What Is Automated Investing?

Automated investing is a type of investing that uses computer algorithms to recommend investment portfolios to an individual based on their goals, time horizon, and risk profile. Automated investing platforms, also known as robo-advisors, tend to feature lower fees, lower minimum balances, digital applications, and a more hands-off approach to investing.

Because automated investing can be done with little or no direct human effort, it can be an ideal option for investors just starting their wealth-building journey. Automated investing may reduce the learning curve for some investors entering the financial markets, helping them start building and managing a portfolio to achieve their financial goals.

Key Points

•   Automated investing uses algorithms to provide tailored financial planning and retirement advice.

•   Lower fees and minimum balances make automated investing accessible for beginners.

•   Platforms collect data on financial situations, risk tolerance, and goals to manage a diversified portfolio.

•   Automated platforms handle tasks like portfolio rebalancing and tax-loss harvesting.

•   Drawbacks include limited human interaction and potential exposure to market volatility.

Automated Investing: A Primer

There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.

Automated investing uses computer algorithms to select and trade stocks, exchange-traded funds (ETFs), or other assets without the need for oversight by a human financial advisor.

Automated investing has changed the financial advisory game in fundamental ways. Like so much else that has happened during the digital revolution, automated investing has eliminated the middle man and is delivering a service directly to the client – you, the investor.

Investors who sign up for an automated investing platform usually start by filling out a questionnaire, which collects information about the investor’s financial situation, risk tolerance, and goals. The automated investing advisor then uses this data to recommend investments to the client that may help them meet their financial goals. Based on the investor’s input, the automated investing platform will recommend and manage a pre-determined portfolio for the investor using computer algorithms and other data.

Automated investing advisors may also handle portfolio rebalancing and tax-loss harvesting if the client chooses these services. (SoFi’s automated portfolio includes the above features, but not automated tax-loss harvesting.)

Most automated advisors use Modern Portfolio Theory (MPT) to create and manage a portfolio’s asset allocation. The idea is to decrease risk by diversifying a portfolio into many assets and not “put all your eggs in one basket.”

Automated Investing vs Robo Advisors

Automated investing tools are sometimes referred to as robo advisors. Investors may see the terms automated investing and robo-advisors used interchangeably to describe digital tools that use computer algorithms to manage a financial portfolio.

In reality, though, automated investing is a broader term that can refer to several aspects of today’s financial products and features.

•   Using automatic transfers and contributions to investment portfolios and retirement plans is a form of automated investing.

•   Target date funds, a type of mutual fund that rebalances over time to become less conservatively invested, uses a form of automated investing known as a glide path.

Recommended: Robo-Advisor vs. Financial Advisor: Which Should You Choose?

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Why People Choose an Automated Investing Strategy

There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.

Low-Cost Process

Automated investing advising generally costs less than traditional financial advisors. The reason the cost of automated advising is lower is because it relies on an algorithm, while the guidance of a live person can cost more. In other words: A human touch comes with a premium price.

Automated investment fees are usually a percentage of the assets under management (AUM). Typical fees are less than 0.5% of AUM annually. So if an investor puts $10,000 into an automated investing service, they generally pay less than $50 per year.

By comparison, a reasonable rate for a human financial advisor would be a 1% investment fee. On a $ 10,000 investment, that’s $100 per year just for the advisory fee. Investors may also have to pay fees on their investments and commissions for products the financial advisor sells.

However, automated investing services have additional fees as well. Robo-advisors charge a brokerage fee, and the ETFs themselves typically generate management fees, taxes, and other costs for which the consumer is responsible.

Like many investment costs, however, these fees can be hard to track as they may simply be deducted from investor returns. That’s why it’s important to look beneath the hood, so to say, of any investment product to learn the exact costs.

Recommended: How Much Does a Financial Advisor Cost?

More Affordable Initial Investment

Many automated investing platforms have low minimum account requirements. And some platforms have no minimum initial investment requirements.

In contrast, some human financial advisors won’t take on a client unless they have more than $100,000. At the high end, private wealth managers could require minimums of $5 million.

Because of the lower initial investment required, younger consumers have turned to automated investing in planning for their financial future. Previously, high minimum balances had been headwinds to younger investors, preventing them from getting financial advice.

As younger investors, like Generation Z and millennials, start hitting life milestones like getting married and saving for a house, automated investing may be a good option for them to begin building wealth.

Efficient & Convenient Access

With traditional financial advisors, clients had limited access and had to work around the human advisor’s schedule. Automated advisors use digital platforms. This allows clients to ask questions and access help 24 hours, seven days a week, if needed.

Need to make a trade or a change? There is no need to call to schedule an appointment, fill out a physical form, meet with an advisor in person, or wait for office hours. Usually, a few button pushes can do the trick.

Lower fees and minimum balances have attracted younger investors to the automated investing industry. But the digital and mobile platforms these services offer have also made younger users turn to such automated services more.

Concerns About Automated Investing Services

Robo advisors do come with some downsides, however.

Limited Human Interaction

While some automated services may offer investors the ability to contact a live advisor or representative, not all of them do. And even when that’s available, your access may depend on how much money you have invested.

In any case, if you have pressing questions or an investing dilemma, it’s likely it will be up to you to figure out the right steps to take.

Not Fully Customizable

It’s true that a robo-advisor is designed to offer a range of pre-set portfolios, one of which will hopefully meet an investor’s needs. But automated platforms don’t have the flexibility to offer each person a fully customizable portfolio — for that they would need to craft their own or work with a professional.

By the same token, if your personal circumstances changed in such a way that your investment strategy also shifted, it’s unlikely that you’d be able to adjust an automated portfolio except in terms of its basic asset allocation.

Risks and Costs of ETFs

Most robo advisors use a mix of ETFs and low-cost index funds. ETFs hold a basket of stocks or bonds and the vast majority of these funds are passively managed, i.e. they are built to mirror an index, such as the S&P 500. ETFs differ from index mutual funds in that they are traded throughout the day on an exchange, similar to stocks.

ETFs come with certain risk factors. Because ETF shares are traded throughout the day, they’re bought and sold at the market price, which may or may not reflect the fund’s net asset value or NAV. Thus, an ETF’s performance is subject to market volatility. In addition there can be tax consequences, owing to the trading of shares.

What to Look for in an Automated Investment Platform

If you’re interested in opening an automated investing account, there are several factors you may want to consider before deciding if automating investing is right for you.

Automated Investing Fees

As mentioned above, automated investing fees are generally lower than traditional financial advisors. However, you still want to compare the fees of the various automated investing platforms on the market.

Some platforms charge a flat fee, while others charge a percentage of your assets under management. In addition, some platforms charge fees for specific services, such as tax preparation or additional investment advice.

Affordability

Some automated investment platforms require a minimum investment to open an account. You’ll want to understand any minimum investment requirements before opening an account. For example, some automated investing platforms may offer a $0 account minimum, but that might not include certain robo-advisory services you’re looking for.

Investment Options

The investment options offered by automated investment platforms vary. Some platforms offer a limited selection of investment options, while others offer a wide range of investments. You want to ensure the automated investing platform you choose offers investment options that meet your needs.

Usually, robo-advisors only invest in ETFs and mutual funds, so you’ll want to see if the services offer a range of funds, from international equities to domestic corporate bonds. Knowing what investment options a robo-advisor provides may help you ensure that you may end up with a diversified portfolio that aligns with your goals.

Investment Rebalancing

Generally, a robo-advisor will make automated investments based on your risk tolerance and financial goals. These services will create a portfolio of a certain percentage of stock ETFs and bonds ETFs based on risk tolerance. But you want to check that the automated investing services will rebalance your portfolio to maintain that percentage of stocks and bonds.

For example, an investor with a more aggressive risk tolerance may have a portfolio with an asset allocation of 80% stocks and 20% bonds. With time, the portfolio may change and knock that ratio off balance — too much of one and not enough of the other. An automated investor can automatically rebalance your account to its original 80/20 ratio. No human interaction is needed; the rebalance happens through the automated investing algorithm.

Human Interaction

Some automated investing services may give investors access to human financial professionals, which can be helpful for investors who need to ask questions, discuss goals, and plan for the future. Automated investing services might charge for this service, but it could be helpful to have this option.

Who Might Want to Consider Auto Investing?

Automated investing may be a good option for people who want to invest for the long term but do not want to manage their own portfolios or pay high fees for a traditional financial advisor. It can also be a good option for people who want to invest in various asset classes, but don’t have the time or expertise to do so themselves.

That doesn’t mean auto investing is right for everyone. For those who aren’t particularly tech savvy or comfortable with automated platforms, using a robo-advisor might not make sense. Again, it’s important to be comfortable with the investments offered in these pre-determined portfolios, as well as the risks and costs associated with these products.

As noted above, many younger investors have begun using robo-advisors to create portfolios and make automated investment decisions. This may allow younger investors to build up experience in the financial markets while using a pre-set portfolio. As they build wealth and expertise, younger investors may decide to make investment decisions on their own or hire a traditional financial advisor to help manage their financial goals.

The Takeaway

An automated investing platform can be ideal for many investors, particularly regarding affordability, convenience, and avoiding potential human errors. This investment tool allows investors to use a hands-off approach, which many people may prefer over the time-consuming research and management required for picking and choosing stocks, bonds, and other assets to build and manage a portfolio.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.

Open an automated investing account and start investing for your future with as little as $50.


Photo credit: iStock/gorodenkoff

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Guide to Environmental, Social, and Governance (ESG) Investing

What Is ESG?

ESG investing can be considered a form of sustainable or impact investing, but the term itself emphasizes that companies must focus on positive results in light of environmental, social, and governance factors.

ESG investing strategies are still popular, with global mutual funds and exchange-traded funds (ETFs) that embrace ESG-focused strategies seeing a high of $480 billion in assets under management, as of November 2023, up from $391 billion in 2021.

But ESG strategies have waxed and waned over the last few years, particularly in the U.S. Domestic ETFs and open-end funds saw outflows of about $19.6 billion in 2024, the largest amount since Morningstar began tracking sustainable fund flows in 2015.

Unfortunately, there has yet to be a single ESG framework used by all investors or financial firms to evaluate a company’s progress toward ESG goals. Rather, there are a number of ESG standards worldwide, most of them voluntary, and investors must learn which ones a certain fund or stock adheres to before choosing to invest.

Key Points

•   ESG refers to non-financial criteria that can help investors assess a company’s performance in terms of environmental, social, and governance factors.

•   ESG strategies are seeing an increase in investor interest, with global ESG-specific funds reaching $480 billion in AUM in 2023. But U.S. open-end funds and ETFs had another year of outflows in 2024.

•   Tracking a company’s adherence to ESG standards can also reveal its ability to manage certain ESG risks.

•   Currently, ESG standards are largely voluntary, although some ESG frameworks are more widely used than others.

•   It’s possible to invest in ESG-focused stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

What Is ESG Investing?

ESG refers to environmental, social, and governance factors that underlie certain investment strategies. By using ESG standards, investors can evaluate how well companies meet relevant criteria and manage risks.

Following are some of the factors that investors can consider when evaluating the three pillars of ESG, and deciding whether to invest online or through a brokerage in ESG funds, ETFs, or other options.

Environmental

The environmental component of ESG criteria might include metrics on a company’s energy emissions, waste, and water usage. Investors may also focus on the risks and opportunities associated with the impacts of climate change on the company and its industry.

Some company information that environmentally conscious investors may evaluate include:

•   Pollution and carbon footprint

•   Water usage and conservation

•   Renewable energy integration (such as solar and wind)

•   Climate change policies

Recommended: Beginner’s Guide to Sustainable Living

Social

The social component of ESG generally describes the impact of a company’s relationships with people and society. Factors as varied as corporate culture, commitment to diversity, and how much a company invests in local organizations or communities can impact socially conscious investors’ decisions on buying into a specific corporation.

Some other social factors can include:

•   Employee pay, benefits, and perks

•   Diversity, equity, and inclusion

•   Commitment to social justice causes

•   Ethical supply chains (e.g., no sweatshops, conflict-free minerals, etc.)

Governance

The governance component of ESG generally focuses on how the company is run. Investors want to know how the board of directors, company, and shareholders relate to one another.

Some additional governance factors that investors evaluate include:

•   Executive compensation, bonuses, and perks

•   Diversity of the board of directors and management team

•   Transparency in communications with shareholders

•   Rights and roles guaranteed to shareholders

Understanding ESG Investment Strategies

At one point, ESG strategies were primarily guidelines for investing according to certain values. But in the last couple of decades, it’s become clear that ESG factors can also impact a company’s bottom line. For instance, there may be potential risks to company performance that require a company to follow ESG risk mitigation efforts.

Unfortunately, there is no universal set of standards for measuring a company’s progress in these three areas. That said, many companies have embraced global ESG frameworks, which are largely voluntary.

Additionally, third-party organizations have stepped in to create ESG scores for companies and funds based on their adherence to various ESG factors.

How ESG Scores Work

ESG scores — sometimes called ESG ratings — are designed to measure a company’s performance based on specific environmental, social, and governance criteria. Investors can use them to assess a company’s success, risks, and opportunities concerning these three areas.

Where ESG Scores Come From

Due to the growing need for ESG information and metrics, third-party data providers have become a part of the industry.

That’s because ESG guidelines are still very much a work in progress. Some are mandatory, some are not. In some cases, companies have developed proprietary systems to assess and report their own performance or risk mitigation efforts.

In short, investors can’t rely on just one ESG score, but must become familiar with how different ESG scores work and how they’re applied.

ESG Scoring Systems

An ESG score is typically calculated by analyzing a company’s available data on environmental, social, and governance policies and practices using various sources, like SEC filings, government databases, and media reports.

A high ESG score typically means a company is reaching certain targets, or manages ESG risks better than its peers, while a low ESG score means the company is not reaching its ESG goals, or it has more unmanaged ESG risks. Evaluating a company’s ESG score, along with financial analysis, can give investors a better idea of the company’s long-term prospects.

Some of the most prominent ESG score providers are MSCI, Morningstar Sustainalytics, and S&P Global. But some financial firms conduct their own ESG evaluations and provide proprietary scores. Transparency into how the scores are calculated can vary.

ESG vs SRI vs Impact Investing

ESG investing is sometimes called sustainable investing, impact investing, or socially responsible investing (SRI). But these terms are not interchangeable. Impact investing and SRI are broader terms. ESG could be seen as a type of impact or socially responsible investing.

What Is SRI?

Socially responsible investing selects or excludes investments according to specific ethical guidelines. Investors utilizing an SRI strategy may avoid investing in companies related to gambling and other sin stocks, or they may avoid companies that cause damage to the natural environment — or they may choose companies with a track record of green initiatives or policies that support a diverse workforce.

What Is Impact Investing?

Impact investing strategies are designed to have a measurable impact on certain industries, sectors, or even companies directly.

Impact investing is generally employed by institutional investors and foundations. The aim of impact investing is often to generate positive social or environmental impact, but it can refer to any agenda that involves using capital to push for a certain outcome or result.

Impact investing is a broad category that can include a range of strategies, including ESG (environmental, social, and governance) and SRI (socially responsible investing), as well as others.

Other Types of Impact Investing

In addition there are a couple of other designations investors may want to know:

•   Green investing refers to strategies that aim to benefit the physical environment. Investors may put money into organizations that support renewable energy, low carbon, pollution mitigation, and more.

•   Last, corporate social responsibility initiatives, or CSR refers to programs that companies may establish on their own. Often, these business initiatives support socially responsible movements, like environmental sustainability, ethical labor practices, and social justice initiatives.

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Types of ESG Investments

Investors can make ESG investments in the stocks and bonds of companies that adhere to ESG criteria or have high ESG scores. Other potential investment vehicles are mutual funds and ETFs with an ESG strategy.

Stocks

Buying stocks of companies with environmental, social, and governance commitments can be one way to start ESG investing. However, investors will often need to research companies that have ESG credibility, or rely on third-party agencies that release ESG scores.

Bonds

The bonds of corporations involved in ESG-friendly business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.

Additionally, government bonds used to fund green energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

Recommended: How to Buy Bonds: A Guide for Beginners

Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to hundreds of ESG companies and investments.

A growing number of index funds invest in a basket of sustainable stocks and bonds. These allow investors to diversify their holdings by buying shares of a single fund.
However, not all ESG funds follow the same criteria, and each fund can focus on different aspects of environmental, social, and governance issues. Interested investors would do well to look under the hood of specific funds to evaluate their holdings and other criteria.

Recommended: A Beginner’s Guide to Investing in Index Funds

Identifying ESG Companies

What is the best way to find an ESG company? Some 600 third-party agencies now gather ESG data from companies and conduct their own analysis and scoring.

Commonly used rating agencies include:

•   Bloomberg ESG Data Services

•   Dow Jones Sustainability Index

•   MSCI ESG Research

•   Morningstar Sustainalytics

•   S&P Global, ISS ESG

•   Moody’s Investors Service

•   Thomson Reuters ESG Research Data.

Benefits of ESG Investing

ESG investing has several potential benefits, including:

•   Improving long-term financial performance: A growing body of evidence suggests that companies with solid ESG ratings may be good investments. They tend to outperform those with weaker ratings, both in share price performance and earnings growth.

•   Mitigating risk: ESG factors can help identify companies with poor governance practices or exposure to environmental and social risks, leading to financial losses.

•   Creating social and environmental impact: By investing in companies that are leading the way on environmental, social, and governance issues, investors can help drive positive change and make a positive impact on society.

These potential benefits are increasing the popularity of ESG investing. According to Bloomberg, all global ESG assets reached $30 trillion by the end of 2022, and are projected to reach $40 trillion by 2030, up from $22.8 trillion in 2016.

Risks of ESG Investing

The main disadvantage of ESG strategies is that they limit the number of investments that people can consider. Thus, in some cases investors could end up trading potential returns for the ability to invest according to their values.

In addition, ESG investments can sometimes come with higher costs, for example an ESG fund may have a higher expense ratio vs. a traditional counterpart.

While there is a growing body of data regarding the performance of ESG indices and securities, it’s still a relatively new sector relative to more traditional investments, and again many standards and disclosures are still not mandatory.

How to Invest in ESG

If you’re interested in creating an ESG portfolio, you can start by contacting a financial advisor who can help you shape your investment strategy.

However, if you are ready to start investing and want to build a portfolio on your own, you can follow these steps:

1. Open a brokerage account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you will be able to buy and sell stocks, mutual funds, and other securities.

2. Pick your assets

Decide what type of investment you want to make, whether in a stock of a company, an ESG-focused ETF or mutual fund, or bonds.

3. Do your research

It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.

4. Invest

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive social and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification may help to reduce your risk and improve your returns.

ESG Investing Strategies

ESG investing can be different based on values and financial goals. It’s therefore essential to start with your investment goals and objectives when crafting an ESG investing strategy. Consider how ESG factors may help you reach these goals.

It’s also crucial to understand the data and information available on ESG factors; this will vary by company and industry. When researching potential ESG investments, you want to make sure a company has a clear and publicly available ESG policy and regularly discloses its ESG performance. Additionally, it can be helpful to look at third-party scores to determine a company’s ESG performance.

Why Is ESG Investing Important?

ESG investing offers investors a way to invest their money with the hope of having a genuine impact in terms of environmental, social, and governance factors.

In addition, companies today face a number of ESG risk factors. Adhering to certain ESG principles may help manage ESG risks.

Whether or not companies or funds that embrace ESG strategies deliver on the promised goals is a matter for investors to decide via due diligence. As noted above, without a commonly agreed-upon set of standards and some form of accountability, it’s difficult to ascertain which companies are truly having an impact.

Are ESG Strategies Profitable?

Investors have continued to be interested in ESG strategies over time. As noted above, global ESG-focused assets under management have continued to grow, although U.S. sustainable open-end fund and ETF outflows increased for the second year in a row, according to a 2024 report from Morningstar.

According to the report: “Sustainable funds faced many headwinds in 2024. They continued to lag conventional peers, with only 42% of sustainable funds landing in the top half of their respective Morningstar Categories.”

The Takeaway

In recent years, investor interest in sustainable investing strategies like ESG has grown. In addition, there is some data that suggests that ESG strategies may be just as effective as traditional strategies in terms of performance.

This is despite the fact that ESG criteria are inconsistent throughout the industry. There are a myriad different ways that companies can provide ESG-centered investments, but there aren’t industry-wide benchmarks for different criteria or success metrics.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.

Open an automated investing account and start investing for your future with as little as $50.

FAQ

What are the three pillars of ESG?

ESG stands for three areas that some companies strive to embrace by being proactive about the environment, supportive of social structures, and transparent and ethical in corporate leadership.

What are some examples of ESG investing?

There are many ways to add ESG strategies to your portfolio: You can consider investing in green bonds, in companies that focus on environmentally supportive technologies, in funds that invest in renewable energy companies, clean water initiatives, carbon sequestration, and more.

What is the difference between ESG and sustainability?

Sustainability is a broader term. Environmental, social, and governance (ESG) factors may support sustainability in different ways: by limiting air or water pollution, by supporting fair labor practices, by requiring transparency in corporate governance.


SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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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What Are Fixed-Rate Mortgages and How Do They Work?

With the median U.S. home listing price sitting at $400,500 in January 2025, most people will need a mortgage to fund their purchase, and the majority of them will choose a fixed-rate loan, in which the interest rate does not fluctuate over the life of the loan.

But if you’re preparing to take the homeownership plunge, how do you know which kind of loan is right for you and what are the pros and cons of fixed-rate mortgages? Let us be your guide.

Key Points

•   Fixed-rate mortgages offer a consistent interest rate and monthly payment throughout the loan term.

•   These loans are especially popular among first-time homebuyers.

•   Fixed-rate loans are available in terms of 10, 15, 20, and 30 years.

•   Shorter-term mortgages have higher monthly payments but lower total interest.

•   Refinancing a fixed-rate mortgage is possible but involves additional costs.

What Is a Fixed-Rate Mortgage?

The fixed-rate mortgage definition is, as its name suggests, a mortgage loan whose interest rate is fixed across the lifetime of the loan. The rate is stated at the time the documents are signed and does not change at any point throughout the loan term (provided that all payments are made in full and on time).

Fixed-rate mortgages are the most common type of mortgage. According to the National Association of Realtors® 2024 Profile of Home Buyers and Sellers, 64 percent of all buyers use a fixed-rate mortgage, with this type of mortgage being slightly more common among first-time homebuyers than repeat buyers. Fixed-rate mortgage terms can be 10, 15, 20, or 30 years. A mortgage calculator can help you work through the different monthly payments for each and see what best suits your situation.

How Does a Fixed-Rate Mortgage Work?

Once you sign your home loan documents and close on your purchase, you’ll begin making a monthly mortgage payment. With a fixed-rate loan, you can expect to pay the same amount each month. How much of your payment goes toward the principal vs. interest will change over the life of your loan — typically more of your payment goes toward interest at the outset of the loan, with more going toward the principal nearer to the end of the term — but the overall payment amount will remain the same. You can see the breakdown of your payments in your loan’s mortgage amortization table.

How are fixed mortgage rates determined? Monetary policy actions by the Federal Reserve and overall economic factors (such as inflation) influence the rates lenders offer in broad strokes. The specific rate each individual borrower is offered is additionally affected by factors such as the loan amount, loan type, and loan term as well as borrower credit scores and financial profile.

Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages

If you’re deciding between a fixed-rate vs. adjustable-rate mortgage (or ARM), the difference is that with an ARM, the interest rate can move up or down according to the market. The rate is calculated according to the index and margin — the index is a benchmark interest rate based on market conditions at large, and the margin is a number set by the lender when the loan is applied for.

You may see options like a 5/1 ARM, which means the rate is set for the first five years of the loan and then adjusts annually after that.

Long story short: A fixed-rate mortgage offers you a predictable interest rate and monthly payment, whereas an adjustable-rate mortgage can shift over the course of the loan term according to external factors, like inflation affecting the APR or the actions of the Federal Reserve.

It is, however, important to understand that your total monthly housing bill can still change, even with a fixed-rate mortgage, if, for example, your property taxes or homeowners insurance rates change or if you miss several payments.

Recommended: Home Loan Help Center

Types of Fixed-Rate Mortgages

There are a few variables to fixed-rate mortgages.

•   Conventional Loans: Conventional fixed-rate mortgages are offered by banks, credit unions, and other lending institutions. They typically have stringent requirements about credit score and debt-to-income ratio (or DTI) that an applicant must meet.

•   Government-Insured Loans: FHA, USDA, and VA mortgages tend to have less tough requirements and target certain kinds of homebuyers, like those with lower income, in the military (past or present), and living in rural areas. They may offer no or low down payment and other perks, too.

•   Conforming and Non-Conforming Loans: Mortgages can also be considered “conforming” or “nonconforming,” depending on whether or not they meet the guidelines established by the Federal Housing Finance Agency (commonly known as Fannie Mae and Freddie Mac). For 2025, the conforming loan limit for one-unit properties is $806,500, or $1,209,750 in areas deemed “high cost.”

Of course, homes costlier than these limits exist, and it is possible to take out a mortgage to buy one. Those loans are considered “nonconforming” and are also sometimes called “jumbo loans.”

Because the loans are so large, eligibility requirements tend to be more stringent, with borrowers usually needing a down payment well above 3%, cash in the bank, and a solid credit score.

Fixed-Rate Mortgage Term Lengths

You can’t answer the question “what is a fixed-rate mortgage?” without looking closely at mortgage term lengths. The term length that a buyer chooses for a fixed-rate mortgage can have a significant effect on the overall costs of the loan, so it’s helpful to understand how term lengths and costs intersect.

30-Year Fixed

The most common term length for a fixed-rate mortgage is 30 years. Repaying the loan (plus interest) over three decades means paying more interest over the life of the loan than you would if you chose a shorter term length, but the longer term also makes for a lower monthly payment than a shorter term. This is one reason it’s such a popular choice. A chart showing 30-year mortgage rate trends can help you see how current rates compare to historical highs and lows.

15-Year Fixed

A shorter term means higher monthly payments but less interest paid over the life of the loan, which is a critical consideration when choosing between a 30-year and a 15-year mortgage. For example, if a homebuyer borrowed $350,000 at 7.00% with a 30-year loan, the monthly payment amount would be $2,328.56 and the total interest paid would be $488,281.14. But borrowing the same amount at the same rate with a 15-year term would mean a monthly payment of $3,145.90 and total interest paid of $216,261.81. A 15-year mortgage term, or other shorter-term fixed-rate loan, may be a good choice for those who can afford to comfortably make the higher monthly payment.

Other Terms

As noted above, a fixed-rate mortgage term can also be 10 or 20 years. To see how changing the term length affects the monthly payment amount and the total interest paid over the life of the loan, try plugging different term lengths into a mortgage calculator.

Example of a Fixed-Rate Mortgage

Here’s an example of how a fixed-rate mortgage might work if you buy a house for $428,700 with 20% down and take out a 30-year fixed-rate home loan. Your mortgage principal will be $342,960, and at a rate of 6.72% with a solid credit score of 740+, your monthly payment (not including any taxes or insurance) will be $2,217.

As we’ve seen, when you make your loan payments, at first most of the money goes towards interest. This is because the interest is “front-loaded,” to use the industry lingo. Perhaps 90% of your payment will be paying interest and 10% will be applied to the principal. As you get to the end of your loan payment, these figures may well be reversed. That is, 10% of the $2,217 goes towards interest and 90% toward the principal.

Pros and Cons of Fixed-Rate Mortgages

Fixed-rate mortgages are more common among homebuyers because of the predictability they offer. Still, there are both drawbacks and benefits to pursuing this kind of home loan.

Benefits of Fixed-Rate Mortgages

Because homebuyers who take out fixed-rate mortgages will know their rates at the time they sign on the dotted line, these loans provide long-term predictability and stability — which can help people who need to fit their housing expenses into a tight budget.

Fixed-interest mortgages, and other types of fixed-rate loans, shield borrowers from potentially high interest rates if the market fluctuates in such a way that the index significantly rises.

Drawbacks of Fixed-Rate Mortgages

Although fixed-rate mortgages are more predictable over time, they tend to have higher interest rates than ARMs — at least at first. Sometimes an ARM might have a lower interest rate but only for a relatively brief introductory period, after which the rate will be adjusted.

If the index rate falls in the future, homebuyers who opt for a fixed-rate loan might end up paying more in interest than they would have with an ARM.

Because lenders risk losing money on fixed-interest mortgages if index interest rates go up, these loans can be harder to qualify for than their adjustable-rate counterparts.

How to Calculate Fixed-Rate Mortgage Payments

Now that you know what a fixed-rate mortgage is and how it functions, you might wonder how much it could cost you. If you are curious about what fixed-rate mortgage payments would look like at different home price points, for varying terms, you use an online mortgage calculator or, for an even more detailed look at what you’ll pay each month, check out a mortgage calculator with taxes and insurance.

When Is a Fixed-Rate Mortgage the Right Choice?

Fixed-rate mortgages offer long-term predictability, which can be a must for those who need budget stability. Furthermore, fixed interest rates can be beneficial for those who plan to stay in their home for a longer period of time — say, at least seven to 10 years.

Here’s why: Homebuyers with 30-year fixed-rate loans may need that long to build home equity (remember: during the initial years of the loan most of your payments go toward interest, not equity).

Finally, if homebuyers suspect that interest rates are about to rise, a fixed-interest loan can be a good way to protect themselves from those increasing rates over time.

That said, there are some instances in which an ARM may be a better choice. If a homebuyer is planning to sell in a short amount of time, for example, the low introductory interest rate on an adjustable-interest loan could save them money (as long as they can sell the property) before the rate can tick upward.

Recommended: First-Time Homebuyer Guide

The Takeaway

Fixed-rate loans, in which the interest rate holds steady for a loan term of 10, 15, 20, or 30 years, are popular in part because their costs are predictable. But when you’re in the market for a home, shopping for the right loan is almost as important as shopping for the house itself, so an adjustable-rate mortgage might be worth a look too, especially if you need a lower monthly payment and don’t plan to stay in the home for very long.

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

Can you refinance a fixed-rate mortgage?

Yes, you can refinance a fixed-rate home loan. Because refinancing means taking out an entirely new loan and involves some upfront costs, it’s important to make sure that these costs don’t outweigh the savings you will enjoy due to, say, a lower interest rate or a shorter loan term (two of the chief reasons people opt to refinance).

What is the average fixed-rate mortgage?

Mortgage rates can change daily, so if you want to know the current average fixed-rate mortgage number, it’s best to check online. For most of the last two and a half years (dating back to mid-2022) the 30-year fixed rate has been between 6.00% and 7.00%.

Are most mortgages fixed rate?

Fixed-rate mortgages have been more popular than adjustable-rate mortgages since the housing market crisis in 2007, largely because they offer borrowers a predictable payment schedule. Over the last 15 years, the share of adjustable-rate mortgages originated has been between 4 percent and 25 percent of all new home loans.


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


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


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

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

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

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

¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SOHL-Q125-066

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house next to a condo

House or Condo: Which is Right For You? Take The Quiz

If you’re thinking about buying a home in the not-too-distant future, you may be wondering what kind of property to purchase. Would a single-family house be better, or perhaps a condo unit?

Some important factors: Do you prefer being in a city, perhaps in an apartment or townhome, or are you all about a house with a picket fence? Do you like handling your own gardening and picking your own front-door paint colors, or would you like to delegate that? Do you like neighbors close by or prefer privacy? Does your household include furbabies?

These are some of the considerations that may impact whether a house or a condo is right for you. Each option has its pros and cons, and of course, finances will play a role too.

Key Points

•   Houses typically cost more but are considered better long-term investments.

•   Condos reduce maintenance and utility costs, but fees apply.

•   Houses offer more privacy and living space.

•   Condos often include shared amenities, and many offer urban perks.

•   Condo values appreciate more slowly than those of houses.

To decide which might suit you best, take this house vs. condo quiz, and then learn more about some key factors.

Next, you might want to take these pros and cons into consideration as well.

Pros and Cons of Buying a House

A top-of-mind question for many people is, “Isn’t a house more expensive than a condo?” Cost is a factor, especially when buying in a hot market, and there can typically be a significant difference between a house and a condo when you are home shopping.

The median sales price of existing single-family homes was $404,400 in the fourth quarter of 2024, according to St. Louis Fed data, compared with a median existing condo price of $359,000 in December 2024, according to the National Association of Realtors®.

Now that you know that price info, look at these pros and cons when buying a house vs. a condo.

Pros of Buying a House

Among the benefits of buying a house are the following:

•   More privacy and space, including storage

•   A yard

•   Ability to customize your home as you see fit

•   Room to garden and create an outdoor space, just as you want it to be

•   Control of your property

•   Pet ownership unlikely to be an issue

•   Sometimes no homeowners association (HOA) or dues

•   Generally considered a better investment

Cons of Buying a House

However, you may have to contend with these downsides:

•   Potentially higher initial and ongoing costs

•   More maintenance inside and out

•   Typically higher utility bills

•   Potentially higher property taxes and homeowners insurance

•   Possibly fewer amenities (such as common areas, a gym, etc.)

If, after taking the quiz and weighing the pros and cons, buying a house feels like the right choice, you can start brainstorming about size, style, location, and price; attending open houses; and looking online.

Learning how to win a bidding war might also come in handy, depending on the temperature of the market.

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 Buying a Condo

A quick look at how condos work before diving in: Condominium owners share an interest in common areas, like the grounds and parking structures, and hold title to their individual units. They are members of an HOA that enforces community rules. Being a member of a community in this way is a key difference between a condo and a house.

Pros of Buying a Condo

Here are some of the upsides of purchasing a condo:

•   More affordable

•   Amenities included (this might include common rooms, a fitness center, and other features)

•   Potentially less expensive homeowners insurance and property taxes

•   Repairs and upkeep of the property typically taken care of

•   Typically lower utility bills

•   Security, if the community is gated or patrolled

•   Access to urban perks

Cons of Buying a Condo

Next, consider the drawbacks of condo living:

•   Less privacy

•   Typically no private yard

•   Rules and restrictions (about noise levels, outside wall colors, pets, and more)

•   Typically less overall space

•   HOA fees

•   Limited parking

•   Slower appreciation in value

Plus, the mortgage interest rate and down payment are often higher on a condo vs. a house of the same value, though that isn’t always the case, especially for a first-time buyer of an owner-occupied condo.

Conventional home loan mortgage lenders sometimes charge more for loans on condo units; they take into consideration the strength of the condo association financials and vacancy rate when weighing risk.

Mortgages backed by the Federal Housing Administration (FHA) are available for condos, even if they are not part of an FHA-approved condominium project, with a process called the Single Unit Approval Program.

An FHA loan is easier to qualify for and requires as little as 3.5% down, but you’ll pay upfront and ongoing mortgage insurance premiums.

Condo vs House Pros and Cons

What Are the Costs of a House or Condo?

As mentioned above, houses tend to cost more than condos. But here are a few other ways to look at the financials when comparing a condo vs. a house:

•   Condos tend to have lower list prices than houses which may mean a smaller mortgage. However, you also need to factor in monthly maintenance fees and HOAs so you get the full picture.

•   Condos may have assessments from time to time. These are additional charges to fund projects for the unexpected expenses, such as a capital improvement to the entire dwelling.

•   Homeowner fees are growing along with inflation, so when you make your purchase, understand that these charges are not static.

•   Before buying into an HOA community, it’s imperative to vet the board’s finances, including its reserve fund, how often it has raised rates in recent years, whether it has collected any special assessments or plans, and whether it’s facing any lawsuits.

•   If you are buying a house, keep in mind that maintenance and upkeep are your responsibility. This can mean everything from replacing a hot-water heater that’s reaching the end of its lifespan to dealing with roof repairs.

•   Down payments will vary due to several factors. For a condo, a down payment is typically around 10% but can vary considerably from, say, 3% to 20%.

•   With a house, a down payment could be from 3.5% with an FHA loan to the conventional 20% needed to avoid private mortgage insurance, or PMI. Those who qualify for VA loans may be able to buy a house without a down payment.

•   If you are buying a house, make sure to scrutinize property taxes and factor those into your budget. Those are not fixed and can rise over time.

Another smart move: Check out this home affordability calculator to get a better feel for the bottom line.

When Is a Good Time to Buy?

You may know what you’d like to buy (condo vs. a house) and where (in what neighborhood), but do you feel as though now is the right time? If so, fantastic.

You might decide, though, that you want to rent for a while longer under certain circumstances, which can include:

•   Hoping to wait out an overheated market and looking at price-to-rent ratios

•   Wanting to save more money for the down payment and closing costs (the bigger your down payment, the lower your monthlies will likely be)

•   Needing to boost your credit score first

•   Wanting to pay down credit card debt or other debt, which improves your debt-to-income ratio or DTI

•   Needing more time to look at houses and condos before deciding which path to take

Check out local real estate
market trends to help with
your home-buying journey.


The Takeaway

The condo vs. house decision depends on a multitude of factors. Reviewing the pros and cons of buying a condo vs. a house can at least give you a direction to start your search. And so can such givens as knowing that you want to be in a certain location (downtown in a condo instead of in a house on a couple of acres), or that you have lots of dogs and therefore want your own yard, and so forth.

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.


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.

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.


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.

SOHL-Q125-045

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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.

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. This second type of escrow account is the one most likely to trigger a refund.

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.

Recommended: What Is an Escrow Holdback?

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.

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. (The clock starts ticking on the “computational year” when you make your first mortgage payment.) 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 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, 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 You 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 you get a new mortgage 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.

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 long does it take to get escrow money back?

If you’ve paid off your mortgage in full, the balance in your escrow account should be returned to you within 20 days. If you are still paying into escrow but an escrow analysis (a process conducted every 12 months) has found you’re due money back, you should receive it within 30 days.

Do you get an escrow refund every year?

There is no rule that says you’ll get an escrow refund every year. In fact, in some years you may find that you need to pay more into escrow the following year (or make a lump-sum payment) to make up for a shortfall.


Photo credit: iStock/MaslovMax

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


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


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

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

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

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

SOHL-Q125-050

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