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Homeownership comes with plenty of perks, But one important financial benefit is the opportunity to build home equity, which is how much of a property you actually own. Home equity is considered a common way to generate wealth over time.

Read on to learn how homeowners can help build equity and increase the value of their home.

What Is Home Equity?

In order to understand how building home equity works, it’s important to understand exactly what it is.

Equity is the amount of your home you actually own. More specifically, it’s the difference between how much you owe your lender and how much your home is worth.

To calculate home equity, simply subtract the amount of the outstanding mortgage loan from the price paid for the home. So if a home is worth $350,000, and the homeowner owes $250,000 on their mortgage, they have $100,000 of equity built up in their house. Their mortgage lender still has an interest in the home to the tune of $250,000 and will continue to have an interest in the home until the mortgage is paid off.

7 Smart Ways to Build Your Home Equity

Here, learn some techniques for growing home equity.

1. Making a Big Down Payment

Homeowners can get a jump on building home equity when they’re buying a home by making a large down payment.

Typically, homebuyers using a conventional loan will put down at least 20% as a down payment to avoid having to pay mortgage insurance. That means that right off the bat, the homeowner has a 20% interest in their home. They can increase this amount by putting even more down. A down payment of 30%, for instance, will increase equity and potentially give the homebuyer more favorable mortgage payments and terms. (It can also help you avoid paying mortgage insurance.)

If making a large down payment means having less in emergency savings, however, the home buyer may want to use other methods to build equity.

2. Prioritizing Mortgage Payments

Each mortgage payment a homeowner makes increases the amount of equity they have in their home. Making mortgage payments on time will avoid potential late fees.

Keep in mind that a portion of each mortgage payment goes toward interest and sometimes escrow. You’ll want to take these amounts into account when calculating how much equity is accruing.

3. Making Extra Payments

Extra payments chip away at a loan’s principal, help build equity faster, and potentially save thousands of dollars in interest payments. Even if it’s only a little bit each month, paying more than your regular mortgage payment amount can help you increase how much home equity you build.

If adding some extra cash each month isn’t feasible, perhaps making one-time payments whenever possible — when you get a bonus at work, for instance — would be an option. Using a money windfall this way can help you build equity more quickly.

To ensure those payments are applied correctly, be sure to notify the lender that any extra or lump-sum payments should be put toward the loan’s principal.

Beware that some lenders may charge a prepayment penalty to borrowers who make significantly large payments or completely pay off their mortgage before the end of the term. Before making extra payments, consider asking the lender about a prepayment clause.

4. Refinancing to a Shorter Term

You may also consider refinancing with a loan that offers a shorter term. For example, a homeowner could refinance their 30-year mortgage to a 20-year mortgage, shaving off up to a decade of mortgage payments. However, doing so means they will also be increasing the amount they pay each month.

Still, shorter-terms loans may have the added benefit of lower interest rates, which could soften the blow of higher monthly payments.

Mortgage refinancing is not necessarily a simple process, nor is it guaranteed that a lender will offer a new loan. Homeowners can increase their chances of securing a refinanced mortgage by maintaining healthy credit and a low debt-to-income ratio. It may also help to have equity built up in the home already.

5. Renovating Your Home

Making home improvements typically increases the value of a home, which will likely increase equity. Renovating a home’s interior can be a good place to start.

Minor renovations like updating light fixtures and repainting can add some value to a home. Larger projects such as updating the kitchen, adding bathrooms or finishing the basement may yield good returns on the investment.

Weighing present cost against potential future gain may be a good thing to do before tackling a big project. The idea is that making these improvements now, and then being able to sell at a premium will mean recouping your expenses and then some. An online home improvement project calculator can help you estimate the cost of projects and how much value they could potentially add.

6. Sprucing Up the Outside

Similarly, adding to a home’s curb appeal may also increase its value. A fresh coat of paint, a well-maintained lawn, and tasteful landscaping could help increase a home’s desirability and the amount that buyers are willing to pay.

Mature trees, for example, can potentially add thousands of dollars to a home’s resale value. If you’re thinking of selling in a decade or more, planting a tree now could have a big effect on sale price later.

Increasing usable outdoor space by adding a deck or patio and installing good outdoor lighting may increase the value of your home.

7. Waiting for Home Values to Rise

The real estate market is always evolving, and sometimes, playing the waiting game could help you build equity. For instance, if your neighborhood becomes more popular, home prices could start to rise. If that happens, it may be worth keeping a home there longer to take advantage of the trend. Of course, the flip side is that housing prices may drop over time, which could mean a loss in equity.

Why Build Home Equity?

Building home equity is important because it gives the homeowner the opportunity to convert that equity into cash when the need arises. This is commonly done when a home is sold. But the equity in a home can also be important when taking out a home equity loan, which could allow the homeowner to use the value of their home while still living there.

For a home equity loan, a lender provides a lump-sum payment to the borrower. The amount must be repaid over a fixed time period with a set interest rate. As with a personal loan, home equity loans can be used for a variety of purposes. The loan is backed by the value of the home and typically must be repaid in full if the home is sold.

A home equity line of credit, or HELOC, is a revolving line of credit that uses the value of the home as collateral. Unlike lump-sum loans, a HELOC allows the homeowner to borrow money as needed up to an approved credit limit. That amount is paid back and can be drawn on again throughout the course of the loan’s draw period. While a person’s home is likely to be their most valuable asset, it’s also valuable purely because of its provision of shelter.

Researching and understanding all of the risks involved with loans that use a home as collateral, including that it could be lost if the loan is not paid back, is important before considering this option.

Of course, there may be times in your life when you want to access cash but you prefer not to tap into your home equity loan. For those times, a personal loan may be a good option, allowing you to access a lump sum of cash (typically, from a couple of thousand dollars to $50,000 or $100,000) to use for almost any purpose, such as a home renovation, a big medical bill, or a vacation.

In this case, you would repay the principal and interest over a term that’s usually two to seven years. Interest rates for an unsecured personal loan tend to be somewhat higher than those for secured loans in which collateral is involved.

The Takeaway

There are many ways to build equity in a home. Different strategies include making a large down payment or extra monthly mortgage payments, refinancing to a shorter term, renovating your home, or waiting for home values in your area to rise. Whatever your strategy, home equity can provide you with a valuable resource that can be used when a financial need arises. Often this resource is tapped into by means of a loan that is secured by the home. However, this means if the loan is not repaid, a homeowner could lose their home. If you want to avoid using a home as collateral for a loan, consider a personal loan.

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

FAQ

What is the fastest way to build home equity?

Among the faster ways to build home equity are to make a larger down payment and to apply money windfalls to the principal of your home loan.

What is the three-day rule for home equity?

The 3-day rule for home equity says that you can cancel a home equity loan or a HELOC within three days without any penalties, provided you are using your main residence as collateral.

What credit score do you need for a home equity loan?

Many lenders want to see a credit score of at least 620 to approve a home equity loan. Usually, the higher your score, the more favorable your rate and loan terms will be.

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

SOPL-Q225-048

Using retirement funds to pay for college may seem like a convenient solution when faced with the high cost of higher education, especially for parents looking to support their children. However, tapping into these savings can have significant financial consequences.

While certain retirement accounts, like IRAs, allow penalty-free withdrawals for qualified education expenses, the funds are often still subject to income tax and may reduce long-term retirement security.

Understanding the pros and cons can help families make informed decisions about whether to use retirement savings for college costs.

Pros of Using Retirement Funds to Pay for College

If you already have the money saved up, there can be some upsides to taking money out of your retirement funds so that your child won’t need to take out student loans.

May Avoid an Early Withdrawal Penalty

If you have an individual retirement account (IRA), taking an early withdrawal typically results in income taxes on the withdrawal amount plus a 10% penalty. However, if you withdraw funds for qualified higher education expenses, the 10% penalty is waived.

That said, the withdrawn funds will still be considered taxable as income. Also, this tax break does not apply to 401(k) accounts. But if you roll over your 401(k) into an IRA, then you would be able to withdraw the funds from the IRA and avoid the penalty.

May Avoid Taxes Altogether

If you have a Roth IRA, you can withdraw up to the amount you’ve contributed to the account over the years without any tax consequences at all.

Paying Interest to Yourself With a 401(k) Loan

In addition to allowing you to take early withdrawals, some 401(k) plans also let you borrow from the amount you’ve already saved and earned over the years.

If you borrow from a 401(k) account, that money won’t be subject to taxes the way an early withdrawal would. Also, when you’re paying that loan back, the money you pay in interest goes back into your 401(k) account rather than to a lender.

Drawbacks of Using Retirement Funds to Pay for College

Before you raid your retirement to pay for your child’s college tuition, here are some potentially negative aspects to consider.

May Be Negative Tax Consequences

Even if you manage to avoid being charged a 10% early withdrawal penalty on your retirement account, some or all of the money you withdraw from a retirement account may be considered taxable income. Depending on how much it is, you could face a larger-than-usual tax bill when you file your tax return for the year.

401(k) Loan Repayment Can Be Affected by Your Job Status

If you take out a large loan from your 401(k), then leave your job, you may be required to pay the loan in full right then, regardless of your original repayment term. If you can’t repay it, it’ll likely be considered an early withdrawal and be subject to income tax and the 10% penalty.

You May Have to Work Longer

Taking money out of a retirement account not only lowers your balance, but it also means that the money you’ve withdrawn is no longer working for you.

Due to compounding interest, the longer you have money invested, the more time it has to grow. But even if you replace the money you’ve taken out over time, the total growth may not be as much as if you’d left the money where it was all along.

Alternatives to Using Retirement Funds to Pay for College

While you can use retirement funds to pay for college, there are other options to consider, too.

Scholarships and Grants

One of the best ways to pay for a college education is with scholarships and grants, since you typically don’t have to pay them back.

Check first with the school that your child is planning to attend (or is already attending) to see what types of scholarships and grants are available.

Then, make sure your child fills out the Free Application for Federal Student Aid (FAFSA®). The information provided in the FAFSA will help determine his or her federal aid package, which typically includes grants, federal student loans, and/or work-study.

Finally, you and your child can search millions of scholarships from online scholarship databases. While your child may not qualify for all of them, there may be enough relevant options to help reduce that tuition bill.

Federal Student Loans

As mentioned above, filling out the FAFSA will give your child an opportunity to qualify for federal student loans from the U.S. Department of Education.

These loans have low fixed interest rates, plus access to federal benefits, including loan forgiveness programs and income-driven repayment plans.

With most federal student loans, there’s no credit check requirement, so you don’t have to worry about needing to cosign a loan with your child.

Parent PLUS Loans

If you’re concerned about the effect of student loan debt on your child, you can opt to apply for a federal Parent PLUS Loan to help cover the costs of college.

Keep in mind that the terms aren’t usually as favorable for Parent PLUS Loans as they are for federal loans for undergraduate students. The interest rates are currently higher, and you may be denied if you have certain negative items on your credit history.

Private Student Loans

If your child can’t get federal student loans, is maxed out on loans, or has pursued all other options to no avail, private student loans may be worth considering to make up the difference.

To qualify for private student loans, however, you and/or your child may need to undergo a credit check. If your child is new to credit, you may need to cosign to help them get approved by being a cosigner — or you can apply on your own.

Private student loans don’t typically offer income-driven repayment plans or loan forgiveness programs, but if your credit and finances are strong, it may be possible to get a competitive interest rate.

Recommended: A Complete Guide to Private Student Loans

The Takeaway

Using retirement funds to pay for college is one way to help your child, but you may not want to risk your future financial security. Take the time to help your child consider all of the options to get the money to pay for school.

Options to pay for college include cash savings, working a part-time job, scholarships, grants, federal student loans, and private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

Can I use retirement funds to pay for my child’s college education?

Yes, it’s possible to use retirement funds, such as those from an IRA or 401(k), to pay for college expenses. However, this decision carries potential tax implications and penalties, depending on the type of account and how the funds are withdrawn.

What are the tax implications of withdrawing from an IRA for college expenses?

Withdrawals from an IRA for qualified higher education expenses can avoid the 10% early withdrawal penalty. However, the amount withdrawn is still considered taxable income, which could impact your tax bracket and financial aid eligibility.

What are the alternatives to using retirement funds for paying college tuition?

Alternatives include applying for scholarships, federal student loans, Parent PLUS Loans, and private student loans. These options can help cover college costs without compromising your retirement savings.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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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.

SOISL-Q225-043

A budget can be a great tool for managing your money and making it work harder for you. But typically a budget involves distinguishing between fixed expenses (those that stay constant, month after month) and variable expenses, which change over time.

Understanding where your money is going in these two ways can be helpful as you work to track and optimize how you earn, spend, and save.

What’s important to know is that each kind of expense can be lowered in many cases, and fixed vs. variable expenses don’t necessarily translate as needs vs. wants.

Here, we take a closer look at these two ways you spend money, plus offer tips on how to trim both types of expenses and free up funds for saving and future goals.

What Is a Fixed Expense?

Fixed expenses are those costs that you pay in the same amount each month — items like your rent or mortgage payment, insurance premiums (which can be an often-forgotten budget expense), and your gym membership. With fixed expenses, you know the amounts you will owe ahead of time, and they don’t change (or perhaps only annually).

Fixed expenses tend to make up a large percentage of a monthly budget since housing costs, typically the largest part of a household budget, are generally fixed expenses. This means that fixed expenses present a great opportunity for saving large amounts of money on a recurring basis if you can find ways to reduce their costs. However, cutting costs on fixed expenses may require bigger life changes, like moving to a different apartment — or even a different city, where the cost of living is lower.

Keep in mind, though, that not all fixed expenses are necessities — or big budget line items. For example, an online TV streaming service subscription, which is withdrawn in the same amount every month, is a fixed expense. It’s also a “want” as opposed to a “need.” Subscription services can seem affordable until they start accumulating and perhaps become unaffordable.

Examples of Fixed Expenses

Here are some examples of fixed expenses:

•   Mortgage payments or rent

•   Car payments

•   Student loan payments

•   Membership and subscription fees

•   Insurance premiums

•   Childcare or tuition payments

•   Internet or mobile phone fees

What Is a Variable Expense?

Variable expenses, on the other hand, are those whose amounts can vary each month, depending on factors like your personal choices and behaviors as well as external circumstances like the weather.

For example, in areas with cold winters, electricity or gas bills are likely to increase during the winter months because it takes more energy to keep a house comfortably warm. Grocery costs are also variable expenses since the amount you spend on groceries can vary considerably depending on what kind of items you purchase and how much you eat.

You’ll notice, though, that both of these examples of variable costs are still necessary expenses — basic utility costs and food. The amount of money you spend on other nonessential line items, like fashion or restaurant meals, is also a variable expense.

In either case, variable simply means that it’s an expense that fluctuates on a month-to-month basis, as opposed to a fixed-cost bill you expect to see in the same amount each month.

Examples of Variable Expenses

Here are some common variable expenses:

•   Utilities

•   Food

•   Dining out

•   Entertainment

•   Personal care

•   Travel

•   Medical care

•   Gas

•   Property and car maintenance

•   Gifts

Fixed vs Variable Expenses

To review the difference between variable vs. fixed expenses:

•   Fixed expenses are those that cost the same amount each month, like rent or mortgage payments, insurance premiums, and subscription services.

•   Variable expenses are those that fluctuate on a month-to-month basis, like groceries, utilities, restaurant meals, and movie tickets.

•   Both fixed and variable expenses can be either wants or needs — you can have fixed expense wants, like a gym membership, and variable expense needs, like groceries.

When budgeting, whether you are calculating expenses for one person or a family, it’s possible to make cuts on both fixed and variable expenses.

Ways to Save on Fixed Expenses

Just because an expense is fixed doesn’t mean it can’t be downsized. These strategies can help you trim back some of recurring expenses.

Review Where Your Money Is Going

Take a look at your fixed expenses with a critical eye. Did your landlord raise your rent a significant sum? It might be time to look for more affordable options or get a roommate.

Has the number of subscription services you pay for crept up over time? You might save on streaming services by dropping a platform or two.

Refinance Your Loans

Interest rates rise and fall. If they are dropping, you might be able to save money by refinancing your loans, such as your mortgage. Check rates, and see if any offers are available that would reduce your monthly spend.

One option can be to get a lower payment over a longer period. You will likely pay more interest over the life of the loan, but it could help you out if you are living paycheck to paycheck right now.

Consolidate Your Debt

If you have a significant amount of high-interest debt, such as credit card debt, you might consider paying it off with a personal loan that offers a lower interest rate. This could save you money in interest and help lower your fixed expenses.

Bundle Your Insurance

Many insurance companies offer a lower premium if you sign up for both automotive and homeowners insurance with them. Check available offers to potentially reduce your costs.

Ways to Save on Variable Expenses

As you delve into variable vs. fixed expenses, here are some possible ways to minimize the ones that vary.

Scrutinize How You Spend

When you track your spending, you may find ways to cut back. For instance, you could look for ways to do your grocery shopping on a budget by planning meals in advance and shopping with a list. You might be able to challenge yourself to go for one month without, say, takeout food and the next without movies and then put the savings towards paying down debt.

Hit “Pause” on Impulse Purchases

If you feel the urge to buy something that isn’t in your spending plan, try the 30-day rule. Mark down the item and where you saw it and the price in your calendar for 30 days in the future. When that date arrives, if you still feel you must have it, you can find a way to buy it. But there is a very good chance that sense of urgency will have passed.

Try Different Budget Methods

If you find you need more help reining in your variable expenses, you might benefit from trying different budgeting tactics. “If it works with your income, the 50/30/20 budget is one simple method for people starting to organize their finances,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “This budget allocates 50% of your income for essentials, like rent and bills; 30% to personal day-to-day spending; and 20% for savings or financial goals.”

Other people prefer the envelope budget method or using a line-item budget to dig into where their money is going. You might also benefit from apps and digital tools to help you track where your money is going. Many banks offer these to their customers.

Recommended: 50/30/20 Rule Calculator

Check in With Your Money Regularly

The exact cadence is up to you, but it can be helpful to review your money on a regular basis. Some people like to check in on their account balances a few times a week; others prefer to review their accounts in-depth monthly. Find a system that works for you so you can see if your spending is on-target or going overboard.

Benefits of Saving Money on Fixed Expenses

If you’re trying to find ways to stash some cash, finding places in your budget to make cuts is a big key. And while you can make cuts on both fixed and variable expenses, lowering your fixed expenses can pack a hefty punch, since these tend to be big line items — and since the savings automatically replicate themselves each month when that bill comes due again.

Think about it this way: if you quit your morning latte habit (a variable expense), you might save a grand total of $150 over the course of a month — not too shabby, considering it’s just coffee. Even small savings can add up over time when they’re consistent and effort-free — it’s like automatic savings.

But if you recruit a roommate or move to a less trendy neighborhood, you might slash your rent (a fixed expense) in half. Those are big savings, and savings you don’t have to think about once you’ve made the adjustment: They just rack up each month. The savings you reap can help you pay down debt or save more, which can help you build wealth.

Saving Money on Variable Expenses

Of course, as valuable as it is to make cuts to fixed expenses, saving money on variable expenses is still useful — and depending on your habits, it could be fairly easy to make significant slashes.

As mentioned above, by adjusting your grocery shopping behaviors and aiming at fresh, bulk ingredients over-packaged convenience foods, you might decrease your monthly food bill. You could even get really serious and spend a few hours each weekend scoping out the weekly flyer for sales.

If you have a spendy habit like eating out regularly or shopping for clothes frequently, it can also be possible to find places to make major cuts in your variable expenses. You can also find frugal alternatives for your favorite spendy activities, whether that means DIYing your biweekly manicure to learning to whip up that gourmet pizza at home. (Or maybe you’ll find a way to save enough on fixed expenses that you won’t have to worry as much about these habits.)

The Takeaway

Fixed expenses are those costs that are in the same amount each month, whereas variable expenses can vary. Both can be trimmed if you’re trying to save money in your budget, but cutting from fixed expenses can yield bigger savings for less ongoing effort.

Great budgeting starts with a great money management platform — and SoFi can help you with that, thanks to our dashboard and smart features.

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

FAQ

What are examples of variable expenses?

Variable expenses are changeable costs that include such items as groceries, utilities, entertainment, dining out, and credit card debt. They differ month by month.

What are examples of fixed expenses?

Fixed expenses are constant month after month. These can include such things as rent, car payments, student loan payments, and subscription services.

Are utilities fixed or variable?

Utilities may be an essential expense but they typically vary from month to month, making them a variable expense. For instance, if you live in a cold climate, your heating bill will likely rise in the winter. Or you might run the dishwasher more over the holiday season, increasing your bill.

Photo credit: iStock/LaylaBird

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

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

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

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

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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SOBNK-Q325-066

An ACH routing number is a nine-digit code that identifies a financial institution during an electronic financial transaction. It ensures that money transferred using the ACH (Automated Clearing House) network is taken from and sent to the right place. ACH transfers are usually faster than paper checks and are used for various transactions like autopay and direct deposits.

Since ACH routing numbers play a vital role in everyday banking, let’s take a closer look.

What Is an ACH Routing Number?

An ACH routing number is essentially a digital address for your bank. It’s used specifically for transfers made using the Automated Clearing House (ACH) network, a system that facilitates electronic payments and direct deposits between financial institutions in the U.S.

Smaller banks and credit unions may have only one ACH routing number, while big banks may use several different ACH routing numbers based on region.

You’ll need your bank’s ACH routing number for a number of financial transactions. This includes setting up direct deposit at work, getting a tax refund directly deposited into your bank account, authorizing a one-time online payment, setting up autopay, and using a P2P payment app.

To set up an ACH transaction, you also need to provide your account number, which (unlike an ACH number) is unique to you. Your account number identifies the specific account, such as a traditional or online checking account, within the bank you want to use for the ACH credit or debit.

How Do I Find My ACH Routing Number?

Let’s say you want to sign up to pay your homeowner’s insurance automatically every month or you need to enroll in a P2P app to send someone money. To find your bank’s ACH routing number, you have a few options.

Using Your Checkbook

If you have paper checks, you can find your routing number by looking at the string of numbers printed along the bottom of a check. Your bank’s routing number is the first set of nine digits on the bottom left. It is usually followed by your account number and then the check number.

Using Your Online or Mobile Bank Account

Another way to get your ACH routing number is to go to your bank’s website and sign into your account. Methods vary by bank but, typically, here’s how you do it: Click on the last four digits of your account number (which appears above your account information) and choose “see full account number” next to your account name. A box will then open to display your bank account number and routing number.

You can also find your ACH routing number by signing into your bank’s mobile app. Typically, you just need to choose your account title and then tap “show details,” and your bank account and routing number will appear.

Using the Internet

If you don’t have access to online banking, you can also find your ACH routing number by going to your bank’s official website. You can then use the search function to look for “ACH routing number” or check the “Help” or “FAQ” sections.

Another option is to do a simple internet search. Put “ACH number” and the name of your bank into a search engine and you should be able to find it. Keep in mind that some large banks may have multiple regional ACH numbers. You want to make sure you are getting the one associated with your location.

Contacting Customer Service

If you can’t get online, you can always contact your bank’s customer service department by phone. They can provide you with the correct ACH routing number.

What Are ACH Routing Numbers Used For?

ACH routing numbers serve several essential functions in the banking system. Here are some of the main uses for ACH routing numbers:

•   Direct deposit Employers use ACH routing numbers to deposit salaries directly into employees’ bank accounts. This method is fast, secure, and convenient for both employers and employees.

•   Bill payments Many people use ACH routing numbers to pay bills electronically. This includes payments for utilities, mortgages, and other recurring expenses.

•   Tax refunds The IRS and state tax agencies use ACH routing numbers to deposit tax refunds directly into taxpayers’ bank accounts.

•   Transfers between accounts ACH routing numbers are used to transfer money between different bank accounts, whether within the same bank or between different banks. This is common for personal transactions, such as moving funds from a checking account to a savings account.

ACH vs ABA Routing Numbers: The Differences

An ABA (American Bankers Association) routing number is similar to an ACH routing number in that it identifies your bank. However, these numbers are used in different contexts.

ACH routing numbers are specifically used for electronic transactions processed through the Automated Clearing House network. This includes direct deposits, bill payments, and other electronic funds transfers. ABA routing numbers (also known as check routing numbers) are used for processing paper checks and for wire transfers. ABA and ACH simply refer to the method in which the money is moved.

These days, the same nine-digit number can serve as both an ACH routing number and an ABA routing number, which means that the ABA and ACH routing number for your bank is likely the same. If that’s the case, your bank will simply refer to its ABA/ACH routing number simply as its “routing number.”

Some banks, however, may provide separate ACH numbers (for electronic transfers) and ABA numbers (for checks and wire transfers).

ACH vs ABA Routing Numbers: History

ABA numbers were created in 1910 by the American Bankers Association (ABA) to help facilitate the sorting, bundling, and shipping of paper checks. They are still used for the processing of paper checks (and also for wire transfers).

More than a half century later, in the late 1960s, a group of California banks banded together to find a speedier alternative to check payments. They launched the first ACH in the U.S. in 1972; that was a key milestone in the evolution of electronic banking.

ACH vs ABA Routing Number: Numerical Differences

In the past, ABA and ACH numbers were slightly different, specifically the first two digits. Today, though, they are typically identical. Your bank’s ABA routing number and ACH routing number are likely to be one and the same. The reason is that both ABA and ACH numbers are used for the same purpose — transferring funds to the correct destination.

The Takeaway

An ACH routing number is a nine-digit code that identifies a bank during an electronic financial transaction. The ACH system has been used for decades and makes life easier by keeping transactions quick and secure. While ACH numbers used to be different from ABA routing codes, today these two numbers are typically the same.

Whether you are setting up direct deposits, paying bills, or transferring money between accounts, it’s essential to know your bank’s ACH routing number. You can find it by looking at your checks, logging into your account, or doing a simple online search. It’s that easy.

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

FAQ

Is the routing number different for ACH and wire transfers?

In some cases, the routing number for ACH transactions may be different from the routing number used for wire transfers. ACH routing numbers are used for electronic transactions processed through the Automated Clearing House network, such as direct deposits and bill payments.

Wire transfers, which are often faster and more direct, require an ABA or wire transfer routing number. It’s a good idea to confirm with your bank to ensure you use the correct routing number for the type of transaction you are making.

For SoFi wire transfers, the routing number is the same for ACH and wire transfers: 031101334.

Do all banks have an ACH routing number?

All banks and credit unions that process ACH transactions have an ACH routing number. This nine-digit number is your bank’s digital address, and is essential for facilitating electronic transactions such as direct deposits and bill payments. Each financial institution has its own specific ACH routing number to ensure that transactions are routed correctly.

Is your ACH number your account number?

No, your ACH routing number is not the same as your account number. The ACH routing number is a nine-digit code that identifies your bank or financial institution. Your account number, on the other hand, is a unique identifier for your specific bank account within that institution.

Both numbers are required for electronic transactions, but they serve different purposes. The routing number directs the transaction to the correct bank, while the account number specifies the particular account to be credited or debited within that bank.

Photo credit: iStock/fizkes

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

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

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

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

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

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College students often use a combination of funding including grants, scholarships, student loans, and savings to pay for their college education. Scholarships and grants are helpful because they typically don’t have to be repaid. In many cases, though, students rely on borrowed funds to help pay for some college costs.

Student borrowers have two major options available to them — private and federal student loans. While both types can be used by students to help pay for college, there are big differences in how a student will apply for them.

Continue reading for more details on the differences between private and federal student loans and their application process.

Federal Student Loans vs Private Student Loans

Federal student loans are provided by the federal government. Private student loans are issued by institutions such as banks, some schools, and other private lenders. In order to make an educated borrowing decision, it’s important to understand the major differences between federal vs private student loans. These differences include:

Repayment Terms

Federal student loans have a standardized set of repayment options. Borrowers can choose any of the federal plans and can adjust their repayment plan at any time without incurring any costs by contacting their loan servicer.

These repayments include income-driven repayment options, which aim to make repaying student loans more affordable by linking monthly payments to your income.

The repayment terms on private student loans are set by the lender at the time the loan is borrowed. Some lenders may offer flexible repayment terms, but they are not required to do so. Thoroughly review the loan terms before borrowing.

Interest Rates

All federal student loans have fixed interest rates, which are determined annually by Congress.

Private student loans may have either fixed or variable interest rates. With variable rates, the starting rate depends on factors such as your credit score, income, and employment history, and it can change as the economy fluctuates. Lenders determine the interest rate on a loan based on reviewing borrower information such as income, credit history, and score, among other factors.

In-School Deferment Options

Your choice between federal and private student loans may also determine when you start paying back your loans.

If you have a federal student loan, you generally aren’t required to start making payments until you graduate, leave college altogether, or reduce your course load below half-time. Many federal loans offer a six-month grace period after you leave school or cut back to below half-time, meaning you don’t have to make student loan payments during this time.

Certain private lenders allow you to wait to make payments on your private student loans just as you would with federal loans, but others require you to start paying them while you’re still in school full-time. This varies depending on the lender, so it’s important to check the specifics before taking out a loan.

Recommended: Using In-School Deferment as a Student

Which Type of Student Loan Should You Apply for First?

Federal student loans tend to be more flexible in regards to repayment options and loan forgiveness, and sometimes offer lower interest rates than private student loans. Because private loans are awarded based on borrower criteria, including credit history, undergraduate students with limited credit history may need to add a cosigner to strengthen their chances of being approved for a private student loan.

Generally speaking, federal loans are prioritized over private student loans. But, in situations where borrowers have exhausted their federal borrowing options, private student loans can help fill financing gaps.

Application Process of Federal and Private Student Loans

Navigating the application process for student loans is an important step in financing your college education. Whether you’re considering federal or private student loans, understanding how each process works can help you make informed decisions and avoid unnecessary delays.

But first, we’re looking at student loan deadlines for both federal and private loans.

How Does the Application Process Differ Between Federal and Private Student Loans?

We’ll dive into an overview of how to apply for student loans, broken down by federal and private loans. But you should know that there are two main differences in the processes: where to apply and when to apply.

Federal Student Loan Deadlines

For federal student loans, you’ll fill out the Free Application for Federal Student Aid, better known as the FAFSA®. You will need to fill out the FAFSA each year you are in school.

When it comes to timing, there are important FAFSA deadlines set by the state and sometimes your individual college. Some states offer aid on a first-come, first-served basis, so procrastinating may not be in your best interest. Jumping on the FAFSA early could make a difference in how much aid you receive.

Private Student Loan Deadlines

To apply for a private student loan, you’ll fill out an application directly with an individual lender. While private student loans are known for being more stringent with their terms and requirements, they can actually be more flexible when it comes to application timing. There’s no universal private student loan deadline. That’s one reason you may prefer to apply for federal student loans before private ones — to see how much federal financial aid you receive first, then, if needed, you can fill in the gaps with private loans.

Recommended: When to Apply for Student Loans: Student Loan Deadlines

Applying for Federal Student Loans

To apply for federal student loans, the first step is to fill out the FAFSA.

Filling out the FAFSA

You can fill out the FAFSA online at the Student Aid website. You can list up to 10 colleges on your FAFSA form. If you want to list more than 10, you just have to follow a couple of extra steps.

The FAFSA form will ask for personal and financial information about the student and their parents (if the student is a dependent). These questions cover your age, marital status, level of degree you’re acquiring, military status, and your own dependents.

You’ll provide the necessary financial information. This includes your federal income tax returns and tax documents (and/or your parents’ returns and documents, if you’re considered a dependent). The website includes an IRS Data Retrieval Tool, and once you enter the relevant information, it should be able to pull up you and/or your parent’s tax return(s).

Just a heads up — you won’t submit the most recent tax return. For example, if you’re applying for aid for the 2024-25 school year, you’ll attach your 2022 tax returns.

Last but not least, you and/or your parents will provide bank statements. These statements should be current at the time you fill out the application, not from the year of the tax documents you submitted.

Recommended: SoFi’s FAFSA Guide

Completing FAFSA Follow-up Steps

After receiving your Student Aid Report, you may want to double-check with the schools you listed on the FAFSA® to make sure they received your information and to ask if they need you to fill out any more documents. Some schools require different documents, so it may be beneficial to contact each one.

Once a school has processed your information, you’ll receive an award letter from the institution that officially reports how much aid you’ll be receiving. Colleges differ in how long they wait to send out award letters, so if you’re feeling antsy, you can call to inquire about their reward deadline.

Now for a huge follow-up step: applying for private student loans if scholarships, grants, and federal loans don’t cover everything.

Types of Federal Student Loans

There are four types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans for graduate and professional students, and Direct PLUS Loans for parents.

Direct Subsidized vs Unsubsidized Loans

Direct Subsidized Loans are available for undergraduate students. These loans are for students in financial need, and you don’t have to pay the interest until six months after you’ve graduated, left school, or dropped below half-time enrollment. These six months are referred to as the “grace period.” Interest will still accrue while you’re in school, but the government covers interest while you’re enrolled and during the grace period.

Direct Unsubsidized Loans for graduate and undergraduate students, but they aren’t disbursed based on your financial situation. The government doesn’t cover the cost of interest while you’re in school, so interest will accumulate throughout your time in college.

Direct PLUS Loans

The third type of federal student loan is a Direct PLUS Loan for graduate or professional students. The student takes out the loan, which is unsubsidized.

The fourth type is the Direct PLUS Loan for parents. This loan is for the parents of undergraduate students, so the parents would apply for and are held responsible for paying back the loan. Parent PLUS Loans are also unsubsidized.

Direct PLUS Loans require a credit check, unlike Direct Subsidized and Unsubsidized Loans.

Applying for Private Student Loans

As mentioned above, you can typically apply for private student loans directly on the lenders’ websites. If you’re having trouble deciding where to apply for private loans, but have already narrowed down your top schools, you can contact those institutions. Some colleges have “preferred lender” lists.

However, you aren’t necessarily bound by those lender lists. You may still want to research private student loans to find the right interest rates, interest rate types (fixed or variable), payment schedules, and included fees for your specific needs. Remember, private student loans tend to vary in their terms, so a little research can’t hurt.

Lender Requirements

Make sure you meet the requirements to receive a private student loan. For example, will you be enrolled in school at least half-time?

You should also make sure you’re attending a school that’s eligible for private student loans. If you’re attending a community college or trade school, you may or may not be able to receive a private loan.

Keep in mind that private student loan lenders tend to check things like your credit, income, and job history when you apply. This step will affect everyone differently, but if you’re fresh out of high school, this step could throw you for a loop. What if you’ve never had a job? What if you didn’t even know credit scores were a thing before this moment?

Considering a Cosigner

One thing that may help in this predicament is finding a student loan cosigner. Your options for a cosigner are fairly flexible, but many borrowers choose someone they trust, such as a parent, close relative, or trusted friend.

A cosigner agrees to take equal responsibility for the loan. If the student borrower cannot make payments, the cosigner is legally obligated to repay the debt, which can help the student qualify for better loan terms.

Still, it may be possible to get a private loan without a cosigner if you have low credit and/or income. Just be prepared to possibly pay more in interest!

Other Ways to Finance Your Education

While federal and private student loans are tools for receiving money to pay for college, there are other options. These include scholarships, grants, and Federal Work-Study.

Scholarships and Grants

Scholarships are gift aid, which means they don’t usually need to be repaid, and are typically merit-based. You can search for scholarships based on skill, such as academic, athletic, or music scholarships.

There are also scholarships available for people of certain demographics, such as ones for minorities or for women. You could even find scholarships for people of a certain religion/denomination or for those who’ve engaged in community service.

Grants are gift aid awarded based on your financial need. Some grants are provided by the government (state or federal), while others may be offered by your school or a private company.

Recommended: SoFi’s Scholarships Search Tool

Work-Study Program

The Federal Work-Study Program awards students with financial need the option to work part-time jobs to help pay for college. If you are interested in participating in the work-study program, you can indicate your interest when you fill out the FAFSA.

If you do not qualify for work-study, you may consider getting a part-time job.

The Takeaway

To apply for a federal student loan and other forms of federal financial aid, students will fill out the FAFSA annually. Students interested in private student loans will fill out applications directly with private lenders.

Other ways to pay for college include cash savings, scholarships, grants, and Federal Work-Study.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

What is the first step in applying for federal student loans?

The initial step is completing the Free Application for Federal Student Aid (FAFSA), which determines eligibility for federal student loans and other financial aid.

How does the application process differ between federal and private student loans?

Federal student loans require completing the FAFSA annually, with specific deadlines set by the federal government, states, and individual colleges. Private student loans are applied for directly through individual lenders and typically have more flexible application timelines.

When should I apply for private student loans?

While private student loans don’t have strict deadlines, it’s advisable to apply after determining your federal aid eligibility and once you’ve decided on a school. Applying early ensures funds are available when tuition payments are due.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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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.

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