Investing

Reviewed by Samantha Silberstein

A mortgage is a long-term loan designed to help you buy a house. In addition to repaying the principal, you also have to make interest payments to the lender. The home and land around it serve as collateral. But if you are looking to own a home, you need to know more than these generalities. This concept also applies to businesses, especially concerning fixed costs and shutdown points.

Key Takeaways

• Mortgage payments are made up of your principal and interest payments.
• If you make a down payment of less than 20%, you will be required to take out private mortgage insurance, which increases your monthly payment.
• Some payments also include real estate or property taxes.
• A borrower pays more interest in the early part of the mortgage, while the latter part favors the principal balance.
• Making a larger down payment will immediately boost the equity in your home.

Mortgages

Just about everyone who buys a house has a mortgage. Mortgage rates are frequently mentioned on the evening news, and speculation about which direction rates will move has become a standard part of the financial culture.

The modern mortgage came into being in 1934 when the government—to help the country overcome the Great Depression—created a mortgage program that minimized the required down payment on a home, increasing the amount potential homeowners could borrow. Before that, a 50% down payment was required.

In general, a 20% down payment is desirable, mostly because if your down payment is less than 20%, you are required to take out private mortgage insurance (PMI), making your monthly payments higher. Desirable, however, is not necessarily achievable. There are mortgage programs available that allow significantly lower down payments, but if you can manage that 20%, you definitely should.

The main factors determining your monthly mortgage payments are the size and term of the loan. Size is the amount of money you borrow and the term is the length of time you have to pay it back. Generally, the longer your term, the lower your monthly payment. That’s why 30-year mortgages are the most popular. Once you know the size of the loan you need for your new home, a mortgage calculator is an easy way to compare mortgage types and various lenders.

PITI: Mortgage Payment Components

There are four factors that play a role in the calculation of a mortgage payment: principal, interest, taxes, and insurance (PITI). As we look at them, we’ll use a $100,000 mortgage as an example.

Principal

A portion of each mortgage payment is dedicated to repayment of the principal balance. Loans are structured so the amount of principal returned to the borrower starts out low and increases with each mortgage payment. The payments in the first years are applied more to interest than principal, while the payments in the final years reverse that scenario. For our $100,000 mortgage, the principal is $100,000.

Interest

Interest is the lender’s reward for taking a risk and loaning you money. The interest rate on a mortgage has a direct impact on the size of a mortgage payment: Higher interest rates mean higher mortgage payments.

Higher interest rates generally reduce the amount of money you can borrow, and lower interest rates increase it. If the interest rate on our $100,000 mortgage is 6%, the combined principal and interest monthly payment on a 30-year mortgage would be about $599.55—$500 interest + $99.55 principal. The same loan with a 9% interest rate results in a monthly payment of $804.62.

Taxes

Real estate or property taxes are assessed by government agencies and used to fund public services such as schools, police forces, and fire departments. Taxes are calculated by the government on a per-year basis, but you can pay these taxes as part of your monthly payments. The amount due is divided by the total number of monthly mortgage payments in a given year. The lender collects the payments and holds them in escrow until the taxes have to be paid.

Insurance

Like real estate taxes, insurance payments are made with each mortgage payment and held in escrow until the bill is due. There are comparisons made in this process to level premium insurance.

Two types of insurance coverage may be included in a mortgage payment. One is property insurance, which protects the home and its contents from fire, theft, and other disasters. The other is PMI, which is mandatory for people who buy a home with a down payment of less than 20% of the cost. This type of insurance protects the lender if the borrower is unable to repay the loan.

Because it minimizes the default risk on the loan, PMI also enables lenders to sell the loan to investors, who can have some assurance that their debt investment will be paid back to them. PMI coverage can be dropped once the borrower has at least 20% equity in the home.

While principal, interest, taxes, and insurance make up the typical mortgage, some people opt for mortgages that do not include taxes or insurance as part of the monthly payment. With this type of loan, you have a lower monthly payment, but you must pay the taxes and insurance.

Important

Mortgage insurance may be canceled once the balance reaches 78% of the original value.

The Amortization Schedule

A mortgage’s amortization schedule provides a detailed look at what portion of each mortgage payment is dedicated to each component of PITI. As noted earlier, the first year’s mortgage payments consist primarily of interest payments, while later payments consist primarily of principal.

In our example of a $100,000, 30-year mortgage, the amortization schedule has 360 payments. The partial schedule shown below demonstrates how the balance between principal and interest payments reverses over time, moving toward greater application to the principal.

Payment	Principal	Interest	Principal Balance
1	$99.55	$500.00	$99,900.45
12	$105.16	$494.39	$98,772.00
180	$243.09	$356.46	$71,048.96
360	$597.00	$2.99	$0

As the chart shows, each payment is $599.55, but the amount dedicated to principal and interest changes. At the start of your mortgage, the rate at which you gain equity in your home is much slower. This is why it can be good to make extra principal payments if the mortgage permits you to do so without a prepayment penalty. They reduce your principal which, in turn, reduces the interest due on each future payment, moving you toward your ultimate goal: paying off the mortgage.

On the other hand, the interest is the part that’s tax-deductible to the extent permitted by law; if you itemize your deductions instead of taking the standard deduction.

Note

FHA-backed mortgages, which allow people with low credit scores to become homeowners, only require a minimum 3.5% down payment.

Your First Mortgage Payment

The first mortgage payment is due one full month after the last day of the month in which the home purchase closed. Unlike rent, due on the first day of the month for that month, mortgage payments are paid in arrears, on the first day of the month but for the previous month.

Say a closing occurs on Jan. 25. The closing costs will include the accrued interest until the end of January. The first full mortgage payment, which is for February, is then due March 1. For example, let’s assume you take an initial mortgage of $240,000 on a $300,000 purchase with a 20% down payment.

Your monthly payment is $1,077.71 under a 30-year fixed-rate mortgage with a 3.5% interest rate. This calculation only includes principal and interest but does not include property taxes and insurance.

Your daily interest is $23.01. This is calculated by first multiplying the $240,000 loan by the 3.5% interest rate, then dividing by 365. If the mortgage closes on Jan. 25, you owe $161.10 for the seven days of accrued interest for the remainder of the month. The next monthly payment, the full monthly payment of $1,077.71, is due on March 1 and covers the February mortgage payment.

You should have all this information in advance. Under the TILA-RESPA Integrated Disclosure rule, two forms must be provided to you three days before the scheduled closing date—the loan estimate and closing disclosure.

The amount of accrued interest and other closing costs are laid out in the closing disclosure form. You can see the loan amount, interest rate, monthly payments, and other costs and compare these to the provided initial estimate.

How Is a Mortgage Payment Calculated?

A mortgage payment is calculated using principal, interest, taxes, and insurance. If you want to find out how much your monthly payment will be there are several good online mortgage calculators.

When Do Mortgage Payments Start?

When you buy a home, mortgage payments begin on the first of the month after you have lived in the home for 30 days. If you buy a home in October, your first payment on your mortgage will be due on Dec. 1, even if you purchased your home on Oct. 1 or Oct. 31.

What Is Mortgage Insurance?

There are two kinds of insurance associated with a mortgage payment. The first one is property insurance, which protects the home and everything in it, more or less, from man-made and natural disasters. The second kind of mortgage insurance is PMI and if you bought your home with a downpayment of less than 20%, you will have to pay this insurance to protect the lender, if you suddenly can’t pay your loan back.

The Bottom Line

A mortgage is an essential tool for buying a house, allowing you to become a homeowner without making a large down payment; however, when you take on a mortgage, it’s important to understand the structure of your payments, which cover not only the principal (the amount you borrowed) but also interest, taxes, and insurance. It tells you how long it will take you to pay off your mortgage and how expensive it will be to finance your home purchase.

Fact checked by Yarilet Perez

Becoming a millionaire just doesn’t have the cultural cache it once did. To be sure, a million dollars remains a tidy sum and a worthy goal for your retirement or other savings. But to truly announce you’ve made it into the upper reaches of the nation’s moneyed elite, you need at least a billion dollars—nine zeros instead of just six.

Here’s what amassing that kind of wealth looks like for the average person using widely available investment strategies.

Key Takeaways

• Amassing $1 billion on an average salary alone would take more than 16,100 years.
• Compound interest significantly shortens the time required to amass a fortune, even with a modest interest rate.
• Investing to reach $1 billion needn’t be complicated; the S&P 500 outperformed billionaires from 2020 to 2024.
• An index fund investment strategy can result in a nest egg of $1 billion in 71 years.

Earning It

If you chase after a billion dollars solely with wages and no investments, you will have to work for a long time. According to the U.S. Bureau of Labor Statistics, the average weekly earnings for a full-time worker in the United States was $1,192 per week in the fourth quarter of 2024. That comes out to $61,984 per year. Let’s say you have a second income to cover living expenses and decide to stash your $61,984 annual income under your mattress and make your billion that way.

You’ll have to work and stash your paychecks for 16,134 years before you make your first billion.

In addition to lots of time, you’ll need lots of space for your cash. A billion dollars in $100 bills will be stacked on 10 standard construction pallets, with each pallet being 48 inches by 40 inches.

You can speed things up if you move your money to a bank savings account that pays the current national average interest rate of 0.41%. In that case, you will have saved $1,000,000,000 in 1,029 years. Compound interest is as powerful as they say!

Saving for It

Since compound interest is so helpful, consider moving your annual wages into a high-yield savings account or a certificate of deposit (CD). The annual percentage yields (APYs) for these fluctuate with the economy’s health and the Federal Reserve’s responses. We’ll keep things simple and use the current best rates for a national high-yield savings account and a CD and assume those rates hold for the campaign’s duration. (In reality, they’ll go up and down, but it’s hard to predict how much, especially over generations of economic activity.)

Currently, the best jumbo CDs pay 4.55% in interest. (We chose a jumbo CD because yours will qualify as one in your second year of saving.) With your annual wage and that return, you’ll amass a billion dollars in 149 years.

Meanwhile, the best high-yield savings accounts pay 4.75% interest right now. You’ll only have to wait 144 years for your billion at that rate.

Investing for It

By now, you’re probably convinced that the key to getting a billion dollars is to take advantage of compound interest as aggressively as possible through investing. But not too aggressively. You decide to invest your annual wages into an index fund and choose Fidelity’s FXAIX, one of Investopedia’s top funds tracking the S&P 500. You’ll have broad exposure to the stock market without paying a lot in fees, and you won’t have to worry about rebalancing as the tracked companies’ fortunes rise and fall over time. The index fund’s managers will take care of all that for you.

Note

Can you beat the billionaires? Perhaps surprisingly, you can. From 2020 to 2024, aggregate billionaire wealth in North America grew by 58.5%, from $3.8 trillion to $6.1 trillion, according to the UBS Billionaire Ambitions Report 2024. Over roughly the same period, the S&P 500 index grew 78%, demonstrating the power of U.S. equities markets and the wisdom of index fund investing.

FXAIX has returned 11.02% since its inception in 1988. At that rate of return and annual contributions of $61,984, you will acquire your first billion in 71 years.

Strategy	Annual Investment	Interest Rate	Total Contributions	Total Interest Earned	Years	Total
Mattress	$61,984	0.00%	$1,000,049,856.00	$0.00	16,134	$1,000,049,856.00
Passbook Savings	$61,984	0.41%	$63,781,536.00	$939,679,759.76	1,029	$1,003,461,295.76
Jumbo CD	$61,984	4.55%	$9,235,616.00	$1,021,093,327.08	149	$1,030,328,943.08
High-Yield Savings	$61,984	4.75%	$8,925,696.00	$1,031,526,660.71	144	$1,040,452,356.71
S&P 500 Index Fund	$61,984	11.02%	$4,400,864.00	$103,635,073.19	71	$1,044,062,234.59

A whole lifetime is longer than most average wage earners have to invest, but what a wonderful legacy to pass on to your children or grandchildren! And if they continue to follow your prudent investment strategy, they will double their billion-dollar nest egg to $2 billion by year 78. And four years later (a total of 82 years of patient investing), it will have tripled to $3 billion. It’s true what they say: The first billion is the hardest to get.

What Is Investment Strategy?

Investment strategy is a set of principles designed to help an individual investor achieve their financial and investment goals. This plan is what guides an investor’s decisions based on their age, goals, risk tolerance, and future needs for capital.

What Is a Billionaire?

A billionaire is an individual who has a net worth of at least one billion units of currency, including dollars, pounds, or euros. A billionaire’s net worth can include personal and business assets like cash, cash equivalents, real estate, investments, and other assets.

How Many Billionaires Are There?

The United States had 813 billionaires—the most of any country in the world—worth a combined $5.7 trillion in 2024, the most recent data available, according to the annual Forbes World’s Billionaires List. Worldwide in 2024, there were 2,781 billionaires worth a combined $14.2 trillion.

The Bottom Line

Whether you have 71 years or 16,134, it is possible to become a billionaire like the well-known wealthy such as Elon Musk, Jeff Bezos, Bill Gates, and Warren Buffett.

Besides the above-mentioned investment strategies, other dos for becoming a billionaire include being a successful inventor, being an entrepreneur, and having a business innovation strategy. Don’ts include thinking you know it all, making flashy investments, and giving up too soon.

How they help the mortgage market and provide crisis relief

Reviewed by Julius Mansa

If you’ve ever taken out a mortgage, chances are Fannie Mae or Freddie Mac played a role—whether you realized it or not. They’re both government-sponsored enterprises (GSEs) that buy residential mortgages on the secondary market to hold or (more often) bundle and sell as mortgage-backed securities (MBS) to investors. This replenishes lenders with cash to issue further mortgages, injecting liquidity, stability, and affordability into the housing market.

Today, Fannie Mae and Freddie Mac back most of the country’s 51 million residential mortgages. However, the two entities have a checkered past. They have faced significant challenges, from the 2008 subprime mortgage crisis to the pandemic-era forbearances and moratoriums. To fully understand their role in the housing market, let’s explore why they were established, how they evolved, and their future.

Key Takeaways

• Fannie Mae and Freddie Mac are pivotal in the secondary mortgage market, buying and securitizing mortgages.
• They ensure a steady flow of mortgage credit, influencing interest rates and availability.
• Their government sponsorship includes an implicit guarantee and regulatory oversight by bodies like FHFA and HUD.
• They played significant roles during the 2008 financial crisis, leading to a government bailout and conservatorship.
• Their response to the COVID-19 pandemic involved measures to support homeowners and renters, impacting their financial health.

Historical Background

Before the 1930s, you typically had to put down 50% on a home mortgage and repay it in 10 years or less, making homeownership largely inaccessible. Then, to make matters worse, the Great Depression sent nearly 1 in 4 mortgages into default, triggering a housing crisis. 

Fannie Mae

In response, the federal government introduced a series of New Deal initiatives, including the Federal Housing Administration (FHA) that insures qualifying mortgages and the Federal National Mortgage Association (FNMA) that creates a secondary market for them. Chartered as a federal agency in 1938, the FNMA—soon to be known as “Fannie Mae”—initially bought, held, and sold only FHA-insured loans but began investing in VA loans in 1948.

In 1954, the Federal National Mortgage Association Charter Act converted Fannie Mae into a public-private, mixed-ownership corporation, exempting it from all state and local taxes, except real property taxes. Then in 1968, it was reorganized into a for-profit, shareholder-owned company and listed on the New York Stock Exchange (NYSE) while remaining under the regulation of the Department of Housing and Urban Development (HUD).

This marked the beginning of Fannie Mae operating with private capital while still benefiting from government support. The change aimed to reduce direct federal involvement in mortgage financing, allowing Fannie Mae to function more like a private financial institution while still providing long-term, fixed-rate mortgages. 

Freddie Mac

Two years later, the Emergency Home Finance Act of 1970 established the Federal Home Loan Mortgage Corporation (FHLMC) or “Freddie Mac.” It expanded the secondary mortgage market by purchasing mortgages from smaller savings and loan (S&L) associations. Furthermore, the law allowed both Fannie Mae and Freddie Mac to buy and sell non-government-backed mortgages for the first time.

After the savings and loan crisis of the 1980s, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 restructured Freddie Mac as a for-profit corporation, leading to its listing on the NYSE alongside Fannie Mae. Since then, the two enterprises have served similar functions, with one main difference: Fannie Mae buys its mortgages mainly from major commercial banks, while Freddie Mac buys them from smaller thrift banks. 

Functions and Operations

Neither Fannie Mae nor Freddie Mac originate or service mortgages. Instead, they buy them off private lenders, who use the cash to extend even more loans, widening mortgage access.

However, the two government-sponsored entities only buy loans that meet their criteria for loan size, loan-to-value (LTV) ratio, debt-to-income (DTI) ratio, borrower credit score, etc. Loans that meet these criteria are called conforming loans. In 2025, the conforming loan limit is $806,500 in most of the U.S. and $1,209,750 in some high-cost areas like New York City and San Francisco.

After purchasing mortgages on the secondary market, Fannie Mae and Freddie Mac pool them into MBS and sell them to investors—especially large institutional buyers such as pension funds and insurance companies—which injects further liquidity into the mortgage market. Meanwhile, the two GSEs guarantee the principal and interest payments on the MBS, making them a relatively safe investment with a credit rating close to that of U.S. Treasuries.

Government Sponsorship and Regulation

Fannie Mae and Freddie Mac are unique entities in their company structure. Their close relationship with the federal government gives them access to lower borrowing costs and more investor confidence due to an “implicit guarantee.” Many assume the government will intervene before letting the GSEs default, even though there is no explicit guarantee. Case in point: During the late 1970s and early 1980s inflation and recessions, the federal government helped Fannie Mae recover from its financial losses with regulatory forbearance and tax benefits.

However, this government backing comes with strict government oversight. For example, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 created the HUD’s Office of Federal Housing Enterprise Oversight (OFHEO), which is now the Federal Housing Finance Agency (FHFA). It’s authorized to conduct routine safety and soundness examinations of the GSEs and enforce necessary changes. Furthermore, the HUD requires the GSEs to meet annual mortgage purchase goals and dedicate a portion of their loans to low- and moderate-income borrowers. 

Fannie Mae and Freddie Mac’s congressional charters made them Government Sponsored Enterprises GSEs. Though private, they had ties to the U.S. federal government that was thought to provide a financial backstop, with a line of credit from the U.S. Treasury for $2.25 billion. In September 2008, during the height of the financial crisis, they were placed under the direct supervision of the federal government.

During regular times, the government ties were less apparent but important. Each was a unique company unlike any other in the U.S. Here are some of the differences:

• The President of the United States appoints five of the 18 members of the organization’s boards of directors.
• The Secretary of the Treasury can buy up to $2.25 billion of securities from each company to support its liquidity.
• Their securities are considered “government securities” under the Securities Exchange Act of 1934.
• These securities did not have to be registered with the U.S. Securities and Exchange Commission.
• They could not originate mortgages, but they could buy them for securitization or investment purposes. In 2008, a year we’ll return to, the mortgage amounts were limited to $417,000, effectively closing them out of higher-priced real estate areas given their mission to target low—and moderate-income households.
• Both Fannie Mae and Freddie Mac are exempt from state and local taxes.
• The Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) regulate both companies.
• Should they face insolvency, this was not to be resolved through a bankruptcy process but by Congress.

The FHFA regulates, enforces, and monitors Fannie and Freddie’s capital standards and limits the size of their mortgage investment portfolios. HUD oversees Fannie and Freddie’s general housing missions.

Role in the 2008 Financial Crisis

In the years leading up to the 2008 Financial Crisis, Fannie Mae and Freddie Mac started investing in riskier loans, contributing to a housing bubble. In particular, they purchased large volumes of Alt-A mortgages, which had higher LTV and DTI ratios and often lacked full documentation of borrowers’ incomes. Furthermore, the GSEs bought private-label MBS collateralized by subprime mortgages, i.e., loans issued to borrowers with poor credit ratings.

When home values collapsed in 2007, defaults surged, and the MBS market unraveled. Fannie Mae and Freddie Mac lost billions of dollars on their portfolios and MBS guarantees, and investor confidence in them eroded. As their stock prices plummeted and insolvency loomed, the federal government intervened to prevent a wider economic fallout. 

In July 2008, Congress passed the Housing and Economic Recovery Act, establishing the Federal Housing Finance Agency (FHFA). Less than six weeks later, the FHFA placed Fannie Mae and Freddie Mac into conservatorship, effectively bringing them under government control. The U.S. Treasury then bailed out the GSEs with $190 billion through Senior Preferred Stock Purchase Agreements, requiring dividend payments in return. In 2010, both entities were delisted from the NYSE and began trading over the counter.

Since then, Fannie Mae and Freddie Mac have repaid the U.S. Treasury and returned to profitability but remain under conservatorship. 

In addition, Fannie Mae changed its business model. Instead of relying on income from its retained portfolio, it began generating most of its revenue by charging guaranty fees for ensuring the timely payment of principal and interest on MBS. As a result, its retained portfolio shrunk by 90% since 2010, and its revenue derived from guaranty fees went from less than 25% to over 80% of its total revenue.

Note

In September 2019, the U.S. Treasury and FHFA announced that Fannie Mae and Freddie Mac could start keeping their earnings to build up their capital reserves. The move was a step toward transitioning the two out of conservatorship. In early 2024, Fannie Mae and Freddie Mac had net worths of $77.7 billion and $47.7 billion, respectively.

Response to the COVID-19 Pandemic

The COVID-19 pandemic posed an entirely different set of challenges for Fannie Mae and Freddie Mac. With many Americans facing job losses and financial uncertainty, the federal government passed the CARES Act, introducing widespread homeowner protections. 

For example, federally-backed mortgages were granted the option to enter forbearance programs that paused or lowered mortgage payments for up to 180 days, with an option to extend for another 180 days—without late fees or penalties. Although 16% of mortgage holders used forbearance at some point between April 2020 and December 2021, most of them did it for three months or less. 

Meanwhile, federal and state-level moratoriums protected struggling borrowers and renters from losing their homes during the worst of the housing crisis. Under the CARES Act, lenders of federally-backed mortgages were prohibited from executing foreclosures until July 31, 2021. At the same time, the FHFA enforced more lenient lending and appraisal standards to help ensure buyers could still get into homes.

Naturally, the relief to federally-backed mortgage borrowers took a financial toll on Fannie Mae and Freddie Mac, which facilitated the effort with streamlined repayment plans, including deferred payments and extended loan terms. 

Current and Future Prospects

While Fannie Mae and Freddie Mac have since recovered from the COVID-19 pandemic, they remain under conservatorship. Some argue for privatizing the two GSEs to promote competition and shift risk away from taxpayers. However, others warn that privatization could lead to tighter mortgage credit, higher interest rates, and reduced support for low-income borrowers.

Privatization efforts have been proposed multiple times. In 2019, the first Trump administration released a Treasury plan outlining potential housing reforms, including an end to Fannie Mae’s and Freddie Mac’s conservatorships. However, this never materialized. 

Then in January 2025, the U.S. Treasury and the FHFA announced a framework to facilitate the orderly exit of Fannie Mae and Freddie Mac from government control, which involves soliciting public input and ensuring that the transition minimizes disruptions to the housing and financial markets. GSE share values jumped to multi-year highs at the news, reflecting investor optimism about the potential for privatization under President Trump’s second administration. However, President Trump has yet to propose a change, and some experts warn that ending conservatorship could take years, drive up interest rates, end the 30-year fixed-rate mortgage, and make the housing market more volatile.

For now, Fannie Mae and Freddie Mac play an important role in stabilizing the mortgage market and making it accessible to more Americans. 

Recently, the FHFA finalized its 2025-2027 housing goals for Fannie Mae and Freddie Mac, and according to the announcement, the GSEs must meet the following single-family loan benchmarks to support equitable housing access for low-income families and minorities:

Single-Family Goals (percentage of overall qualified single-family purchases)
Single-Family Goals	Benchmark Level 2025-2027
Low-Income Home Purchase	25%
Very Low-Income Home Purchase	6%
Minority Census Tracts Home Purchase	12%
Low-Income Census Tracts Purchas	4%

Moving forward, Fannie Mae and Freddie Mac will continue to be influenced by interest rates, inflation, and other economic and regulatory factors. For example, higher mortgage rates since 2022 have dampened homebuyer activity, reducing the volume of loans the GSEs can purchase and securitize. However, if rates decline, mortgage activity could rebound, benefitting GSE balance sheets. At the end of 2024, Fannie Mae’s net worth was nearly $95 billion (up 22% from 2023), and Freddie Mac’s net worth was nearly $60 billion (up 25% from 2023).

The Bottom Line

From the Great Depression to the 2020 COVID-19 pandemic, Fannie Mae and Freddie Mac have been instrumental in shaping the modern mortgage market. For better or worse, they support around 70% of U.S. home loans. In 2024 alone, Fannie Mae acquired $326 billion in single-family loans (up 3% from 2023), and Freddie Mac acquired over 1 million loans, repackaged into MBS totaling over $411 billion (up 18% from 2023).

With the federal government’s support, Fannie Mae and Freddie Mac have helped maintain a steady and reliable source of mortgage funding for individuals, families, and investors—both in economic downturns and periods of growth. Without them, Americans would likely face higher mortgage rates, shorter loan terms, and more difficulty buying homes. 

Use These Smart Planning Tips to Set the Stage for Your Loved Ones’ Futures

Fact checked by Vikki Velasquez
Reviewed by David Kindness

Everybody needs an estate plan, regardless of their age, state of health, or even the size of their assets. An estate plan ensures that your money and property go to the people of your choice while minimizing the impact of taxation. Having a plan also will help your heirs access their inheritance faster and more easily.

You have numerous options, and one of them should be the best for you and your family.

Key Takeaways

• Federal law allows an individual to inherit up to $13.610 million tax-free as of the 2024 tax year. For 2025, the maximum rises to $13.99 million.
• There is no limit to the tax-free status for the spouse of the deceased.
• People who inherit assets valued under the maximum do not usually have to file an estate tax return.
• Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.

The Fundamentals of Wealth Transfer

Federal law provides an estate tax lifetime exemption that allows an individual to transfer up to $13.61 million tax-free to beneficiaries in 2024. The figure rises to $13.99 million in 2025.

This exemption could change significantly at the end of 2025 when the Tax Cuts and Jobs Act (TCJA) expires unless Congress agrees to extend the provision. The provision’s chances of an extension rose with the reelection of President Donald Trump, who signed it into law at the end of 2017.

Assets valued at more than the exemption amount can be taxed at a rate of as much as 40%. That rate has been in place since 2013.

The estate tax applies to everything you own at the time of your death, including partial interests in some assets, but not to the overall value of your assets, referred to as your gross estate. Your heirs are permitted to subtract mortgages, the costs of administering the estate, any gifts you give to charity, other debts you hold at the time of death, and anything you leave to your spouse.

Important

The Tax Cuts and Jobs Act (TCJA) nearly doubled the estate tax lifetime exemption when the law was passed in December 2017. The exemption could be cut to as low as $7 million when the TCJA expires at the end of 2025.

The Unlimited Marital Deduction

Federal tax law allows you to pass your wealth to your spouse with no limit. These transfers are completely tax-free whether they occur during your lifetime or when you die.

Of course, this exemption lasts only for the lifetime of the surviving spouse, whose heirs may face inheritance taxes on amounts exceeding the limit.

The Portability Rule

Another Internal Revenue Service (IRS) rule allows surviving spouses to reduce the impact of taxess on their heirs. The first spouse to die can transfer any unused portion of his or her own lifetime exemption to the survivor.

Let’s say the first spouse has died, passing on an estate that is valued at only half of the $13.61 million lifetime exemption. The surviving spouse can add the remaining $6.8 million to their own $13.61 million exemption for a total of $20.41 million under this portability rule.

The surviving spouse must file an estate tax return for the decedent to claim this right.

It’s worth noting that only Hawaii and Maryland offer portability for state-level estate taxes.

Ideally, both spouses are U.S. citizens because some restrictions apply otherwise. The IRS includes same-sex spouses provided that they’re legally married. It doesn’t recognize registered domestic partnerships or civil unions.

Tax-Efficient Ways to Transfer Wealth

Federal law provides a few other strategies to transfer your wealth without an undue tax burden if you are not married or want to leave a portion of your estate to others. 

Form an Irrevocable Trust

A trust is a legal entity set up by a grantor, usually the original owner of the assets it holds. The grantor funds the trust by transferring ownership of their property into its name or into the name of a trustee. The trustee is the individual or entity designated to oversee the trust upon the grantor’s death.

The assets that the trust holds don’t contribute to the grantor’s taxable estate.

One tax advantage to an irrevocable trust is that it can hold your life insurance policy. In that case, its value doesn’t contribute to the value of your taxable estate at the time of your death.

Moreover, any income earned by the assets held within the trust is taxed to the trust, not to the grantor, because the trust technically now owns the income-producing assets. This provides a benefit during your lifetime as well, easing your annual income tax burden.

The downside to an irrevocable trust is that, as the name implies, it can’t be amended, changed, or revoked by the grantor. It’s forever.

The grantor can’t reclaim the property they’ve placed into it. This is not the case with a grantor trust or revocable trust, which allows the grantor or creator to take back and reclaim assets placed into it or even dissolve the trust completely.

They can delete beneficiaries or add new ones without restriction.

Engage in Annual Gifting

You might prefer to simply give your wealth away during your lifetime, and the IRS has rules in place for this, too.

The gift tax is a separate level but it works in tandem with the estate tax. Gifting during your lifetime will decrease the value of your eventual estate because you’ve already given much of your wealth away, rendering your estate nontaxable. The IRS doesn’t want that to happen, so it imposes both taxes.

The tax code provides an annual gift tax exclusion of $18,000 per person per year for 2024, rising to $19,000 for 2025. You can give this much away, free of taxation.

Those numbers are more generous than they appear at first glance. The limit is for an individual, so multiple family members can get gifts.

“Take advantage of the gift-splitting provision,” advises Mike K. Earl, a certified financial planner and partner and director of The Wealth Group, Austin B. Colby & Associates in Minnesota. “For example, a married couple could give $36,000 to their son ($18,000 as a gift from each spouse). If this same couple’s son was married with two children, the couple could give up to $144,000 each year to their son’s family.” (Each spouse can give $72,000.)

You’re also granted a lifetime gift tax exemption, but unfortunately, it’s shared with the estate tax. Gifts that exceed the $18,000 yearly exclusion can be applied to your lifetime exemption so that the tax isn’t payable until your death, and they would then only be taxed if the total value of your estate and your lifetime gifts exceeds the annual estate tax exemption limit.

As with the estate tax, gifts made to your spouse or to charity don’t count against these limits. But lifetime gifts can subtract from the lifetime exemption if you do this, leaving less dollar-value protection for your estate.

The annual gift tax exclusion and the estate tax examption amount are adjusted annually for inflation.

Explore Other Gifting Options

Gifts made directly to a qualified educational institution or to a healthcare provider on behalf of someone other than yourself can be made tax-free.

Tuition and medical bills don’t apply against the annual gift tax exclusion, nor do gifts made to political organizations.

Form a Family Limited Partnership

A family limited partnership (FLP) provides joint ownership of family-owned assets to family members. Family members are either general partners or limited partners who assume varying (or no) responsibility for controlling the assets placed into the FLP’s ownership and managing its investments.

Parents and grandparents who donate their wealth and assets into an FLP then serve as partners who can transfer their partnership interests to other family members, including their children and grandchildren.

This can minimize or entirely dodge gift and estate taxes and protect assets from personal creditors, but the IRS does require that the partnership have a clear and definable business or investment purpose.

It must be created in such a way as to earn income of its own, and family partners must report that income on their own tax returns for income tax purposes.

“These structures can centralize family wealth management, provide some asset protection, and offer opportunities for tax-advantaged gifting through the use of valuation discounts,” says Celeste Robertson, a Texas-based estate planning and probate attorney with offices in Rockport and Corpus Christi.

Form a Generation-Skipping Transfer Trust

The generation-skipping transfer tax (GSTT) targets both lifetime gifts and estate bequests made to a person who is at least 37½ years younger than you, such as grandchildren or great-grandchildren you want to include in your estate plan.

The tax code provides for a generation-skipping transfer tax lifetime exemption as well. The maximum is $13.61 million for 2024 and $13.99 million for 2025.

The “skip person”—the individual who is two or more generations younger than the individual making the gift—must be the sole beneficiary of the trust and must have withdrawal rights to take advantage of the annual exclusion.

What Is the Most Tax-Efficient Way to Transfer Wealth?

The best strategy depends on the individual’s situation. Meeting with an estate tax lawyer or financial planner can help you determine the best way to pass on your wealth to your heirs.

What Are Some Strategies for Transferring Wealth?

One strategy is to give away some or all of your wealth over your lifetime rather than transfer it after your death. Or, you can create a generation-skipping transfer trust to provide for anyone who is at least 37½ years younger than you, such as grandchildren or great-grandchildren.

What Is the Greatest Wealth Transfer?

The greatest wealth transfer, as it has been called, is the process happening in the U.S. right now as the baby boom generation passes its wealth on to younger generations. Baby boomers are projected to leave their heirs, mostly millennials and Gen Xers, $84 trillion through 2045.

The Bottom Line

The federal gift and estate tax structure is currently generous enough to allow the vast majority of people to pass their wealth and assets to their loved ones tax-free.

You’ll still want to know and understand your options so you can properly plan for the future. Keep these taxes and options in mind as you plan your estate, and consider touching base with an attorney or tax professional who can guide you and keep you up to date with changes in the law.

It can give you an edge in a tight real estate market but there are downsides

Fact checked by Katharine Beer
Reviewed by Lea D. Uradu

“Cash is king,” goes the old adage. However, does that philosophy ring true when buying a home?

You may want to pay cash for your home if you’re shopping in a competitive housing market, or if you’d like to save money on mortgage interest. It could help you close a deal and beat out other buyers. However, there are downsides to not using a mortgage, such as the risk you take in tying up your funds in an illiquid asset. Learn when you should and shouldn’t pay for a home in all cash.

Key Takeaways

• Cash offers can give homebuyers an edge with motivated sellers eager to close the deal, or with sellers in tight markets where many bidders are competing for the same properties.
• Paying all cash for a home can make sense for some people and in some markets, but be sure that you also consider the potential downsides.
• The drawbacks include tying up too much investment capital in one asset class, losing the leverage provided by a mortgage, and sacrificing liquidity.

What Is the Process of Buying a Home with Cash?

The first step in buying a home with cash, not surprisingly, is coming up with the cash. Unless you happen to have that much money sitting in the bank, you’ll probably need to liquidate other investments and have the proceeds transferred into your bank account. Bear in mind that selling securities on which you’ve made a profit will trigger capital gains taxes.

A prospective seller may also ask for proof that you have the cash, such as your latest bank statement.

After that, the process is very similar to buying a home with a mortgage—except for having a mortgage lender looking over your shoulder. Once you’ve chosen a home that you want to buy:

1. Negotiate a price and sign a contract: Often referred to as a sales and purchase agreement, this contract will confirm the terms to which you and the seller have agreed. Sample forms are available online, from your real estate agent, or from your or the seller’s lawyer. You will want the contract to include a home inspection contingency so that you can get out of the deal or renegotiate the price if there’s anything seriously wrong with the property.
2. Hire a professional home inspector: This most likely would be mandatory if you were using a mortgage, but it’s also a very good idea if you’re paying cash.
3. Arrange for title insurance: Since no mortgage lender is involved, you won’t have to pay for lender’s title insurance. However, you will want owner’s title insurance. The title insurance company’s job is to search public records to verify that you’ll have clear title to the property that you’re purchasing—meaning that you own it free of any liens, claims, or disputes over whether the seller was the actual owner. Title insurance protects you against any problems that the title search might have missed. Whether you or the seller pays the one-time premium for this insurance is for you to negotiate.
4. Set up the closing: This is the meeting at which you and the seller will sign and exchange various documents to seal the deal. It may be held at the office of an escrow company hired by you or the seller to handle the necessary paperwork and register the sale with the proper authorities. Some title insurance companies also provide these services.
5. Fork over the cash: The closing is typically the point at which you pay the seller. This has traditionally required a cashier’s check from your bank but also may be done electronically these days.

Pros of Paying All Cash for a Home

Paying all cash provides advantages for homebuyers in competitive markets, and could provide some financial benefits, too.

You’re a More Attractive Buyer

A seller who knows that you don’t plan to apply for a mortgage is likely to take you more seriously. The mortgage process can be time-consuming, and there’s always the possibility that an applicant will be turned down, the deal will fall through, and the seller will have to start all over again, noted Mari Adam, a certified financial planner in Boca Raton, Fla.

Better Deal Possible

Just as cash makes you a more appealing buyer, it also puts you in a better position to bargain. Even sellers who have never heard the phrase “time value of money” will understand intuitively that the sooner they get their money, the sooner they can invest or make other use of it.

Avoid Mortgage Applications

After the housing bubble and the ensuing financial crisis of 2007–2008, mortgage underwriters tightened their standards for deciding who’s worthy of a loan. While they have loosened up somewhat since then, they are still likely to request substantial documentation even from buyers with solid incomes and impeccable credit records.

While that might be a prudent step on the part of the lending industry, it can mean more time and aggravation for mortgage applicants.

Other buyers have little choice but to pay cash. “We’ve had buyers who couldn’t get a new mortgage because they already have an existing mortgage on another house up for sale,” Adam said.

“Since they can’t get a new mortgage, they buy the new property with all cash. Once the old property sells, they may place a mortgage on the new property or perhaps decide to forgo the mortgage altogether to save on interest.” 

No Mortgage Payments

Mortgages are typically the largest bill that people have to pay each month, as well as the biggest burden if their income falls off due to a job loss or some other misfortune.

Years ago, homeowners would sometimes celebrate their final payments with mortgage-burning parties. Today, the average homeowner is unlikely to stay in the same place long enough to pay off a 30-year mortgage or even a 15-year one. In addition, homeowners often refinance their mortgages when interest rates fall, which can extend their loan obligations further into the future.

Mortgage-Free Retirement

If peace of mind is important to you, then paying off your mortgage early or paying cash for your home in the first place can be a smart move. That’s especially true as you approach retirement. Though considerably more Americans of retirement age carry housing debt than they did 20 years ago, according to Federal Reserve data, many financial planners and retirees see at least a psychological benefit in retiring free of debt.

“If someone is downsizing to a less expensive house in retirement, I generally advise them to use the equity in their current home and not get a mortgage on the new house,” said Michael J. Garry, a certified financial planner in Newtown, Pa.

Cons of Paying All Cash for a Home

Although there are pluses to buying a home in cash, don’t forget to consider the downsides.

Money Tied Up in One Asset Class

If the cash required to buy a home outright represents most of your savings, then you’ll be bucking one of the hallowed rules of personal finance: diversification.

What’s more, in terms of return on investment, residential real estate has historically lagged behind stocks, according to many studies. That’s why most financial planners will tell you to think of your home as a place to live rather than as an investment. 

Loss of Financial Leverage

When you buy an asset with borrowed money, your potential return is higher—assuming the asset increases in value.

For example, suppose you bought a $300,000 home that has since risen in value by $100,000 and is now worth $400,000. If you had paid cash for the home, then your return would be 33% (a $100,000 gain on your $300,000). However, if you had put down 20% and borrowed the remaining 80%, then your return would be 166% (a $100,000 gain on your $60,000 down payment). This oversimplified example ignores mortgage interest, tax deductions, and other factors, but that’s the general principle. 

Warning

Leverage works in the other direction, too. If your home declines in value, then you can lose more, on a percentage basis, if you have a mortgage than if you had paid cash. That may not matter if you intend to stay in the home, but if you need to move, then you could find yourself owing your lender more money than you can collect from the sale.

You Sacrifice Liquidity

Liquidity refers to how quickly you can take your cash out of an investment, if you ever need to. Most types of bank accounts are totally liquid, meaning that you can obtain cash almost instantly. Mutual funds and brokerage accounts can take a little longer, but not much. A home, however, can easily require months to sell.

You can, of course, borrow against the equity in your home, through a home equity loan, a home equity line of credit, or, if you’re at least age 62, a reverse mortgage. As Garry points out, however, all of these options have drawbacks, including fees and borrowing limits, so they should not be entered into casually.

How Common Are All-Cash Home Sales?

Just over 36% of single-family house and condominium sales were all cash in 2022, according to ATTOM Data Solutions. That’s the highest level since 2013.

How Much Can I Save if I Pay All Cash?

A study published in 2021 found that homebuyers with mortgages paid 11% more on average than those who paid all cash. But a lot will depend on the state of the housing market at any given time.

Can I Change My Mind Later and Get a Loan on a Home I Paid Cash for?

Yes, and you’ll have a variety of options to choose from. These include a mortgage with cash-out refinancing, a home equity loan or line of credit, or a reverse mortgage if you meet the age requirements.

Can I Get Cash from Securities Without Selling Them?

If you have investments in a brokerage account that allows margin loans for purposes such as buying real estate, then you may be able to borrow as much as 50% of their value without selling them. However, this is a risky move, especially if you don’t pay the money back quickly, such as by taking a mortgage on the home soon after you’ve completed the all-cash transaction.

The Bottom Line

Buying a home in all cash may save you money, both on the purchase price and in interest, and it could give you an edge in a competitive homebuying market. It also eliminates a big monthly bill when you don’t have a mortgage payment to make.

But before you draw down all of your savings to buy a house, consider whether you’d be better off keeping some of your funds liquid, investing the difference, and leveraging your mortgage to your advantage.

Fact checked by Vikki Velasquez
Reviewed by David Kindness

Unsteady first working years, higher than average student loan balances, and the disappearance of defined benefit plans (or pensions) mean many millennials have been fighting an uphill battle most of their working lives.

Still, many financial advisors are impressed with this generation and how they have prioritized their finances, and for good reason. This digitally native generation is also tech-savvy in figuring out the best ways to save for their futures.

But even the most dedicated saver can use expert advice on juggling competing financial priorities. We asked top financial advisors for insight for millennials who want to get the most out of their money.

Key Takeaways

• Sixty-four percent of millennials have investments, making them the most invested generation.
• Social media platforms like LinkedIn, X (formerly Twitter), YouTube, and TikTok are rising in popularity among millennials as sources of financial information.
• Financial advisors emphasize the importance of emergency savings while staying on track.
• The 50/30/20 budget rule is a simple way to allocate after-tax dollars to account for needs, wants, and savings.

First: What Millennials Are Getting Right

According to financial advisors like Douglas Boneparth, president of Bone Fide Wealth, millennials are using the past to fuel their financial futures. Boneparth “thinks the trauma of the Great Recession has made millennials very aware of savings and emergency funds,” which creates a stronger foundation that allows them to be in the accumulation phase during their higher earning years.

Melissa Joy, certified financial planner (CFP) and certified divorce financial analyst (CDFA), agrees. She says, “Millennials are responsible for their money and making great choices.” Joy is particularly encouraged by how comfortably they navigate retirement through company programs.

Joy also finds in her practice that once millennials feel they have a handle on balancing their debt, earnings, and current savings, they seek information about the next steps.

Even for millennials with no prior savings or plans for the future, all is not lost. Joy says, “If you feel like you are behind, now is such a good time to get to investing. Now, you are entering your high-earning years. There is no better time than the present to use your human capital to improve your picture.”

Emergency Savings Are Very Important

All the financial advisors interviewed in this article agreed that having emergency savings is the foundation of a sound financial plan. Life happens, and Joy emphasizes that the security of an emergency savings account can help you stick to your goals.

Sure, you could skip the emergency fund and instead invest that money. However, the average credit card interest rate for users with a balance is 22.80% (the latest available data, November 2024). Even the best investment will have a hard time outpacing 22.80% interest.

Tip

Individuals without emergency savings are more likely to use credit cards or debt to cover emergency costs.

Boneparth sums up the importance of emergency savings by saying, “Give yourself the opportunity to feel safe and secure before you even start investing. Starting early is important, but what good is compounding if you can’t stay invested? This way, you can navigate the ups and downs of life without having to worry. The ability to navigate that and stay on your path separates good and bad investors.”

Set Clear Priorities

Those who are most successful in planning their financial futures have clear priorities, say financial advisors.

“You cannot have everything you want, so what is the most important thing to you? You need to list it out and really prioritize it,” says Thomas Kopelman, co-founder and financial planner at AllStreet Wealth. “Also, do the opposite. Make a list of things that you can cut.”

Many people think investing and planning for the future is just about dollars and cents, but financial advisors know that many money moves are psychological. By clearly establishing priorities and knowing “what it is that you are truly after,” Boneparth says, your goals will motivate you to keep going.

If you’re struggling to figure out what is most important, it’s best to talk to a financial advisor about prioritizing your goals.

Give Every Dollar a Job

With that in mind, Nathaniel Hoskin, CFP, accredited wealth management advisor (AWMA), and founder and lead advisor at Hoskin Capital, recommends “giving every dollar a job.” The best way to do that is to create a realistic budget.

Budgeting is a critical part of a financial plan, and while there are as many different ways to budget as there are stars in the sky, the most important part of budgeting is seeing where your money is going. Financial advisors know this is an uncomfortable truth for many people and that the further we get away from tangible money, the easier it is to ignore. In fact, 65% of people do not know how much money they spent last month.

Boneparth echoes that he has seen this in his practice and encourages people to be honest about their budgets by budgeting “not based on what you think you are spending but what you know you are spending.”

To face budgeting woes head-on, some financial advisors, like Hoskin, recommend looking at spending for three months before they lay out a budget for future expenditures. Hoskin recommends smartphone apps as a quick way to see income vs. expenses for the three prior months without having to backtrack every expense with pencil and paper.

Focus on Reverse Budgeting

Budgeting will reveal either a surplus or a deficit. Once you know where your money is going, “even if [your] money is not spreading as far as [you] want it to,” you can focus on reverse budgeting, says Hoskin. Reverse budgeting means putting money aside for your future self first.

Kopelman agrees wholeheartedly with Hoskin on reverse budgeting. Hoskin further recommends that you take advantage of automated investing and savings. He sees automation as tricking your brain and nervous system into sticking to the strategies. Setting money aside for your future self first by automatic withdrawals or transfers means you are working toward your goals before any of your income is spent.

Budgeting is not a set-it-and-forget-it endeavor. You should continue to track your budget and adjust goals as your priorities and income change. An easy place to continually track your budget is with a calculator.

“The best we can do is our best,” says Colin Overweg, CFP, founder of Advize Wealth Management. “We cannot predict the future, so we will put together a plan, stick to it, and adjust accordingly.”

Be a Goal-Getter with ‘Free Money’

Another way to slay your financial future is to make sure that you take advantage of all the “free money” offered by your employer.

An overwhelming percentage of millennials are participating in employer-sponsored retirement plans and should pat themselves on the back for that. Participating is the first step; taking advantage of employer matching is the next logical step. Hoskin says this should be the watermark for people with few extra means. Leaving matching contributions on the table is like walking away from free money.

Create a Financial Plan

Once you’ve established emergency savings and taken advantage of all matching employer contributions, financial advisors recommend working toward tackling those financial goals and priorities based on your budget.

There are some universally accepted future-focused budgeting tactics, like the 50/30/20 budget rule, where 50% of income is spent on needs, 30% on wants, and 20% on savings. While the 50/30/20 rule is simple, financial advisors tend to agree that saving 20% of income is a solid target, but 15% is a great starting point.

Those incapable of saving 20% of their income today should ideally save no less than 10% and incrementally increase it. Joy calls this “matching your lifestyle creep with your savings creep.” Managing the lifestyle creep is where a financial advisor can come in handy as well, because they can help you continually reassess the percentage of gross income you’re investing.

Financial advisors want their clients to invest based on their priorities, but they also emphasize the importance of Roth individual retirement accounts (Roth IRAs) for those who qualify. Roth IRAs are accounts in which you can invest after-tax dollars. That is beneficial because those who wait to withdraw this money until after they are 59½ years old can withdraw this money and its growth tax-free.

There are many more resources you can use to help you plan for and fund your retirement.

Additional Considerations

The most popular source for financial advice is social media. Many advisors today exist in the social media space and practice radical generosity with their knowledge and expertise.

However, as with anything, only some on the internet are experts. You should approach some free financial literacy with the same caution as approaching an unusual, spam-like social media direct message.

If you’re investing in company-sponsored plans, you should talk with your plan provider and financial advisor to ensure your money is being invested appropriately for your target retirement date and risk tolerance.

Joy also encourages people with stock options as part of their overall compensation to talk to an advisor. She has seen ill-prepared people make very reactive decisions regarding their stock options, and says planning can integrate these stock options into financial plans.

Where Do Millennials Get Their Financial Advice?

According to a survey from the National Association of Personal Financial Advisors, most millennials get financial advice from a family member (31%), a website (27%), a trusted friend (26%), a parent (26%), a financial advisor (21%), or social media (20%). Thirty-four percent of millennials and Gen Z respondents said that lack of financial guidance was hurting their ability to manage their retirement plans.

What Percentage of Millennials Have a Financial Advisor?

About 21% of millennials surveyed by the NAPFA got advice from a financial advisor.

Why Do Millenials Struggle Financially?

Millennials have trouble saving because the costs of living and inflation have increased, rents and home prices are up, and wages and salary increases have not kept pace.

The Bottom Line

Millennials are DIY-ing their financial future more than any previous generation, but financial advisors agree they’re doing well. Still, those who desire the best outcomes should prioritize goals and budgeting, take advantage of “free money” from their employer, make a savings plan, and stick to it.

Financial advisor Melissa Joy reminds us that perception is not always reality because “you always think everyone is doing better than you are, and that is not always the case.” However, millennials worried about how they stack up should not quit before they begin. It’s not too late to plan for your financial future.

Douglas Boneparth reiterates, “The first best time is yesterday. The second best time is today.”

How to use them to save for retirement

Fact checked by Vikki Velasquez
Reviewed by David Kindness

Millennials born in the early 1980s to mid-1990s are beginning to enter middle age and their peak earning years. This generation entered the workforce around the time of the Great Recession and has faced barriers that include a hefty student loan debt burden, the COVID-19 pandemic, and an increasing number of natural disasters. As a result, they may experience many obstacles in securing their retirement.

Target date funds may provide a helpful and convenient option for those who find saving for retirement difficult or daunting.

Key Takeaways

• Target date funds are convenient because they offer automatic asset allocation and diversification.
• When choosing target date funds, you should consider your risk tolerance and investment goals.
• Other factors to consider when selecting target date funds include expense ratios, fund performance, and investment philosophy.

Introduction to Target Date Funds

Target date funds, also known as life-cycle funds, aim to manage risk on behalf of investors to ensure that their retirement savings are protected as the date of retirement approaches. These funds are typically labeled by the intended year of retirement—such as a “2055 Fund”—and use what is known as a glide path to shift exposure from higher-risk, potentially higher-reward assets to lower-risk ones over time.

Target date funds are usually mutual funds that hold a combination of stocks, bonds, and other investments. Over time, the managers of these funds shift the allocation of these various asset types toward a more conservative approach. For instance, they shift from a more stock-heavy portfolio when retirement is still decades away to a fixed-income or cash-equivalent-heavy portfolio in the final years before retirement.

A goal of these funds is to bet on relatively riskier assets earlier in the investor’s career, in order to capitalize on the possibility of higher returns when there is still time to recover from potential market declines. Then, as retirement nears, a target date fund works to protect the investments accumulated over time from sudden market volatility or other factors that might erase returns at the last minute.

Note

Target date funds are typically offered through 401(k) plans and may, in fact, be the default investment plan within a 401(k).

Benefits of Target Date Funds for Millennials

Target date funds offer a variety of advantages for those interested in saving for retirement. These include:

• Automatic asset allocation: Target date funds remove all the work of managing risk. You simply contribute to the fund, and the fund managers automatically shift the asset allocation over time in line with the overall goals of the fund and the intended retirement date. If you don’t have the time or interest to participate actively in the investment process, this makes target date funds an excellent choice.
• Simplification: Because target date funds tend to be broadly diversified mutual funds, they can be considered a single investment vehicle in your retirement planning. Unlike individual stocks, bonds, exchange-traded funds (ETFs), or other assets, which investors may need to monitor, buy, and sell regularly, target date funds are very straightforward.
• Risk tolerance is factored in: Many target date funds allow investors to specify their relative level of risk tolerance and adjust the glide path accordingly. If you are comfortable with a greater level of risk, for example, a higher percentage of the portfolio may be allocated to stocks.
• Long time horizon: By definition, target date funds consider long time horizons when making allocations. The oldest in this generation still have decades until retirement age, making these funds a strong choice given this time frame.

Risks and Considerations of Target Date Funds for Millennials

It’s important to be aware of some risks and other considerations before you begin investing in a target date fund. These include:

• Misalignment of risk tolerance or investment goals: There is a risk of target date funds oversimplifying the retirement planning process for some investors. It’s important to consider the specifics of a fund—where does it invest funds, exactly how does it shift asset allocation over time, and so on—and compare those against your own level of risk tolerance and your financial goals.
• Fees: While it can be tempting to set up participation in a target date fund and put it out of mind, you should also be aware that different funds may have fees that must be paid periodically. These may be for the fund itself or, occasionally, for other mutual funds in which the target date fund invests.
• No guarantee of success: Just because a target date fund is designed to adopt a more conservative approach as you approach retirement, there is no guarantee that it will successfully protect retirement savings at that point.
• Limited agency: By choosing a target date fund, you remove the option of controlling aspects of an investing approach, which may be important. If you have a particular focus—for instance, you might wish to invest only in stocks meeting certain environmental, social, and governance (ESG) metrics—you may not be able to specify that preference when using a target date fund. You may also wish to have a fund that is actively managed by a professional, even if you wish to take a hands-off approach. Increasingly, a variety of target date funds do incorporate these kinds of investing preferences and strategies, though you may have to hunt for them.

Factors to Consider When Choosing Target Date Funds

If you’ve decided to use a target date fund, there are some key considerations to keep in mind before initiating an investment. The most important of these may be the target retirement date itself.

Other considerations include expense ratios of the fund and any constituent funds, overall fund performance (particularly as it compares to other target date funds operating on the same time frame), and which funds are available through your particular investment manager.

Comparing Target Date Funds to Other Options

Retirement planners may weigh target date funds against other investment options, such as individual stock investments, robo-advisors, and traditional retirement accounts. The choice often comes down to how actively you wish to participate.

Note

Target date funds are one of the least-involved retirement planning options.

Index funds and related products are somewhat more involved, as you’ll need to determine which funds to focus on and how to allocate them over time.

Individual stock investments represent the opposite end of the spectrum and might be appealing if you’re looking to be more actively involved in determining how your money is allocated.

One popular alternative to target date funds if you have decades until retirement is to focus on a growth fund instead.

Chad Kennedy, a financial planner for Lighthouse Financial in Arkansas, points to a case in which a you might choose between a target date fund, large-cap growth fund, or S&P 500 index fund. Kennedy notes that most target date funds “range from 0.5% all the way up to 1% or more” in internal costs, while growth funds might cost “below 0.1%.” A typical expense ratio for an index fund may be 0.1%, although some are much lower.

So, someone with retirement decades away may “opt for a growth-oriented investment mix for the foreseeable future,” Kennedy says, making one of those growth funds a comparable option to target-date funds over the short term. He adds that someone considering between the two may “have a much better opportunity to outperform their respective target date fund opting for a simple growth fund” until it comes time to shift to a more conservative allocation many years down the line.

Common Misconceptions About Target Date Funds

A common misconception about target date funds is that funds with the same target date but offered by different providers are the same. On the contrary, target date funds with similar dates are likely to hold different allocations and types of assets.

For example, in most cases, a target date fund offered by a particular provider will include mutual funds only offered by the same provider. In contrast, others will hold various U.S. equity, foreign equity, and bond funds offered by the same provider.

If you’re eyeing your retirement, many more resources exist that can help you plan and support your financial future.

Another misconception about target date funds is that the allocations will be changed frequently. As Kennedy points out, most people can select a growth fund and make “updates to the investment mix…as retirement approaches in 20 to 30 years.” The impact of not changing asset allocations significantly in the short term may be minimal, particularly considering the relative cost difference between growth and target date funds.

Most investment management firms offer target date funds. Besides Vanguard, Fidelity, and T. Rowe Price, others include TIAA, BlackRock, State Street, JPMorgan Chase, and many more. The best target date fund for you may depend on whether you have a preference among these and other fund managers. Beyond that, this generation is likely targeting retirement dates of roughly 2045 through 2060, so choosing a fund with the appropriate time horizon is essential.

Next, it will be helpful to consider expense ratios across different comparable funds, as well as the assets that make up the portfolio and how you might expect them to shift over time.

What Should My Target Fund Date Be?

Your target date fund should be dated as close to the date you plan to retire as possible.

Where Do Millenials Invest Their Money?

Many are invested in traditional stocks and retirement accounts but are also interested in alternative investments.

What Is the Best 401(k) Mix for a 30 Year Old?

It depends on who you talk to and your investing strategy, preferences, risk tolerance, and goals.

The Bottom Line

Target date funds begin with a higher concentration of riskier assets like stocks and shift toward a more conservative approach as a target retirement date approaches. These funds may appeal to investors for their ease of access, as they allow them to make contributions and leave the rest of the fund management process up to professionals. However, they tend to have higher expense ratios than growth index funds, which may provide a similar performance and risk level for much of an investor’s career.

Compare interest rates, equity requirements, and other terms

Fact checked by Vikki Velasquez
Reviewed by Khadija Khartit

You can evaluate a fintech’s home equity offerings by comparing interest rates, terms, and any additional perks.

If you’re in the market for a home equity product such as a home equity loan or home equity line of credit (HELOC), you may turn to your bank or credit union. However, a growing number of fintech companies are also offering these products.

A fintech, or financial technology company, operates primarily online and uses advanced technology that enables a digitized lending process. As a result, fintechs can often offer a faster approval process and potentially better terms for the loans. Learn more about how home equity products work and how to evaluate a fintech’s home equity offerings.

Key Takeaways

• A fintech company, or financial technology company, operates primarily online and uses advanced technology for underwriting.
• Fintechs are increasingly offering home equity products like loans, lines of credit, or shared-appreciation arrangements.
• Home equity products use your home equity as collateral for a loan or revolving line of credit.
• Shared-appreciation arrangements allow homeowners to secure a lower rate in exchange for a portion of any increased home value to the lender.

Why Tap Into Home Equity

Home equity loans can often offer a more affordable way to access cash for major expenses like home repairs or college tuition. Their interest rates are typically much lower than the rates on personal loans and other loan products. Many people also use home equity loans or HELOCs to pay off higher-interest debt such as high credit card balances.

Homeowners with significant equity may also use a home equity product to help fund their living expenses in retirement. This practice is called a reverse mortgage, since the owners start the reverse process of receiving payments periodically against the value accumulated in their home over time and that they might not need for so long since they are aging.

Types of Home Equity Products

When you evaluate products from a fintech, you’ll want to understand the differences in how they work.

With a home equity loan, the lender provides a lump-sum amount that you can use for any purpose. The loan amount you can be approved for will depend on how much equity you have in your home, with many lenders capping loans at about 80% combined loan-to-value (CLTV) ratio, meaning you can usually only use a part of your equity. You repay a home equity loan in regular payments with a fixed interest rate.

Home equity lines of credit (HELOCs) work more like a credit card. Homeowners receive a line of credit that they can access as they need, and the interest rates are usually variable.

With both loans and lines of credit, the lender is repaid in full if the homeowner sells their property.

Note

Some lending companies, including fintechs, also offer shared-appreciation arrangements. Shared-appreciation financial products allow homeowners to get a lower interest rate in exchange for giving the lender a percentage of the increase in value, or appreciation, of the home if it’s sold.

How to Compare Home Equity Products

When you evaluate home equity products from a fintech company, you’ll want to take into account their terms and interest rates as well as how they compare to similar products from traditional lenders. For example, a fintech may offer a fixed interest rate on HELOCs, whereas traditional lenders typically offer variable rates. A fintech might charge minimal up-front fees because its process is digital and not costly, while traditional lenders might charge higher up-front fees since their process is manpower intensive.

Equity Requirements

Some fintech companies may accept more of your home equity as collateral than others. Many companies don’t accept a 100% CLTV, but you could potentially use up more of your home’s value with some products than others. More commonly, you will be be approved for a loan-to-value (LTV) ratio of 80% of less.

Important

A combined loan-to-value (CLTV) ratio is the ratio of the total amount of secured loans on a property compared to the property’s value. The lower the CLTV, the lower the risk to the lender.

You may also face minimum equity requirements, such as needing at least 20% equity in your home. Each fintech will set its specific minimum equity requirements.

Interest Rates

Interest rates on home equity products will vary from lender to lender. The lower your interest rate, the more you will save in total loan costs. So, compare interest rate offerings among several fintechs to determine which is most affordable. This means getting the lowest fixed rate over comparable lending periods. Some fintechs might have a more efficient underwriting process, different risk management through access of data, or cheaper cost of capital that they can pass on to you in the form of lower interest rates. And there might be other factors to consider with interest rates as well.

Some home equity products have fixed interest rates, which are more predictable. Others have variable interest rates, which could potentially be lower but could rise over time. Consider your current interest rate environment and your personal financial situation when you evaluate which type of interest rates may work best for you.

Length of Loan

Repayment terms for home equity loans and HELOCs will also vary.

With home equity loans, term lengths can range from five to 30 years. You’ll make regular payments to the lender during that time.

With a HELOC, the fintech will extend a line of credit to you for a set period of time called the draw period. Then your repayment period will begin, and you will begin making regular payments, typically with variable interest rates.

Other Terms

As technology companies, fintechs often offer innovative products, including with their home equity loans. For example, lenders like Synergy One Lending and Figure offer a HELOC that is powered by blockchain technology to provide a more efficient process for the application, underwriting, and funding. By using blockchain and other technology, fintechs can make loan origination significantly more affordable.

Finally, be sure to evaluate the different fees associated with various fintech home equity products. A home equity loan or HELOC may have a competitive interest rate, but higher closing costs. Many home equity loans or HELOCs come with closing costs of 2% to 6%.

How Does a Home Equity Loan Work?

A home equity loan is a loan for a set amount of money, repaid over a set period of time that uses the equity you have in your home as collateral for the loan. If you are unable to pay the loan back, you may lose your home to foreclosure.

What Is a Fintech Mortgage Company?

A fintech mortgage company is a lender that uses financial technology to process, approve, and fund a mortgage. Technology-based lenders process loans significantly faster than traditional lenders.

What Is a Blockchain HELOC?

A blockchain home equity line of credit (blockchain HELOC) uses your home as collateral and uses blockchain to store and transmit records in the application process. Using blockchain to verify data can make the approval and underwriting process much faster.

How Much Equity Can I Cash Out?

Lenders impose limits on the amount that you can borrow with a home equity loan or HELOC. Generally, your combined loan-to-value (CLTV) ratio needs to be 80% or less, meaning that the total loans using your home as collateral must be no more than 80% of your home’s value.

What Is the Difference Between a Home Equity Loan and a Shared-Appreciation Mortgage?

A home equity loan is debt financing. The borrower gets a sum of money and must repay it, plus interest. The lender may have a lien, or claim to the property, but receives only the principal plus interest as in any other loan. In a shared-appreciation arrangement, the lender receives part of the increased value of the home at some point in the future.

The Bottom Line

Fintech lenders can provide competitive home equity products like loans and lines of credit that may fit your financial needs. Review all your options in home equity loans, comparing the pros and cons and different terms. Consider consulting a professional financial advisor for guidance on the best home equity product for your particular situation.

Fact checked by Ryan Eichler

During homeownership, as you pay down your mortgage and the value of your home rises, you begin building equity in the property. Home equity is the difference between the market value of your property and what you owe on the mortgage. This can be used to borrow money against it in the form of a one-time home equity loan or an ongoing home equity line of credit (HELOC). Both options have pros and cons so it’s important to understand the key differences between the two so you can make the right choice for your financial goals.

Before pursuing either, it’s worth considering other financing options. Depending on your financial situation, personal loans, mortgage refinancing, or other lines of credit might offer better terms.

Key Takeaways

• Home equity loans and HELOCs use home equity as collateral to lend you money.
• Equity loans offer lump sum cash while HELOCs offer a line of credit for recurring borrowing.
• Home equity loans and HELOCs may not always be the best options for you, so consider alternatives like mortgage refinancing. 
• Both options come with the serious risk of losing your home if you miss payments. 

HELOCs and Home Equity Loans: The Basics

Home equity loans and HELOCs use the equity you own in your property as collateral to let you borrow money. However, there are some differences in how the two options work.

Home equity loans offer money as a lump sum, often at a fixed interest rate, so you get all the cash upfront. On the other hand, HELOCs operate similarly to credit cards, offering a line of credit with a variable interest rate depending on market conditions, allowing you to borrow and repay money as needed.

While both options can be useful for raising funds, they can pose serious risks as you use your home as collateral. This means if you fail to repay the money, the lenders can place a lien on your home, which is a legal claim against a property that lets them seize and sell the asset to recover the amount loaned to you.

Note

Home equity loans and HELOCs typically have lower financing fees compared to other unsecured options like credit cards. 

How Much Can You Borrow?

How much money you can borrow against home equity loans and HELOCs typically depends on factors like how much equity you own in the property and your personal credit history. It’s possible you won’t qualify for either option. 

Lending institutions use a combined loan-to-value (CLTV) ratio to make the decision. This ratio looks at the total value of all loans secured by your home so far, including both your primary mortgage and any additional mortgages, compared to the current market value of the property.

For example, say your home is worth $300,000 and the bank has a maximum CLTV ratio of 80%. This means the total loans secured by your home can’t exceed 80% of its appraised value. In this case, the bank would consider approving you if you have less than $240,000 in total debt.

If you still owe $150,000 on your primary mortgage, you could potentially qualify for a second mortgage (home equity loan or HELOC) for the difference, which would be $90,000 in this scenario. However, keep in mind that each lender can have different guidelines and your creditworthiness also plays a role in the decision. 

How Home Equity Loans Work

Home equity loans offer a lump sum of cash at once, which can be helpful for major one-time expenses like home renovations, buying a vehicle, weddings, emergency medical bills, etc. One of the key benefits they offer is that they typically have fixed interest rates so you know exactly what your monthly payments will be, which makes budgeting easier. 

Important

Different lenders each have their own procedures if you can’t pay back your loan. Generally, you may have to pay late fees or other penalties, your credit score will dip, and your home may be foreclosed to recover what’s owed. 

If you need a larger amount and want the predictability of a fixed-rate loan, a home equity loan may be a good choice. However, if you’re looking to borrow a smaller amount for nominal expenses like paying off a little credit card balance or buying a new phone, you might want to consider other financing options like Buy Now, Pay Later, personal loans, or even HELOCs that we’ll explore below. 

Some lenders may offer up to $100,000 in home equity loans, but they’re typically meant for expenses larger than $35,000. A major drawback is that you’ll pay closing costs similar to a primary mortgage, including appraisal fees, loan origination fees, and processing fees. These costs can range anywhere from a few hundred to a few thousand dollars, depending on the size of your loan.

If you are using “points” or prepaid interest, you’ll have to pay them at closing. Each point equals 1% of the loan amount, so for a $100,000 loan, one point would cost you an extra $1,000. Points are used to buy down your interest rate, lowering your monthly payments over time. This can be beneficial for long-term loans, but you may not get the full benefits if you plan to pay it off quickly. Negotiating for fewer or no points may be possible, depending on the lender. 

If you have a higher credit score, you may qualify to pay a lower interest rate.

How HELOCs Work

HELOCs offer an ongoing line of credit, letting you borrow and repay money as needed. Think of it like a credit card with a much larger limit, but the equity in your home secures it. This means HELOCs are often more flexible than home equity loans, making them suitable for larger and smaller expenses arising from different life situations. 

HELOCs are generally a good option for homeowners who want flexible access to funds over time without committing to a large, one-time loan with recurring payments lasting for years. Depending on the lender, HELOCs offer different ways to access the funds up to your assigned credit limit. You can transfer money online, write checks, or even use a credit card linked to the account.

One of the most appealing aspects of a HELOC is that it typically has low, or even no, closing costs. This makes it more affordable to set up compared to a home equity loan, which usually comes with various fees, sometimes making it more expensive than what you initially budgeted for. 

Moreover, you only pay interest on the amount you borrow while a much larger sum may be available in case you need extra help. Once you pay it off, the sum is added back to the available credit without requiring any extra interest until you borrow again. This can be ideal for people who prefer having money on standby rather than committing to a fixed loan amount up front.

While the benefits make it sound like one of the most flexible and convenient forms of borrowing money against your property, there are key downsides to consider. HELOCs often come with variable interest rates, meaning your rate and monthly payments could increase or decrease over time. 

Some lenders do offer fixed rates for the first few years of the loan, but after that, the rate will often fluctuate with market conditions. This can make it difficult to predict what your payments will look like, so HELOCs can be a bit tricky to budget for in the long term.

Home Equity Loan vs. Mortgage Refinance

If you want to use home equity to borrow money, equity loans aren’t the only options. You may also want to consider mortgage refinancing, which replaces your current loan with a new one, usually with better terms. The newer loan can offer a reduced interest rate or the option to switch from a variable interest rate to a fixed one or vice versa. 

Both have their benefits and drawbacks, so take some time to consider each option thoroughly and if needed, discuss with a financial advisor to find the best option for your needs. Here’s a comparison table to make the decision easier. 

Factors	Home Equity Loan	Mortgage Refinance
Interest rates	Typically carries higher interest rates.	Interest rates are usually lower than equity loans.
Payments	Fixed payments over a set term.	Fixed or variable payments, depending on your refinance terms.
Private Mortgage Insurance (PMI)	No PMI required.	PMI may be required if you have less than 20% equity in your home.
Fees	Generally lower fees than refinancing, but may include appraisals, origination fees, and other costs.	Higher closing costs due to a new mortgage, including appraisals, origination fees, title insurance, recording fees, etc.

Getting a Home Equity Loan or HELOC

If you’ve considered all possible options and feel ready to get a home equity loan or a HELOC, here are the steps to follow. 

1. Explore different options: Compare borrowing options from different institutions like traditional banks, mortgage companies, credit unions, etc.
2. Get multiple quotes: Set up consultations and receive multiple quotes from different providers to compare the terms. Don’t settle for the first offer you receive. If you have active accounts, enquire about special rates for existing customers. 
3. Consider working with mortgage brokers: Mortgage brokers can connect you with multiple lenders and receive their commission directly from the lender you choose so you don’t have to bear heavy consultation expenses. 
4. Look beyond interest rates: Choosing the offer with the lowest interest rate may not always be the best decision. Consider other fees like appraisals and closing costs that can add up quickly. 

Warning

Criminals are increasingly targeting HELOCs, either by applying in someone else’s name or hacking into existing accounts to steal funds. Regularly check your credit report for unfamiliar transactions and keep an eye on your HELOC statements for any unusual activity.

The Bottom Line

Both home equity loans and HELOCs can help you borrow money by using the equity you own in your house as collateral. However, they come with serious risks, especially when you can’t keep up with payments. Make sure you have a solid repayment plan in place to avoid losing your home. 

Reviewed by Lea D. Uradu
Fact checked by Kirsten Rohrs Schmitt

Applying to multiple mortgage lenders allows you to compare rates and fees to find the best deal. Having multiple offers in hand provides leverage when negotiating with individual lenders. However, applying with too many lenders over too broad a time period may result in score-lowering credit inquiries, and it can trigger a deluge of unwanted calls and solicitations.

Key Takeaways

• Applying to multiple lenders allows borrowers to pit one lender against another to get a better rate or deal. 
• Applying to multiple lenders lets you compare rates and fees, but it can impact your credit report and score due to multiple credit inquiries.
• If you’re going to keep a mortgage for many years, it’s best to opt for a lower rate and higher closing costs. If you plan to refinance or pay off the loan after a few years, it’s best to keep closing costs low.
• There is no optimal number of applications, though too few applications can result in missing out on the best deal, while too many might lower your credit score and besiege you with unwanted calls.

Reasons to Apply to Multiple Lenders

It’s difficult to know you are getting the best deal if you have not compared it with other offers. What looks like small interest rate savings now could translate to a large dollar amount over 15- or 30-year mortgages. Use a mortgage calculator to compare how different rates would impact your monthly payment.

Moreover, different lenders structure loans in different ways with regard to rates and closing costs, which carry an inverse relationship. Some lenders ramp up closing costs to buy down your interest rate, while others that advertise low or no closing costs offer higher interest rates in exchange.

Looking at multiple good faith estimates (GFEs) side by side lets you compare rate and closing-cost scenarios to pick the best one for your situation. It generally makes sense to pay higher closing costs for a lower interest rate when you plan to keep the mortgage for many years because your interest rate savings eventually surpass the higher closing costs.

If you plan to sell or refinance after a few years, it is better to keep closing costs as low as possible because you are not paying off the mortgage long enough for interest rate savings to add up.

You can even play one lender against another when you have multiple offers. Suppose lender A offers you a 4% interest rate with $2,000 in closing costs. Then lender B comes along and offers 3.875% with the same closing costs. You can present lender B’s offer to lender A and try to negotiate a better deal. Then, you can take lender A’s new offer back to lender B and do the same thing, and so on.

If you are comparing lenders with each other, try to get an official loan estimate from each one that details all the terms, rates, fees, and points for each loan. When possible, try to compare loans with the same points. Lenders have been known to mislead borrowers with where they place their fees and points to make their deal seem better than a competitor’s.

Important

There is no magic number of applications. Some borrowers opt for two to three, while others use five or six offers to make a decision.

Drawbacks of Applying to Multiple Lenders

For a lender to approve your mortgage application and make an offer, it has to review your credit report. To do so, the lender makes credit inquiries with the three major credit bureaus.

Credit analysts note that too many inquiries can lower your numerical credit score. Hard inquiries in particular stay on your report for two years. Most scoring models, such as FICO and VantageScore, make inquiries into your credit account. These models are closely guarded, so few people know the exact extent to which inquiries matter. Fair Isaac Corporation (FICO), the creator of the FICO model, states that multiple mortgage inquiries that occur within 30 days of one another do not affect your FICO score.

In a hot housing market, borrowers could have to go through multiple rounds of credit checks as buyers get pre-approved, submit offers, and close on homes over several months instead of 30 days. Though multiple checks from mortgage companies over several months may be excluded by your lender for your housing purchase, it may lower your credit score for the following two years.

Another thing many borrowers may not know is that credit bureaus make additional revenue by selling your information to mortgage lenders to which you have not applied. This is known in industry parlance as a trigger lead. Submitting a mortgage application triggers a credit pull, and mortgage companies pay the credit bureaus for lists of people whose credit was recently pulled by mortgage companies.

Credit Pulls

There is no real limit to how many times you can pull credit for a mortgage, but too many pulls over too much time can lower your credit score. Most borrowers have their credit pulled for pre-approval and again at closing to make sure it hasn’t dropped. On occasion, lenders may pull credit again during the underwriting process if a long period of time has elapsed since your pre-approval or if they are verifying that you completed something such as paying off a debt, or if a dispute was removed.

Having credit checked at the beginning of the process is important to obtain a pre-approval letter, which shows you are a serious buyer. You only need one mortgage pre-approval letter. If you’ve had a recent change in financial circumstances such as a raise or inheritance that changes your income, credit score, or down payment amount for the better, it may be worth getting a newer, stronger pre-approval letter.

Do Multiple Credit Inquiries From the Same Lender Count as One?

Generally, multiple inquiries made within 30 days are counted as one inquiry. If your lender pulls your credit multiple times outside of a 30-day period, it may count on your credit report as a hard inquiry.

Can I Lock Mortgage Rates With Multiple Lenders?

Technically, yes, but it is not a very courteous thing to do and you may be on the hook for costs such as credit-check and appraisal fees from each lender, depending on their policies. Originating and underwriting a loan takes a lot of time and care from several dedicated professionals. Locking rates with a lender implies that you are going through with the loan, which is how they get paid. If you cancel at the last minute, they have wasted their time and that company or lender may not be willing to work with you in the future.

Can I Shop for Rates Without a Hard Inquiry?

Yes. Many online lenders, local banks, and mortgage brokers list their rate charts transparently on their websites. If you prefer to call around, clarify in your phone call that you are only consenting to a soft credit check. Not everyone you speak with will be willing to give you rates over the phone, but there are many who will.

The Bottom Line

Too few applications can result in missing out on the best deal, while too many might lower your credit score and besiege you with unwanted calls. Unfortunately, there is no Goldilocks number that represents the right number of mortgage lenders to which you should apply. Some borrowers apply with only two, feeling certain that one or the other can provide the ideal loan, while others want to hear from five or six banks before making a decision.

Perhaps the best approach to getting a mortgage is to start by conducting market research to get an idea of what constitutes a great deal from the best providers in the current lending climate. Next, contact two or three lenders and challenge them to match or beat the terms you have established. If you review their offers and still believe a better deal exists, apply to additional lenders as necessary but understand the established drawbacks of doing so.