SoFi

If you’re looking at your chipping laminate countertops, you’re probably wondering what it would take to replace them — and maybe your whole kitchen, for that matter. That leads to the big money question: How are you going to pay for home improvements?

One option is to cash out the equity you have in your home in order to fund improvements on it, by doing a cash-out refinance. A cash-out refinance replaces your current mortgage with a new one and refunds you the difference in cash. You can use the cash however you would like.

However, it’s not your only option, and not every situation is the same. You’ll need to consider what it means to refinance for home improvements and whether or not it’s right for you.

How Cash-Out Refinancing for Home Improvement Works

When you cash out equity for home improvements, you can get a new mortgage and have some equity refunded to you in the form of cash. It’s best to look at how cash-out refinancing works with an example.

Let’s say you own a home worth $800,000 and your current mortgage amount is $500,000. Lenders allow a refinance of around 80% of the home’s value, so 80% of $800,000 is $640,000. $640,000 is the maximum amount that the lender will loan.

Let’s suppose you qualify for that loan. Next, the lender will pay off your original mortgage of $500,000. After you subtract $500,000 from $640,000, you’ll have $140,000 left. You’ll receive $140,000 in cash after you close on the loan (minus the closing costs on the loan). Your new loan amount will be $640,000.

If you want to take a closer look at how much money you would want to have on hand for a renovation, you can use a home improvement cost calculator to form an estimate of potential expenses.

What Can You Use the Cash For?

According to Fannie Mae guidelines, which are the regulations mortgage lenders follow for conforming loan types, you can use the cash from a cash-out refinance for anything. That includes whatever home improvement dreams you have — a pool, new kitchen, she-shed, pickleball court — so dream big!

Pros and Cons of a Cash-Out Refinance for Home Improvements

Benefits

Cash-out refinancing for home improvement has some benefits to consider.

•   A better loan. When you apply for a cash-out refinance loan, your loan terms will change with the new mortgage. It’s not guaranteed, but you could end up with a lower interest rate than the one you had on your previous mortgage. Depending on the scenario, it is possible that a refinance could lower the payment for the borrower while accessing cash and shortening the term.

•   Increased property value. When you refinance for home improvements, the renovations could increase your property value. New flooring or an updated kitchen could increase the value of your home by more than the amount of money you pour into the project.

•   One payment. With a cash-out refinance, there’s one payment for both your mortgage and the cash you take out for home improvement projects. It’s convenient and usually offers a lower monthly payment than other financing methods.

•   Lower interest rates than other types of loans. A mortgage has a lower interest rate than other loan types, such as credit cards or personal loans, which can reach an APR of 30%. Just keep in mind that financing over another 15- or 30-year term could add a significant amount of interest to your loan, so be judicious in how much debt you add to your home.

Drawbacks

As with any financing option, there are some drawbacks you’ll want to consider before refinancing for home improvement with a cash-out refi.

•   Loan terms may change. If you have very favorable loan terms on your original mortgage, you won’t necessarily get those same ones when you refinance. If interest rates have risen since your original closing, the mortgage refinancing cost could make your new mortgage more expensive than an old one.

•   What you can borrow depends on equity. You need a substantial amount of equity to be able to do a cash-out refinance. Your lender may only want to lend on 80% of the home’s current market value. That means you’ll need to have an original mortgage amount even further beneath that amount to be able to cash out equity for home improvements.

•   Closing costs. With a new mortgage come new closing costs, which are never fun to pay. There are usually fewer closing costs to pay with a refinance, but it’s still a cost you need to consider.

•   Long-term costs. Increasing the amount of your mortgage over a long period brings large interest costs. Take a look at an amortization table or mortgage calculator so you know exactly what the total cost of your mortgage will now be.

Requirements for a Cash-Out Refinance

To qualify for a cash-out refinance, you’ll need to qualify for a mortgage again. A lender will look at your credit score, debt-to-income ratio, as well as the amount of equity you have in your home.

Credit Score Minimum

When you’re looking to qualify for a mortgage, you want your credit score as high as possible so you can qualify for the best available mortgage rates. For the best rates, aim for a credit score of 740 or above. A credit score of 620 is needed for most home loan types, though you may be able to get a home with a credit score around 500, depending on the type of mortgage or program available in your area.

Home Equity Requirements

The amount of your new mortgage will retain around 20% equity before refunding cash (sometimes less, depending on the lender or the program). If your home is worth $500,000, that means they’ll likely be willing to lend up to $400,000 on the home. If your current mortgage sits at $300,000, the most cash you would be able to access with a cash-out refinance is $100,000.

Debt-to-Income Ratio (DTI)

A debt-to-income (DTI) ratio is the total sum of your debts divided by your income. Generally, lenders look for a DTI ratio at 43% or lower. There are exceptions, so be sure to consult with your lender.

Cash-Out Refinance vs Home Equity Line of Credit (HELOC)

Another way to pay for home improvements is with a home equity line of credit (more commonly referred to as a HELOC). A HELOC is a second mortgage loan that uses the equity in your home as collateral. It acts like a line of credit and you only borrow what you need. It’s flexible and easy to use.

It makes sense to use a HELOC instead of a cash-out refinance in a few scenarios:

•   When the interest rate on your current mortgage is very low. Changing your current mortgage to a higher-interest mortgage with a cash-out refinance would be very expensive. Paradoxically, a HELOC or personal loan will have an even higher interest rate than what you can get on a primary mortgage, but because you’re paying the HELOC or personal loan off sooner, you will spend far less in interest.

•   You can make a larger HELOC payment. A HELOC usually won’t take 30 years to pay off. On a HELOC that is paid off sooner, the monthly payment amount will be higher, but if the numbers make sense (meaning, you’re able to access enough money for your home improvements from a HELOC at a competitive interest rate and you can cover the payments), then you probably want to go with a HELOC instead of a cash-out refinance.

•   You’re not sure how much you need. With a HELOC, you apply for a credit line and are approved up to a limit, kind of like a credit card. You only take out what you need, which is convenient when you’re planning a project and are not sure exactly how much it will cost.

The Takeaway

Cashing out the equity for home improvements can be an affordable way to update, repair, or improve your home — but only if the circumstances are right. While a lump sum of cash can be a great way to pay for home improvements, be sure to factor in all the costs before you choose this method. There are other financing tools available to you if this one is too costly.

Turn your home equity into cash with a cash-out refi. Pay down high-interest debt, or increase your home’s value with a remodel. Get your rate in a matter of minutes, without affecting your credit score.*

FAQ

Can I use a cash-out refinance for ongoing or future home improvement projects?

The cash you get from refinancing your home can be used for any purpose.

How long does the process typically take for a cash-out refinance for home improvements?

The cash-out refinance process averages 30 to 45 days regardless of what purpose the excess funds will be used for.

Can I use a cash-out refinance to fund home improvements on an investment property?

Yes, however the requirements for a cash-out refinance on an investment property may be different from those on your personal residence, so it’s best to consult with a mortgage lender.

Are there any restrictions on how I can use the funds from a cash-out refinance for home improvements?

No, there are no restrictions on how to use funds from a cash-out refinance. You can pay for whatever home improvements you would like. There are restrictions, however, on whether or not you can deduct the interest you pay on the loan on your taxes. Ask your tax preparer for guidance.

Can I apply for a cash-out refinance for home improvements if I have a second mortgage or existing liens on my property?

Yes, but the second mortgage and other liens will likely need to be paid for a lender to issue a new mortgage for a cash-out refinance. There are some exceptions, so it’s best to consult with your mortgage professional on this one.

Photo credit: iStock/Kerkez

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

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.

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.

SOHL0723001

Jumbo loans are just that: jumbo. For 2023, conforming loan limits for houses in most counties — set by the Federal Housing Finance Agency — are $726,200. If you want to buy a more expensive home and need to finance more than that limit, you’ll be in the market for a jumbo loan.

Homeowners often refinance traditional (i.e., conforming) mortgages to get a lower interest rate, change their loan terms, or tap into home equity. But what about homeowners with a jumbo loan: Can they refinance as well?

A mortgage refinance for a jumbo loan is possible, but it may be a little more complicated. Let’s have a look at the process of a jumbo loan refinance.

When Can You Refinance a Jumbo Loan?

There is no set timeline for refinancing a jumbo mortgage loan. In theory, you could refinance at any point during your loan, but lenders typically have strict requirements before approving a jumbo mortgage refinance. If you’ve been paying down the loan for a while, it’s possible your refinance would fall within the conforming loan limits. To determine whether or not this is the case, take a look at the conforming loan limits for your specific area. If you still need a jumbo mortgage loan, this is what you’ll want to consider:

Credit Score

Unsurprisingly, getting approved for a jumbo refinance means you’ll need a strong credit score. To refinance to a 30-year fixed-rate loan, lenders typically want to see a credit score of 680 or higher. Refinancing to a 15-year fixed or adjustable-rate mortgage has an even tougher credit score threshold: 700 or higher. And if you’re looking for a refinance for an investment or rental property, you may need a credit score as high as 760.

Recommended: Does Having a Mortgage Help Your Credit Score?

Debt-to-Income Ratio

Similarly, lenders will analyze your debt-to-income (DTI) ratio when reviewing your jumbo refinance application. While lenders typically want a DTI of 50% or lower for conventional loans, you may need a DTI as low as 36% when refinancing a jumbo mortgage loan.

Cash Reserves

Lenders will also typically want to see that you have cash reserves set aside. The amount of mortgage reserves you need will vary by lender but could be as much as six months’ worth of mortgage payments in liquid assets, more if you are self-employed.

Other Considerations

In addition, lenders may consider your payment history. If you have made one or more late payments on your current jumbo mortgage loan, you might not get approved for a refinance.

Other lenders may want you to have a certain amount of equity in your home before permitting a refinance.

And if you’ve filed for bankruptcy, it can be much more challenging to refinance. You’ll usually need to wait until the bankruptcy (or a past foreclosure) vanishes from your credit history — potentially 10 years.


💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

Jumbo Loan Refinance Requirements

Assuming you have the right qualifications for a jumbo refinance, here’s what you’ll typically need to provide to the lender:

•   Two previous months of bank statements

•   Proof of income, like your most recent pay stub

•   Tax returns from the last two years, including all W-2s

•   A profit/loss and balance sheet if you’re self-employed

•   Any other documentation of income, such as 1099s, that can help your chances of approval

Of course you’ll also have to go through all the steps of refinancing a mortgage that would be required with any loan.


💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

Pros and Cons of Refinancing a Jumbo Loan

As with regular refinancing, jumbo mortgage refinances have a number of pros and cons to consider:

Pros

•   Faster payoff: If you refinance to a mortgage with a shorter term, you’ll pay off your home sooner — and be free from that high monthly payment.

•   Less interest: If you get a lower interest rate, you could save money over the life of the loan.

•   Predictable payments: If you switch from an adjustable-rate mortgage to a fixed-rate loan, your monthly payments will be locked in.

•   No more PMI: You may be able to get rid of private mortgage insurance when you refinance your loan.

•   Home improvements: If you do a jumbo cash-out refi, you can leverage the equity you have in your home to make home improvements. You could also use the money to pay down debt or cover college costs.

Cons

•   Closing costs: Refinancing a home loan means you’ll have to close again, and that can get expensive. According to Freddie Mac, closing costs when refinancing average about $5,000.

•   Larger monthly payments: If you shorten your loan term when refinancing, be prepared for larger monthly payments. You’ll want to feel confident that if you face a job loss, have a new baby, or experience another big life change you can still afford the higher monthly payment.

•   Lost equity: With a cash-out refinance, you borrow against the equity in your home. While it’s helpful for funding home improvements or paying down high-interest debt, you lose out on that equity you’ve built.

Recommended: How Much Does It Cost to Refinance a Mortgage?

How Will Refinancing a Jumbo Loan Affect Your Mortgage?

Refinancing a jumbo loan can have a few intended effects, including:

Lower Rate

Mortgage rates fluctuate over time. If rates drop, you might want to refinance to take advantage of the lower interest rate.

Longer Loan Term

If your current monthly mortgage payment is too high for you to handle, you may be able to lower it by refinancing and lengthening the loan term. Keep in mind, you’ll likely pay more in interest over the life of the loan — but the tradeoff for lower monthly payments might be worth it.

Shorter Loan Term

On the flip side, you might be able to shorten the length of your loan by refinancing. Your monthly payments may go up, but you’ll likely pay less in interest, and you’ll be free from the burden of a mortgage payment significantly sooner.

Take Cash Out of Equity

Many homeowners do a cash-out refinance to take advantage of some of the equity they’ve built in their home. You might refinance to get a nice lump sum to put toward home renovations, high-interest credit card debt, or another big expense.

Change Interest Structure

If your jumbo loan is an adjustable-rate mortgage, you may have trouble predicting your monthly payments. When you refinance to a fixed-rate loan, you’ll get more dependable monthly payments, which can make it easier to budget.

The Takeaway

Refinancing a jumbo mortgage is possible and could yield several benefits, like a better interest rate, better terms, and a better interest structure. The requirements to refinance your jumbo loan may be stricter than refinancing a conforming loan. Work with a lender to understand when and how you can refinance your jumbo loan.

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

FAQ

Can I refinance my jumbo mortgage loan with my current lender?

It may be possible to refinance your jumbo mortgage loan with your current lender. But refinancing is also a time to shop around and consider the terms other lenders have to offer. With any jumbo loan refinance, you’ll need to meet certain requirements; this might include a minimum credit score or DTI.

What are the risks associated with refinancing a jumbo mortgage loan?

Refinancing a jumbo mortgage will involve significant closing costs. Your credit score will also likely drop when you refinance because of the hard inquiry. And if it’s a cash-out refinance, you’ll lose some of the equity you’ve built in your home.

How often can I refinance my jumbo mortgage loan?

While there’s technically no limit to how often you can refinance a mortgage loan, you likely won’t want to do it too often. You’ll pay closing costs every time you refinance, and your credit score can take a hit each time.

Can I still refinance my jumbo mortgage loan if I’m self-employed?

It’s possible to refinance a jumbo mortgage loan if you’re self-employed. You may just have to jump through additional hoops to prove your income. That can mean providing a profit-and-loss and balance statement, tax returns or 1099s from recent years, and business bank statements.

Can I refinance my jumbo mortgage loan if I have an adjustable-rate loan?

Yes, you can refinance your jumbo mortgage if you have an adjustable-rate loan. One of the many reasons people consider refinancing a jumbo loan is to switch from an adjustable- to a fixed-rate mortgage.

What should I do if I’m having trouble making payments on my jumbo mortgage loan?

If you’re having trouble making payments on your jumbo mortgage loan, you may be able to refinance to get a better interest rate/and or lengthen the loan term. Both options could lower your monthly payment. However, if you’ve already missed one or more payments, getting approved for a jumbo refinance could be challenging.

How do I know if refinancing my jumbo mortgage loan is the right decision for me?

To determine if refinancing a jumbo mortgage loan is right for you, consider your current finances and long-term goals. If refinancing means your monthly payments will be more manageable, you’ll save money in the long term, or you’ll be able to leverage your equity to fund a home renovation or pay down high-interest debt, it may be a good strategy for you.

Photo credit: iStock/FG Trade

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

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

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

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.

SOHL0523002

The term “first-time homebuyer” may sound really specific, but it isn’t nearly as limiting as you might think. Even if you’ve owned a home before, you still may be eligible for many first-time homebuyer assistance programs.

That’s good news if you’re hoping to take advantage of benefits like down payment and closing cost help, which could make a real difference in the type of home you can afford — or whether you can afford a home at all.

Read on to find out how you can be a first-time homebuyer twice and how to make the most of any benefits that might be available to you.

First-Time Homebuyer Qualifying Factors

If you’ve never owned a home before, you’re obviously a first-time homebuyer. But other criteria also can factor into whether you qualify for first-time homebuyer status and can benefit from assistance programs.

When are you considered a first-time homebuyer again? The U.S. Department of Housing and Urban Development (HUD) says a former homeowner may still qualify if you meet one of these criteria:

You Haven’t Owned a Principal Residence for Three Years

Even if only one spouse qualifies under this scenario, both spouses would be considered first-time homebuyers.

It’s Your First Home as a Single Parent

If you’re a single parent who has only previously purchased a home with a former spouse while still married, you qualify as a first-timer.

You’re a Displaced Homemaker

If you are a displaced homemaker who doesn’t or didn’t earn wages from outside employment and has only ever owned a home with a spouse, you would be considered a first-time homebuyer.

Your Last Home Was Detached

If you’ve owned a primary residence that wasn’t permanently attached to a foundation according to applicable building regulations (such as a mobile home when the wheels are in place), you qualify.

Your Home Was Out of Compliance

If you have only owned a home that didn’t comply with state, local, or model building codes, and could not be brought into compliance for less than the cost of constructing a permanent structure, you can claim first-timer status.

State, local, and private first-time homebuyer programs may have their own qualifying criteria, so it can be a good idea to check out all the rules before starting the application process.

Recommended: First-Time Homebuyer Guide

Is It Smart to Be a First-Time Homebuyer Twice?

Finding a home — and figuring out how to afford a down payment on your first home — can be especially challenging in today’s market, while prices are still high and mortgage rates are rising. But if you’re eligible for one of the many assistance programs created to help first-time buyers, you may be able to improve your chances of (literally) getting your foot in the door.

Many states, cities, and community organizations provide assistance in the form of grants or forgivable second loans that can help with the down payment on your home and/or closing costs. Some of these down payment assistance programs only offer support to those who fall under an income cap. But, according to a report from the Urban Institute, up to 51% of potential homebuyers residing in the U.S. metropolitan areas studied would qualify for some form of home down payment assistance. Some private lenders also offer lower low-interest mortgage loans on conventional loans and other benefits to qualifying first-time homebuyers. And, of course, there are several longstanding federal programs that may offer more lenient income and credit score requirements, smaller down payments, and lower mortgage rates. So it can be a good idea to investigate all the opportunities available to you — and to your spouse if you’re married.

Note: At SoFi, a member cannot be claimed as a first-time home buyer twice.

Benefits of Using an FHA Loan

Whether this is the first time you’ve considered purchasing a home, or you’re a returning first-time homebuyer, you may want to look into the benefits provided through the Federal Housing Authority (FHA) loan program.

The FHA isn’t a lender, so it doesn’t make loans directly to borrowers. Instead, it insures loans made by HUD-approved private lenders. If a property owner defaults on the mortgage, the FHA will pay the lender’s claim for the unpaid principal balance.

Because lenders are taking on less risk with an FHA-insured loan, they can offer more flexible eligibility requirements, lower down payment amounts, and lower closing costs than a buyer might get with a conventional loan. For example, if you have a FICO® credit score of 580 or higher, you may qualify for an FHA loan with just 3.5% down. And even with a score between 500 and 579, you still could be able to get a loan with 10% down.

FHA loans also may offer lower interest rates than comparable conventional mortgages, which could be an important consideration if mortgage rates keep rising in 2023.

Are There Drawbacks to an FHA Loan for First-Time Homebuyers?

FHA loans can be appealing to first-time buyers who are struggling to come up with a down payment, or who have a low debt-to-income ratio or other problems qualifying for a mortgage. But, a potential downside is that the mortgage insurance premiums borrowers typically must pay to get and keep an FHA loan may end up being more expensive than the private mortgage insurance required for a conventional home loan. Here’s what those costs can look like when you compare MIP versus PMI:

•   Homebuyers with a conventional mortgage can expect to pay an annual premium for private mortgage insurance (PMI) until they have at least 20% equity in their home. (If you make a down payment of 20% or more, PMI isn’t required.) PMI costs can vary based on the type of mortgage you get, your loan-to-value ratio (LTV), your credit score, and other factors, but generally, the annual premium is 0.5% to 1% of the total loan amount.

•   FHA borrowers, on the other hand, are required to pay two separate mortgage insurance premiums (MIP). One premium is paid upfront at closing and is 1.75% of the loan amount. The other premium is based on the amount, length, and loan-to-value (LTV) ratio of the mortgage and is usually paid annually for as long as you have the FHA loan. If you put down at least 10%, you may have the FHA MIP removed after 11 years of payments — but unlike PMI on a conventional loan, there is no equity cutoff for MIP.

As you research different lenders and types of loans, you may want to keep these costs in mind. Remember: Mortgage insurance, whether MIP or PMI, protects your lender, not you, if you default on your payments. You still could ruin your credit or lose your home to foreclosure if you fall behind, so it’s important to keep your payments as manageable as possible.

Other First-Time Buyer Options

FHA loans are a popular borrowing option, but there are many other first-time homebuyer programs that could help you manage your costs, including programs offered by your state or city, or through local charitable organizations. Your real estate agent or lender may be able to help you find a program that’s appropriate for your situation. You also can find information through your state housing finance agency or HUD.

Other federal programs that you may want to consider include:

Freddie Mac Home Possible Mortgages

The Federal Home Loan Mortgage Corporation, known as Freddie Mac, offers the Home Possible mortgage program to help low-income borrowers who hope to purchase their own home. Because the program is backed by Freddie Mac, approved lenders can accept a smaller down payment from qualifying buyers, and some qualifications and terms may be more flexible than with a conventional mortgage.

Fannie Mae HomeReady Mortgages

The Fannie Mae Home Ready Mortgage is another path to homeownership for low-income borrowers. Creditworthy buyers may find lenders are more flexible with their terms and qualifications because these loans are backed by Fannie Mae.

Department of Veterans Affairs (VA) Loans

With a VA-backed home loan, the Department of Veterans Affairs guarantees a portion of the loan you obtain from a private lender. And because there’s less risk for the lender, you may receive better terms. Service members, veterans, and eligible surviving spouses may be eligible for this assistance.

US Department of Agriculture (USDA) Loans

The USDA offers both direct and backed loans to assist very low, low- and moderate-income buyers who want to buy a home in an eligible rural area. Usually, no down payment is required. And more areas of the country are eligible for USDA-loan status than you might imagine.

HUD Good Neighbor Next Door Program

Eligible law enforcement officers, teachers, firefighters, and emergency medical technicians may find housing help through HUD’s Good Neighbor Next Door program. Through this program, certain single-family HUD properties in designated revitalization areas are available for sale to public service workers at 50% off the list price.

Recommended: How Much House Can I Afford?

The Takeaway

If you can qualify for one of the many assistance programs available to first-time homebuyers (even if you’ve owned before), you may be able to significantly reduce the daunting down payment and closing costs that can come with purchasing a home. Or you may qualify for a loan with a lower interest rate.

While you’re considering your options, though, keep in mind that you won’t necessarily have to come up with a 20% down payment if you decide to go with a conventional loan.

FAQ

Can I be a first-time homebuyer again?

Yes, under certain circumstances, you may qualify as a first-time homebuyer even if you’ve owned a home before. You may be eligible for many first-time buyer programs, for example, if you haven’t owned a home in three years.

Can I get an FHA loan twice?

Yes, you can apply for an FHA loan even if you’ve had one before. But you usually can’t have more than one FHA loan at a time.

As a first-time homebuyer, am I required to make a 20% down payment?

No. A first-time homebuyer may be able to qualify for a mortgage with as little as 3% down.

Photo credit: iStock/FG Trade Latin

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.

SOHL0223001

You’ve saved for a down payment, and you’re ready to cover closing costs. But do you have enough cash and assets to cover your mortgage reserves?

Lenders sometimes require mortgage reserves from home buyers in order for the loan to be approved at application and then funded on the day of closing. But what are mortgage reserves, and how much might you need to have set aside? Below, we’ll review what assets qualify as mortgage reserves and when you might need them.

What Are Mortgage Reserves?

Mortgage reserves are the cash and other assets that home buyers can access in the event they need help covering their mortgage payments for a set number of months. Such reserves are a kind of fail-safe in the event a buyer is laid off or otherwise loses a revenue stream.

In some cases, lenders require you to prove you have such reserves before funding your home mortgage loan. Requirements can range from as little as one month of reserves (i.e., all your mandatory housing costs for a month) to six months or more.

Luckily for home buyers, lenders consider more than just the money in your checking and savings accounts as mortgage reserves. Cash and assets that can be classified as mortgage reserves include:

•   Money in a deposit account (not only checking and savings, but also money market accounts and certificates of deposit)

•   Stocks and bonds

•   Trust accounts

•   Cash value in a life insurance policy

•   Vested retirement funds, such as money in 401(k)s and IRAs

Keep in mind that money in your savings account that you’ll use for the down payment and closing costs does not count toward your mortgage reserves. Mortgage reserves are money and assets that you will have access to after closing.

Still crunching the numbers on your dream home? Use our mortgage calculator to understand just how much you might spend.

Recommended: What Is a Bank Reserve?

Do All Types of Mortgages Require a Reserve?

Not every borrower will need mortgage reserves when buying a home. Requirements depend on the type of mortgage you’re applying for, as well as your overall financial picture (credit score, debt-to-income ratio, and size of your down payment, for instance).

The table below breaks down potential mortgage reserve requirements by loan type:

Why do these requirements vary? Lenders may have different rules depending on whether a government agency is guaranteeing the loan, or whether the home will be your primary residence or if it’s an investment property.

Lenders may also have stricter mortgage reserve requirements if you’re making a small down payment, you have a high debt-to-income ratio, or if your credit score is too low (typically anything below a 700 credit score can warrant larger reserves if the borrower is making a down payment of less than 20 percent).

Recommended: Tips to Qualify for a Mortgage

Tips for Building Your Mortgage Reserves

Saving up for a down payment can be challenging on its own, but cobbling together enough cash reserves for a mortgage loan can make it even tougher. Here are some tips for building your home loan reserves:

Decrease Spending

Take a good, hard look at your budget to figure out how to stop spending money that you could be saving. Common culprits include dining out, streaming services, cups of coffee on your way to work, and memberships and subscriptions. Determine what you can cut out of your life — just for now — to reduce your monthly spending.

You may also be able to lower your utility bills by making some simple, eco-friendly updates in your current home. Also consider carpooling or using public transportation to reduce fuel costs, and raise your deductible on your car insurance to get a lower monthly premium. Finally, clip coupons and look for deals when shopping for groceries.

Use a Certificate of Deposit

If you know you’ll be buying a home within a few years, store some savings in a certificate of deposit (CD). Though the money is less liquid than funds in a savings account, it still counts toward your mortgage reserves and a CD may offer a higher interest rate, so your money will grow faster.

Set Aside a Chunk of Your Income

When you get each paycheck, intentionally move some into a high-yield savings account that’s earmarked for your mortgage reserves. (You can also do this when saving for the down payment on your home.)

Automatically setting aside some of your income for a specific purpose can make it a lot easier to resist the temptation to spend it on other things, like clothes and vacations.

Take Up a Side Gig

If you’ve cut all the expenses you can and you’re still coming up short, think about how you can earn more money. You can always ask for a raise at work, but you may have more luck taking on a side hustle to earn extra income. That doesn’t always mean getting a second job — there are passive income ways to build wealth.

Boost Your Retirement Contributions

Mortgage reserves don’t have to be money in your bank account. Retirement contributions to IRAs and 401(k)s (if vested) also count toward your reserves, and these may grow faster than money in a high-yield savings account, depending on how the market is doing.

Even better, if your employer matches contributions to a 401(k), that’s an easy way to quickly increase your mortgage reserves. And it’s free money!

What Happens If You Don’t Meet the Mortgage Reserve Requirements?

Mortgage reserve requirements are called that for a reason: They’re required. Just like the down payment and closing costs, you will absolutely need your mortgage reserves if your lender asks for them in order to have your mortgage loan funded. You’ll be asked to note these assets on a mortgage application.

If the lender discovers prior to the closing that you don’t have the reserve for the mortgage, the lender can back out.

The Takeaway

Depending on your credit score, down payment, the type of property you’re purchasing, and the type of mortgage loan you’re looking for, you may need to have mortgage reserves set aside to get approved. Mortgage reserves are cash and assets you can use to cover your housing costs for a set number of months if something happens and you suddenly can’t afford your mortgage.

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

FAQ

What is the difference between cash reserves and mortgage reserves?

Mortgage reserves are a type of cash reserves. Cash reserves broadly refers to money set aside for short-term needs and emergencies, like sudden job loss; cash reserves can get you through a set number of months’ worth of expenses.

Mortgage reserves are specifically money set aside to cover housing costs for a set number of months and may be required for some home loans.

Can I use retirement savings as mortgage reserves?

Retirement savings can count toward your mortgage reserves. If you’re using 401(k) funds in the total calculation, they must be vested.

How long do I need to maintain mortgage reserves?

How long you need to maintain mortgage reserves depends on the type of mortgage loan you’re using and factors like your credit score and debt-to-income ratio. Typical conventional loan reserve requirements are two months of mortgage reserves after closing, but it’s possible to need up to six months of reserves for a conventional mortgage.

Can I use gift funds for mortgage reserves?

You can use gift funds for mortgage reserves for an FHA loan, as well as certain other loans with some restrictions. Gift funds refers to money or assets donated to a home buyer, usually from a loved one, without the expectation of repayment.

Photo credit: iStock/FilippoBacci

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

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

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

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

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A cash-out refinancing loan is treated differently by the IRS than a traditional mortgage. Although you receive a lump sum of cash, cash-out refinancing is considered a form of debt restructuring, and you do not pay taxes on the cash you receive.

With cash-out refinancing, you cash out a percentage of the equity that you have accrued in your home and replace your existing mortgage with one with a higher principal. You can use the cash for any reason, such as consolidating debt, paying for home renovations, or unexpected medical expenses.

Here’s what you should know about cash-out refinancing and the tax implications.

How Cash-Out Refinancing Works

When you refinance your mortgage, you cash out equity. Equity is the difference between your current mortgage balance and the value of your home today. Let’s say your home is worth $300,000 and the balance on your mortgage is $150,000, you have $150,000 in home equity.

A lender typically requires you to keep at least 20% of the value of your home in equity. In the above case, you would leave $60,000 in equity and have $90,000 to cash out. Your mortgage lender would also charge around 1% in closing costs.

The Tax Implications of Mortgage Refinancing

A cash-out refinancing loan is treated differently by the IRS than a traditional home loan because it is considered a form of debt restructuring. You do not pay tax on the money you receive in cash, and you might also be able to deduct some of the interest you pay on that cash from your taxes.

Here’s a closer look at the tax implications of a cash-out refinancing loan.

Is a Cash-Out Refinance Taxable?

Because the IRS considers a cash-out refinance to be a form of debt restructuring, the cash you receive is considered a loan, not income, and is not taxed. In addition, you could receive additional tax benefits depending on how you spend the money you receive.

If you use the cash to increase the value of your home, such as putting on a new addition or replacing your heating or cooling system, you can claim the interest that you pay on the loan as a tax deduction.

Before you do this, however, consult a tax professional to make sure that the work qualifies. Simple repairs like painting or general maintenance do not qualify for tax deductions. You will also have to keep meticulous records and save receipts documenting what you spend so that you can prove your case when you file your taxes.

Requirements for Interest Deductions on a Cash-Out Refinance

Capital improvements to a property that increase its value will qualify for an interest deduction. Examples could include a new addition, a security system, or a new swimming pool. General maintenance and repairs will not qualify, nor can you deduct the interest you pay on the loan if you spend the money on a vacation, medical bills, or credit card debt.

How to Make a Cash-Out Refinance Tax-Deductible

Below is a list of home improvements that qualify for the interest deduction.

Qualifying Home Improvements

•   Renovating or adding on an addition, such as a garage or a bedroom

•   Putting in a swimming pool

•   New fencing

•   New roof

•   New heating or cooling system

•   Installing efficient windows

•   Installing a home security system

Improving your property’s value means you can also save money if you sell your home. Capital home improvements count toward the total amount you spent on the property and can potentially lessen your capital gains tax liability when you sell your home.

Deductions for Adding a Home Office

Adding a home office to your home is a capital improvement that qualifies for the interest deduction on a cash-out refinancing loan. There are also additional potential tax benefits to adding a home office for small businesses or the self-employed.

How Home Offices Can Impact Your Taxes

You can deduct the interest on your cash-out refinancing loan if you use the money to add a home office, because it will increase the value of your home and is considered a capital improvement. If you are a business owner or self-employed, you could also qualify for the home office deduction on your federal taxes.

The home office deduction is a benefit that allows you to claim a percentage of what you pay on your loan as a business expense. You must use the designated office space for business purposes only, and it cannot be used as a spare bedroom or family space or it will not qualify. Also, your home office must be the primary place where you conduct business.

Recommended: What to Know Before You Deduct Your Home Office

Tax Implications of a Cash-Out Refinance for Rental Property

Rental income is considered personal income by the IRS. If you use the capital from a cash-out refinance to improve or repair a rental property, the expenses are tax-deductible. Also, interest, closing costs, and insurance paid on a rental property can be deducted from your income as business expenses.

What Are the Limitations for Interest Deduction with a Cash-Out Refinance?

For the 2022 tax year, single filers and married couples filing jointly could deduct mortgage interest up to $750,000. Married taxpayers who file separately could deduct up to $375,000 each. (The limit is higher for debts incurred prior to December 16, 2017: $1 million or $500,000 each for married couples filing separately.)

Can You Deduct Your Mortgage Points?

Mortgage points, also known as discount points, are fees you pay a lender upfront so that you can pay a lower interest rate on your loan. One point is equal to 1% of your mortgage loan. With a cash-out refinance, you cannot deduct the money you paid for points in the year you refinanced until after 2025. But you can spread out the cost throughout the loan. That means if you accumulate $2,500 worth of mortgage points on a 15-year refinance, you can deduct around $166 per year throughout the loan.

Risks of a Cash-Out Refinance

Cash-out refinancing is a risk. You are taking on a larger loan than your original home mortgage, which means that your monthly mortgage payment will increase unless interest rates are lower than when you applied for your current mortgage. If your payments are higher and you can’t keep up with them, you could be at greater risk of foreclosure.

Alternatives to a Cash-Out Refinance

Two financing alternatives that also use equity in your home are a home equity loan or a home equity line of credit (HELOC).

A home equity loan is a second mortgage for a fixed amount that you repay over a set period while keeping your original loan. The payments include interest and principal, just like a traditional mortgage, but the interest rate may be higher than a primary mortgage. This is because the primary lender is paid first in the event of foreclosure, so the secondary lender takes on more risk.

A home equity line of credit (HELOC) is also a second mortgage but with a revolving balance. That means you can borrow a certain amount, pay it back, and then borrow again. As with a credit card, your payments are based on how much you use from the line of credit, not on the available credit amount. If you don’t need to borrow a large sum, this might be a cheaper option than cash-out refinancing because a HELOC tends to have a lower interest rate.

Recommended: Home Equity Loans vs HELOCs vs Home Improvement Loans

The Takeaway

Cash-out refinancing is a way to access the equity in your home and use it to pay for expenses, though it does mean taking on increased debt. The cash from this type of mortgage refinancing can be used any way you like, such as to pay for home renovations, college, or unexpected medical expenses.

When you opt for cash-out refinancing, your original mortgage is replaced by a larger mortgage. If interest rates are lower than when you took out your original mortgage, your monthly payments may go down, but it will take you longer to pay off the loan. Depending on how much cash you need, you can also consider a HELOC or a home equity loan to obtain the money you need.

Turn your home equity into cash with a cash-out refi. Pay down high-interest debt, or increase your home’s value with a remodel. Get your rate in a matter of minutes, without affecting your credit score.*

FAQ

Is cash-out refinance tax-deductible?

Some of the interest you pay on a cash-out refinancing loan might be tax deductible if you use the money to make capital improvements on your home and you keep meticulous documentation to prove it. It’s best to consult with a tax professional to make sure the improvements you do on your home qualify for the deduction.

Do you pay taxes on a cash-out refinance?

No. The funds you receive from cash-out refinancing are not subject to tax because the IRS considers refinancing a form of debt restructuring, and the money isn’t categorized as income.

How do I report a cash-out refinance on my tax return?

You don’t need to report the cash you receive from a cash-out refi as income, so the refi would only show up if you record the interest you are paying on the new mortgage on an itemized return.

What are the tax implications of a cash-out refinance on a rental property?

Rental income is taxed as personal income by the IRS. The good news is that if cash from a refinancing is used to improve or repair a rental property, the expenses are tax-deductible. Also, closing costs, interest, and insurance paid on a rental property may also be deductible from your income as business expenses.

How does the timing of a cash-out refinance affect my taxes?

As long as you meet the requirements for capital improvements, you can deduct the interest paid on your refinanced loan every year that you make payments throughout the life of your refinance loan. So, if you refinance your mortgage to a 15-year term, you must spread your deductions over the 15 years. However, you can only deduct the interest you pay each year, and the amount of interest paid will become less as the loan matures and you pay more toward the principal.

Photo credit: iStock/Jun

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

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.

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

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

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