If you don’t have a 20% down payment on a home, that’s OK. Most buyers don’t. But if you’re in that league and acquire a conventional mortgage, the lender will want extra assurance — insurance, if you will — that you’ll pay the loan back.Private mortgage insurance is usually the price to pay until you reach 20% equity or, as lenders say, 80% loan-to-value.
In an effort to help low- and middle-income borrowers, the Biden-Harris Administration recently reduced monthly mortgage insurance premiums for new FHA loans. Those cuts will not affect homebuyers with conventional loans and private mortgage insurance (PMI).
Can you avoid PMI? Other than coughing up 20% down, you could seek a piggyback mortgage or lender-paid mortgage insurance.
What Is PMI?
Private mortgage insurance is charged by lenders of conventional mortgages, which are loans not insured by a government agency. FHA, VA, and USDA loans are.
The 30-year conventional home loan is the most common mortgage, and 20% down is ideal. But…
You’ve seen home prices lately. Twenty percent down on a $250,000 or $400,000 or $750,000 home is just not doable for many, or most. The average down payment for all buyers has been about 13%, according to the National Association of Realtors.®
PMI is meant to protect the lender from risk. The premiums help the lender recoup its losses if a borrower can’t make the mortgage payments and goes into default.
How Much Does PMI Cost?
PMI is often 0.5% to 1.5% of the total loan amount per year but can range up to 2.25%.
The cost of PMI depends on the type of mortgage you get, how much your down payment is, your credit score, the type of property, the loan term, and the level of PMI coverage required by your lender.
If you’re shopping for a mortgage and you apply for one or more, the premium will be shown on your loan estimate. If you go forward with a home loan, the premium will be shown on the closing disclosure.
Estimate PMI Costs
Use this calculator to estimate PMI based on how much home you can afford.
How to Pay PMI
Most borrowers pay PMI monthly as a premium added to the mortgage payment.
Another option is to pay PMI with a one-time upfront premium at closing.
Yet another is to pay a portion of PMI up front and the remainder monthly.
How to Avoid PMI Without 20% Down
One way to avoid PMI is to make use of a piggyback mortgage. Another is to seek out lender-paid mortgage insurance.
Piggyback Loan
With a piggyback loan, typically an 80/10/10 mortgage, you’d take out two loans at the same time, a first mortgage for 80% of the home price and a second mortgage for 10% of the home value, and put 10% down.
The 80% loan is usually a 30-year fixed-rate mortgage, and the 10% loan is typically a home equity line of credit that “piggybacks” on the first mortgage.
A 75/15/10 piggyback loan is more commonly used for a condo purchase because mortgage rates for condos are higher when the loan-to-value ratio (LTV) exceeds 75%.
Both loans do not have to come from the same lender. Borrowers can tell their primary mortgage lender that they plan to use a piggyback loan and be referred to a second lender for the additional financing.
Because you’d be taking out two loans, your debt-to-income ratio (monthly debts / gross monthly income x 100) will fall under more scrutiny. Mortgage lenders typically want to see a DTI ratio of no more than 36%, but that is not necessarily the maximum.
Piggybackers will need to be prepared to make two mortgage payments. They will want to think about whether that secondary loan payment will be higher than PMI would be.
Lender-Paid Mortgage Insurance
In most cases with lender-paid mortgage insurance (LPMI), the lender pays the PMI on your behalf but bumps up your mortgage interest rate slightly. A 0.25% rate increase is common.
Monthly payments could be more affordable because the cost of the PMI is spread out over the whole loan term rather than bunched into the first several years. But the loan rate will never change unless you refinance.
Borrowers will want to look at how long they expect to hold the mortgage when comparing PMI and LPMI. If you need a short-term mortgage, plan to refinance in a few years, or want the lowest monthly payment possible, LPMI could be the way to go.
When PMI Is No Longer Required
Borrowers generally need to have 20% equity in their home to drop PMI.
The Homeowners Protection Act was put in place to protect consumers from paying more PMI than they are required to. Specifically for single-family principal mortgages closed on or after July 29, 1999, the law covers two scenarios: borrower-requested PMI termination and automatic PMI termination.
Once you’ve built 20% equity in your home, meaning you’re at an 80% LTV based on the home’s original value (the sales price or the original appraised value, whichever is lower), you can ask your mortgage loan servicer — in writing — to cancel your PMI if you’re current on all payments. Your monthly mortgage statement shows your loan servicer information.
The very date of this occurrence, barring no extra payments, should have been given to you in a PMI disclosure form when you received your mortgage.
As long as you’re current on all payments, PMI will automatically terminate on the date when your principal mortgage balance reaches 78% of the original value of your home.
If that LTV ratio is not reached by the midpoint of the mortgage amortization period, PMI must end the month after that midpoint.
PMI vs MIP vs Funding Fees
The upside of PMI is that it unlocks the door to homeownership for many who otherwise would still be renting. The downside is, it adds up.
If you’re tempted to go with a mortgage backed by the Federal Housing Administration, realize that an FHA loan requires up front and annual mortgage insurance premiums (MIP) that go on for the life of the loan if the down payment was less than 10%.
Mortgages insured by the Department of Veterans Affairs come with a sizable funding fee, with a few exceptions, and loans backed by the Department of Agriculture come with up front and annual guarantee fees.
A bigger down payment not only may allow a borrower to avoid PMI but usually will afford a better loan rate and provide more equity from the get-go, which translates to less total loan interest paid.
So how to afford a down payment? You could shake down Dad or Granny (just kidding; Grandma responds better to sweet talk than coercion). For a conventional loan, gift funds from a relative or from a domestic partner or fiance count toward a down payment. There’s no limit to the gift, but you may be expected to come up with part of the down payment. You’ll also need to present a formal gift letter to validate the funds given to you.
A gift of equity is a wonderful thing indeed. When a seller gives a portion of the home’s equity to the buyer, it is shown as a credit in the transaction and may be used to fund the down payment on principal or second homes.
You could look into down payment assistance from state, county, and city governments and nonprofit organizations, which usually cater to first-time homebuyers. And home listings on Zillow now include information about down payment assistance programs that might be available to buyers searching for homes on the platform.
Even if you can’t come up with 20%, it’s all good because PMI doesn’t last forever, and real estate is one of the key ways to build generational wealth.
The Takeaway
What is PMI? Private mortgage insurance, which typically goes along for the ride when a borrower puts less than 20% down on a conventional mortgage. How to avoid PMI? Hunt for lender-paid mortgage insurance or a piggyback loan, or seek gifts or other assistance to fatten the down payment.
SoFi offers fixed-rate conventional mortgages at competitive rates. Qualifying first-time homebuyers can put just 3% down, and others can put 5% down.
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.
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.
Some buyers may be, well, buoyed by the thought of living on the water full time. Living in a floating house is unique, and building one may be a more ambitious undertaking than building a houseboat.
What’s the cost of building a floating house? Read on to learn about the expenses, benefits, and considerations associated with these aquatic abodes.
Average Cost of Building a Floating Home
The cost to build a floating house will vary based on the size, features, labor, and materials, but a 1,200-square-foot model starts at over six figures, a Dutch architect and advocate says.
These are not houseboats, which are self-propelled and free to move about. Nor are they usually tiny house tiny, though some are. They’re often twice as big as a houseboat.
An alternative to building a floating home is to buy an existing one. A quick look shows listings ranging from under $100,000 to over $1 million on the West Coast, and a home floating in the Florida sun for a few hundred thousand. Buying or renting a slip will add to the cost.
In comparison, the cost to build a house of 1,200 square feet could be about $165,600, based on $138 per square foot, not including the land.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Factors That Affect the Cost of Building a Floating Home
There are at least two foundational considerations when building a floating home: constructing the platform the home will rest on, and finding a slip at a moorage for rent or purchase.
The cost of building a floating house could ebb and flow depending on who’s doing the building — is this a DIY project or do you need to find contractors? — and the following factors.
The Foundation
Traditionally, floating homes rested on giant logs, but over time logs begin to sag and sink, requiring pressure-filled barrels under them to shore up the whole shebang.
Nowadays, these homes stay afloat using concrete floats. One type of concrete float is filled with foam, which creates buoyancy. The other concrete float is empty, and like a bowl placed upside down in water, the space and pressure keep the home floating.
Size of the House
Generally, the bigger the home, the more expensive the build. And the larger the home, the more floats it will require, further adding to the cost.
Floating homes are limited by the size of the moorage, meaning buyers have to work within specific parameters. That means building up, but only as much as the floats allow.
Design and Materials
The more custom or high-end designs integrated into the home, the more the build could cost. From custom cabinets in the kitchen to nonstandard windows, these add-ons carry a higher price tag.
Alternatively, floating homes can be prefabricated, using a standard design to lower the cost. Similarly, some companies are now using decommissioned shipping containers as building materials, which could cut down on the total cost to build a floating house.
Another cost to keep in mind is the siding material. Float houses are on the water and subject to the elements, which means the exterior materials must be resilient.
Interior Finishes
As with a traditional home, the choice of interior finishes can drive the cost of a floating house up or down. Opting for a prefabricated floating house may lower the spend on the interior.
Other Expenses of a Floating Home
Mooring and Insurance
Floating-home owners pay a monthly moorage fee or a homeowners association fee. The cost will vary by moorage but could be $1,000 a month.
There could be a transfer fee to assume a rental slip. Insurance may be hard to find and expensive. Marinas may require liability coverage.
Utilities
Floating homes are permanently affixed to the moorage and hooked up to local utilities, including water, sewage, and electric or gas.
If a floating house is designed with efficiency in mind, the monthly cost of utilities will likely be similar to traditional homes in the area. But a lack of shade could mean higher bills for cooling.
Some floating homes rely on a plumbing pump to carry sewage out of the home. It could create a higher electric bill.
Furniture
The average cost to furnish a home is $16,000, but since a floating home resides dockside, it’s harder to transport large items to the property. That could mean hiring extra labor or larger delivery fees.
Additionally, floating homeowners may be constrained by the dimensions of a smaller space, meaning custom or specialty furniture that fits in with and into the home.
Financing Your Floating Home
In some states, a floating home is considered personal property, so it cannot be built or purchased with a traditional home mortgage loan. A local bank or credit union may offer a floating home loan with at least 20% down and at a higher rate than a usual home loan. An inspection, at your expense, will likely be required to see if the home is in adequate shape to qualify.
Another option is a personal loan, which provides fast cash but usually has a higher rate than a secured loan.
Options for homeowners who have built sufficient home equity and are dreaming of a floating home include a home equity line of credit (HELOC), home equity loan, and cash-out refinance.
How Long Do Floating Homes Last?
With regular upkeep and maintenance, owners of floating homes can expect their property to last 50 to 60 years before requiring rebuilding or refurbishment.
Pros and Cons of Living on a Floating Home
If you hear the siren call of the floating-house lifestyle, it’s a good idea to weigh the good vs. the not-so-great before taking the plunge.
Pros
Some of the benefits floating-home owners can expect include:
• Tight-knit community. Dock living means living close to neighbors. A floating community could be a great fit if that’s your thing.
• Good choice if downsizing: Minimalists, retirees, and others with an affinity for the water may find a floating home a chance to downsize.
• Doesn’t require an engine. Floating homes are permanently docked, so buyers or builders don’t need to factor in the costs of a motor. Greener still, one DIY floating-home builder crafted a home on a lake in British Columbia that has a pellet stove, solar power, a composting toilet, and an evaporation gray water system.
• Water views all the time. If you prioritize proximity to nature, you can’t beat living on the water. A cup of coffee or glass of wine is always accompanied by a pretty vista.
• May be less expensive housing. You may be able to build a floating home for less than a single-family home, especially in some of the hot spots for floating homes.
• Potential for tax breaks. In some states, floating homes are considered personal property, not “real property.” Those owners will not pay annual property taxes but will pay personal property tax. Also, interest paid on a loan for a floating home as a first or second home can be included in the mortgage interest deduction if you itemize.
Cons
Now the potential downers:
• Costs go beyond the build: Moorage or HOA fees can range from a few hundred dollars to $1,000 a month. Insurance can be pricey.
• Limited locations. Floating-home communities are uncommon, meaning vacancies are even less frequent. It could be hard to find a dock community to take a floating home to, or it could mean waiting for a spot.
• Weather damage. Constant exposure to saltwater or freshwater can take a toll on a floating home. That can translate into more frequent repairs and replacements, adding to the cost of upkeep.
• Financing challenges. It can be hard to secure financing to construct or buy a floating home.
The Takeaway
Build your own floating home? A few do take on that challenge, which can pay off in terms of cost and self-satisfaction. Others will look into buying a floating house that’s already berthed, as moorage can be a challenge.
Whether you’re interested in building or buying a floating home, a HELOC brokered by SoFi could be the answer.
Access up to 95%, or $500,000, of your home equity, and borrow what you need, when you need it.
Tap your home equity to tether your floating-home vision to reality.
FAQ
Can you live permanently in a floating home?
Yes, floating homes can be permanent residences.
Do you have to pay property tax on a floating home?
Floating-home owners don’t have to pay property taxes in some states or cities. It varies by location.
Where can you get a loan to build a floating home?
Floating homes don’t qualify for traditional mortgages. Options include a floating-home loan from a small pool of lenders, a personal loan, a home equity line of credit, a home equity loan, and a cash-out refinance.
Photo credit: iStock/Roman_Makedonsky
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
Did you know you can use a home loan for renovations? Renovation home loans cover the cost of purchasing and renovating a home. If you’re familiar with construction loans, renovation loans are similar. Also called “one-close” loans or renovation mortgages, renovation loans can offer buyers simplified financing for transforming a fixer-upper into an attractive, modernized home.
We’ll explain how to add renovation costs to your home loan, and other ways you might want to use extra funds.
What Is a Renovation Home Loan?
A renovation home loan combines the cost of a home purchase and money for renovations in one mortgage. There’s only one closing and one loan when buying a new home or refinancing an existing home. The lender has oversight of the renovation funds, including the budget, vetting of the contractor, and disbursement of funds for renovation work as it is completed.
The borrower, their property, and their lender must all meet criteria set out by the remodel home loan program to qualify, which can present a challenge. Qualifying lenders in particular can be hard to find. That’s because most lenders must maintain a custodial account for the renovations over the course of an entire year, which requires extra work and resources. However, if you can find a lender that can handle the process, renovation loans can be a convenient way to improve a promising fixer-upper.
Types of Home Loans That Can Include Renovations
Most mortgages will not include renovations in the loan amount. Renovation mortgages are niche products serviced by a fraction of lenders. Buyers and properties must also meet certain requirements, which we’ll outline below.
There are several different types of home loans you can apply for that are eligible for adding renovation costs to the mortgage.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
1. FHA 203K
An FHA 203(k) is a mortgage serviced by the Federal Housing Authority in which the cost of repairs is combined with the mortgage amount. It’s different from a traditional FHA loan that does not include improvement expenses, but qualifications (credit score, down payment, etc.) are very similar.
Interest rates and terms are also similar to what you see in a standard FHA loan. However, you can expect additional lender fees to cover the extra oversight needed on a renovation loan.
The amount you can borrow is equal to either the value of the property plus the cost of renovations or 110% of the projected value of the property after rehabilitation. Borrowers must use an FHA-approved lender for this type of mortgage.
Eligible properties must be one to four units. Repairs can include those that enhance the property’s appearance and function, the elimination of health and safety hazards, landscape work, roofing, accessibility improvements, energy conservation, and more. A limited 203(k) is also available for repairs costing $35,000 or less.
2. Fannie Mae HomeStyle
The Homestyle Renovation loan from Fannie Mae takes into account the value of the property after renovations are complete. The amount of allowable renovation money can equal 75% of the value of the property after renovations are complete.
In the world of home loans, the loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed. Many lenders limit your LTV to 80% to 85%.
A HomeStyle loan allows an LTV of up to 97%. This means it’s possible to put as little as 3% down. Some investment properties are also eligible for this type of loan. Renovations are eligible as long as they are permanently affixed to the property. Work must be completed within 15 months from the closing date of the loan.
3. Freddie Mac CHOICERenovation
The Freddie Mac CHOICERenovation program is virtually identical to the Fannie Mae HomeStyle program. This renovation loan is for buyers who want a loan with more flexibility than an FHA renovation loan.
Like HomeStyle, renovations that are permanently affixed to the property are eligible in one- to four-unit residences, one-unit investment properties, second homes, and manufactured homes. The maximum allowable renovation amount is 75% of the “as-completed” appraised value of the home — meaning the appraised value of the home before renovations but accounting for all planned changes. The maximum loan-to-value (LTV) ratio is 95% (97% for HomePossible or HomeOne loans).
The Freddie Mac CHOICEReno eXPress Mortgage is an extension of the CHOICERenovation mortgage. The CHOICEReno eXPress mortgage is a streamlined mortgage for smaller-scale home renovations. Renovation amounts are limited to 10% or 15% of the “as-completed” appraised value of the home. Borrowers need to work with an approved lender to apply for one of these programs.
4. USDA Purchase with Rehabilitation and Repair Loan
A USDA Purchase with Rehabilitation and Repair Loan assists moderate- to very-low-income households in rural areas with repairs and improvements to their homes. Buyers can secure 100% financing with this loan.
For very low-income borrowers, there’s a separate loan you can qualify for with a subsidized, fixed interest rate set at 1% with a 20-year term. This makes borrowing incredibly affordable.
To apply, you must have a household income that qualifies as low to moderate in your county per USDA standards. The property must be your primary residence (no investments), and rehab funds cannot be used for luxury items, such as outdoor kitchens and fireplaces, swimming pools and hot tubs, and income-producing features. Manufactured homes, condos, and homes built within the last year are not eligible.
5. VA Alteration and Repair Loan
The VA allows qualified service members to bundle repairs and alterations with the purchase of a home. As with all VA loans, 100% financing is available on these low-interest loans.
Alterations must be those “ordinarily found” in comparable homes. Renovations are also required to bring the property up to the VA’s minimum property standards.
The loan amount can include the “as completed” value of the home as determined by a VA appraiser. Leftover money from the home loan after renovations are complete is applied to the principal.
Home Style Quiz
Other Options for Financing Home Renovations
While a renovation home loan is a great way to finance a renovation, it’s not your only option for borrowing money for home improvements. Nor is it the most flexible. Alternative loans — such as cash-out refis, home renovation personal loans, and home equity loans -– have a lot more flexibility.
Cash-out Refinance
A cash-out refinance is where you replace your old mortgage with a new mortgage, and the equity (here, the “cash”) is refunded to the homeowner. You will have closing costs with a new mortgage, but you won’t have separate financing costs for the money you’re using for renovations.
Personal Loan
Personal loans are often used for a home remodel or renovation. Because the funds are not secured by your property, you’ll likely have to pay a higher interest rate. The bright side of funding this way means you won’t lose your home if you stop paying back the loan.
This type of loan comes with a shorter repayment period, higher monthly payment, and lower loan amount. You can find these loans through banks, credit unions, and online lenders.
Home Equity Loan
A home equity loan is a secured loan that uses your home as collateral. That means the lender can foreclose on the home if you stop paying the loan, and so interest rates are typically lower. A home equity loan also comes with a longer repayment period than a personal loan.
Home Equity Line of Credit (HELOC)
A HELOC is a line of credit that lets homeowners borrow money as needed, up to a predetermined limit. As the balance is paid back, homeowners can then borrow up to the limit again through the draw period, typically 10 years. The interest rate is usually variable, and the borrower pays interest only on the amount of credit they actually use.
After the draw period ends, borrowers can continue to repay the balance, typically over 20 years, or refinance to a new loan.
A private loan is a loan made without a financial institution. Loans made from a family member, friend, or peer-to-peer source are considered private loans. Qualification requirements will depend on the individual or group lending the money. There are some serious drawbacks to obtaining funding from a private source, but these loans can help some borrowers in buying a home.
Government or Nonprofit Program
It is possible to finance the cost of remodeling with the help of government programs. Federal programs like HUD have financing options for renovations, as do some state and local government agencies.
Homeowners have a lot of options for financing renovations, especially in an era when home equity is higher than ever before. Renovation home loans allow borrowers to purchase and renovate a property with one loan, but that’s not the only way you can remodel a fixer-upper. Some alternatives to renovation home loans include home equity loans, HELOCs, and personal loans.
A HELOC allows owners to pull from their property’s equity continually over time. A HELOC brokered by SoFi allows homeowners to access up to 95% of their home’s equity, or $500,000, and offers lower interest rates than personal loans. Borrow what you need to finance home improvements or consolidate debt.
Learn more about turning your home equity into cash with a HELOC brokered by SoFi.
FAQ
How do renovation mortgages work?
Home renovation loans are known for combining the cost of financing a renovation or remodel with the cost of purchasing the home into a single-closing transaction. Lenders calculate the amount to be borrowed based on the value of the home after renovations are complete.
Can you include renovation costs in a mortgage?
A home loan can include renovations, but you must work with your lender to be approved for specific renovation loan programs.
Can you add renovation costs to your mortgage?
You cannot add renovation costs to an existing mortgage, but you can refinance your mortgage with a new “renovation mortgage.” However, you will need to choose a specialized home loan product. You can also apply for a renovation home loan when you make a new purchase.
Photo credit: iStock/Hispanolistic
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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
P2P payments, aka peer-to-peer transfers, are a great way to use digital technology to send money to other people or receive funds from them. With a money transfer app or perhaps one from your financial institution, you can send a friend your half of the dinner bill, gas money, or other payments, quickly and easily from your mobile device. Chances are, you can also buy items (say, on Instagram or a website) using one of these apps.
To move money via P2P, all you need to do is to download one of the transfer apps, like Venmo or PayPal, and connect your bank account, debit card, or credit card to it. Or your financial institution may offer their own app that you could enable. Either way, once you are set up, you are just a few clicks away from being able to send money.
Here’s a closer look at exactly how these apps work, including:
• What is a P2P money transfer?
• How does a P2P payment work?
• How long does a P2P transfer take?
• Are P2P payments safe?
• What are some alternatives to P2P payments?
What Is a P2P Payment?
With a P2P payment, you can send money to a friend with just a few clicks on your mobile device. This replaces the need to get cash at an ATM or write out a personal check, options that aren’t always quick or convenient.
For traditional P2P apps, both parties need to have an account with the transfer service in order to make the transaction. For example, if you want to use Venmo to repay a friend for the salad they bought you at lunchtime, that person would also need to have a Venmo account to receive that payment.
Typically, a P2P account is attached to your bank account online. Some P2P platforms, however, allow customers to link their P2P accounts to a debit card or even a credit card, though it may involve additional fees.
How does a P2P payment work? Here’s a closer look at what goes on when you use a P2P payment app.
Overview of the P2P Transfer Process
Say that you want to send money P2P to your sister for your mother’s birthday present. Depending on the type of P2P service you use, you’ll follow some variation of these basic steps.
• Creating a P2P Account. You will need to download a P2P app and then sign up for an account. In order to send money to your sister, you’ll both need to have an account with the same money transfer service.
• Linking your bank account to your P2P account. Some P2P services have the ability to hold funds, but they generally must be linked to a primary bank account, credit card, or debit card in order to be fully operational. This is how the account will pull any funds needed to make a payment.
To link your checking account, you may need your checking and routing number (which appear at the bottom of a check). Some P2P transfer services may only need your bank log-in information. Others may allow you to set up extra verification measures.
• Searching for a user to transfer funds to. To send money to your sister, you’ll need to find her on the P2P platform. You can typically search by username, email address, or a phone number. In most cases you will be able to add her account as a contact or “friend” in your account.
• Initiating a transfer. The next step in how a P2P payment works is getting the money moving. Your sister can request a payment from you, or you can initiate the payment yourself. This requires choosing the option to send funds, entering a dollar amount, and then clicking submit. If you’ve enabled additional security measures on your account, you may need to enter a PIN that gets texted to you as well.
You may be prompted to choose whether you are making a purchase or sending money to a friend or family member. This can impact whether fees get assessed and what kind of protection you receive for the transaction.
You may have the option to add a description or “memo” to your transaction. Some P2P services may require this information so that they can charge a fee for business-related transactions. Others offer the option to act as a personal ledger should you need it in the future.
• Waiting for the transfer to complete. Now the funds are in motion via a P2P bank transfer. When money is sent from one customer to another, it moves in the form of an electronic package safeguarded with multiple layers of data encryption. This makes it hard for hackers to access the data (like your bank account number) within the transfer while it is in motion. Similarly, data encryption keeps your money and account information safe. Once the data set reaches its destination, it is decoded and deposited as currency.
• Transferring the funds into the payee’s bank account. When a P2P transfer is completed, the funds may be deposited directly into your sister’s bank account. Or they may go into an account created for her by the P2P service. Funds received into P2P user accounts can then be transferred into traditional bank accounts at little to no cost. (You are likely to pay a fee if you want the funds transferred ASAP versus in a couple of days.)
Your sister will likely receive some combination of email, text, and/or in-app notifications that the funds have arrived. If she decides to leave the money in her P2P account, she can use that account balance the next time she needs to pay someone or purchase something from a business that accepts P2P transactions.
How Long Do P2P Transfers Take?
The general rule of thumb for P2P transfer services is to allow one to three business days for a transfer to complete (although some seem instantaneous; timing varies). That’s because standard bank transfers use the ACH (or Automated Clearing House) system, which can take a day or two to complete.
When it comes time to move funds from the app to, say, a checking account, some apps may charge a small fee, often around 1.75% of the overall transfer amount.
Are P2P Money Transfers Safe?
Many people wonder, Are mobile payment apps safe? Any time your bank account, credit, or debit card information is online, there is a chance that someone can get a hold of it, and P2Ps are no different. While all major money transfer companies encrypt your financial information, no P2P system can say it’s totally impervious to hacks and scams.
There are also additional measures you can take to make sure that your account remains secure. For example, you may be able to set up two-factor authentication, which might involve typing in a unique pin number that is texted to your phone for each transaction. Or you might elect to receive notifications each time there’s a transaction posted on your account, enabling you to spot financial fraud right away if it were to happen.
You may also want to take care when you type in a recipient’s email address, phone number, or name. A typo could lead to the money going to the wrong person.
How Do Peer-to-Peer Transfer Companies Make Money?
P2P transactions are largely offered for free to consumers, which may beg the question of how the companies that offer these services stay in business. Here are two major ways that P2P money transfer apps may generate income.
Account Fees
Typically, you can make P2P payments from a linked bank account or straight from the P2P account for free. If you want an instant transfer or you are transferring money using a credit card or from depositing checks into your P2P account, there may be a fee involved.
Business Fees
P2P platforms aren’t just for consumers — they are used by businesses as well. Compared to the free transactions that standard user profiles offer, business profiles are generally subject to a seller transaction fee for each customer purchase made with a P2P money transfer app. Venmo, for instance, charges a fee of 1.9%, plus 10 cents for each transaction.
What Are the Benefits of P2P Money Transfers?
There are three main benefits to using online money transfer services.
• They’re fast. Depending on the service, P2P money transfers can happen very quickly. They can take anywhere from just a few seconds to a couple of business days.
• They’re cheap. When exchanging money between friends and family, P2P money transfers are often free. There may be a small fee, however, if you want an instant bank transfer, are using a credit card instead of a bank account, are making a transfer above a certain dollar amount, are conducting a high volume of transfers, or are using the service for a business transaction.
• They’re easy. P2P transfers eliminate the need to make trips to the ATM or a local bank branch to get cash. They also eliminate the need to get out your checkbook, write a check, and then mail it to someone. For a P2P transfer, all you likely need is a mobile device, the app, and cell service or WiFi.
Alternatives to P2P Money Transfers
What if a P2P money transfer isn’t available or doesn’t suit your needs? Try these options instead to move money.
Sending a Check
You can go old-school and write a paper check. You fill out the necessary details and hand or mail the check to the person you are paying. Typically, no fee is involved, although you may have to pay for a new checkbook when you run low and order more checks.
Money Orders
Money orders are in some ways similar to a check, but you don’t write them from a bank account. Instead, you purchase them (essentially pre-paying for the amount you are sending) at the post office, businesses like Western Union or Moneygram, or from certain retailers.
Typically, you will pay a small fee. For example, the United States Post Office will issue money orders up to and including $1,000. Those that are for amounts up to $500 will be assessed a $1.75 fee; for ones that are $500.01 to $1,000, $2.40 will be charged. Once you have a money order, you can either give it to the recipient in person or mail it. You can also typically track a money order to see when it’s cashed.
Using Online Bill Payment Services
Many financial institutions offer ways for their customers to pay bills electronically. A key feature of mobile banking, this service can be a simple way to send funds from your checking account, regardless of where you are or what time it is. You may be able to set up recurring payments as well for bills you receive regularly.
Wire Transfers
Wire transfers are another way to send funds electronically using a network of financial institutions and transfer agencies that operate globally. Typically, you will access a wire transfer via your bank, its website, or its app. You’ll need to have your payee’s banking details and will likely pay a fee to wire money.
For instance, domestic wire transfers can charge a fee of anywhere from $15 to $50, and they can be processed in a few hours or within a day. International wire transfers can cost more (with both the sender and recipient possibly paying fees) and can take longer, typically two days.
Peer-to-Peer (or P2P) payment apps facilitate mobile money transactions. You can use them in place of cash or writing a check when you want to give friends or family money, whether it’s to cover your portion of a dinner bill or split the cost of a vacation rental. Some businesses also accept this form of payment.
All you need to make a P2P transfer is a mobile device, an internet connection, and your P2P app, which you must link to your bank account or credit card.
Customers with a SoFi online bank account can send money to any person, anywhere, even if that person doesn’t have a SoFi Checking and Savings account. If the person does happen to be a member of SoFi, the transfer will happen instantaneously. That’s not the only reason to open an online bank account with SoFi, though: You’ll also earn a competitive annual percentage yield (APY), pay no account fees, and, for qualifying accounts, get paycheck access up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.
FAQ
How much time does a P2P transfer take?
P2P accounts can take just a few seconds or a couple of days to move funds. Then, if the person who has money in the P2P app wants to transfer their cash to a bank account, that can also take between hours and a few days. Often, you may be charged a fee if you want the money moved ASAP.
Is P2P digital money?
P2P, or peer-to-peer-payments, are a digital way of moving funds from one person to another. Once the transfer is complete, the recipient has money they can use to pay for purchases or transfer into a bank account.
What’s an example of a P2P payment?
An example of a P2P payment would be to use a P2P app such as PayPal or Venmo to send funds to a friend you owe money. Or you might send a payment to a service provider or retailer using P2P apps as well.
Do banks use P2P?
Many banks offer their own version of P2P apps. For example, you might be able to almost instantly send funds from your account to a friend, a retailer, or a service provider.
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, 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 Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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