Aug
29
2024
Prime Loan vs Subprime Loan: What Are the Differences?

Prime Loan vs Subprime Loan: What Are the Differences?

By | Financial Independence, personal_loan, Terminology | Comments Off on Prime Loan vs Subprime Loan: What Are the Differences?

Labels like prime and subprime help denote loans that are designed for people with different credit scores. Prime loans are built for borrowers with good credit, while subprime loans are designed for those with less-than-perfect credit. While subprime loans can help this group finance big purchases like a home or a car, they also come with potentially significant downsides.

Here are key things to know about prime and subprime loans to help you make better borrowing decisions.

Prime Loan vs Subprime Loan

When you’re shopping for a loan, lenders will consider your credit history to help them determine how much default risk they’d be taking on were they to loan you money.

Your credit score is a three-digit representation of your credit history that lenders use to understand your creditworthiness. While there are different credit scoring models, the FICO® score is one of the most commonly used. Lenders and other institutions may have different rules for which credit scores determine prime vs subprime loans.

For example, Experian, one of the three major credit reporting bureaus, defines a prime loan as requiring a FICO score of 670 to 739. With a score of 740 or above, you’re in super prime territory. Borrowers with a FICO score of 580 to 669 will likely only qualify for subprime loans.

Here are some key differences between the two that borrowers should be aware of.

Interest Rates

Borrowers with lower credit scores are seen as a greater lending risk. To offset some of that risk, lenders may charge higher interest rates on subprime loans than on prime loans.

What’s more, many subprime loans have adjustable interest rates, which may be locked in for a short period of time after which they may readjust on a regular basis, such as every month, quarter, or year. If interest rates are on the rise, this can mean your subprime loan becomes increasingly more expensive.

Down Payments

Again, because subprime borrowers may be at a higher risk of default, lenders may protect themselves by requiring a higher down payment. That way, the borrower has more skin in the game, and their bank doesn’t need to lend as much money.

Loan Amounts

Subprime borrowers may not be able to borrow as much as their prime counterparts.

Higher Fees

Fees, such as late-payment penalties or origination fees, may be higher for subprime borrowers.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Repayment Periods

Subprime loans typically carry longer terms than prime loans. That means they take longer to pay back. While a longer term can mean a smaller monthly payment, it also means that you may end up paying more in interest over the life of the loan.

Prime Loan vs Subprime Loan: What Type of Loans Are They?

Prime and subprime options are available for a variety of loan types. For example, different types of personal loans come as prime personal loans or subprime personal loans. When you’re comparing personal loan interest rates, you’ll see that prime loans offer lower rates than subprime. Common uses for personal loans include consolidating debt, paying off medical bills, and home repairs.

You can also apply for prime and subprime mortgages and auto loans. What is considered a prime or subprime score varies depending on the type of loan and the lender.

Recommend: How to Get Approved for a Personal Loan

Prime Loan vs Subprime Loan: How to Get One

By checking your credit score, you can get a pretty good idea of whether you’ll qualify for a prime or subprime loan. That said, as mentioned above, the categories will vary by lender.

The process for applying for a prime or subprime loan is similar.

Get Prepared

Lenders may ask for all sorts of documentation when you apply for a loan, such as recent paystubs, employer contact information, and bank statements. Gather this information ahead of time, so you can move swiftly when researching and applying for loans.

Research Lenders

Banks, credit unions, and online lenders all offer prime and subprime loans. You may want to start with the bank you already have a relationship with, but it’s important to explore other options too. You may even want to approach lenders who specialize in subprime loans.

To shop around for the best possible rate, you may be able to prequalify with several different lenders. This only requires a soft credit inquiry, which won’t impact your credit. That way you can see which lender can offer you the best terms and interest rates. Applying for credit will trigger a hard inquiry on your credit report, which will temporarily lower your credit score.

Consider a Cosigner

If you’re having trouble getting a subprime loan, you may consider a cosigner with better credit, such as a close family member. They will be on the hook for paying off your loan if you miss any payments, so be sure you are both aware of the risk.

Subprime Loan Alternatives

There are alternatives to subprime loans that also carry a fair amount of risk. Some, like credit cards, are legitimate options when used responsibly. Others, like payday loans, should be avoided whenever possible.

Credit Cards

Credit cards allow you to borrow relatively small amounts of money on a revolving basis. If you pay off your credit card bill each month, you will owe no interest. However, if you carry a balance from month to month, you will owe interest, which can compound and send you deeper into debt.


💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.

Predatory Loans

Payday loans are a type of predatory loan that usually must be paid off when you receive your next paycheck. These lenders often charge high fees and extremely high interest rates — as high as 400%, or more. If you cannot pay off the loan within the designated period, you may be allowed to roll it over. However, you will be charged a fee again, potentially trapping you in a cycle of debt.

The Takeaway

Subprime loans can be a relatively expensive way to take on debt, especially compared to their prime counterparts. If you can, you may want to wait to improve your credit profile before taking on a subprime loan. You can do this by always paying your bills on time and by paying down debt. That said, in some cases, taking on a subprime loan is unavoidable — you may need a new car now to get you to work, for example — so shop around for the best rates you can get.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Why are subprime loans bad?

Subprime loans are not necessarily bad. However, these loans typically charge higher interest rates and fees than their prime counterparts. Borrowers may also be asked to put down a higher down payment, and they may be able to borrow less.

What is the difference between subprime and nonprime?

Nonprime borrowers have credit scores that are higher than subprime but lower than prime.

What type of loan is a subprime loan?

A variety of loan types may include a subprime category, including mortgages, auto loans, and personal loans. All loans in the subprime category likely have higher interest rates and fees.

Photo credit: iStock/Nikola Stojadinovic

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.


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

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 .

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


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Jul
08
2024
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Can You Refinance Student Loans More Than Once?

By | Debt Payoff, Student Loans, student_loan | No Comments

Refinancing your student debt can have many benefits, including saving money on interest, lowering your monthly payments, or changing your repayment terms. But can you do it more than once? And, if so, should you?

Yes. And maybe.

There is no limit on how many times you can refinance your student loans. If your finances and credit have improved since you last refinanced and/or market interest rates have gone down, it may be worthwhile to refinance your loans, even if you’ve refinanced before.

That said, refinancing multiple times isn’t always worthwhile. Here are key things to consider before you refinance your student loans more than once.

Key Points

•   There is no limit to how many times you can refinance student loans, as long as you qualify each time.

•   Refinancing again can be beneficial if your credit has improved, interest rates have dropped, or you need different repayment terms.

•   Lower interest rates can reduce overall costs, and some lenders offer better repayment options or promotional discounts.

•   Frequent refinancing can impact your credit score, extend repayment (increasing total interest paid), and require time and effort.

•   Before refinancing again, compare interest rates, loan terms, lender reputation, and fees to ensure it’s the right decision.

How Many Times Can You Refinance Student Loans?

Technically, there is no limit to the number of times you can refinance your student loans with a private lender. In fact, as long as you qualify, you can refinance your student loans as many times and as often as you’d like. And given that lenders often don’t charge prepayment penalties or origination fees, there may be no extra cost involved with refinancing your student loans again.

Refinancing student loans again generally makes the most sense when your finances or credit score improves or interest rates decline. In these cases, it may be possible to save thousands of dollars in interest by reducing your interest rate by a couple percentage points.

If you’re not able to get a lower rate, however, refinancing may not make sense, especially if it extends your repayment term, leading to higher costs.

Also keep in mind that if you only have federal student loans, refinancing with a private lender may not be your best option, since it means giving up government protections like income-driven repayment plans and Public Service Loan Forgiveness.

When Should You Consider Refinancing Your Student Loans Again?

If you’ve already refinanced your loans with a private lender, here are some key reasons why you might consider refinancing again.

Your Financial Situation Has Changed

If you have experienced a significant improvement in your credit score, income, or overall financial health since your last refinance, you may be eligible for a better loan rate and terms than you did even a year ago. In fact, some borrowers with limited or poor credit might refinance their loans multiple times as their credit score improves and they become more desirable applicants.

Interest Rates Have Come Down

Student loan rates are not only tied to your creditworthiness, but also current economic conditions. If market interest rates have dropped since your last refinance, you might be able to secure a lower rate, reducing your overall interest payments. Even a small reduction in interest rates can lead to substantial savings over the life of the loan.

It’s a good idea to keep an eye on market trends and compare current rates to what you’re paying to determine if refinancing again makes financial sense.

Recommended: 3 Factors That Affect Student Loan Interest Rates

You’re Looking for Different Loan Terms

Changing loan terms can also be a reason to refinance again. Perhaps your initial refinance resulted in a longer loan term to lower your monthly payments, but now you’re in a better financial position and can afford higher payments to pay off your loan faster.

Conversely, you might need to extend your loan term to lower monthly payments due to a change in financial circumstances. Just be aware that extending your repayment term can cost you more money in interest over time.

What Are Some Advantages of Refinancing Multiple Times?

Before you decide to refinance your student loan again, it’s important to know the advantages and disadvantages of this strategy. Here’s a look at some of the pros of refinancing more than once.

•   Save money: Refinancing multiple times can help you take advantage of lower interest rates as your financial situation improves or as market rates decrease. Each reduction in interest rates can save you money over the life of your loan. You can also shorten your loan term to pay off your debt faster, which can also reduce what you pay in interest.

•   Better lender benefits: Refinancing with a different lender can provide access to better benefits, such as more flexible repayment options and hardship programs (such as deferment or forbearance). Choosing a lender that offers these benefits can provide additional financial security.

•   Promotional offers: Some lenders will offer special promotions or discounts for refinancing with them — if you see a great deal, it may be worth making the switch to that lender.

What Are Some Disadvantages of Refinancing Multiple Times?

Refinancing again also has potential drawbacks. Here are some to consider.

•   Credit impact: When you formally apply for a refinance, the lender runs a hard credit inquiry, which can negatively affect your credit score. While a single inquiry has a minimal impact, multiple inquiries in a short period can lower your credit score.

•   You could end up paying more: If you refinance to a longer repayment term, or even the same term every few years, you’re extending the amount of interest payments you make. This can keep you in debt longer and increase the total amount of interest you pay. If you refinance to a variable-rate student loan, the rate could also go up during the life of the loan.

•   Time and effort: The process of refinancing can be time-consuming, involving research and making comparisons between lenders, as well as paperwork and credit checks. Doing this multiple times requires a significant investment of time and effort. It might not always be worth it if you won’t save much money with your new loan.

Things to Look for When Refinancing

If you’re considering another refinance, it’s important to look at the following factors to ensure you’re making a smart financial decision.

•   Interest rates: Compare the offered interest rates with your current rate to ensure you’re getting a better deal.

•   Fixed vs. variable rates: Variable-rate loans have interest rates that typically start off lower, but can fluctuate based on market rates. The rate could climb if the rate or index it’s tied to goes up (and vice versa). Variable-rate loans might be a good choice for shorter-term loans. The longer the loan term, the bigger the chance of a rate hike.

•   Loan terms: Evaluate the terms of the new loan, including the length of the loan and monthly payment amounts. Keep in mind that a longer term can lead to lower payments but increase the total cost of your loan in the end.

•   Fees and costs: Be aware of any fees associated with the refinance and calculate whether the savings outweigh these costs.

•   Lender reputation: Research the lender’s reputation and customer service to ensure you’re working with a reliable and supportive institution.

•   Borrower benefits: Consider the benefits offered by the lender, such as flexible repayment options, forbearance, or deferment.

Recommended: How Soon Can You Refinance Student Loans?

Refinancing Your Student Loans With SoFi

Refinancing student loans multiple times can be a strategic move to save money and better manage your debt. While there’s no limit to how many times you can refinance, it’s important to carefully consider the costs, benefits, and your financial goals each time.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Can I consolidate student loans more than once?

Typically, you can’t consolidate federal student loans into a Direct Consolidation Loan more than once. However, you may be able to do this if you have federal loans that were not included in a previous consolidation, or you previously consolidated loans under the Federal Family Education Loan (FFEL) consolidation program. Remember that federal consolidation does not lower your interest rate.

With private student loan consolidation, called refinancing, there is no limit on the number of times it can be done. Each refinance creates a new loan with new terms, so you’ll want to evaluate the benefits, interest rates, and any potential fees before deciding to refinance again.

How many times can you refinance a loan?

There is typically no set limit on how many times you can refinance a loan, including student loans. As long as you qualify, you can refinance your student loans as many times and as often as you’d like. Each refinance involves taking out a new loan to pay off the existing one, so it’s important to consider factors like interest rates, loan term, and any associated fees.

How many times can you take out student loans?

There’s no set limit on how many student loans you can take out, but the federal government and private lenders do impose lending limits based on dollar amount.

For federal student loans, there are annual and aggregate (lifetime) limits based on your degree level and dependency status. For private student loans, lenders set their own annual and aggregate student limits. Often, they will cover up to the annual cost of attendance minus other financial aid each year.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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.

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 .

SOSL-Q224-1920974-V1

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Jun
20
2024
What Is Mortgage Principal? How Do You Pay It Off?

What Is Mortgage Principal? How Do You Pay It Off?

By | Family Finances, Home Ownership, mortgage | Comments Off on What Is Mortgage Principal? How Do You Pay It Off?

Many homebuyers swimming in the pool of new mortgage terminology may wonder how mortgage principal differs from their mortgage payment. Simply put, your mortgage principal is the amount of money you borrowed from your mortgage lender.

Knowing how mortgage principal works and how you can pay it off more quickly than the average homeowner could save you a lot of money over the life of the loan. Here’s what you need to know about paying off the principal on a mortgage.

Mortgage Principal Definition

Mortgage principal is the original amount that you borrowed to pay for your home. It is not the amount you paid for your home; nor is it the amount of your monthly mortgage payment.

Each month when you make a payment on your mortgage loan, a portion goes toward the original amount you borrowed, a portion goes toward the interest payment, and some goes into your escrow account, if you have one, to pay for taxes and insurance.

Your mortgage principal balance will change over the life of your loan as you pay it down with your monthly mortgage payment, as well as any extra payments. Your equity will increase while you’re paying down the principal on your mortgage.

Mortgage Principal vs Mortgage Interest

Your mortgage payment consists of both mortgage principal and interest. Mortgage principal is the amount borrowed. Mortgage interest is the lending charge for borrowing the mortgage principal. Both are included in your monthly mortgage payment, though you likely won’t see a breakdown of how much of your monthly mortgage payment goes to principal vs. interest.

When you start paying down principal, the mortgage amortization schedule will show that most of your payment will go toward interest rather than principal.

Hover your cursor over the amortization chart of this mortgage calculator to get an idea of how a given loan might be amortized over time if no extra payments were made.

Mortgage Principal vs Total Monthly Payment

Your monthly payment is divided into parts by your mortgage servicer and sent to the correct entities. It includes principal plus interest.

Fees and Expenses Included in the Monthly Payment

Your monthly payment isn’t just made up of principal and interest. Most borrowers are also paying bits of property taxes and homeowners insurance each month, and some pay mortgage insurance. In the industry, this is often referred to as PITI, for principal, interest, taxes, and insurance.

A mortgage statement will break all of this down and show any late fees.

Among the many mortgage questions you might have for a lender, one is whether you’ll need an escrow account for taxes and insurance or whether you can pay those expenses in lump sums on your own when they’re due.

In the world of government home loans, FHA and USDA loans require an escrow account, and lenders usually require one for VA-backed loans.

Conventional mortgages typically require an escrow account if you borrow more than 80% of the property’s value. If you live in a flood zone and are required to have flood insurance, an escrow account may be mandatory.

Does the Monthly Principal Payment Change?

With a fixed-rate mortgage, payments stay the same for the loan term, but the amount that goes to your mortgage principal will change every month. An amortization schedule designates a greater portion of your monthly mortgage payment toward interest in the beginning. Over time, the amount that goes toward your principal will increase and the amount you’re paying toward interest will decrease.

Adjustable-rate mortgages (ARMs) are more complicated. Most are hybrids: They have an initial fixed period that’s followed by an adjustable period. They are also usually based on a 30-year amortization, but most ARM borrowers are interested in the short-term benefit — the initial interest rate discount — not principal reduction.

If you take out an ARM and keep it, you could end up owing more money than you borrowed, even if you make all payments on time.

Understanding mortgages and amortization schedules can be a lot, even for those who aren’t novices. A home loan help center offers a wealth of information on this and other topics.

What Happens When Extra Payments Are Made Toward Mortgage Principal?

Making extra payments toward principal will allow you to pay off your mortgage early and will decrease your interest costs, sometimes by an astounding amount.

If you make extra payments, you may want to contact your mortgage servicer or notate the money to make sure it is applied to principal instead of the next month’s payment.

Could you face a prepayment penalty? Conforming mortgages signed on or after January 10, 2014, cannot carry one. Nor can FHA, USDA, or VA loans. If you’re not sure whether your mortgage has a prepayment penalty, check your loan documents or call your lender or mortgage servicer.

Keeping Track of Your Mortgage Principal and Interest

The easiest way to keep track of your mortgage principal and interest is to look at your mortgage statements every month. The mortgage servicer will send you a statement with the amount you paid and how much of your principal was reduced each month. If you have an online account, you can see the numbers there.

How to Pay Off Mortgage Principal

Paying off the mortgage principal is done by making extra payments. Because the amortization schedule is set by the lender, a high percentage of your monthly payment goes toward interest in the early years of your loan.

When you make extra payments or increase the amount you pay each month (even by just a little bit), you’ll start to pay down the principal instead of paying the lender interest.

It pays to thoroughly understand the different types of mortgages that are out there.

And if you’re mortgage hunting, you’ll want to shop for rates and get mortgage preapproval.

The Takeaway

Knowing exactly how mortgage principal, interest, and amortization schedules work can be a powerful tool that can help you pay off your mortgage principal faster and save you a lot of money on interest in the process.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is the mortgage principal amount?

The mortgage principal is the amount you borrow from a mortgage lender that you must pay back. It is not the same as your mortgage payment. Your mortgage payment will include both principal and interest as well as any escrow payments you need to make.

How do you pay off your mortgage principal?

You can pay off your mortgage principal early by paying more than your mortgage payment. Since your mortgage payment is made up of principal and interest, any extra that you pay can be taken directly off the principal. If you never make extra payments, you’ll take the full loan term to pay off your mortgage.

Is it advisable to pay extra principal on a mortgage?

Paying extra on the principal will allow you to build equity, pay off the mortgage faster, and lower your costs on interest. Whether or not you can fit it in your budget or if you believe there is a better use for your money is a personal decision.

What is the difference between mortgage principal and interest?

Mortgage principal is the amount you borrow from a lender; interest is the amount the lender charges you for the principal.

Can the mortgage principal be reduced?

When you make extra payments or pay a lump sum, you can designate the extra amount to be applied to your mortgage principal. This will reduce your mortgage principal and your interest payments over time.

Photo credit: iStock/PeopleImages

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


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



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

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


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.

¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
SOHL-Q224-1918217-V1

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Jun
12
2024
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Preapproved vs Prequalified: What’s the Difference?

By | Family Finances, Home Ownership, mortgage | No Comments

What does it mean to be prequalified or preapproved for a mortgage? One lets a future homebuyer dream, and the other takes that homebuyer one giant step closer to reality. Here’s a look at how these two steps vary, how each can play a part in a home-buying strategy, and how one in particular can increase the chances of having a purchase offer accepted.

What Does Prequalified Mean?

Getting prequalified is a way of finding out how much you might be able to borrow to purchase a home, using the most basic information about your finances. Getting prequalified by phone or online usually takes just minutes.

Here’s how it goes: You provide a few financial details to mortgage lenders. The lenders use this unverified information, usually along with a soft credit inquiry, which does not affect your credit scores, to let you know how much you may be able to borrow and at what interest rate.

Getting prequalified can give homebuyers a general idea of loan programs, the amount they may be eligible for, and what monthly payments might look like, the way a home affordability calculator provides an estimate based on a few factors.

You might want to get prequalified with several lenders to compare monthly payments and interest rates, which vary by mortgage term. But because the information provided has not been verified, there’s no guarantee that the mortgage or the amount will be approved.

What Does It Mean to Be Preapproved?

After you get prequalified, you can consider the options before you from a range of lenders. You’ll want to brush up on types of mortgage loans, and then zero in on the lender — and loan — you feel is the best fit. Then you’ll face the probe known as mortgage preapproval.

Preapproval for a mortgage loan requires a more thorough investigation of your income sources, debts, employment history, assets, and credit history. Verification of this information, along with a hard credit pull from all three credit bureaus (which may cause a small, temporary reduction in your credit scores) allows the lender to conditionally preapprove a mortgage before you shop for homes.

A preapproval letter from a lender stating that you qualify for a loan of a specific amount can be useful or essential in a competitive real estate market. When sellers are getting multiple offers, some will disregard a purchase offer if it isn’t accompanied by a preapproval letter.

When seeking preapproval, besides filling out an application, you will likely be asked to submit the following to a lender for verification:

•   Social Security number and card

•   Photo ID

•   Recent pay stubs

•   Tax returns, including W-2 statements, for the past two years

•   Two to three months’ worth of documentation for checking and savings accounts

•   Recent investment account statements

•   List of fixed debts

•   Residential addresses from the past two years

•   Down payment amount and a gift letter, if applicable

The lender may require backup documentation for certain types of income. Freelancers may be asked to provide 1099 forms, a profit and loss statement, a client list, or work contracts. Rental property owners may be asked to show lease agreements.

You should be ready to explain any negative information that might show up in a credit check. To avoid surprises, you might want to order free credit reports from www.annualcreditreport.com. A credit report shows all balances, payments, and derogatory information but does not give credit scores.

Knowing your scores is also helpful. There are a few ways to check your credit scores without paying.

Those who have filed for bankruptcy may have to show documentation that it has been discharged.

Calculate Your Potential Mortgage

Use the following mortgage calculator to get an idea of what your monthly mortgage payment would look like.

Do Preapproval and Prequalification Affect Credit Scores?

Getting prequalified shouldn’t affect your credit scores. Only preapproval requires a hard credit inquiry, which can affect scores. But the good news for mortgage shoppers is that multiple hard pulls are typically counted as a single inquiry as long as they’re made within the same 14 to 45 days.

Newer versions of FICO® allow a 45-day window for rate shoppers to enjoy the single-inquiry advantage; older versions of FICO and VantageScore 3.0 narrow the time to 14 days.

You might want to ask each lender you apply with which credit scoring model they use.

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

Questions? Call (888)-541-0398.

Do I Have to Spend How Much I’m Preapproved for?

No! The preapproval amount is your maximum house-hunting budget. Staying well under that number can’t hurt and might free up money for, say, a college fund, retirement, or — groan — emergency home repairs.

Recommended: Guide to First-Time Home Buying

Are Prequalification and Preapproval the Same Thing?

By now you know that they are not one and the same. Here’s a visual on what’s needed for each:

Prequalification

 Preapproval
Info about income Recent pay stubs
Basic bank account information Bank account numbers and/or recent bank statements
Down payment amount Down payment amount and desired mortgage amount
No tax information needed Tax returns and W-2s for past two years

Do I Need a Prequalification Letter to Buy a House?

No. Nor do you have to have a preapproval letter when making an offer on a house.

But getting prequalified can allow you to quickly get a ballpark figure on a mortgage amount and an interest rate you qualify for, and preapproval has at least three selling points:

1.    Preapproval lets you know the specific amount you are qualified to borrow from a particular lender.

2.    Going through preapproval before house hunting could take some stress out of the loan process by easing the mortgage underwriting step. Underwriting, the final say on mortgage approval or disapproval, comes after you’ve been preapproved, found a house you love and agreed on a price, and applied for the mortgage.

3.    Being preapproved for a loan helps to show sellers that you’re a vetted buyer.

The Takeaway

Prequalified vs. preapproved: If you’re serious about buying a house, it’s important to know the difference. Getting prequalified and then preapproved may increase the odds that your house hunt will lead to a set of jangling keys.

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.

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


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



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

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


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.


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


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

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Jun
07
2024

What Is the APR for Student Loans and How Is It Calculated?

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

Student loans are complicated, especially when it comes to figuring out how much the loan will actually cost you over time. APR, or annual percentage rate, reflects the total cost of the loan, including the interest rate and any fees.

Knowing how APR formulas affect your student loans is an important part of maintaining financial health, and can even help you decide whether or not you should look into alternative loan repayment strategies, like consolidation or refinancing.

What Is APR For Student Loans?

As briefly mentioned, your annual percentage rate, known as “APR,” is the interest and fees you are responsible for paying on your student loan balance over the course of a year. The APR formula shows you your actual cost of borrowing, including your interest rate and any extra fees or costs, like origination fees or forbearance interest capitalization.

APR vs Interest Rate on Student Loans

The interest rate on your student loan is the amount your lender is charging you for the loan, expressed as a percentage of the amount you borrowed. For example, the interest rate for Federal Direct Subsidized Loans and Unsubsidized Direct Loans is currently 6.53% for 2024-25, which means that you would be responsible for paying your lender 6.53% of the amount of money you borrowed in yearly interest.

That 6.53%, however, does not include other costs that are considered in the APR formula, including disbursement costs. For loans with no fees, it is possible that the APR and interest rate will match. But in general, when comparing APR vs interest rate, the APR is considered a more reliable and accurate explanation of your total costs as you pay off your student loans. If you’re shopping around for student loans or planning to refinance your loans, the APR offered can help you decide which lender you would like to work with.

Recommended: Student Loan Info for High Schoolers

An Example of How APR Is Calculated for Student Loans

Let’s say you take out a student loan for $20,000 with an origination fee of $1,000 and an interest rate of 5%. An origination fee is the cost the lender may charge you for actually disbursing your loan, and it is usually taken directly out of the loan balance before you receive your disbursement.

So, in this example, even though you took out $20,000, you would only receive $19,000 after the disbursement fee is charged. Even though you only receive $19,000, the lender still charges interest on the full $20,000 you borrowed.

The APR accounts for both your 5% interest rate and your $1,000 origination fee to give you a new number, expressed as a percentage of the loan amount you borrowed. That percentage accurately reflects the true costs to the consumer. (In this example, if the loan had a 10-year term, the APR would be 6.124% )

What Is a Typical Student Loan APR?

For federal student loans, interest rates are determined annually by Congress. Federal loans also have a disbursement fee, which is a fee charged when the loan is disbursed.

APRs for federal student loans may vary depending on the loan repayment term that the borrower selects. Federal student loans are eligible for a variety of repayment plans, some of which can extend up to 25 years. Generally speaking, the longer the repayment term, the larger amount of interest the borrower will owe over the life of the loan.

Typical APR for Private Student Loans

The interest rate on private student loans will vary by lender and so will any fees associated with the loan. As of June 2024, APRs on private student loans may vary from around 4% to upwards of 16% for fixed interest rates.

The interest rate you qualify for is generally determined by a variety of personal factors including your credit score, credit history, and income, among other factors. In addition to varying APRs, private student loans don’t offer the same benefits or borrower protections available for federal student loans — things like income-driven repayment plans or deferment options. For this reason, they are generally considered only after all other sources of funding have been reviewed.

How to Find Your Student Loan APR

By law, lenders are required to disclose the APR on their loans — including student loans. These disclosures help you make smart financial choices about your loans and ensure that you’re not blindsided by mystery costs when you take out a loan.

For federal student loans, the government lists the interest rates and fees online, but make sure to carefully examine any loan initiation paperwork for your exact APR, which will depend on other factors including the amount you plan to borrow, the interest rate, and origination fees.

If you’re currently paying off federal student loans, your student loan servicer can tell you your APR. If you use online payments, you can probably see your APR on your student loan servicer’s website or on your monthly bill.

If you’re shopping around for private student loans, your potential lenders must disclose the APR in their lending offer to you. Your APR will vary from lender to lender depending on many factors, which can include your credit score, any fees the lender charges, and how they calculate deferred interest, which is any unpaid interest that your minimum payment doesn’t cover.

One student loan tip — compare quotes and offers from various lenders closely. Once you’ve decided on a lender and taken out a loan, your APR should be reflected on your loan paperwork and usually on your lender’s online payment system.

Recommended: Understanding a Student Loan Statement: What It Is & How to Read It

The Takeaway

APR is a reflection of the total amount you’ll pay in both interest rate and fees for borrowing a student loan. Interest rate is just the amount of interest you will be charged. On loans with no fees, it’s possible for the interest rate and APR to be the same. Interest rates and fees for different types of federal student loans are published, but individual APRs may vary based on the amount you borrow and the repayment term you select.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What is the APR on student loans?

APR or annual percentage rate is a reflection of the interest rate plus any fees associated with the loan. It provides a picture of the total cost of borrowing a loan and is helpful in comparing loans from different lenders.

Is the APR the same on subsidized and unsubsidized student loans?

The interest rate for unsubsidized and subsidized federal student loans is sent annually by Congress. These loans also have an origination fee. For the 2024-2025 school year the interest rate on Direct Subsidized and Unsubsidized loans is 6.53% and the origination fee is 1.057%. The APR for your loan will be determined by factors including the repayment term you select.

What is the typical interest rate on private student loans?

Interest rates on private student loans vary based on a variety of factors such as the lender’s policies, and individual borrower characteristics such as their credit score and income, among other factors. As of June 2024, interest rates on fixed private student loans hovered around 4% to upwards of 16%.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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.

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ 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.

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