A Guide to Townhouses: Key Characteristics, Pros and Cons

What is a Townhouse House: Pros and Cons

Looking for a relatively affordable property? Let’s hit the town. For many buyers, a townhouse is the sweet spot in real estate. But what is a townhouse? It’s not a detached single-family home, but it isn’t a condo, either. Let’s see how townhomes stack up.

What is a Townhouse?

A townhouse, or townhome, is distinct among the different types of homes. It is defined as a single-family unit that has:

•   Two or more floors

•   A shared wall with at least one other home

•   Ownership that differs from a condo: You own the inside and outside of your unit and the land it sits on, whereas a condo owner owns the interior of the condo

The meaning of the word townhouse can be traced back to 19th century England. The rich and royalty would have a large manor in the country but also a home “in town.” The definition has evolved over the years. A townhome doesn’t need to be a second home, and it doesn’t even need to be in the city. In some parts of the U.S., townhouses with a similar design and facade are also called row houses.


💡 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.

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

Questions? Call (888)-541-0398.


Pros and Cons of a Townhouse

Townhouses come with a fair share of benefits, but like any home, it’s not one size fits all. Consider these pros and cons of buying a townhouse.

Pros

•   Makes the most of space. As townhomes share a wall or two with neighbors, and are often in densely populated areas, they use space efficiently.

•   Affordability. Because of their shared walls and space-saving layout, townhomes are often more affordable than single-family homes in the area.

•   Independence, with less maintenance. Townhouses usually have less upkeep than single-family homes. There might be a small yard, and your own roof, to maintain.

•   Lower property taxes. A townhome owner may pay less in property taxes than the owner of a standalone home.

•   HOA perks. Some townhomes are part of homeowners associations. If amenities like a pool, gym, and maintenance of common areas and possibly your own little yard are a priority, a townhome with an HOA could be a good fit.

•   Looser rules. The HOA rules may not be as strict as those for a condo.

Cons

•   Limited landscape options. Townhouse lots are small. If you want space for landscaping, it’s unlikely you’ll find much with a townhouse.

•   Uncreative exteriors. If the townhome is part of an HOA, the ability to decorate the exterior of the unit could be limited. Townhomes typically look very similar to their neighboring units as well, so standing out could be a no-no.

•   Stairs, stairs, and more stairs. Townhomes have an efficient build for spaces where land is at a premium. That means building up, not out. A townhome may have three (or more) floors, meaning climbing stairs repeatedly.

•   Less privacy. Townhouses have at least one “party wall,” or wall shared with another property. That could be a problem for buyers who prioritize peace and quiet if the neighbors are loud.

•   Less appreciation. As a rule of thumb, townhomes don’t gain as much value as single-family homes do.

•   HOA fees. If the community has an HOA, it will charge a monthly or quarterly fee to cover communal perks. The fees usually rise over time, and can be high at a complex full of amenities.

Finding a Townhouse

Finding a townhouse will depend on where a buyer is looking. Most commonly, they’re encountered in densely populated areas where land might be pricey and scarce. The search may be more restricted if a buyer wants to purchase a townhome in an HOA community. One place buyers typically won’t find townhomes is in rural or secluded areas. Land may be more affordable and plentiful, which means properties don’t need to be condensed.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Who Should Get a Townhouse?

A townhome might be the right option if the buyer:

•   Isn’t interested in much maintenance. Maintaining your unit and your parcel of land will almost always be less intensive than maintaining a detached single-family home and yard. If there are HOA fees, they might include landscaping services.

•   Is a first-time buyer. The lower cost and maintenance of a townhouse might be the right fit as a first-time homebuyer learns the ropes of homeownership and looks into homeowner resources.

•   Is an investor or buyer of a second home: Both may see the benefits of a townhouse.

•   Is on a budget. Generally, a townhouse will cost less than a single-family home in the same area. Buyers could live in a desirable area without paying top dollar. (A calculator for mortgage payments helps buyers see the effect of different down payments.)

•   Wants to live in an urban or suburban area. Because townhomes are built in areas where space is at a premium and the cost of living is high, a townhouse could be the right fit.

The Takeaway

With less maintenance (and potentially a lower price tag) than a detached single-family home, a townhome can be a great opportunity for buyers. Townhomes qualify for the same kind of mortgages that detached single-family homes do, and they require less exterior maintenance than a detached home. So there’s a lot to love about living in a townhouse.

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


SoFi Mortgages: simple, smart, and so affordable.

FAQ

How is a townhouse different from a house?

The biggest difference between a townhouse and a detached single-family house is the shared walls. A townhome may have one or more “party walls” with the properties adjacent to it.

Do townhouses have backyards?

Some townhomes may have a small backyard or patio, but that’s not a requirement for a home to be considered a townhouse.

Can you get a loan to buy a townhouse?

Yes. Similar to purchasing a traditional single-family home, townhouse buyers can use a home loan to purchase the property.


Photo credit: iStock/JARAMA

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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What is the Federal Home Loan Mortgage Corporation?

The Federal Home Loan Mortgage Corporation, or FHLMC, is known as Freddie Mac, the entity created by Congress for the purpose of buying mortgages from lenders to increase liquidity in the market. Freddie Mac was created in 1970 and expressly authorized to create mortgage-backed securities (MBS) to help manage interest-rate risk.

Because the FHLMC buys mortgages, lenders don’t have to keep loans they originate on their books. In turn, these lenders are able to originate more mortgages for new customers. The mortgage market is able to keep capital flowing and offer competitive financing terms to borrowers because of this system. In other words, the market runs more smoothly because of Freddie Mac and its sister company, Fannie Mae, the Federal National Mortgage Association (FNMA).

If you want to know more about how this government-sponsored enterprise works and how it affects your money, read on for details on:

•   What is the FHLMC and what are FHLMC loans?

•   What is the difference between Freddie Mac and Fannie Mae?

•   What are Freddie Mac mortgages?

•   How does the Federal Home Loan Mortgage Corporation work?

Freddie Mac and Fannie Mae


These organizations, with their friendly-sounding nicknames, serve a very important purpose. Freddie Mac and Fannie Mae were created for the purpose of stabilizing the mortgage market and improving housing affordability. These government-sponsored enterprises (GSEs) do this by increasing the liquidity (the free flow of money) in the market by buying mortgages from lenders. Mortgages are then pooled together into a mortgage-backed security (MBS) and sold to investors. The process created the secondary mortgage market, where lenders, homebuyers, and investors are connected in a single system.

In the past, Freddie Mac and Fannie Mae operated as private companies, though they were created by Congress. Fannie Mae came first in 1938, followed by Freddie Mac in 1970. Freddie Mac’s addition in 1970 resulted in the creation of the first mortgage-backed security.

The federal government took over operations at both companies following the financial crisis in 2008. According to the National Association of Realtors, without government support of Freddie Mac and Fannie Mae, there wouldn’t be very much money available to lend for mortgages.

The Federal Housing Finance Agency (FHFA) has oversight of Freddie Mac and Fannie Mae. On a yearly basis, they assess the financial soundness and risk management of Fannie Mae and Freddie Mac.

What Is the Purpose of the FHLMC?


As mentioned above, the FHLMC, or Freddie Mac, makes the housing market more affordable, stable, and liquid by buying mortgages on the secondary market. When they buy these loans, the retail lenders they buy them from are able to originate more mortgages to new customers and keep the mortgage market flowing smoothly.

There are many types of mortgage loans; the ones that Freddie Mac buys are known as conventional loans. The mortgage loan must meet certain standards (such as loan limits) for Freddie Mac to guarantee they will buy these loans.

In general, the process of successfully obtaining a mortgage usually looks something like this once the buyer has made an offer on a house that’s been accepted:

•   The consumer finds a lender, if they haven’t already done so, and will apply for a mortgage.

•   The lender collects documentation required by the loan type and submits it to underwriting.

•   The underwriter approves the loan.

•   The homebuyer closes on the loan, and mortgage servicing begins

•   The lender sells the loan on the secondary mortgage market to Freddie Mac (or Fannie Mae or Ginnie Mae, depending on what type of loan it is and from what type of lender it originated).

From a homebuyer standpoint, they will see the outward mortgage servicing, which is the entity to which they will send their monthly payment and who takes care of the escrow account. The mortgage servicer is the one who forwards the different parts of the mortgage payment to the appropriate parties.

Mortgage servicing can also be sold from servicer to servicer, but this is different from the sale of a mortgage to Fannie Mae or Freddie Mac.

Freddie Mac is also tasked with the responsibility of making housing affordable. There are specific mortgage programs guaranteed by Freddie Mac and offered by lenders.

•   HomeOne®. HomeOne is a mortgage program that offers low down payment options for first-time homebuyers. There are no income or geographic limits.

•   Home Possible®. Home Possible is a program for first-time homebuyers and low- to moderate-income homebuyers. It offers discounted fees and low down payment options.

•   Construction Conversion and Renovation Mortgage. This type of loan combines the costs of purchasing, building, and remodeling into one loan.

•   Manufactured Home Mortgage. For qualified buyers, Freddie Mac can guarantee mortgages when buying manufactured homes that meet their criteria.

•   Relief Refinance/Home Affordable Refinance Program (HARP). For borrowers with a good repayment history but little equity, loans are available to refinance into a more affordable rate.

Recommended: What Is the Average Down Payment on a House?

Understanding Mortgage-Backed Securities


After a mortgage is acquired from a lender, Freddie Mac can do one of two things: either keep the mortgage on its books or pool it with other, similar loans and create a mortgage-backed security (MBS). These MBS are then sold to investors on the secondary mortgage market.

What’s attractive about a mortgage-backed security to an investor is how secure it is. Fannie Mae and Freddie Mac guarantee payment of principal and interest. Both Fannie Mae and Freddie Mac issue mortgage backed securities now.

Does the FHLMC offer Mortgage Loans?


Freddie Mac does not sell mortgages directly to consumers. You won’t see a Freddie Mac mortgage or an FHLMC loan advertised to consumers. Instead, the FHLMC buys mortgages from approved lenders that meet their standards.

Recommended: What Are the Conforming Loan Limits?

The Takeaway


The housing market in the United States arguably benefits from the role of the Federal Home Loan Mortgage Corporation. Lenders can essentially originate mortgages to as many borrowers as can qualify. The free flow of capital created by the FHLMC also means mortgages are less expensive for homebuyers all around. In short, the smooth operation of the housing market owes much of its success to Freddie Mac and Fannie Mae.

If you’re shopping for a home and looking for a lending partner, consider what SoFi has to offer. With dedicated loan officers, competitive interest rates, flexible terms, and low down payment options, SoFi Mortgage Loans can offer something for nearly every borrower.

SoFi Mortgage Loans: Simple, smart, flexible.

FAQs

What does FHLMC stand for?


FHLMC is an abbreviation of Federal Home Loan Mortgage Corporation. It is commonly referred to as Freddie Mac.

What type of loan is FHLMC?


Freddie Mac guarantees conventional loans that adhere to funding criteria, but it does not offer Freddie Mac mortgages directly to consumers.

What is the difference between FNMA and FHLMC?


Fannie Mae and Freddie Mac originated in different decades and initially had different purposes, but for the most part, they serve the same purpose today of helping to improve mortgage liquidity and availability.

Photo credit: iStock/Andrii Yalanskyi

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


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

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

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When Do I Get My Escrow Refund?

If you, as a mortgage holder, have money in an escrow account, you may see an escrow refund after an escrow analysis at the end of the year. It may not happen often, but an escrow refund check comes if there’s an excess amount in your escrow account. Regulations set by the Consumer Financial Protection Bureau (CFPB) allow the mortgage servicer to retain two months’ worth of your escrow payment as a cushion. Amounts greater than $50 above the cushion should be refunded to you. Escrow balances less than this amount can be retained in the escrow account for the next year or refunded to the borrower.

Escrow refunds generally come when there’s an expense that’s smaller than expected, such as a lower insurance bill or fewer taxes. Your mortgage servicer pays the lower amount and then, when the servicer conducts an escrow analysis, the difference will be refunded to you, typically by check. The funds can also come when an escrow account is closed, such as when the mortgage is paid off or refinanced.

Here, you’ll learn more about escrow refunds, including:

•   What is an escrow refund?

•   How is escrow overage calculated and dispersed?

•   When might you expect an escrow refund?

•   How long does an escrow refund take?

Key Points

•   An escrow refund occurs when there is an overpayment in an escrow account.

•   It typically happens when property taxes or insurance premiums decrease.

•   The lender or servicer will issue a refund check to the homeowner.

•   Homeowners can use the refund to reduce their mortgage balance or for other purposes.

•   It’s important to review escrow statements and communicate with the lender to ensure accurate refunds.

The Escrow Process 101

You might have heard the term “escrow” in a couple of different settings when you’re buying a home. First, an escrow account is like a savings account that is set up for holding earnest money after you make an offer on a house.

And second, a different escrow account is set up by your mortgage servicer after you close on the loan. It can manage your taxes, private mortgage insurance (PMI), and/or homeowner’s insurance. The second factor is most likely to trigger a refund.

Recommended: What Is an Escrow Holdback?

In its simplest form, the escrow process looks like this:

1.    The mortgage servicer sets up an escrow account.

2.    The borrower makes monthly payments to the mortgage servicer.

3.    The mortgage servicer deposits the portion of the monthly payment for the homeowners insurance, taxes, and mortgage insurance into an escrow account.

4.    The taxing entity, homeowners insurance provider, and/or mortgage insurance company send the mortgage servicer a bill.

5.    The mortgage servicer pays the bill on the borrower’s behalf.

6.    The mortgage servicer audits accounts every year to determine if there is an overage or a shortage.

7.    If there is an overage above $50, the borrower can be refunded that money. The servicer will alter the monthly payment lower for the next year.

8.    If there is a shortage, the mortgage servicer will modify your monthly payment to account for both the shortage in the last year and the increased cost for the upcoming year.

What Is an Escrow Refund?

An escrow refund occurs when you, as a mortgage holder, receive a check at the end of the year for the extra money you paid into your escrow account. This is a requirement of mortgage servicing.

When you start making monthly payments to your mortgage servicer, you’ll pay the same amount each month. This amount typically includes your principal, interest, property taxes, homeowners insurance, and PMI (if you have it). The portion designated for taxes, PMI, and homeowner’s insurance will go into your escrow account. This amount is saved until your bill is due. The mortgage servicer pays the bill and deducts the amount from your escrow account.

Every year, the mortgage servicer is required to conduct an escrow analysis. This is a process where the servicer looks at the deposits made by you as well as the bills for insurance and taxes. Adjustments are made, and if you overpaid, you get a refund.

Escrow Refunds at Closing

You also might be wondering, “Do you get escrow money back at closing?” The process for escrow refunds at closing is a little different.

•   Your lender typically uses the money from your existing escrow account to apply toward your down payment or closing costs.

•   Then, for the new escrow account opened by your mortgage servicer, you will contribute what are called “prepaid closing costs” to the account to fund your escrow account. If you end up paying too much, you’ll see an escrow refund check from your servicer after an escrow analysis has been performed.

Mortgage servicers like escrow accounts because it helps protect their investment in your home. When the homeowner’s insurance is paid, the lender can be assured there is protection for the home should anything happen to it. Likewise, when the taxes are paid, the lender doesn’t have to worry about the taxing entity placing a lien on the home.

Recommended: What Is Escrow?

When Might You Expect An Escrow Refund?

Mortgage servicers are required to complete an escrow analysis at the end of the escrow account computation year, according to Regulation X of the Real Estate Settlement Procedures Act (RESPA). After the yearly escrow analysis, you will receive an escrow account statement. This statement will show you the deposits and expenses for the year, as well as show you a projection of anticipated expenses for the upcoming year.

It will also notify you of changes to your monthly payment that need to be made. These steps help ensure that your mortgage servicer is able to pay your taxes and insurance in full from your monthly payment. It’s common for the amount to change a bit from year to year.

If the escrow analysis uncovers a surplus above the allowable cushion in your escrow account, you can expect a mortgage escrow refund within 30 days.

Here are some common scenarios where you might expect to see a refund from your escrow account.

Mortgage Payoff

When you pay off your mortgage or refinance with a new low interest mortgage loan, your mortgage servicer is no longer required to hold an escrow account for you. You may receive a refund from your escrow account for any unused funds.

Lower Tax Bill

If your tax bill decreases, that means the amount collected from your monthly mortgage payment over the year will be more than what is actually due. The excess amount in your escrow account could be refunded to you after escrow analysis.

Better Insurance Rate

If you change your homeowners insurance to a company that offers a better rate, you may be due a refund. If this happens, you’ll likely pay the higher premium that you had locked into your monthly payment for the year. However, once the escrow analysis is completed at year’s end, the savings will be apparent and you should receive your refund.

Private Mortgage Insurance No Longer Required

On many conventional mortgages, there may come a time when you don’t need to pay for mortgage insurance. Let’s say you were a first-time homeowner who put less than 10% on your house. When your home equity reaches 20%, you may be able to have the private mortgage insurance premium removed (depending on the type of mortgage you have).

This may happen in the middle of the year before your servicer expects it. Your monthly payment may not be adjusted until an escrow analysis is completed at the end of the year. After an analysis has been completed, you’ll likely receive a refund because you’ve been overpaying for that mortgage insurance you no longer need.

Recommended: What Is a Mortgage Contingency?

Purchase Overpay

If you overpaid for an escrow item when you closed on your home, the surplus can be refunded to you after an escrow analysis.

When You Won’t See an Escrow Refund

The part of your monthly mortgage payment that goes toward your escrow account is set at the beginning of the year. However, tax rates and insurance rates often increase during the year. When your tax or insurance bill is due, your escrow servicer will pay the larger bill even though there isn’t enough money in the escrow account to cover it. This may result in a negative escrow balance.

In the case of a negative escrow balance, the servicer uses their own money to cover the shortfall. To make up for the shortage, the servicer will make adjustments after completing escrow analysis and take steps to collect the shortfall. The adjustment will also account for the new increased amounts due monthly during the upcoming year.

How Soon Can I Expect a Refund?

For ongoing mortgage payments: Your escrow servicer is required to issue a refund within 30 days of discovering a surplus of $50 or more. (This surplus is above a two-month allowable cushion of escrow payments that your mortgage lender may hold.). Borrowers must be current on their mortgage payment, however, to be able to receive this refund.

If you pay off your mortgage: Your escrow servicer may refund the balance of your escrow account within 20 days. Or, if your new mortgage is with the same servicer, the servicer can apply the balance of the escrow account to a new escrow account with your permission.

The Takeaway

You may see an escrow refund coming your way if you’ve negotiated a better deal for your homeowners insurance, expect to pay less in taxes, or no longer need to pay PMI. It will happen automatically because your mortgage servicer is required to perform yearly escrow analysis. You’ll also receive a refund if you pay off your mortgage and possibly when you refinance. Once that happens, the servicer has 30 days or less to refund the money you’re owed from your escrow account.

If you need a reliable mortgage partner, consider what SoFi Home Loans have to offer. With competitive rates, low down payment options, and dedicated loan officers, you can be assured you’re in good hands.

When you’re ready for a new mortgage, a refinance, or a home equity loan, SoFi is here to help.


Photo credit: iStock/MaslovMax

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


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

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What Is an Interest-Only Loan Mortgage?

An interest-only mortgage lets you pay just interest for a set period of time, typically between seven and 10 years, as opposed to paying interest plus principal from the beginning of the loan term.

While interest-only mortgages can mean lower payments for a while, they also mean you aren’t building up equity (ownership) in your home. Plus, you will likely have a big jump in payments when the interest-only period ends and you are repaying both interest and principal.

Read on to learn how interest-only mortgages work, their pros and cons, and who might consider getting one.

Note: SoFi does not offer interest only mortgages at this time. However, SoFi does offer conventional mortgage loan options.

How Do Interest-Only Mortgages Work?

With an interest-only mortgage, you solely make interest payments for the first several years of the loan. During this time, your payments won’t reduce the principal and you won’t build equity in your home.

When the interest-only period ends, you generally have a few options: You can continue to pay off the loan, making higher payments that include interest and principal; look to refinance the loan (which can provide for new terms and potentially lower interest payments with the principal); or choose to sell the home (or use saved up cash) to fully pay off the loan.

Usually, interest-only loans are structured as a type of adjustable-rate mortgage (ARM). The interest rate is fixed at first then, after a specified number of years, the interest rate increases or decreases periodically based on market rates. ARMs usually have lower starting interest rates than fixed-rate loans, but their rates can be higher during the adjustable period. Fixed-rate interest-only mortgages are uncommon.

An interest-only mortgage typically starts out with a lower initial payment than other types of mortgages, and you can stick with those payments as long as 10 years before making any payments toward the principal. However, you typically end up paying more in overall interest than you would with a traditional mortgage.

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

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

Questions? Call (888)-541-0398.


Interest-Only Loan Pros and Cons

Before you choose to take out an interest-only mortgage, it’s a good idea to carefully weigh both the benefits and drawbacks.

Pros

•  Lower initial payments The initial monthly payments on interest-only loans tend to be significantly lower than payments on regular mortgages, since they don’t include any principal.

•  Lower interest rate Because interest-only mortgages are usually structured as ARMs, initial rates are often lower than those for 30-year fixed-rate mortgages.

•  Frees up cash flow With a lower monthly payment, you may be able to set aside some extra money for other goals and investments.

•  Delays higher payments An interest-only mortgage allows you to defer large payments into future years when your income may be higher.

•  Tax benefits Since you can deduct mortgage interest on your tax return, an interest-only mortgage could result in significant tax savings during the interest-only payment phase.

Cons

•  Cost more overall Though your initial payments will be smaller, the total amount of interest you will pay over the life of the loan will likely be higher than with a principal-and-interest mortgage.

•  Interest-only payments don’t build equity You won’t build equity in your home unless you make extra payments toward the principal during the interest-only period. That means you won’t be able to borrow against the equity in your home with a home equity loan or home equity line of credit.

•  Payments will increase down the road When payments start to include principal, they will get significantly higher. Depending on market rates, the interest rate may also go up after the initial fixed-rate period.

•  You can’t count on refinance If your home loses value, it could deplete the equity you had from your down payment, making refinancing a challenge.

•  Strict qualification requirements Lenders often have higher down payment requirements and stricter qualification criteria for interest-only mortgages.

Recommended: What Is Considered a Good Mortgage Rate?

Who Might Want an Interest-Only Loan?

You may want to consider an interest-only mortgage loan if:

•  You want short-term cash flow A very low payment during the interest-only period could help free up cash. If you can use that cash for another investment opportunity, it might more than cover the added expense of this type of mortgage.

•  You plan to own the home for a short time If you’re planning to sell before the interest-only period is up, an interest-only mortgage might make sense, especially if home values are appreciating in your area.

•  You’re buying a retirement home If you’re nearing retirement, you might use an interest-only loan to buy a vacation home that will become your primary home after you stop working. When you sell off your first home, you can use the money to pay off the interest-only loan.

•  You expect an income increase or windfall If you expect to have a significant bump up in income or access to a large lump sum by the time the interest period ends, you might be able to buy more house with an interest-only loan.

Recommended: Tips for Shopping for Mortgage Rates

Qualifying for an Interest-Only Loan

Interest-only loans aren’t qualified mortgages, which means they don’t meet the backing criteria for Fannie Mae, Freddie Mac, or the other government entities that insure mortgages. As a result, these loans pose more risk to a lender and, therefore, can be more difficult to qualify for.

In general, you may need the following to get approved for an interest-only loan:

•  A minimum credit score of 700 or higher

•  A debt-to-income (DTI) ratio of 43% or lower

•  A down payment of at least 20% to 30% percent

•  Sufficient income and assets to repay the loan

The Takeaway

An interest-only mortgage generally isn’t ideal for most home-buyers, including first-time home-buyers. However, this type of mortgage can be a useful tool for some borrowers with strong credit who fully understand the risks involved and are looking at short-term ownership or have a plan for how they will cover the step-up in payment amounts that will come down the road.

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


SoFi Mortgages: simple, smart, and so affordable.


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


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


*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.

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

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Historical 30-Year Fixed-Rate Mortgage Trends

Historical 30-Year Fixed-Rate Mortgage Trends

Historically speaking, mortgage rates have remained relatively low since the Great Recession, with some fluctuation at times due to market conditions. As a result, a generation of homebuyers has become accustomed to a low 30-year fixed-rate mortgage.

But with mortgage rates on the rise, it can put a sour taste in the mouths of people trying to join the ranks of homeowners in the country. They may be thinking that they missed an opportunity to buy a home. However, it’s important to look at the history of mortgages and mortgage rates to put the current conditions into context.

Key Points

•   Historical mortgage rates have been relatively low since the Great Recession, encouraging a generation of homebuyers.

•   The Federal Housing Administration initiated modern mortgage lending in the U.S. during the 1930s.

•   Mortgage rates peaked at 18.63% in October 1981 due to tight monetary policies.

•   Post-2007, rates dropped significantly, influenced by the Federal Reserve’s efforts to stimulate the economy.

•   Recent trends show a rise in mortgage rates, reaching 7.79% in October 2023 before slightly decreasing.

The History of Mortgage Rates

The modern history of mortgage lending in the U.S. began in the 1930s with the creation of the Federal Housing Administration. From the 1930s through the 1960s, a combination of government policy and demographic changes made owning a home a normal part of American life. During this time, the 30-year fixed-rate mortgage became the standard for home mortgage loans.

When discussing the fluctuation of mortgage rate trends, analysts usually refer to the average 30-year fixed-rate mortgage. Here’s a look at the trend of these mortgage rates since the 1970s.

The 1970s

Throughout the 1970s, mortgage rates rose steadily, moving from the 7% range into the 13% range. This uptick in rates was due, in part, to the Arab oil embargo, which significantly reduced the oil supply and sent the U.S. into a recession with high inflation — known as stagflation.

As a result, Federal Reserve Chairman Paul Volcker made a bold change in monetary policy by the end of the decade, raising the federal funds rate to combat inflation. Though the Federal Reserve doesn’t directly set mortgage rates, its monetary policy decisions can still impact many financial products, including mortgages.

The 1980s

The average 30-year fixed-rate mortgage hit an all-time high in October 1981 when the rates reached 18.63%. The Federal Reserve’s tight monetary policy affected this high borrowing cost and put the economy into a recession. However, inflation was under control by the end of the 1980s, and the economy recovered; mortgage rates moved down to around 10%.

The 1990s and 2000s

Mortgage rates continued a downward trend throughout the 1990s, ending the decade at around 8%. At the same time, the homeownership rate in the U.S. increased, rising from 63.9% in 1994 to 67.1% in early 2000.

Several factors led to a housing crash in the latter part of the 2000s, including a rise in subprime mortgages and risky mortgage-backed securities.

The housing crash led to the Great Recession. To boost the economy, the Federal Reserve cut interest rates to make borrowing money cheaper. Mortgage rates dropped from just below 7% in 2007 to below 5% in 2009.

Recommended: ​​US Recession History: Reviewing Past Market Contractions

The 2010s

Mortgage rates steadily decreased throughout most of the 2010s, staying below 5% for the most part. The Federal Reserve enacted a zero-interest-rate policy and a quantitative easing program to prop up the economy during this time following the Great Recession. This helped keep mortgage rates historically low.

The 2020s

The Federal Reserve reduced the federal funds rate to near-zero levels in March 2020, causing a drop in rates of various financial products. The effects of the fallout from the Covid-19 pandemic pushed mortgage rates below previous historic lows. The average 30-year fixed-rate mortgage hit 2.77% in August 2021.

However, with inflation reaching levels not experienced since the early 1980s, the Federal Reserve reversed course. The central bank started to tighten monetary policy in late 2021 and early 2022, which led to a rapid increase in mortgage rates. In May 2022, the average mortgage rate was above 5%. While this was below historical trends, it was the highest rate since 2018. From there, the 30-year fixed rate mortgage crept upward, reaching a high of 7.79% in October 2023 before declining to 7.1% in April 2024.

Recommended: How Inflation Affects Mortgage Interest Rates

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Why Do Mortgage Rates Change?

As we can see from looking at interest rate fluctuations, major economic events can significantly impact mortgage rates both in the short and long term. As noted above, this has to do primarily with the Federal Reserve.

Federal Reserve actions influence nearly all interest rates, including mortgages through the prime rate, long-term treasury yields, and mortgage-backed securities. The Federal Reserve sets the federal funds benchmark rate, the overnight rate at which banks lend money to each other.

This rate impacts the prime rate, which is the rate banks use to lend money to borrowers with good credit. Most adjustable short-term rate loans and mortgages use the prime rate to set the base interest rates they can offer to borrowers. So, after the Federal Reserve raises or lowers rates, adjustable short-term mortgage loan rates are likely to follow suit.

Longer-term mortgage rates have also risen and fallen alongside economic and political events with movement in long-term treasury bond yields. In the short term, a Federal Reserve interest rate change can affect mortgage markets as money moves between stocks and bonds, affecting mortgage rates. Longer-term mortgage rates are influenced by Fed rate changes but don’t have as direct an effect as short-term rates.

Recommended: Federal Reserve Interest Rates, Explained

Can Changing Rates Affect Your Existing Mortgage?

If you have a mortgage with a variable interest rate, known as an adjustable-rate mortgage, changing rates can affect your loan payments. With this type of home loan, you may have started with an interest rate lower than many fixed-rate mortgages. That introductory rate is often locked in for an initial period of several months or years.

After that, your interest rate is subject to change — how high and how often depends on the terms of your loan and interest rate fluctuations. These changes are generally tied to the movement of interest rates, but more specifically, which index your adjustable-rate mortgage is linked to, which can be affected by the Fed’s actions.

However, most adjustable-rate mortgages have annual and lifetime rate caps limiting how high your interest rate and payments can change.

If you took out a fixed-rate mortgage, your initial interest rate is locked in for the entire time you have the home loan, even if it takes you 30 years to pay it off.

Recommended: What Is a Good Mortgage Rate?

The Takeaway

If you are in the market to buy a home, it might be tempting to rush and buy when mortgage rates drop a bit, or to put off buying until rates hopefully decrease in the future. However, choosing the perfect time to buy a home based on the ideal rate can be difficult. You’re probably better off letting your need for a home and your personal financial situation drive your decision making. (Do you have a down payment saved up? Is your debt under control?) When it’s time to buy, do your research and choose the best mortgage available for your personal situation.

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

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