: The Home Mortgage Interest Deduction Explained

Key Components of AVMs

AVMs utilize a collection of different data sources and statistical algorithms to build their estimates. There are several different AVM companies that offer these programs to clients who use them, and they each have their own proprietary way of computing home values.

Some of the most common information that automated valuation models rely on includes:

•  Public records that can include information like property sales and tax history

•  Multiple Listing Service (MLS) data, which offers pricing information on other, similar properties (known in the industry as “comps”)

•  Information about the property, such as its age, size, and tax assessment, which may be pulled from public record

Using machine learning combined with algorithms created by the professionals coding the software, AVMs can use these pieces of information to generate an up-to-date estimate for just about any property in America — though its level of accuracy may vary.

For example, with newly constructed properties, there may not be many perfect comps available in the area, which could lead to a less accurate AVM estimate. There are other situations where AVM accuracy might be lacking, too — we’ll dig into that below.

Applications of AVMs

Automated valuation models are useful in a whole host of situations — from mortgage lending, where lenders can use the information to make better informed underwriting decisions, to portfolio management, which can help investors understand the current value of their real estate assets.

And as anyone who’s ever quickly looked up the price of an eye-catching house can attest, AVMs are very useful for property shoppers, too. As long as the estimate is treated as just that — an estimate rather than an exact price — having access to AVM information can help browsers understand which homes they can afford to make an offer on or how much financial preparation they’ll need to do to be able to afford the house of their dreams. (They won’t, however, give you a complete picture of how much it will cost to own the home. For that you need a mortgage calculator with taxes.)

Advantages and Limitations of AVMs

Like everything else in life, AVMs have both advantages and limitations to keep in mind.

Advantages of AVMs include:

•  Speed. Even the very fastest human property appraiser can’t update every property’s valuation every few hours like an AVM can.

•  Cost-effectiveness. While appraisals must be paid for on a per-appraisal basis, factoring in the appraiser’s time working and expertise, companies may pay for AVM software once or as an affordable subscription service.

•  Scalability. Since AVMs rely on algorithms, they can offer thousands of valuations based on less overall work than the bespoke human appraisal process.

On the other hand, their drawbacks include:

•  Potential for inaccuracy. Any algorithm is only as good as the data fed into it, and mistakes in public records do happen. Records can also be outdated — not reflecting an HVAC upgrade, for example.

•  Inability to assess intangibles. There are some factors (such as property condition) that can affect a home’s value that don’t easily translate to a database. In these instances, a human appraiser still has the edge.

AVM Accuracy and Reliability

As we’ve seen, although AVMs can offer a lot in terms of speed and cost-efficiency, they can sometimes lag behind human appraisers when it comes to accuracy. You might hear the phrase “AVM appraisal” but a valuation isn’t truly the same as an appraisal that you would get from a professional. Newly constructed or non-traditional properties can be more difficult to assess for value based on comps (since there aren’t many or any good ones), and intangibles like property condition don’t always show up in the data these algorithms draw from.

Fortunately, some AVMs also offer confidence scores, which can help those using the estimates to understand how likely it is that the value offered is accurate (or close to it). You could also check with a knowledgeable real estate professional to get their take on whether a given estimate hews closer or further from the truth.

Impact on the Real Estate Industry

AVMs have already changed the real estate industry by making home value estimates widely and readily available to the general public. Along with helping buyers shop in what can sometimes feel like a confounding market, AVMs also make it easier for those who do own their home to understand how much equity they’ve built — or how much they might stand to gain by selling.

While a human appraisal and home inspection continue to be common parts of most real estate transactions, over time, as they increase in accuracy, AVMs may reduce the need for such services, potentially saving money for those on the market. They could also help speed up the underwriting process for home mortgage loan lenders, as well as making it easier for real estate agents to offer their clients home showings in their price range.

The Future of AVMs

Although AI has been all the rage the last few years, we’re still just at the very beginning of this new line of technology — which has the potential to evolve at an exponential rate. While many AVMs are already incorporating machine learning and other high-tech methods, technological developments along with the continued progress of AI and big data could see these valuations becoming far more accurate and accessible over time.

Recommended: Are Property Taxes Included in Mortgage Payments?

The Takeaway

Automated valuation models, or AVMs, have already changed the real estate industry — and have the power to continue to do so as technology improves and advances. However, human appraisals still have an irreplaceable role in today’s market, ensuring the best accuracy for tax assessments and sales.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How do AVMs compare to traditional appraisals in terms of accuracy?

Generally speaking, AVMs are not as accurate as a traditional appraisal. While AVMs are both speedy and cost-effective, their estimates are only as good as the data fed into the program — and, of course, sometimes that data can be inaccurate. AVMs also often can’t evaluate property conditions and other intangible elements that a human appraiser could easily spot.

Can AVMs completely replace human appraisers?

As is true in all parts of technology, as advancements continue, the jobs those technologies make easier may change. For now, human appraisers are still an important part of the real estate market, offering their expertise and individualized focus on a property rather than relying blindly on computer algorithms and data.

How do AVMs handle unique or recently renovated properties?

Nontraditional, newly renovated, or newly constructed properties can be challenging for AVMs, since they utilize publicly available information about comparable properties, or “comps,” to make their estimates (and these types of properties may not have very good comps available). AVMs also assume the same level of condition for all homes, which means they might overvalue a home in disrepair — or undervalue a newly renovated one.

Are AVM results accepted by all financial institutions?

Because AVMs can not (yet) match the accuracy and reliability of a human appraisal, many mortgage lenders still require human appraisals to be part of the purchase process. AVMs are new enough that legislation is still actively being made to regulate their use and ensure they comply with nondiscrimination laws and avoid conflicts of interest. Over time, more lenders may allow AVMs to replace human appraisals, but that’s not the market we have today.

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Photo credits: iStock/miniseries

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.

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