SoFi

Online bill pay can automate payments of one-time and recurring bills, allowing you to seamlessly transfer funds from your bank account to a payee. Using technology in this way can not only be convenient, it may reduce the odds that you’ll forget to pay a bill and end up getting hit with a late fee.

If you’re curious to know more about what online bill pay is, how it works and how to set it up, read on.

What Is Online Bill Pay?

Bill pay is a way of paying your bills online and automating your finances. It allows you to use your mobile device, laptop, or tablet to send money from your account to that of another person or business. No check writing or manual transfers are required.

You specify the funds and provide details on the recipient, and the amount is automatically taken from your account and sent to the payee.

While you can do this in real time, you can also determine the “when.” That means you can schedule bills for payment in advance whenever you have time free, which can be a huge life hack. You can also typically set up recurring payments, which can make paying bills seamless and can help you avoid late fees, too.

How Does the Bill Pay Process Actually Work?

Online bill pay involves a few steps, such as logging into your bank account, accessing the bill pay feature, providing information on where the money should go and the amount, and when you would like it sent.

Then, the banks involved handle the rest, with the funds being electronically debited from your account as indicated and sent to your credit. Often, online bill pay uses the Automated Clearing House, or ACH, system to move the money between financial institutions.

With this process, you can avoid writing and mailing checks or using high-interest credit cards to make payments. In this way, bill pay can be a useful feature of online banking.

Here are some of the ways you might use online bill pay services:

For Electronic Payments to Major Companies

You can use bill pay for automated payments to such major companies as:

•  Your mortgage lender

•  Utilities

•  Your car loan lender

•  Your credit card issuer

•  Your student loan provider

•  Subscription services, like streaming platforms

For Paper Checks to Small Businesses or Individuals

You can also likely use bill pay instead of writing checks for such things as:

•  Gym memberships

•  Individuals, such as a dog walker or landscaper

•  Charities you donate to

Not only can this save you the time it takes to write a check, but it can also avoid any worry of the check being stolen or lost.

Bill Pay vs Autopay: What’s the Difference?

You may be tempted to use the terms bill pay and autopay interchangeably, but they are actually two different processes.

•   With bill pay, you are set up one or more payments; you are establishing when and how much money will be taken out of your bank account and transferred to the payee.

•   With autopay, however, you are authorizing a creditor to take money out of your account (which can make some people feel as if they are sacrificing control) or to use your bank’s bill payment system to do so.

Recommended: Paying Bills From a Savings Account

How to Set Up Online Bill Pay in 5 Steps

While bill pay can help make managing finances simpler, it does require some initial manual set-up. But, once you’ve learned how bill pay works, this automatic feature can make keeping track of and paying bills less cumbersome. Here’s how to set up bill pay:

Step 1: Choose a Bank or Credit Unions That Offers Bill Pay

While many financial institutions offer digital payment tools, like online bill pay, it’s worth investigating the features that are included at each before opening up an account. Online billing is free with some accounts, while some providers may charge for each transaction — either per bill or on a repeating monthly basis. You can likely set it up on your financial institution’s website or your banking app.

Step 2: Gather Your Bill Information

Next, think about which ongoing bills you want to automate.

•   Predictable expenses (or fixed vs. variable expenses) that don’t fluctuate from month to month, such as loan and mortgage payments or the internet bill, are solid candidates for recurring automated payments. You may want to schedule payment for a time each month when you know there’ll be sufficient funds in your account to cover what’s come due. Some service providers may even allow you to change the due date on certain bills.

•   Bills that change every month may be more challenging to automate. For instance, if your credit card bill might be $300 one month and $1,300 the next, it can be hard to be certain you’ll have enough money in your checking account to cover the cost.

When you know which bills you want to pay, you’ll sign onto your bank’s website or app and search for the “Pay a Bill” or “Online Bill Pay” function.

Worth noting: Some financial institutions place a cap on the amount of money that can be transferred electronically through bill pay. If an automatic payment exceeds that designated transaction limit, users may then need to pay via a physical method, such as a personal or cashier’s check.

Step 3: Add Your Payees in Your Banking App

The bank’s portal or app will then typically guide you to add details so your funds can be transferred from your checking account to your payee.

You’ll enter the details of each biller you want to pay, including their name, address, and your account number. Or you may be able to search for your biller or choose from a list provided by the bank.

Step 4: Schedule Your First Payment (One-Time or Recurring)

In this step, you can either schedule a one-time payment (to happen ASAP or at a later date), or you might set up a recurring payment at a given frequency (say, on the first of every month).

Step 5: Confirm the Payment and Set Up Alerts

Now, you’re ready to submit your payment. Before authorizing the transfer, double-check the payment details. When you’re ready to finish your transaction, you may be required to submit a security or multi-factor authentication code.

Some financial institutions place a cap on the amount of money that can be transferred electronically through bill pay. If an automatic payment exceeds that designated transaction limit, users may then need to pay via a physical method, such as a personal or cashier’s check.

What Are the Benefits and Risks of Using Bill Pay?

Here are details about some of the consequences of not paying bills on time.

Benefit: Helps Avoid Late Fees and Protects Your Credit

One of the ways companies or service providers enforce on-time payments is by penalizing people for paying late. Whether it’s a credit card, utility bill or simply missing a payment date by a single day, submitting a late payment can result in late fees, higher interest rates, or other charges.

On top of late penalties, some providers may also charge interest on the balance owed, essentially creating a double wallop of fees if you’re late paying a bill.

•   In some cases, the interest may be charged starting the day an account becomes overdue. In others, it may accrue going back to the purchase date or transaction day.

•   Depending on the interest rate charged and how frequently that interest compounds, this fee could quickly balloon to more than the initial fee assessed.

In addition, late payments are typically reported to the credit bureaus when a payment goes past 30 days unpaid. This in turn can negatively affect your credit score.

Benefit: Simplifies Your Financial Life

Another benefit of using online bill pay can make managing your money easier. There’s no check writing required, and you can make payments anytime, from anywhere you have a wifi connection. So if you need to pay a bill while you are on vacation or you want to set up monthly payments to your power company, it’s easy to do.

As noted above, being able to manage your bill paying with this electronic service can also help you avoid late payments, which can help maintain or build your credit score.

You can also schedule payments for those moments you know there’s enough money in your account to cover debits (say, right after payday), which can help you avoid overdraft fees.

Risk: Payments Aren’t Instant and Require Buffer Time

When using bill pay, it’s wise to keep in mind that it is not an instant payment. Processing times can vary on such factors as time of day and day of the work, as well as individual financial institutions’ policies. Typically, it can take a couple of days for an online bill pay to be completed, so it can be smart to schedule the payment for a few days ahead of the due date. Otherwise, you risk a late payment and possible fees.

Risk: Requires Sufficient Funds to Avoid Issues

Automating your finances doesn’t mean you don’t have to monitor your finances. If you don’t keep very careful tabs on your money, you could risk overdraft if you don’t have overdraft protection. Say you have unusually high expenses one month; your bank balance might be lower than needed to cover your automated bill payments. This could lead to fees and headaches.

Recommended: How to Pay Bills After Job Loss

How Long Does Bill Pay Usually Take?

Bill pay processing times can vary, but electronic payments usually take 2-5 business days. This can offer an advantage over mailing a paper check which requires time in transit as well as up to several days to process.

Keep in mind that scheduling a bill pay at 7pm on a Friday is likely to require more time to arrive at its destination than one that you schedule at 9am on a Monday. Timing and day of the week will impact your payments, so factor this in when scheduling. It’s often best to schedule payments a few days in advance to make sure they reach the creditor by the due date.

The Takeaway

Bill paying is a fact of life, but there are tools that can make it quicker and more convenient. Signing up for automated online bill pay can put you in control. It can ensure that bills get paid on time, reducing the likelihood of late-payment or overdraft fees. It can be a smart move to see what your bank offers in terms of this service and whether it can simplify your financial life.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Is online bill pay safe to use?

Online bill pay is typically very safe. While no financial or digital process is entirely risk-free, a reputable bank or credit union usually uses state-of-the-art security measures, such as encryption and multi-factor authentication.

Can I stop a bill payment after I’ve scheduled it?

If a payment hasn’t yet been processed, you can likely cancel it. You may be able to stop a payment via your bank’s app or website or by contacting customer service. A fee may be involved. If the payment is already being sent, however, you may be out of luck in terms of stopping payment.

Can I use bill pay to pay an individual or a landlord?

While many people may think of bill pay as being used to send funds to, say, a utility or other company, you can often use bill pay to send funds to an individual (say, your landscaper or babysitter). You will need their banking details to set this up.

What happens if I schedule a payment but don’t have enough money in my account?

If you schedule an online bill pay but don’t have enough cash in your bank account, the payment will likely be declined. This means your payee doesn’t receive the funds, and you may be hit with late fees and/or overdraft fees. Typically, your bank will notify you that the funds didn’t transfer, and you will need to take action to remedy the situation.

Is there a fee to use online bill pay?

There typically isn’t a fee charged by your bank to use online bill pay. However, some financial institutions may charge a fee to expedite an online bill payment. Also, third-party bill pay services may sometimes charge a fee to use their services.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q325-101

It may be tempting to tap your 401(k) retirement savings when you have pressing bills, such as high-interest credit card debt or multiple student loans. But while doing so can take care of current charges, you may well be short-changing your future. Early withdrawal of funds can involve fees and penalties, plus you are eating away at your nest egg.

Here’s a look at the pros and cons of using a loan or withdrawal from your 401(k) to pay off debt, along with some alternative options to consider.

What Are the Rules for 401(k) Withdrawal?

A 401(k) plan is designed to help you save for your retirement, so taking money out early usually isn’t easy — or cheap. Generally, you’re allowed to begin taking withdrawals penalty-free at age 59½. If you take money out before that age, the IRS typically imposes a 10% early withdrawal penalty.

If you’re 59 1/2 or older, you won’t have to pay the 10% penalty. However, the amount you withdraw from a traditional 401(k) will still be taxed as income. If you have a Roth 401(k) and have held the account for at least five years (and you’re at least 59½), however, you can withdraw funds tax-free.

💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

Understanding 401(k) Withdrawal Taxes and Penalties

When you withdraw money from a traditional 401(k), the IRS considers it taxable income. That means you’ll owe income tax based on your tax bracket at the time of the withdrawal, plus a potential 10% penalty if you’re under the age threshold.

For example, let’s say you’re 33 years old and you have enough in your 401(k) to withdraw the $15,000 you need to pay off your credit card balance. You can expect to pay the 10% penalty, which will be $1,500. If you pay a tax rate of 22%, you can also expect to owe $3,300 in taxes. This will leave you with $10,200 to put towards your credit card debt.

Exceptions to Early Withdrawal Penalties

There are some exceptions to the 10% withdrawal penalty. You might be able to withdraw funds from a 401(k) without paying a penalty if you need the funds to cover:

•  Emergency expenses

•  Unreimbursed medical expenses over a certain amount

•  Funeral expenses

•  Birth or adoption expenses

•  First-time home purchase

•  Expenses and losses resulting from a federal declaration of disaster (subject to certain conditions)

Your 401(k) summary and plan description should state whether the plan allows early withdrawals in particular situations. Keep in mind that there may be a cap on how much you can withdraw penalty-free. Also, any withdrawal from a 401(k) is generally taxed as ordinary income.

Federal and State Tax Implications

If you make an early withdrawal from your 401(k), the amount is typically added to your gross income. As such, you will owe federal tax on the distribution at your normal effective tax rate. Depending on where you live, your withdrawal may also be subject to state income taxes.

Taking a 401(k) Loan to Pay Off Debt

If you’re looking to use a 401(k) to pay off debt, you may be able to avoid paying an early withdrawal penalty and taxes if you take the money out as a loan rather than a distribution.

A loan lets you borrow money from your 401(k) account and then pay it back to yourself over time. You’ll pay interest, but the interest and payments you make will go back into your retirement account.

Before going this route, however, you’ll want to make sure you understand the rules and regulations surrounding 401(k) loans:

•  Depending on your employer, you could take out as much as half of your vested account balance or $50,000, whichever is less.

•  You typically need to repay the borrowed funds, plus interest, within five years of taking your loan.

•  You may need consent from your spouse/domestic partner before taking a 401(k) loan.

Here’s a look at the benefits and drawbacks of using a 401(k) loan to pay off debt:

Pros

•  No tax or penalty if repaid on time: You won’t owe taxes or early withdrawal penalties as long as you follow the repayment schedule.

•  You pay interest to yourself: The interest you pay on the loan goes back into your retirement plan account.

•  No impacts to your credit: A 401(k) loan doesn’t require a hard credit inquiry, which can cause a small, temporary dip in your scores. And if you miss a payment or default on your loan, it won’t be reported to the credit bureaus.

Cons

•  You may have to repay it quickly if you leave your job: If you leave or lose your job, the full outstanding loan balance may be due in a short period of time. If you can’t repay it, the IRS treats it as a distribution, meaning taxes and penalties may apply.

•  Loss of investment growth: Money taken out of your 401(k) isn’t earning returns, which can hurt your long-term savings and future security.

•  Borrowing limits: You might not be able to access as much cash as you need, particularly if you haven’t been saving for long. Typically, the maximum loan amount is $50,000 or 50% of your vested account balance, whichever is less.

How Early 401(k) Withdrawals Can Impact Your Financial Future

While paying off debt may feel urgent now, dipping into your 401(k) can have long-lasting effects on your retirement security.

Loss of Compound Growth

One of the most powerful benefits of a 401(k) is compound growth. Then is when your initial investment earns returns, then those returns are reinvested and also earn returns. “Compounding helps you to earn returns on your returns, which can help your earnings grow exponentially over time,” explains Brian Walsh, CFP® and Head of Advice & Planning at SoFi. The longer your money has to grow and compound, the more significant the impact of compounding becomes.

Reduced Retirement Readiness

Using your 401(k) to pay off debt means you’ll have less money later in life. When you withdraw or borrow from your account, you reduce the amount that’s working for you. Even a small early withdrawal can result in tens of thousands of dollars in lost retirement income over the decades.

For many Americans, retirement savings are already insufficient. Reducing your nest egg further could lead to delayed retirement or financial insecurity in your senior years.

Alternatives to Cashing Out a 401(k) to Pay Off Debt

Before tapping into retirement funds, consider exploring these less risky options for managing debt.

Balance Transfer Credit Cards

Some credit cards offer introductory 0% APR on balance transfers for a set period of time, often 12 to 21 months. If you qualify, this can give you a break from interest and allow you to pay off your balance faster. Just make sure you pay it off before the promotional period ends to avoid high interest rates.

Debt Consolidation Loans

If you have high-interest credit card debt, you might look into getting a ​​credit card consolidation loan. This is a type of personal loan that you use to pay off multiple credit card balances, combining them into a single loan with a potentially lower interest rate and a fixed monthly payment. This can simplify debt management and potentially save money on interest over time. Unlike 401(k) withdrawals, these loans won’t impact your retirement savings.

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

Credit Counseling Services

Nonprofit credit counseling agencies can help you develop a debt management plan, negotiate lower interest rates with creditors, and offer financial education. This approach may take longer, but it protects your retirement future and can help build good long-term financial habits.

Recommended: Debt Consolidation Calculator

What Are Some Ways of Minimizing Risks to Your Retirement?

If you decide using a 401(k) to pay off debt is your best (or only) option, here are a few things that could help you lower your financial risk.

Prioritizing High-Interest Debt Strategically

Consider taking the avalanche approach to paying off debt. This involves paying off debt with the highest interest rate first, while continuing to pay the minimum on your other debts. Once that highest-interest debt is paid off, you move on to the debt with the next-highest interest rate, and so on.

By focusing on the most expensive debt, you minimize the total interest paid over time, which can help you save money and get you out of debt faster.

Increasing Retirement Contributions Later

If you take a loan or withdrawal now, it’s wise to plan on increasing your 401(k) contributions once you’re in a better financial position. Many people underestimate their ability to “catch up” later, but making additional contributions, especially after age 50 (when catch-up contributions are allowed), can help rebuild your nest egg.

The Takeaway

Using a 401(k) loan or withdrawal to pay off debt may seem like an attractive option, especially when you’re feeling overwhelmed. But it’s a decision that shouldn’t be taken lightly. Early withdrawals generally come with taxes and penalties. And both withdrawals and loans remove money from your retirement account that is growing tax-free.

Instead of cashing out your future, consider alternative debt repayment strategies like balance transfer cards, credit counseling, or using a personal loan to pay off high-cost debt (ideally at a lower rate).

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

FAQ

How much is the penalty for an early 401(k) withdrawal?

If you withdraw from your 401(k) before age 59½, you’ll typically face a 10% early withdrawal penalty on the amount taken out. Additionally, the withdrawn funds are considered taxable income, so you’ll owe federal — and possibly state — income taxes.

Can you take a loan from your 401(k)?

Yes, many 401(k) plans allow participants to take loans from their account. Typically, you can borrow up to 50% of your vested balance, up to a maximum of $50,000. The loan must usually be repaid with interest within five years.
While it’s convenient, taking a loan from your 401(k) can reduce your retirement savings and potential investment growth.

What are alternatives to a 401(k) withdrawal to pay off credit card debt?

Before tapping into your 401(k), it’s a good idea to consider options that won’t jeopardize your retirement savings. Alternatives include using a 0% APR balance transfer card or consolidating credit card debt with a personal loan, both of which can lower interest costs.
You could also negotiate lower interest rates or payment plans with creditors. Boosting income through side jobs or adjusting your budget to free up funds may help too. These options carry less financial risk and don’t incur early withdrawal penalties or taxes.

Does a 401(k) loan affect your credit score?

A 401(k) loan does not impact your credit score because it doesn’t require a credit check to obtain and the loan itself isn’t reported to credit bureaus. However, if you fail to repay the loan on time — especially after leaving your job — it may be treated as a taxable distribution, resulting in penalties and taxes. While that still won’t impact your credit, it can affect your financial health and future security.

What happens if you leave your job with an outstanding 401(k) loan?

If you leave your job with an unpaid 401(k) loan, the remaining balance is usually due quickly. If you don’t repay it in time, the unpaid amount is typically treated as a distribution, triggering income taxes and a 10% early withdrawal penalty if you’re under 59½. This can create a significant tax burden.

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.

SOPL-Q325-010

If your monthly mortgage payment no longer fits your lifestyle or financial goals, you may be able to change it with mortgage refinancing or recasting. Recasting and refinancing are two ways a borrower can save on mortgage costs — sometimes a jaw-dropping amount. To understand which might be best for you, it helps to understand the difference between them and the pros and cons of recasting your mortgage vs. refinancing.

The Difference Between Recast and Refinance

Recasting is the reamortizing of an existing mortgage, meaning the lender will recalculate your monthly payments. Refinancing involves taking out a completely new mortgage with a new rate, and possibly a new term, and paying off your old mortgage in the process.

Recasting

If your lender offers mortgage recasting and your loan is eligible, here’s how it works: You make a large lump-sum payment — $10,000 might be required — toward the principal balance of your mortgage loan. The lender recalculates the monthly payments based on the new, lower balance, which shrinks the payments. The lender may charge a few hundred dollars to reamortize the loan.

Mortgage recasting does not change your loan length or interest rate. But because your principal amount is lower, you’ll have lower monthly payments and will pay less interest over the life of the loan.

If you were to put a chunk of money toward your mortgage principal and not recast the loan, your payments would not change, though the extra principal payment would reduce your interest expense over the life of the loan.

Who might opt for mortgage recasting? Someone who has received a windfall and wants to put it toward the mortgage might like this option. Sometimes it’s someone who has bought a new home before selling the previous one. Once the old home is sold, the homeowner can use some of the proceeds to recast the new mortgage.

Another candidate for recasting might be someone who wants to use the lump sum to pay their loan down to 80% of the home’s value so they can request to stop paying for private mortgage insurance (PMI) or get it automatically dropped (when they reach 78%).

FHA, VA, and USDA loans are not eligible for mortgage recasting. Some jumbo loans are also excluded. If you want to change the monthly payments on those types of mortgages, you’ll need to refinance your loan.

Refinancing

When you seek refinancing, you’re applying for a brand-new loan with a new rate and terms, possibly from a new lender. Most people’s goal is a lower interest rate, a shorter loan term, or both.

While finding a competitive offer might take some legwork, refinancing could help you save money. A lower interest rate for a home loan of the same length will reduce monthly payments and the total amount of interest paid over the life of the loan.

A homeowner who refinances to a shorter term, say from 30 years to 15, will pay much less total loan interest. Fifteen-year mortgages also often come with a lower interest rate than 30-year home loans.

Refinancing may make sense for homeowners who are planning to stay put for years; those who want to switch their adjustable-rate mortgage to a fixed-rate one; and borrowers with FHA loans who want to shed mortgage insurance premiums (MIP), on a loan they’ve paid down or a home that has appreciated. Most FHA loans carry mortgage insurance for the life of the loan. Equity-rich homeowners who’d like to get their hands on cash may find cash-out refinancing appealing.

Recommended: Mortgage Questions for Your Lender

Pros and Cons of Mortgage Recasting

There are both positive and negative aspects to mortgage recasting.

Pros of Recasting

Mortgage recasting lowers your monthly mortgage payments and lets you save on total loan interest while keeping the same interest rate. Since you recast your mortgage with your existing lender, the process is pretty straightforward, and the cost could be as low as $150.

Cons of Recasting

There are some potential drawbacks to mortgage recasting, as well. Making a large lump-sum payment means you could be trading liquidity for equity – and creating financial instability if unexpected expenses arise or if the housing market takes a downward turn.
If you have other debts with higher interest rates, you may want to avoid mortgage recasting. It could make more sense to use the money you would put toward the principal to pay down your higher-interest debt first.

“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.

Recommended: Cash-Out Refinance vs HELOC

Pros and Cons of Mortgage Refinancing

Mortgage refinancing also has upsides and downsides.

Pros of Refinancing

If you are eligible to refinance, you won’t need a large cash source in order to lower your mortgage payments. Instead, your main goal is to qualify for a lower interest rate. If you succeed, you will save a lot of money in interest over time.

With a cash-out refi, you can tap your home equity and use that money for whatever you need to do: pay down higher-interest debt, add to the college fund, or remodel your kitchen.

Cons of Refinancing

Reducing your loan term with a refi could result in a higher mortgage payment, even though it can let you save total interest over the life of the new loan.

Refinancing involves closing costs, which could range from 2% to as much as 6% of the remaining principal. You’re taking out a new mortgage, after all. Some lenders will let you roll closing costs into your loan, though this may raise your interest rate or your loan balance.

To figure out whether a refinance might be worth the price of closing costs, it’s a good idea to calculate the break-even point, when interest savings will exceed closing costs. Everything beyond that break-even point will be savings.

💡 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.

When to Choose Recasting Over Refinancing

Recasting vs. refinancing can seem like a tough choice. But there are a number of situations in which a recast may make more sense.

•   You’ve gotten a windfall and don’t have other pressing financial issues. A recast allows you to cheaply and easily reduce your monthly payments.

•   You have a better rate on your mortgage than you could get today. A recast will let you keep that rate, while reducing your payments.

•   You’re self-employed or have poor credit and would have difficulty qualifying for a mortgage refinance, but you want to lower your monthly payments.

•   You want to lower your monthly payments with a cheaper, faster process than a refinance.

Factors to Consider Before Making a Decision

As you contemplate getting a mortgage recast vs. a refinance, there are a few things to keep in mind.

Loan Type and Lender Policies

It may sound appealing to recast vs. refinance your mortgage but only conventional loans are eligible. If you have a government-backed loan – like a VA home loan or an FHA mortgage – you may need to consider a refinance vs. a recast.

Even if you do have a conventional loan, you’ll still need to find out if your lender offers mortgage recasts (not all of them do). If your lender does provide mortgage recasts, ask what your lender’s requirements are and see if you meet them. Typically, lenders may want:

•   A minimum payment toward principal – typically $10,000

•   Sufficient home equity, as determined by the lender

•   Good financial standing, meaning that you have built up a history of on-time payments

Long-Term Financial Goals

Before you decide on mortgage recasting vs. refinancing, you’ll want to review which process aligns better with your long-range plans.

Say you’re planning an early retirement. If you’d really like to pay off your mortgage soon and not have to budget for that monthly payment any longer, you may want to consider a mortgage refinance vs. a recast. It will let you adjust your interest rate and loan term. And though closing costs are more expensive than a recast servicing fee, a refinance can let you pay your loan off earlier.

However, if you’re planning to work for the next 30 years but would like to pay less each month and save on your overall interest, a mortgage recast vs. a refinance may make sense for you. That’s especially true if you’ve gotten a windfall – from a bonus at work or from selling a previous home, for instance – and don’t have other pressing debts or needs.

A recast may also be appealing if you already have a great interest rate and probably couldn’t get a better one, for instance. Or if you just started a business and don’t have the kind of documentable financial stability a lender would want to see before giving you a refinance. In these situations, you may want to consider recasting your mortgage vs. refinancing.

The Takeaway

A mortgage recast vs. refinance: different animals with similar aims. A recast requires a lump sum upfront but will shrink payments and total loan interest. A mortgage refinance may greatly reduce borrower costs and sometimes free up cash or shorten the loan term. The one that is right for you will depend on your current loan terms and your available cash, among other factors.

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

Can you recast and refinance at the same time?

Not exactly. However, a cash-in refinance combines characteristics of both, letting you make a large payment toward your principal as you get a new home loan. This allows you to get new and, ideally, more favorable terms on a smaller loan, which can save you money. You will, however, have to pay closing costs.

Can you recast any type of mortgage loan?

No. You can recast conventional loans, but not government-backed loans like FHA or VA mortgages. Some lenders may recast jumbo loans.

Does recasting your mortgage affect your interest rate?

Unlike refinancing, recasting your mortgage doesn’t change your interest rate or your loan term.

Are there fees associated with a mortgage recast?

There may be service fees for a mortgage recast, but those are typically no more than a few hundred dollars.

When is refinancing better than recasting?

You may be better off with a refinance vs. a recast if you are interested in paying your loan off earlier than originally planned, if you can get a better interest rate now, or if you don’t have a significant lump sum to put toward your loan principal.

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.

SOHL-Q325-034