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It’s not possible to take a loan from an IRA or Roth IRA. Making an early withdrawal from an IRA is an option, but that comes with taxes and penalties. You can borrow money from a 401(k) plan, however, without any penalties.

Read on to learn the impact of an early withdrawal from an IRA and some other ways to find the cash for unexpected expenses.

Can You Borrow from Your IRA?

An individual retirement account (IRA) is a savings account with tax advantages that is designed as a long-term investment vehicle for your retirement. The money that people invest in IRAs goes to a wide range of financial products, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Banks and investment companies rely on holding the funds for a long time, so lawmakers created strict rules around withdrawing money from traditional and Roth IRAs. There is usually a 10% penalty and an income tax bill.

IRA loans and Roth IRA loans are not allowed. You cannot borrow money from these accounts, but you can withdraw cash from your IRA if you have to, at a cost.

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What Is Possible: Early IRA Withdrawals

Here’s what you can and can’t do regarding withdrawing cash from traditional and Roth IRAs.

Traditional IRAs

If you are 59 ½ or older, you can take money out of your traditional IRA with no penalty, but you’ll owe income taxes on the money you pull out.

Account holders of any age can withdraw funds from an IRA and roll them over into another IRA or redeposit them into the same IRA within 60 days. This amounts to a 60-day loan, and you can do this once every 12 months. If you don’t roll over the funds within 60 days, the action will be considered a withdrawal or lump-sum cash distribution. That means paying federal and state taxes plus an additional 10% federal tax fee.

There are some exceptions that will allow you to avoid the additional 10% federal tax:

•   First-time homebuyers can withdraw $10,000 for a downpayment.

•   The funds are used for higher education expenses.

•   The funds are used for the birth or adoption of a child.

•   You have become permanently disabled.

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Roth IRAs

If you’re at least 59 ½ and you’ve owned your Roth IRA for five years or more, you can take tax- and penalty-free Roth withdrawals of contributions. However, if you withdraw earnings, such as dividends or interest, you might have to pay the 10% penalty and income and state tax on that portion of the withdrawal.

Drawbacks of Early IRA Withdrawals

Disadvantages of early IRA withdrawals are penalties and missed earnings on the money taken out.

Penalties

Before age 59 ½, you are subject to a 10% penalty on any amount withdrawn. The same penalty holds if you fail to redeposit a rollover within 60 days.

Taxes

Before age 59 ½, you are subject to federal and state taxes on early withdrawals.

Lack of Growth Potential

If you take funds out of your IRA, you will lose the earnings from that money that would otherwise go toward your retirement. In that sense, a $10,000 withdrawal could cost you much more than $10K in the long run.

Early IRA Withdrawal Alternatives

There are alternatives to withdrawing funds from an IRA. The best option for you depends on how much cash you need, the taxes and penalties you might pay, and the interest and fees you might pay on the alternative. Here’s a look at some of them.

401(k) Loan

Borrowing from your 401(k) is allowed. If your plan is amenable, you can take out as much as 50% of your savings, up to a maximum of $50,000, within 12 months. You will have to pay back the money, plus interest, within five years. However, the interest is paid back into your own account.

The advantage of a 401(k) loan is that there are no taxes or penalties. The disadvantage is that if you leave your current job, you may have to repay your loan in full. If you cannot, you’ll owe both taxes and a 10% penalty if you’re under 59 ½.

Family Loan

A family loan could be the best option if you can negotiate favorable terms. This route is also the most flexible but can affect family relationships if not handled well. Be sure to set expectations and draw up a contract to protect both parties.

Credit Card Cash Advance

A credit card cash advance is a quick way to get funds. No hard credit inquiry is needed, so there is no effect on your credit score. You can pay small fixed monthly payments, but there will be interest that accrues daily as well as fees.

The interest charges and fees will need to be weighed against the cost of an early withdrawal from an IRA. There may be a charge of up to 5% for a cash withdrawal. There may also be a flat charge for a withdrawal in addition to the percentage charge.

Depending on your credit line, the amount you can withdraw may be less than your credit limit.

Personal Loan

Most of the time, if you are looking for a specific sum of money that you would like to repay over time, a personal loan is a good choice. Current personal loan interest rates are generally much lower than for a cash advance.

Early IRA Withdrawal vs Personal Loan

Your decision may come down to an early IRA withdrawal versus a personal loan. Let’s look at the pros and cons of each.

Pros of Early IRA Withdrawal

•   If you have a Roth IRA, you can withdraw contributions (but not earnings) free of tax and penalties.

•   Early withdrawals provide emergency funds without interest and fees.

Cons of Early IRA Withdrawal

•   You cannot repay the money you withdraw, so you will have less of a nest egg for retirement.

•   If you withdraw gains from a Roth IRA, you may have to pay taxes and fees.

•   You miss out on earnings from the amount that you withdraw.

Pros of a Personal Loan

•   There are no withdrawal penalties with a personal loan.

•   Your retirement savings stay intact, and you will continue to earn money on the funds.

•   A personal loan can put cash into your bank account within one to two business days.

Cons of a Personal Loan

•   Some shopping around is required, and there is an application process.

•   A minimum credit score might be required.

•   Average interest rates and fees could be high depending on your credit score.

The Takeaway

Account holders may not take out loans from an IRA or Roth IRA. Making an early withdrawal from an IRA is an option, but that comes with taxes and a 10% penalty. Because you cannot pay the funds back, a withdrawal loses out on the investment gains those funds would have earned. However, you can withdraw money from your IRA as long as you redeposit it or roll it over into a new account within 60 days. And you can borrow money from a 401(k) plan without any penalties.

Before you consider withdrawing from your IRA, consider a personal loan. SoFi offers competitive personal loans with no origination, prepayment, or late fees. Getting a personal loan is usually straightforward, and funds can be deposited as soon as the same day.

FAQ

Can I take a loan from my IRA?

There is no such thing as an IRA loan because you cannot pay the money back. You can withdraw funds from an IRA and roll them over into the same or another IRA within 60 days, and you can do this once every 12 months. If you don’t roll over the funds within 60 days, the action will be considered a withdrawal or lump-sum cash distribution. That means you will have to pay federal and state taxes plus an additional 10% penalty.

How do I get an IRA loan?

You can’t borrow from your IRA. However, if you’re 59 ½ or older, you can request a distribution from your traditional IRA without any penalty. Since your original contributions were tax-deductible, you’ll need to pay income tax on the funds you withdraw.

If you have a Roth IRA, you can withdraw both contributions and earnings tax-free and penalty-free, but only if you are 59 ½ or older and have owned your Roth IRA for five years or more. If you withdraw earnings early, you’ll have to pay a 10% penalty and income tax on the amount you withdraw.

Lastly, you can use the 60-day rollover rule to your advantage if you can repay the borrowed money in 60 days or less and avoid paying taxes and penalties.

Photo credit: iStock/Geber86

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.

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

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

SOPL0222013

A construction loan sounds pretty straightforward. Historically, borrowers got them when building a new home on a plot of land. In recent years, more borrowers have been using construction loans for projects like an accessory dwelling unit (ADU), a tiny house on a foundation, garage-to-apartment conversion, or basement conversion. But there are complications with this kind of loan that people should be aware of.

We’ll take a look at construction loans, their requirements, and some alternatives to consider.

What Is a Construction Loan?

Construction loans finance the building of a new home or substantial renovations to a current home. They are typically short-term loans with higher interest rates, designed to cover the costs of land, plans, permits and fees, labor, materials, and closing costs. They also cover contingency reserves if construction goes over budget.

How Do Construction Loans Work?

When you buy a house, you can finance the purchase with a mortgage. But when you build a house, getting financing is trickier because there’s no collateral to guarantee the loan. Lenders generally don’t accept undeveloped land as collateral because it cannot be easily appraised and quickly sold.

With construction loans, applicants must submit project plans and schedules along with their financial information. Once approved, they receive funding for the first phase of building only. As construction progresses, assessments are provided to the lender so that the next round of funds can be released. Meanwhile, borrowers make interest-only payments on the funds they’ve received.

When construction is finished — and the borrower now has a home to serve as collateral — the construction loan may be converted to or paid off by a regular mortgage. The borrower then begins repaying both the principal and interest.

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What Does a Construction Loan Cover?

What construction loans cover varies based on the borrower’s needs. If necessary, these loans can cover the cost of the land, building labor and materials, permits, and a contingency cushion for unforeseen expenses.

Types of Construction Loans

Construction-to-Permanent Loan

Sometimes referred to as a single-close loan, this is a construction loan that converts to a mortgage once the project is finished. The borrower saves money on closing costs by eliminating a second loan closing.

Construction-Only Loan

Also called a standalone construction loan, this loan must be paid off when the building is complete. You will need to apply for a mortgage if you don’t have the cash to do so.

Having separate construction and mortgage loans allows homeowners to shop for the best terms available when applying for each loan. However, they will pay separate closing costs on each loan.

Renovation Construction Loan

This is specifically designed to cover the cost of substantial renovations on an existing home. The loan gets folded into the mortgage once the project is complete.

What Are the Requirements for a Construction Loan?

It’s typically harder to get a construction loan than it is to secure a mortgage. Some people even hire construction loan brokers to facilitate the process. Because your house or ADU isn’t built yet, as we mentioned above, there’s no collateral. And because there’s no collateral, lenders will want to see strong evidence that the home will be completed.

A loan that doesn’t require collateral is also known as an “unsecured loan.” You can learn more about the two types of loans in our guide to secured vs. unsecured loans.

With renovations, the lender wants to see that the project will add to the value of the home. To get an idea of the ROI on your renovation project, check out SoFi’s Home Project Value Estimator.

In order to get approved, you’ll have to show your potential lender an overview of your financial profile, with plenty of documentation. They’ll typically want to see a debt-to-income ratio of 45% or lower and a high credit score.

For new construction projects, they’ll also want you to be able to make a down payment of up to 30%. And for construction-only loans, they may want to know what your repayment plan is — that is, whether you will pay in cash or refinance when the project is complete.

In addition, the lender will want a detailed plan, budget, and schedule for the construction. Some lenders will also need to approve your builder. Because the project will depend on the builder’s ability to complete the construction to specifications, your builder’s reputation may be crucial to getting a construction loan approved.

Lenders typically need to see a builder’s work history, proof of insurance, blueprints, and specifications for the project, a materials list, and your signed construction contract.

What Are the Average Interest Rates and Terms?

Typically, construction loans have variable interest rates that rise and fall with the prime lending rate. They tend to be higher than conventional mortgage rates by about 1%.

The terms also vary. A construction-only loan is usually a short-term loan that must be converted or paid off in one year.

A construction-to-permanent loan will typically have a term of 15 to 30 years once it becomes a permanent mortgage. Again, though, the interest rate will usually be higher than a conventional loan because of the increased risk. The longer the term, the higher the rate tends to be.

Are There Alternatives to Construction Loans?

A lot of time and effort may go into securing a construction loan. It can be difficult to find lenders that offer competitive rates and to qualify for them — particularly if you don’t have a flawless credit history. Plus, construction loans tend to be complicated because it is often the builder who has to carry the loan.

If you are planning a small construction project or renovation, there are a few financing alternatives that might be easier to access and give you more flexibility.

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Personal Loans for Renovations

An unsecured personal loan can fund a renovation project or supplement other construction financing.

Personal loan interest rates are typically lower than construction loan rates, depending on your financial profile. And you can frequently choose a personal loan with a fixed interest rate.

Personal loans also offer potentially better terms. Instead of being required to pay off the loan as soon as the home is finished, you can opt for a longer repayment period. And getting approved for a personal loan can be much faster and easier than for a construction loan.

The drawbacks? You won’t be able to roll your personal loan into a mortgage once your renovation or building project is finished.

And because the loan is disbursed all at once, you will have to parse out the money yourself, instead of depending on the lender to finance the build in stages.

Cash-Out Refinance for Construction Costs

A cash-out refinance is also a good financing tool, particularly if you have a lot of equity in your current home. With a cash-out refinance, you refinance your home for more than you owe and are given the difference in cash.

You can estimate your building or renovation expenses with this Home Improvement Cost Calculator. Add your estimate to what you owe on your home to get the amount of your refinance.

Using one — or both — of these alternative financing tools may help you avoid some of the hassle and expense that come with construction loans.

The Takeaway

Planning a new home, ADU, or substantial renovation? A construction loan may be the ticket, though this kind of loan is usually harder to get than a mortgage, often carries a higher interest rate, and is typically short-term. For smaller projects, a personal loan or cash-out refinance can be a good option — and a lot less complicated.

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.

SOPL0722005

Many of us would love to own a vacation home, but the added expense is not always doable. Because we can’t all own multiple properties, vacation timeshares continue to be a popular choice for solo travelers, couples, and families who want more space, amenities, and “a place to call home” at their locale of choice.

We’ll give you an honest rundown of how timeshares work, their pros and cons, and a few financing options.

What Is a Timeshare?

A timeshare is a way for multiple unrelated purchasers to acquire a fractional share of a vacation property, which they take turns using. They share costs, which can make timeshares far cheaper than buying a vacation home of one’s own.

Timeshares are a popular way to vacation. In fact, 9.9 million U.S. households own at least one timeshare, according to the American Resort Development Association (ARDA). The average price of a weekly timeshare is $24,140. This figure can vary widely depending on the location, size, and quality of the property, the length of stay, time of year, and the rules of the contract.

How Do Timeshares Work?

If you’ve ever been lured to a sales presentation by the promise of a free hotel stay, spa treatment, or gift card, it was probably for a vacation timeshare. As long as you sit through the sales pitch, you get your freebie. Some invitees go on to make a purchase. You can also buy a timeshare on the secondary market, taking over from a previous owner.

What you’re getting is access to a property for a set amount of time per year (usually one to two weeks) in a desirable resort location. Timeshares may be located near the beach, ski resorts, or amusement parks. You can trade weeks with other owners and sometimes even try out other properties around the country — or around the world — in a trade.

In addition to the upfront cost of the timeshare, owners pay annual maintenance fees based on the size of the property — about $1,000 on average — whether or not you use your timeshare that year. These fees, which cover the cost of upkeep and cleaning, often increase over time with the cost of living. Timeshare owners may also have to pay service charges, such as fees due at booking.

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Types of Timeshares

There are two broad categories of timeshare ownership: deeded and non-deeded. In addition, you’ll find four types of timeshare use periods: fixed week, floating week, fractional ownership, and points system.

It’s important to understand all of these terms before you commit.

Deeded Timeshare

With a deeded structure, each party owns a piece of the property, which is tied to the amount of time they can spend there. The partial owner receives a deed for the property that tells them when they are allowed to use it. For example, a property that sells timeshares in one-week increments will have 52 deeds, one for each week of the year.

Non-deeded Timeshare

Non-deeded timeshares work on a leasing system, where the developer remains the owner of the property. You can lease a property for a set period during the year, or a floating period that allows you greater flexibility. Your lease expires after a predetermined period.

Fixed-Week

Timeshares offer one of a handful of options for use periods. Fixed-week means you can use the property during the same set week each year.

Floating-Week

Floating-week agreements allow you to choose when you use the property depending on availability.

Fractional Ownership

Most timeshare owners have access to the property for one or two weeks a year. Fractional timeshares are available for five weeks per year or more. In this ownership structure, there are fewer buyers involved, usually six to 12. Each party holds an equal share of the title, and the cost of maintenance and taxes are split.
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Points System

Finally, you may be able to purchase “points” that you can use in different timeshare locations at various times of the year.

Is a Timeshare a Good Investment?

Getting out of a timeshare can be difficult. Selling sometimes involves a financial loss, which means they are not necessarily a good investment. However, if you purchase a timeshare in a place that your family will want to return to for a long time — and can easily get to — you may end up spending less than you would if you were to purchase a vacation home.

Benefits of Timeshare Loans

The timeshare developer will likely offer you financing as part of their sales pitch. The main benefit of a timeshare loan is convenience. And if you’re happy to return to the same vacation spot year after year, you may save money compared to staying in hotels. Plus, for many people, it may be the only way they can afford getting a vacation home.

Drawbacks of Timeshare Loans

Developer financing offers often come with very high interest rates, especially for buyers with lower credit scores: up to 20%. And if you eventually decide to sell, you will probably lose money. That’s because timeshares tend not to gain value over time. Finally, if you’re not careful about running the numbers before you commit, you can end up paying more in annual fees than you expect.

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Financing a Timeshare

Developer financing is often proposed as the only timeshare financing option, especially if you buy while you’re on vacation. However, with a little advance planning, there are alternative options for financing timeshares. If developer financing is taken as an initial timeshare financing option, some timeshare owners may want to consider timeshare refinance in the future.

Home Equity Loan

If you have equity built up in your primary home, it may be possible for you to obtain a home equity loan from a private lender to purchase a timeshare. Home equity loans are typically used for expenses or investments that will improve the resale value of your primary residence, but they can be used for timeshare financing as well.

Home equity loans are “secured” loans, meaning they use your house as collateral. As a result, lenders will give you a lower interest rate compared to the rate on an unsecured timeshare loan offered at a developer pitch. You can learn more about the differences in our guide to secured vs. unsecured loans.

Additionally, the interest you pay on a home equity loan for a timeshare purchase may be tax-deductible as long as the timeshare meets IRS requirements, in addition to other factors. Before using a home equity loan as timeshare financing, or even to refinance timeshares, be aware of the risk you are taking on. If you fail to pay back your loan, your lender may seize your house to recoup their losses.

Personal Loan

Another option to consider for timeshare financing is obtaining a personal loan from a bank or an online lender. While interest rates for personal loans can be higher than rates for home equity loans, you’ll likely find a loan with a lower rate than those offered by the timeshare sales agent.

Additionally, with an unsecured personal loan as an option for timeshare financing, your primary residence is not at risk in the event of default.

Getting approved for a personal loan is generally a simpler process than qualifying for a home equity loan. Online lenders, in particular, offer competitive rates for personal loans and are streamlining the process as much as possible.

The Takeaway

Timeshares offer one way to secure a place to stay in your favorite vacation destination each year — without having to buy a second home. And timeshares may save you money over time compared to the cost of a high-end hotel. However, beware of timeshare financing offered by developers. Interest rates can be as high as 20%. There are other ways to finance a timeshare that can be more affordable, including home equity loans and personal loans.

SoFi personal loans offer lower fixed rates to qualified applicants. And there are no fees ever. Find out your interest rate online with no impact to your credit1 and no commitment.

FAQ

Can I rent my timeshare to someone else?

Whether or not you can rent your timeshare out to others will depend on your timeshare agreement. But in many cases your timeshare resort will allow you to rent out your allotted time at the property.

Can I sell my timeshare?

Your timeshare agreement will give you details about when and how you can sell your timeshare. In most cases, you should be able to sell, but it may be hard to do so, and you may take a financial loss.

Can I transfer ownership of my timeshare or leave it to my heirs?

You can leave ownership of a timeshare to your heirs when you die and even transfer ownership as a gift while you’re living. Once again, refer to your timeshare agreement for rules about what is possible and how to carry out a transfer.

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.

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.

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.

SOPL0722007

A short-term bridge loan allows homeowners to use the equity in their existing home to help pay for the home they’re ready to purchase.

But there are pros and cons to using this type of financing. A bridge loan can prove expensive.

Is a bridge loan easy to get? Not necessarily. You’ll need sufficient equity in your current home and stable finances.

Read on to learn how to bridge the gap between addresses with a bridge loan or alternatives.

What Is a Bridge Loan?

A bridge loan, also known as a swing loan or gap financing, is a temporary loan that can help if you’re buying and selling a house at the same time.

Just like a mortgage, home equity loan, or home equity line of credit (HELOC), a bridge loan is secured by the borrower’s current home (meaning a lender could force the sale of the home if the borrower were to default).

Most bridge loans are set up to be repaid within a year.

How Does a Bridge Loan Work?

Typically lenders only issue bridge loans to borrowers who will be using the same financial institution to finance the mortgage on their new home.

Even if you prequalified for a new mortgage with that lender, you may not automatically get a bridge loan.

What are the criteria for a bridge loan? You can expect your financial institution to scrutinize several factors — including your credit history and debt-to-income ratio — to determine if you’re a good risk to carry that additional debt.

You’ll also have to have enough home equity (usually 20%, but some lenders might require at least 50%) in your current home to qualify for this type of interim financing.
Lenders typically issue bridge loans in one of these two ways:

•   One large loan. Borrowers get enough to pay off their current mortgage plus a down payment for the new home. When they sell their home, they can pay off the bridge loan.

•   Second mortgage. Borrowers obtain a second mortgage to make the down payment on the new home. They keep the first mortgage on their old home in place until they sell it and can pay off both loans.

It’s important to have an exit strategy. Buyers usually use the money from the sale of their current home to pay off the bridge loan. But if the old home doesn’t sell within the designated bridge loan term, they could end up having to make payments on multiple loans.

Bridge Loan Costs

A bridge loan may seem like a good option for people who need to buy and sell a house at the same time, but the convenience can be costly.

Because these are short-term loans, lenders tend to charge more upfront to make bridge lending worth their while. You can expect to pay:

•   1.5% to 3% of the loan amount in closing costs

•   An origination fee, which can be as much as 3% of the loan value

Interest rates for bridge loans are generally higher than conventional loan rates.

Repaying a Bridge Loan

Many bridge loans require interest-only monthly payments and a balloon payment at the end, when the full amount is due.

Others call for a lump-sum interest payment that is taken from the total loan amount at closing.

A fully amortized bridge loan requires monthly payments that include both principal and interest.

How Long Does It Take to Get Approved for a Bridge Loan?

Bridge loans from conventional lenders can be approved within a few days, and loans can often close within three weeks.

A bridge loan for investment property from a hard money lender can be approved and funded within a few days.

Examples of When to Use a Bridge Loan

Most homebuyers probably would prefer to quickly sell the home they’re in, pay off their current mortgage, and bank the down payment for their next purchase long before they reach their new home’s closing date.

Unfortunately, the buying and selling process doesn’t always go as planned, and it sometimes becomes necessary to obtain interim funding.

Common scenarios when homebuyers might consider a bridge loan include the following.

You’re Moving for a New Job, or Downsizing

You can’t always wait for your home to sell before you relocate for work. If the move has to go quickly, you might end up buying a new home before you tie up all the loose ends on the old home.

Or maybe you’ve fallen in love with a smaller home that just hit the market, decided that downsizing your home is the way to go, and you must act quickly.

Your Closing Dates Don’t Line Up as Hoped

Even if you’ve sold your current home, the new-home closing might be scheduled days, weeks, or even months afterward. To avoid losing the contract on the new home, you might decide to get interim funding.

You Need Money for a Down Payment

If you need the money you’ll get from selling your current home to make a down payment on your next home, a bridge loan may make that possible.

Bridge Loan Benefits and Disadvantages

As with any financial transaction, there are advantages and disadvantages to taking out a bridge loan. Here are some pros and cons borrowers might want to consider.

Benefits

The main benefit of a bridge loan is the ability to buy a new home without having to wait until you sell your current home. This added flexibility could be a game-changer if you’re in a time crunch.

Another bonus for buyers in a hurry: The application and closing process for a bridge loan is usually faster than for some other types of loans.

Disadvantages

Bridge loans aren’t always easy to get. The standards for qualifying tend to be high because the lender is taking on more risk.

Borrowers can expect to pay a higher interest rate, as well as several fees.

Borrowers who don’t have enough equity in their current home may not be eligible for a bridge loan.

If you buy a new home and then are unable to sell your old home, you could end up having to make payments on more than one loan.

Worst-case scenario, if you can’t make the payments, your lender might be able to foreclose on the home you used to secure the bridge loan.

Alternatives to Bridge Loans

If the downsides of taking out a bridge loan make you uneasy, there are options that might suit your needs.

HELOC

Rather than the lump sum of a home equity loan, a home equity line of credit lets you borrow, as needed, up to an approved limit, from the equity you have in your house.

The monthly payments are based on how much you actually withdraw. The interest rate is usually variable.

You can expect to pay a lower rate on a HELOC than a bridge loan, but there still will be closing costs. And there may be a prepayment fee, which could cut into your profits if your home sells quickly. (Because your old home will serve as collateral, you’ll be expected to pay off your HELOC when you sell that home.)

Many lenders won’t open a HELOC for a home that is on the market, so it may require advance planning to use this strategy.

Home Equity Loan

A home equity loan is another way to tap your equity to cover the down payment on your future home.

Because home equity loans are typically long term (up to 20 years), the interest rates available, usually fixed, may be lower than they are for a bridge loan. And you’ll have a little more breathing room if it takes a while to sell the old home.

You can expect to pay some closing costs on a home equity loan, though, and there could be a prepayment penalty.

Keep in mind, too, that you’ll be using your home as collateral to get a home equity loan. And until you sell your original home, unless it’s owned free and clear, you’ll be carrying more than one loan.

401(k) Loan or Withdrawal

If you’re a first-time homebuyer and your employer plan allows it, you can use your 401(k) to help purchase a house. But most financial experts advise against withdrawing or borrowing money from your 401(k).

Besides missing out on the potential investment growth, there can be other drawbacks to tapping those retirement funds.

Personal Loan

If you have a decent credit history and a solid income, typical personal loan requirements, you may be able to find a personal loan with a competitive fixed interest rate and other terms that are a good fit for your needs.

Other benefits:

•   You can sometimes find a personal loan without the origination fees and other costs of a bridge loan.

•   A personal loan might be suitable rather than a home equity loan or HELOC if you don’t have much equity built up in your home.

•   You may be able to avoid a prepayment penalty, so if your home sells quickly, you can pay off the loan without losing any of your profit.

•   Personal loans are usually unsecured, so you wouldn’t have to use your home as collateral.

The Takeaway

A bridge loan can help homebuyers when they haven’t yet sold their current home. But a bridge loan can be expensive. Is a bridge loan easy to get? Not all that easy. Only buyers with sufficient equity and strong financials are candidates.

If you find yourself looking to bridge the gap between homes, you might also consider a personal loan or a HELOC.

A personal loan is an alternative worth considering. SoFi offers fixed-rate personal loanss of $5,000 to $100,000 with no prepayment penalty.

And SoFi brokers a home equity line of credit. Access up to 95%, or $500,000, of your home’s equity.

Finally, once you’ve moved into your new home and sold the previous one, you’ll usually want a more traditional mortgage. SoFi can help there, too. Check out SoFi’s mortgage loan offerings.

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Planning to retire at 62 is worth considering, but whether it’s a realistic goal depends on how much you’ve saved, your anticipated living expenses, and an educated estimate of your likely longevity.

If you choose to retire at 62, which is on the early side these days, it’s important to have a solid retirement strategy in place so that you don’t run out of money.

Should You Retire at 62?

Your answer will depend on your overall financial situation and how much preparation you’ve put into planning for early retirement. Retiring at 62 could make sense if:

•   You have little to no debt

•   Your overall living expenses are low

•   You’ll have multiple streams of income to draw on for retirement (e.g. Social Security as well as an IRA, 401(k), or pension)

•   Don’t anticipate any situations that could hinder your ability to meet your retirement expenses (e.g. medical expenses, dependent family members)

On the other hand, retiring at 62 could backfire if you have limited savings, extensive debt, or you think you might need long-term care later in life, which could substantially drain your nest egg.

Beyond financial considerations, it’s also important to think about how you’ll spend your time in retirement.

You might retire at 62 and find yourself with too much time on your hands, which could lead to boredom or dissatisfaction. While studies have shown that retirement, and in particular early retirement, can improve mental health for some individuals, it may worsen mental health for others.

💡 Recommended: Retirement Planning Guide for Beginners

Retiring at 62 With a Little Bit of Money

There is no single dollar amount that’s recommended for retirees, though financial experts might say that $1 million to $2 million is an optimal goal to aim for. If you haven’t saved close to those amounts, you might be wondering how to retire at 62 with little money.

Defining for you can help you decide if retiring at 62 is realistic. Asking these questions can help you clarify your retirement vision:

•   Will you continue to work in some capacity?

•   How much do you have saved and invested for retirement?

•   Will you take Social Security benefits right away or wait?

•   What does your monthly retirement budget look like?

•   What kind of lifestyle are you hoping to enjoy?

•   How much do you anticipate paying in taxes?

Retiring at 62 with little money could be workable if you plan to relocate to an area with a lower cost-of-living, and cut your expenses. It also helps if you have additional money from Social Security, a pension, or an annuity that you can count on.

Investing for Retirement at 62

The longer you have until retirement, the more time you have to invest and grow your money through the power of compounding interest. If you’re planning to retire at 62, adjusting your strategy to be aggressive might be necessary since you:

•   Have less time save

•   Need the money that you do save to last longer

Save and Invest More Aggressively

Instead of saving 15% of your income for retirement, for instance, you might need to set aside 30% or more to cover your living expenses. And rather than stick with a conservative asset allocation, you may want to lean toward a higher percentage of equities to add growth.

For example, if you plan to stop working completely, you’ll need to weigh the cost of health care until you become eligible for Medicare. You can’t apply for Medicare until the year you turn 65. If you have a health condition that requires regular care, you may need to increase your savings cushion to cover those expenses until you become eligible.

Where to Save Your Money

It’s also important to think about where to keep the money you’re investing for retirement at 62. There are different retirement plans that you can use to invest, starting with a 401(k).

A 401(k) plan is generally a workplace plan that allows for tax-advantaged investing. Contributions are deducted from your taxable income and grow tax-deferred. Once you retire, withdrawals are taxed at your ordinary income tax rate.

You can begin making withdrawals penalty-free at age 59 ½, or potentially earlier if you meet Rule of 55 guidelines. This IRS rule enables you to avoid early withdrawal penalties if you leave your job and withdraw from your 401(k) the year you turn 55.

A 457 plan is another option for saving in the workplace. These plans are offered by state and local governments as well as certain non-profits, and they work similarly to 401(k) plans. Whether you have a 401(k) or 457 retirement account, investing consistently matters if you’re planning to retire at age 62.

The good news is that you can fund a 401(k) or 457 plan automatically through salary deferrals. You can adjust the amount you save each year as you get raises to help you get closer to your goals. And if your employer matches contributions, that’s free money you can use to plan for early retirement.

Benefits of Investing for Retirement at 62

The chief benefit of investing for retirement at 62 is that you can grow your money faster than you would by saving it.

When you put your money into the market, you can potentially earn higher returns than you would by keeping it in a savings account or a certificate of deposit (CD). The trade-off, of course, is that you’re also taking more risk by investing versus saving.

It’s important to choose a retirement plan that fits your investment goals. With a workplace plan, you’re typically offered a range of mutual funds and exchange-traded funds (ETFs). The investments you choose should reflect both your risk tolerance and your risk capacity, meaning how much risk you need to take to reach your financial goals. Take too much risk and you could lose money; take too little risk and your money won’t grow enough to fund an early retirement.

It’s also important to consider the fees you’re paying for those investments. Mutual funds and ETFs have expense ratios, which determine how much it will cost you to own them on a yearly basis. The higher the fees, the more they can eat into your returns.

Considerations for Retirement at 62

So, can you retire at 62? It can be a difficult question to answer if you’re not considering all the factors that affect your decision. If you have early retirement in your sights, then there are several things to weigh.

Health Care

Medicare eligibility doesn’t begin until the year you turn 65. So, you’ll need to consider how you’ll pay for medical care in the interim. You could purchase private insurance or continue COBRA coverage through your former employer, but either option could be expensive.

Long-term care is another consideration. The monthly median cost of long-term care ranges from $1,690 for adult day care to $9,034 for a private room in a nursing facility, according to Genworth. Long-term care insurance can help with some of those costs but if you don’t have this kind of coverage, and you or your spouse requires this type of care, it could eat into your savings.

Household Expenses

Some household expenses in retirement could be lower. For example, if you move to a smaller home, you might have a lower mortgage payment. Utility bills may also decrease with a smaller home. Or you might have no mortgage payment at all if you’re able to pay off your home loan when you retire.

On the other hand, your household expenses could increase if you move to a more expensive area. Buying a retirement home in southern Florida, for example, could easily be more expensive compared to living in the Midwest. And your expenses could also climb if your adult child or grandchild unexpectedly moves in with you.

Lack of Income

Retirement generally means that your regular paychecks go away. Instead, you live on savings, investments, Social Security, pensions, or some combination of those things.

If you want to retire at 62, you’ll have to think about how much of an impact a lack of steady income might have financially. You may not miss those regular paychecks if you’re able to draw enough from savings, investments, and other income sources in retirement.

But if you’re in a pinch, you may need to consider ways to make up for a shortfall, such as getting a part-time job or starting a business or side hustle.

Retirement Withdrawals

It’s also important to consider your savings withdrawal rate. This is the rate at which you draw down your savings and investments monthly and annually to fund your retirement lifestyle. The 4% rule is an often-used rule of thumb for determining retirement withdrawals.

For example, say that you’ve saved $500,000 for retirement by age 62. Following the 4% rule, you can withdraw 4% of your savings to live on each year. If you stick to that rule and your portfolio continues to generate a 3% annual rate of return, then $500,000 would be enough to last you until age 97.

That assumes a 3% inflation rate. If inflation is higher at 8%, your money would run out by age 82. So, inflation is another important consideration to factor in when deciding if you can retire at 62.

Social Security Benefits

Determining a day to retire matters if you’re planning to take Social Security benefits at 62. If you’ll be relying heavily on those benefits for income, it’s important to apply in a timely manner so they kick in when needed — but you get the maximum amount possible under the circumstances.

When deciding when to retire, remember that taking Social Security at 62, or any other time before your full retirement age, will reduce your benefit amount. Working part-time can also reduce your benefits if you’re earning income above certain thresholds. Meanwhile, you could increase your benefit amount by delaying benefits up to age 70. Think about how important Social Security is for completing your retirement income picture and when you’ll need to take it.

Investing for Retirement With SoFi

Whether you’re planning to retire at 62 (or any age), having a plan can work in your favor. Estimating your expenses, setting a target savings goal, and investing in your workplace retirement plan can all help you to get on the right track.

You can open a retirement account online and start building a diversified portfolio. And if you’re assessing your retirement savings, you may want to roll over your old 401(k) accounts to an IRA, so you can manage your money in one place.

SoFi makes the rollover process seamless. You don’t have to watch the mail for your 401(k) check because the transfer is handled automatically, and there are no rollover fees.

Help grow your nest egg with a SoFi IRA.

FAQ

Is it a good idea to retire at 62?

Retiring at 62 could be a good idea if you can afford it and you’ve planned for any what-if scenarios that could affect your ability to cover your expenses. If you have significant amounts of debt and minimal savings, however, retiring at 62 may do more harm than good.

How can you retire at 62 with little money?

Retiring at 62 with little money requires careful planning to understand what your expenses will be, how much money you’ve saved, and how long that money will last. Supplementing savings with Social Security benefits or a pension can help, though you may need to plan to live much leaner in order to stretch your dollars.

What are the benefits of retiring after 62?

The longer you wait to retire, the more time you have to invest and build wealth. Delaying retirement after 62 can also increase the amount of benefits you’re eligible to receive from Social Security.

Photo credit: iStock/kate_sept2004

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