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If you’re in the market for a home, you may have come across the term “single-family home” and wondered what it means and if that is what you are looking to buy.

Generally, a single-family home refers to a freestanding home set on its own piece of property. It can be occupied by a single individual or a large family, as long as it’s occupied by a single household.

Owning a single family home comes with a number of benefits, including more privacy and space than other types of residential properties. However, this type of home also tends to come with a higher price tag and more responsibility. Here’s a closer look at what single family homes are and the pros and cons of buying one.

What Is a Single-Family Home?

Generally speaking, the term single-family home refers to a home that is designed for, occupied by, and maintained by one person or household. When you buy a single-family home, you will own both the home and the property it sits on. This is in contrast to other types of properties, such as condominiums (condos), where you only own the interior of your unit and share ownership of common areas with other homeowners in the complex.

In most cases, a single-family home is defined as one that is freestanding and not attached to homes owned by other individuals. However, the government has a broader definition. According to the U.S. Census Bureau, a single-family home includes fully detached homes, as well as semi-detached row houses and townhouses. In the case of attached units, the units must be separated by a ground-to-roof wall in order to be classified as a single-family structure. Also, these units must not share heating/air-conditioning systems or utilities.

In some places, a single-family home is defined in part by how many kitchens it has. Depending on zoning laws, adding a second full kitchen to an in-law’s apartment, for example, can cause a house to be redefined as a multi-family building. If you’re planning on doing this type of renovation, be sure to check local zoning laws beforehand.

Whether a home is classified as a single-family or multi-family home can have an impact on the type of mortgages you qualify for. Both single-family homes and two- to four-unit properties fall under residential lending guidelines. (A property with five or more units is considered commercial property.) You can use a conventional mortgage to purchase a home with four or fewer units, whether it’s a single- or multi-family home. If you’re buying a multi-family home with five or more units, you must use a commercial mortgage. Commercial mortgages have different terms than residential mortgages do.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

Pros and Cons of a Single-Family Home

As you shop for homes, it’s important to consider the various advantages and disadvantages of a single-family residence.

Some of the advantages are:

•   More space Single-family homes tend to offer more space than other types of housing, and it belongs to you alone. They may have large yards where children and dogs can play or where you can plant a vegetable garden. They may also have storage in attics, garages, or basements, which aren’t shared between multiple units.

•   Privacy Single-family units that don’t share walls with neighbors offer more privacy. You are less likely to hear neighbors’ activities, and they are less likely to be bothered by yours.

•   More design features Single-family homes may be available in a broader range of designs and layouts, from Cape Cods or colonials to ranch homes and contemporary designs. You can also make changes to the building or landscape design without input from neighbors with a shared interest in the space.

•   Room to grow Single-family homes may offer you more options for additions if you have a growing family or if aging parents may come to live with you. For example, single family detached homes with larger plots of land may allow additions that wouldn’t be possible in condo units.

•   May offer higher appreciation Single-family homes tend to appreciate in value more than condos and townhouses.

•   Option to rent As the sole owner of a single-family home, you have the option to rent out the house if you decide to move and wish to hang on to the property.

While these factors are attractive, it’s important to weigh potential disadvantages of buying a single-family home as well. Here are some to keep in mind:

•   More expensive Single-family homes tend to be more expensive than other types of homes. That can mean a larger down payment and higher closing costs, and your mortgage payments may be higher.

•   More maintenance Unless your single-family home is part of a homeowner association (HOA) that provides basic services, you’ll be in charge of all home maintenance like lawn mowing and roof repairs. You’ll either have to take the time to do it yourself or hire help.

•   Possible HOA fees Planned developments usually require HOA fees to cover the upkeep of common areas and shared structures.

•   Less income potential With multi-family homes, you have the option to live in one unit while renting out the others. This allows you to bring in regular income to cover the cost of the mortgage and maintenance expenses.

Finding a Single-Family Home

Before you start looking for a single-family home, you’ll want to first determine how much home you can afford. You might start by calculating mortgage costs and getting prequalified for a home loan; prequalification often only takes a few minutes and provides an estimate of how much you might be able to borrow and at what rate (without impacting your credit).

You’re probably already searching real estate listings online and noting the property types. You might also want to do some research on housing market trends, especially if you live in one of the nation’s real estate hot spots.

You may also want to engage a real estate agent. They have expertise in local housing and zoning laws, know whether a list price is fair or above or below average, and can help you negotiate the price of a home you’re interested in buying.

If there’s any question about how a house is zoned, you can often look up zoning information through a particular city’s website.

Recommended: First-Time Home Buyer’s Guide

Who Should Get a Single-Family Home?

Single-family homes are a good fit for people who can cover the higher price tag, want privacy and flexibility, and are willing to take on a lot of responsibility.

If you qualify as a first-time homebuyer, there may be help available to buy a single-family home in the form of down payment assistance and low- or no-interest loans.

If you’re looking for a more affordable home and don’t mind giving up some privacy, you might want to consider a condo or townhouse.

A condo is like an apartment but is available for purchase. These units share walls with neighboring units, but you generally won’t have to worry about maintaining the property.

A townhouse, on the other hand, has multiple stories and will share one or two walls with other units. Like condos, townhouses are typically less expensive than single-family homes. Unlike a condo, you’ll own the property that the townhouse sits on.

If you’re looking to invest in real estate, you might consider buying a multi-family home. While this will likely cost more than a single-family home, you may be able to recoup the added cost (and, over time, earn even more) by collecting rent from tenants.


💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

If You’re Thinking of Purchasing a Single-Family Home, SoFi Home Loans Can Help

Single-family homes are one of the most popular real estate options and often what people envision when they think about achieving the dream of home ownership.

This type of property typically sits on a parcel of private property and doesn’t share walls with neighbors, affording you a high level of privacy. You generally have more control over making enhancements to your home than you have with other types of properties, and usually have access to extra storage, including exterior storage space like a shed or garage.

However, don’t forget to consider the added responsibilities and costs when deciding on the right type of home for you and your family.

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

FAQ

How much does a single-family home cost?

The median price for an existing single-family home — one that’s already standing, not new construction — was $387,600 as of November 2023, according to the National Association of Realtors.

How much do I need to build a single-family home?

The cost of building a single-family home (not including land) can range anywhere from $42,000 to $900,000-plus depending on the home’s type and size and where you build. On average, the cost to build a house in the U.S. is about $329,000.

Can you get a loan to build a single-family home?

If you’re planning to build a single-family home from scratch, you can apply for a construction loan. With this type of loan, money is usually advanced incrementally during construction, as the home-building project progresses. Typically, you only pay interest during the construction period. Once the construction is over, the loan amount becomes due, and it is converted into a regular mortgage.

Photo credit: iStock/Dean Mitchell

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.

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If you’re looking to buy a condo or townhome, understanding the distinctions may help you home in on the choice that better suits your lifestyle and needs. Read on to learn the major differences between these two kinds of property.

What Is a Condo?

A condominium is a private property within a larger property, whether that be a single building or a complex. Residents share amenities like clubhouses, gyms, pools, parking, and the common grounds, and pay homeowners association (HOA) dues to support those shared assets. If you buy a condo, you’ll own your interior space only.

What Is a Townhouse?

A townhouse is a single-family unit that shares one or more walls with another home, usually has two or more floors, and may have a small backyard or patio. If you buy a townhouse, you’ll own the interior and exterior of the unit and the land on which it sits. Upkeep of the exterior could be split between you and the homeowners association (HOA).


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

Condo vs Townhouse: Differences

Both are part of a larger structure, unlike some other house types, and both usually share one or more walls, but some similarities end there. Here are the key differences.

1. Construction

In the condo vs. townhouse debate, construction differs. A townhouse will share at least one wall with a property next door. A condo could have another unit below and above it, in addition to neighbors on either side. That could mean sharing all surrounding walls and floors/ceilings.

2. Actual Ownership

If you’re considering townhouse vs. condo, what would you actually own? With townhomes, the buyer owns the land and the structure. That could mean some creativity with decorating the lot or the home’s exterior. With condos, the buyer owns the interior of the unit and an “interest” (along with all of the other owners) in the common elements of the condominium project.

3. Community

With both condos and townhouses, residents will have fairly close contact with their neighbors. With shared walls and spaces, residents may have more social relationships with their community than they would with a single-family home. That means it’s important for buyers to research the community when condo shopping. Is the condo social? Does it plan a lot of events, or do people generally keep to themselves? Since there are many shared spaces, understanding how the community functions could directly affect living there.

If a townhome isn’t part of an HOA, living in the complex could feel similar to living in a single-family home. In that case, it could be up to the buyer to create a sense of community.

4. Homeowners Associations

Condos come with an HOA, a resident-led board that collects ongoing fees that can range from $200 to thousands of dollars, and mandates any special assessments. The HOA also enforces its covenants, conditions, and restrictions (CC&Rs).

Not all townhouse communities have an HOA, but if they do, townhouse owners usually pay lower monthly fees than condo owners because they pay for much of their own upkeep.

5. Obligations and Regulations

What’s the difference between a townhouse and a condo when it comes to rules and regulations? Condo owners will be required to meet all HOA standards. That could dictate anything from what residents want to hang on their front door to whether they can have pets, how many, and whether Biff needs to be registered as a service animal or emotional support animal. If an owner wants to renovate their condo, they may have to get the work approved by the HOA.

If a townhome is part of an HOA, many of the above restrictions could apply. However, if it’s not an HOA community, townhouse owners have more freedom to decorate the exterior of their home or maintain their landscape as they see fit.

6. Insurance

Condos have their own form of property insurance. HO-6 provides coverage for the interior of a condo and the owner’s personal belongings. In addition, the entire building needs to be insured, which is paid for with HOA dues.

If a townhouse is part of an HOA community, each property requires HO-6 insurance and coverage for the community through HOA dues. When a townhouse isn’t part of an HOA, buyers are typically required to have homeowners insurance.

7. Fees and Expenses

HOA fees for condos are usually higher than for townhouses because they cover exterior maintenance and shared amenities. If townhouse owners are part of an HOA, they’ll usually pay lower monthly fees because they pay for much of their own upkeep.

Condo owners don’t have to worry about repairing the roof or replacing siding. Everything exterior-facing is managed collectively and paid for with HOA dues, but those fees may be high and are periodically reevaluated, and so may rise over time.

8. Financing

It can be harder to obtain financing for a condo than for a townhouse. Condos may be eligible for conventional mortgage loans and government-insured loans. (Study the mortgage basics to learn more about the difference between these types.) Lenders of conventional loans will review the financial health of an HOA, whether most of the units are owner-occupied, and ownership distribution. Interested in an FHA loan or a VA loan? Both agencies maintain respective lists of approved condos.

In the case of a townhouse, the financing process is similar to that of a traditional mortgage because a townhouse includes the land it’s built on. Its value is factored into the process.

9. Resale Value

A large factor in a condo holding value is the management, which isn’t always in the hands of the owner. Strong management can help a condo maintain or grow in value. Additionally, where the condo is located will influence resale value. Condos generally hold value but don’t see the boost in resale expected with single-family homes. Similarly, buying a townhouse may not usher in the appreciation of most single-family homes.


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

Condo vs Townhouse: Which May Be Right for You?

Condos and townhomes have their fair share of differences, as well as some similarities. Overall, condos can offer a low-maintenance property where owners simply look after their condo interior. With condo ownership comes the added perk of shared amenities. But condos come with monthly HOA fees, which must be factored into any purchase. Additionally, the community association and its management of the property will likely have a large impact on what life is like in a particular condo complex. Condo buyers may be more community-minded, as they share space with their neighbors. (If a condo feels like the right choice, read a guide to buying a condo as you embark on your search.)

Townhouses offer more freedom and privacy than condos. Owners may have the option of personalizing their exterior and enjoying outdoor space if the property has a patio or backyard. Townhomes generally require more responsibility and upkeep than a condo, even if there’s an HOA involved. Exterior maintenance will be required. If this sounds like a good fit, dig deeper by reading a guide to buying a townhouse.

Of course, you may be better suited to a different living situation altogether. House or condo? Take a quiz to learn which of these options might be best for you.

The Takeaway

When it comes to finding a home, the perfect fit is up to the individual, but buyers may want to take a hard look at monthly fees, community rules, how social they intend to be, and precisely what they own and must maintain.

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

FAQ

Between condos and townhouses, which is cheaper to buy?

The cost of a condo and townhome will vary based on location and size, but condos are often less expensive than townhouses because they come with no land.

Do you own the land around a condo if you buy it?

No. The purchase of a condo only includes the interior.

Is the resale value higher for a condo or townhouse?

In general, condos and townhomes don’t appreciate as quickly as single-family homes. The value will vary based on area, upkeep, and other conditions.

Between condos and townhouses, which has better financing options?

Financing a townhome is like financing a single-family home. A buyer can choose from multiple types of mortgages.

Financing a condo, on the other hand, involves a lender review of the community or inclusion on a list of approved condominium communities. Because a private lender could see a condo as a riskier purchase, the interest rate could be higher unless a large down payment was made.

Photo credit: iStock/Inhabitant

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.

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If you’re looking for a well-priced home and wouldn’t mind a fixer-upper, you might benefit from a HUD home, which is a property that was foreclosed on and is now being sold by the US Department of Housing and Urban Development.

HUD homes can offer affordable deals, especially to those buyers who don’t mind fixing up a property, and you might find lower down payments and help with closing costs in some cases. But HUD houses aren’t for everyone, so read on to learn the details and the pros and cons.

What Is the Department of Housing and Urban Development?

HUD was created in 1965 as part of President Lyndon B. Johnson’s war on poverty. Its current stated mission is “to create strong, sustainable, inclusive communities and quality affordable homes for all.”

HUD oversees mortgage insurance programs for lower- and moderate-income families; public housing, rental subsidy and voucher programs; and many others. In this way, it helps to improve deteriorating properties.

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

What Are HUD Homes?

Here’s the definition of a HUD home: The one- to four-unit residential properties that HUD sells come into HUD’s possession as a result of defaults on mortgages insured by the Federal Housing Administration (FHA), which is part of HUD.

Owner-occupants get first dibs, after which bidding opens to investors. HUD pays the lender what is owed and then sells the properties to the public to make up the deficit from the foreclosure.

You can look at available properties at the HUD Home Store but must have a HUD-approved real estate broker or agent submit a bid for you.

Recommended: FHA Loan Mortgage Calculator Table

Who Can Qualify for a HUD Home?

If you have the cash or can qualify for a loan, you may buy a HUD home.

Following the priority bidding period for owner-occupants, HUD-approved nonprofit organizations, and government entities, unsold properties are available to all buyers, including investors.

If you will be an owner-occupant, you must plan to live there for at least a year and can’t have purchased another HUD home within the last two years.

If you will need an FHA loan or other mortgage, expect to pass income and credit checks.

If you are buying as an investor, you’ll need to wait 30 days before bidding on a single-family HUD home listed as “insured” or “insured with escrow,” up from 15 days as of January 3, 2024. Homes with those designations are eligible for FHA-insured financing, meaning they may only need cosmetic repairs or nonstructural repairs of up to $10,000.

If the home is listed as “uninsured,” buyers cannot get a typical FHA loan, but they may be able to use an FHA 203k loan — a program that allows buyers to make repairs after closing and finance the cost into their loan.

Recommended: The Most Affordable Places to Live in the US

HUD Assistance Programs

HUD sweetens the pot to help make the dream of buying a home come true.

•   With the Dollar Homes program, low- or moderate-income families can purchase a HUD-owned home for $1. The Dollar Homes are single-family homes that have been in foreclosure and the FHA has been unable to sell for six months. The vacant homes have a market value of $25,000 or less.

•   The Good Neighbor Next Door Program rewards law enforcement officers, K-12 teachers, firefighters, and emergency medical technicians with a 50% discount on the list price of the home. It must be the homebuyer’s principal residence for three years.

HUD requires that you sign a second mortgage and note for the discount amount. No interest or payments are required on this “silent second,” provided that you fulfill the three-year occupancy requirement.

•   You might also find that the FHA HUD $100 Down Program is available in some areas. This involves buying a home with just $100 down vs. the usual requirement.

Buying a HUD Home

Buying a home is a big deal, especially if you’re a first-time homebuyer. How to buy a HUD home, though? Know that buying a HUD home is different from purchasing other properties. For one thing, it has to be sold at auction. If you get the winning bid, HUD contacts your agent and gives you a settlement date, often about 30 to 60 days to close.

Do keep in mind that with HUD, you get what you get. These homes are sold as is. At least go in with your eyes wide open about what you’re purchasing.

Finding HUD Homes

HUD homes exist in their own universe. You can’t find them just anywhere like other homes. You can find them on the agency’s website, the HUD Home Store, and in links to listings of homes being sold by other federal agencies.

Financing

You can finance a HUD home like any other home, though the lender will need to be HUD-approved. You may want to start by finding down payment assistance programs.

Also search for options like an FHA loan, which may be easier to obtain if you have credit issues, costs may be lower, and a lower down payment may be required than elsewhere. You might want to look into FHA 203k loans as well.

If you’re a veteran, a current member of the armed forces, or the spouse of a service member, consider looking into VA loans that might offer you better terms than other loans.

Getting preapproved for a loan is a good practice generally and particularly when you’re going after a HUD home. You’ll want to be ready to pounce if you get the green light on the home you’ve got your heart set on.

Recommended: Home Loan Help Center

HUD Homes vs Conventional Homes

Ready to compare HUD homes vs. conventional homes? Here’s the intel in chart form.

Pros and Cons of HUD Homes

Now, here’s how the pros and cons of HUD homes stack up.

First, the pros of HUD homes:

•   A low down payment can make purchasing a home more affordable.

•   There’s help with closing costs, which can make a big difference in home-buying expenses.

•   Homes may be priced below market value, making them more within reach for limited budgets.

•   Also, you may get a jump on the marketplace because investors must wait 30 days to shop.

As for the cons, here are the key ones:

•   Home is sold in “as is” condition, which can mean there’s a lot of work (DIY projects or otherwise) to be done.

•   You must use a HUD-approved real estate agent or broker, which can limit options.

•   Limited supply, sold at auction, so you may not have your pick of properties.

•   There are restrictions. As the owner-occupant, you need to live there for at least a year (three for the Good Neighbor program), and you can’t purchase another HUD home for at least the next two years.

The Takeaway

Whether you’re buying a HUD home for your own use or as an investment, getting financing lined up is essential. Getting pre-qualified and then pre-approved for a home loan lay the groundwork.

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

FAQ

What does HUD do?

HUD is an agency of the federal government that is responsible for national policy and programs that address housing needs in the US.

How do you qualify for HUD housing in California?

Requirements will vary depending on where in the state you live, so check with your local housing authority. For example, a family’s gross annual income must be below 50% of the Area Median Income (AMI) in Los Angeles County.

What are the different types of HUD?

There are several types of HUD programs, including FHA Mortgage and Loan Insurance, Section 8, Public Housing, and Fair Housing Assistance Program.

Photo credit: iStock/CatLane

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.

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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.

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

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

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.

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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You may feel proud of yourself for paying off a debt early, but doing so could trigger prepayment fees (ouch). The best way to avoid those charges is to read the fine print before you take out a loan that involves this kind of fee.

If you neglected to do that, however, it doesn’t necessarily mean you’re stuck with a prepayment penalty. Read on to learn ways to avoid paying loan prepayment penalties.

What Is a Prepayment Penalty?

A prepayment penalty is when a lender charges you a fee for paying off your loan before the end of the loan term. It can be frustrating that a lender would charge you for paying off a loan too early. After all, many people may think a lender would appreciate being repaid as quickly as possible.

In theory, a lender would appreciate getting repaid quickly. But in reality, it’s not that simple. Lenders make most of their profit from interest, so if you pay off your loan early, the lender is possibly losing out on the interest payments that they were anticipating. Charging a prepayment penalty is one way a lender may recoup their financial loss if you pay off your loan early.

Lenders might calculate the prepayment fee based on the loan’s principal or how much interest remains when you pay off the loan. The penalty could also be a fixed amount as stated in the loan agreement.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

Can You Pay Off a Loan Early?

Say you took out a $5,000 personal loan three years ago. You’ve been paying it off for three years, and you have two more years before the loan term ends. Recently you received a financial windfall and you want to use that money to pay off your personal loan early.

Can you pay off a personal loan early without paying a prepayment penalty? It depends on your lender. Some lenders offer personal loans without prepayment penalties, but some don’t. A mortgage prepayment penalty is more common than a personal loan prepayment penalty.

Recommended: When to Consider Paying off Your Mortgage Early

Differences in Prepayment Penalties

The best way to figure out how much a prepayment penalty would be is to check a loan’s terms before you accept them. Lenders have to be upfront about how much the prepayment penalty will be, and they’re required by law to disclose that information before you take on the loan.

Personal Loan Prepayment Penalty

If you take out a $6,000 personal loan to turn your guest room into a pet portrait studio and agree to pay your lender back $125 per month for five years, the term of that loan is five years. Although your loan term says it can’t take you more than five years to pay it off, some lenders also require that you don’t pay it off in less than five years.

The lender makes money off the monthly interest you pay on your loan, and if you pay off your loan early, the lender doesn’t make as much money. Loan prepayment penalties allow the lender to recoup the money they lose when you pay your loan off early.

Mortgage Prepayment Penalty

When it comes to mortgages, things get a little trickier. For loans that originated after 2014, there are restrictions on when a lender can impose prepayment penalties. If you took out a mortgage before 2014, however, you may be subject to a mortgage prepayment penalty. If you’re not sure if your mortgage has a prepayment penalty, check your origination paperwork or call your lender.

Checking for a Prepayment Clause

Lenders disclose whether or not they charge a prepayment penalty in the loan documents. It might be in the fine print, but the prepayment clause is there. If you’re considering paying off any type of loan early, check your loan’s terms and conditions to determine whether or not you’ll have to pay a prepayment penalty.

How Are Prepayment Penalties Calculated?

The cost of a prepayment penalty can vary widely depending on the amount of the loan and how your lender calculates the penalty. Lenders have different ways to determine how much of a prepayment penalty to charge.

If your loan has a prepayment penalty, figuring out exactly what the fee will be can help you determine whether paying the penalty will outweigh the benefits of paying your loan off early. Here are three different ways the prepayment penalty fee might be calculated:

1. Interest costs. If your loan charges a prepayment penalty based on interest, the lender is basing the fee on the interest you would have paid over the full term of the loan. Using the previous example, if you have a $6,000 loan with a five-year term and want to pay the remaining balance of the loan after only four years, the lender may charge you 12 months’ worth of interest as a penalty.

2. Percentage of balance. Some lenders use a percentage of the amount left on the loan to determine the penalty fee. This is a common way to calculate a mortgage prepayment penalty fee. For example, if you bought a house for $500,000 and have already paid down half the mortgage, you might want to pay off the remaining balance in a lump sum before the full term of your loan is up. In this case, your lender might require that you pay a percentage of the remaining $250,000 as a penalty.

3. Flat fee. Some lenders simply have a flat fee as a prepayment penalty. This means that no matter how early you pay back your loan, the amount you’ll have to pay will always be the prepayment penalty amount that’s disclosed in the loan agreement.

Recommended: Debt Payoff Guide

Avoiding a Prepayment Penalty

Trying to avoid prepayment penalties can seem like an exercise in futility, but it is possible. The easiest way to avoid them is to take out a loan or mortgage without prepayment penalties. If that’s not possible, you may still have options.

•   If you already have a personal loan that has a prepayment penalty, and you want to pay your loan off early, talk to your lender. You may be offered an opportunity to pay off your loan closer to the final due date and sidestep the penalty. Or you might find that even if you pay off the loan early and incur a penalty, it might be less than the interest you would have paid over the remaining term of the loan.

•   You can also take a look at your loan origination paperwork to see if it allows for a partial payoff without penalty. If it does, you might be able to prepay a portion of your loan each year, which allows you to get out of debt sooner without requiring you to pay a penalty fee.

For example, some mortgages allow payments of up to 25% of the purchase price once a year, without charging a prepayment penalty. This means that while you might not be able to pay off your full mortgage, you could pay up to 25% of the purchase price each year without triggering a penalty.

Some lenders shift their prepayment penalty terms over the life of your loan. This means that as you get closer to the end of your original loan term, you might face lower prepayment penalty fees or no fees at all. If that’s the case, it might make sense to wait a year or two until the prepayment penalties are less or no longer apply.

When it comes to your money, you don’t want to make any assumptions. You still need to do your due diligence by asking potential lenders if they have a prepayment penalty. The Truth in Lending Act (TILA) requires lenders to provide documentation of any loan fees they charge, including a prepayment penalty. Also, under the TILA, consumers have the right to cancel a loan agreement within three days of closing on the loan without the lender taking any adverse action against them.

The Takeaway

A prepayment penalty is one fee that can be avoided by asking questions of the lender and looking at the loan documents with a discerning eye. This may hold true both when you are shopping for a loan and when you are paying your loan off.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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

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Once you’ve decided it’s time to buy life insurance, the big question is whether a term or whole life insurance policy is right for you.

Both achieve the same goal: protecting your loved ones from financial hardship when you aren’t there to provide for them. But they go about doing this in very different ways. To decide which one to buy, a little knowledge is an important thing.

Let’s take a look at what each policy offers and highlight some considerations. By the end of this article, you should have a good idea of whether buying term or whole life insurance is right for you.

What Is Term Life Insurance?

Just as the name implies, term life insurance provides coverage for a set term or number of years. What that means is, if you die during the term of the policy, your beneficiaries receive a lump sum payment.

Here’s an example of how that works. Let’s say you take out $500,000 of term life insurance for 20 years. If you, the policy holder, were to die at year 19, your beneficiaries would receive the half-million dollars. But if the policy ends after 20 years, and you were to die a few months later, there’s no benefit at all.

What’s good about term life insurance is that it can offer coverage when you may need it most. With terms typically running between 10 and 30 years (though other variations are available), this kind of policy can give you the reassurance that, even in the worst-case scenario of your death, expenses like tuition, housing, and daily living costs can still be covered.

Many people purchase a term that will see them through the end of a mortgage or a child’s graduation from college. Some insurance providers offer the option of extending a policy as it comes to its conclusion. This is known as renewable term life insurance; check prices in advance as these extensions can be for a brief time period and tend to be costly.

It’s worth noting that if you buy, say, a 30-year term life insurance policy and are alive at the end of that time period, you don’t get a refund of the funds you’ve doled out. You have paid for protection but you didn’t use it. This may strike some people as “throwing away” their money.

For people who have that sentiment, there are options like “return-of-premium” policies that could help you recoup costs. This kind of life insurance is usually considerably more affordable than whole life, which we’ll explore in a minute. Because you are only buying protection for a specific time period, the premiums (the monthly fee you pay for coverage) are typically lower and are fixed.


💡 Quick Tip: Term life insurance coverage can range from $100K to $8 million. As your life changes, you can increase or decrease your coverage.

What Is Whole Life Insurance?

Whole life insurance is a popular type of permanent life insurance that offers coverage for a lifetime.

Generally speaking, once you get a policy, it stays in effect for the rest of your life, unless you cancel it. When the policy owner passes away, their beneficiaries receive a lump sum payment. This can offer peace of mind and may feel like a necessity if, say, you have a loved one who has a chronic health condition and/or cannot live independently.

Whole life insurance is a more complex financial product than term life insurance. It’s essentially a bundled insurance policy plus savings account. What’s known as “cash value” is built into the policy so you are building equity. Part of your premium (the monthly payment) is usually diverted into a separate account; that account can earn interest and may be tapped, as a loan.

This is not the only kind of life insurance policy with a cash account attached to it. For those who want their cash account to grow in different ways, there are also these kinds of permanent life insurance:

•   Universal life insurance, which earns interest on the cash value account and may allow for flexible monthly payments.

•   Variable life insurance, which allows you to invest the cash part of your policy in stocks, bonds, and mutual funds. While these can grow your money faster, they also bring some degree of financial risk if the market drops.

•   Variable universal life, which gives you the ability to invest your savings account in stocks, bonds, and the like, as well as flexible premiums depending on how your cash value performs.

•   Indexed universal life, in which your cash account is linked to a stock market index. It earns interest based on this index, but often there is a minimum rate of return (as well as a limit on how high the interest can go), which makes it less risky than a variable universal life plan.

In general, whole life and the other kinds of permanent life insurance usually have higher initial premiums than term life insurance (its cost may even be a multiple of what you would pay for term insurance). This is due to its lifelong “in effect” status and the way it can help you grow the money in your cash value account.

Recommended: 8 Popular Types of Life Insurance for Any Age

How Do Term and Whole Life Insurance Differ?

Some people hear the differences between term and whole life insurance policies, and know in an instant which one is right for them. Other people have to mull the options for a while and maybe want to make a “pros vs. cons” list. If you fall into the latter camp, don’t worry. Let us help by summarizing some of the key differences right here.

Difference 1: Policy Features

Difference 2: Costs

The cost of a policy is undoubtedly a huge factor in your decision. So let’s cut to the chase: Whole life insurance costs up to 15 times more than term life for the same amount of coverage.

That’s because whole life insurance provides lifelong coverage and also includes that “cash value” savings component. It’s a more complex financial product, while term insurance is just straightforward coverage for a certain number of years.

Also know that while the cash value portion of a whole life policy can be tax-deferred over the life of the policy, when you redeem the cash value, there are usually tax implications due to the interest accrued.

Recommended: How to Buy Life Insurance in 9 Steps

How to Choose Between Term and Whole Life Insurance

When deciding which kind of policy to buy, there is no hard and fast rule. All that matters is what’s right for you. Consider these questions to help figure out your best option.

1. How long do you need coverage to last?

Do you need coverage to last your entire life, perhaps to fuel a trust for your children or provide a death benefit for a family member with a disability? Then you may be happiest with whole life insurance, meaning a death benefit will be paid, even if you live well past age 100.

If, however, you only need to know that a certain time frame is covered (say, the length of your mortgage or until your youngest graduates from college), then term life may work best for you. A policy can usually be purchased in various increments between 10 and 30 years.

2. Do you want just coverage or savings too?

Some people are just shopping for a policy that offers protection and peace of mind. They want to know that, should they die within a certain time frame, their loved ones would receive money to help cover expenses. For this insurance shopper, a term policy may make sense. It will pay a lump sum benefit if the policy holder dies within the term.

But if you are looking for a product that doesn’t just offer coverage but also helps you save, then a whole life plan may be a good move. These policies also have a cash value account that can grow over the years.

3. How much can you spend on life insurance?

There’s a pretty big disparity in the price of the two main kinds of life insurance. Whole life policies, which deliver ongoing, permanent coverage, typically cost much more than term insurance, which is only active for a limited number of years. Estimates say that a person will have to spend anywhere up to 15 times more for whole life versus term insurance. Also, the interest on the cash value of a whole life policy is usually subject
to taxes as well.

4. Does my age determine whether I should get term or whole life insurance?

In general, your age doesn’t determine whether you should buy term or whole life insurance. For instance, people often purchase a policy when they marry or are expecting their first child. These milestone events mean you have people depending on you, and you may well think now is the time to get life insurance coverage. However, deciding on term insurance that runs until your child’s 21st birthday or whole life insurance which delivers permanent coverage is a matter of personal preference and finances.

There are some cases in which term insurance is likely to be the better bet. For instance, if you and your partner took out a mortgage together, you might want term insurance that covers the length of your home loan. That way, if anything were to happen to you, your spouse doesn’t wind up being solely liable for all that debt.

Another scenario is buying life insurance when you are quite old and want to get coverage. In this case, term life insurance is likely to again be a good bet. You could buy a term of 10 or 20 years if you are in good health.

For those with medical issues, what’s called simplified issue or guaranteed issue term insurance may be best. These are typically small policies that cover end of life expenses, and they require no medical exams.

5. What if I Already Have Life Insurance and Want to Change My Policy?

It’s human to change your mind. No matter how much research you do, time and circumstances can make you rethink your purchase. Some term life insurance policies can be turned into whole life or other types of permanent insurance. This may have to occur within a certain time window, and it’s likely to trigger pricier premiums. Talk to your insurance company about your options. Your term may also be renewable or extendable.

With whole life insurance, changes to the policy may result in surrender charges, since the policy is a permanent one. Check with the policy provider to know what to expect.


💡 Quick Tip: Term life insurance coverage can range from $100K to $8 million. As your life changes, you can increase or decrease your coverage.

The Takeaway

While no one wants to think about their death, the silver lining to life insurance shopping is you know you’ll secure a way to provide for your loved ones when you’re no longer here.

To recap the two different approaches: Term life insurance has a time limit on coverage, and tends to be considerably more affordable. Whole life is a form of permanent life insurance that offers lifelong protection and an additional cash account, but tends to cost much more than term. As you weigh your needs and options, don’t be swayed by what others buy. This is an important financial decision that should be tailored to your specific situation, finances, and aspirations.

SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. Apply in just minutes and get an instant decision. As your circumstances change, you can update or cancel your policy with no fees and no hassles.

Explore your life insurance options with SoFi Protect.

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

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.

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