How Does Non-Farm Payroll (NFP) Affect the Markets?

How Does Non-Farm Payroll (NFP) Affect the Markets?

What Is Nonfarm Payroll?

A nonfarm payroll is an economic report used to describe the number of Americans employed in the United States, excluding farm workers and select other U.S. workers, including some government employees, private household employees, and non-profit organization workers.

Known as “the jobs report” the nonfarm payroll looks at the jobs gained and lost during the previous month.

The US Nonfarm Payroll Report Explained

The NFP report studies US employment via two main surveys by the US government of private employers and government entities.

•  The U.S. Household Survey. This report breaks down the employment numbers on a demographic basis, studying the jobs rate by race, gender, education, and age.

•  The Establishment Survey. The result of this survey tracks the amount of jobs by industry as well as the number of hours worked and average hourly earnings.

The US Bureau of Labor Statistics then combines the data from those reports and issues the updated figures via the nonfarm payroll report on the first Friday of every month, and some call the week leading up to the report “NFP week.” Economists view the report as a key economic indicator of the US economy.

How Does NFP Affect the Markets?

Many investors watch the nonfarm payroll numbers very closely as a measure of market risk. Surprise numbers can create potentially large market movements in key sectors like stocks, bonds, gold, and the US dollar, depending on the monthly release numbers.

Investors create a strategy based on how they think markets will behave in the future, so they attempt to factor their projections for jobs report numbers into the price of different types of investments. Changing or unexpected numbers, however, could prompt them to change their strategy.

If the nonfarm payroll number reflects a robust employment sector, for example, that could lead to a rise in US stock market values along with a hike in the US dollar relative to other global currencies. If the nonfarm payroll points to a downward-spiraling job sector, however, with declining wages and low employment growth, that could portend a stock market downturn and the US dollar could also decline in value, as investors lose confidence in the US economy and adjust their investment portfolios accordingly.

4 Figures From the NFP Report to Pay Attention To

Investors look specifically at several figures within the jobs report:

The Unemployment Rate

The unemployment rate is central to US economic health, and it’s a factor in the Federal Reserve’s assessment of the nation’s financial health and the potential for a future recession. A rising unemployment rate could result in economic policy adjustments (like higher or lower interest rates), which could impact the financial markets, domestically and globally.

Higher-than-expected unemployment could push investors away from stocks and toward assets that they consider more safe, such as gold, potentially triggering a stock market correction.

Employment Sector Activity

The nonfarm payroll report also examines employment activity in specific business sectors, like manufacturing or the healthcare industry. Any significant rise or fall in sector employment can impact financial market investment decisions on a sector-by-sector basis.

Average Hourly Wages

Investors may look at average hourly pay as a good barometer of overall US economic health. Rising wages point to stronger consumer confidence, and to a stronger economy overall. That scenario could lead to a stronger stock market, but it may also indicate future inflation.

A weaker hourly wage figure may be taken as a negative sign by investors, leading them to reduce their stock market positions and seek shelter in the bond market, or buy gold as a hedge against a declining US economy.

Revisions in the Nonfarm Payroll Report

Nonfarm payroll figures, like any specific economic benchmarks, are dynamic in nature and change all the time. Thus, investors watch any revisions to previous nonfarm payroll assessments to potentially re-evaluate their own portfolios based on changing employment numbers.

How to Trade the Nonfarm Payroll Report

While long-term investors typically do not need to pay attention to any single jobs report, those who take a more active, trading approach may want to adjust their strategy based on new data about the economy. If you fall into the latter camp, you’ll typically want to make sure that the report is a factor that you consider, though not the only one.

You’ll want to look at other economic statistics as well as the technical and fundamental profiles of individual securities that you’re planning to buy or sell. Then, you’ll want to devise a strategy that you’ll execute based on your research, your expectations about the jobs report, and whether you believe it indicates a bull or a bear market ahead.

For example, if you expect the nonfarm payroll report to be a positive one, with robust jobs growth, you might consider adding stocks to your portfolio, as they tend to appreciate faster than other investment classes after good economic news. If you believe the nonfarm payroll report will be negative, you may consider more conservative investments like bonds or bond funds, which tend to perform better when the economy is slowing down.

Or, you might opt to take a more long-term approach, taking the opportunity to potentially get stocks at a discount and invest while the market is down.

The Takeaway

Markets do move after nonfarm payroll reports, but long-term investors don’t have to make changes to their portfolio after every new government data dump. That said, active investors may use the jobs report as one factor in creating their investment strategy.

Whatever your strategy, a great way to start executing it is via the SoFi Invest® brokerage platform. It allows you to build your own portfolio, consisting of stocks, exchange-traded funds, and other investments such as IPOs and crypto currency. You can get started with an initial investment of as little as $5.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Fee-Based vs Fee-Only Financial Planners

Financial planners help their clients create a customized plan for managing their money, though they aren’t all alike. In terms of cost, there’s a significant difference between hiring a fee-based financial advisor and a fee-only financial advisor.

A fee-based financial planner earns money through commissions while fee-only financial advisors earn money based solely on the services they provide. Both types of financial planners can help with things like saving for retirement, debt management, investing, and asset allocation. But it’s important to understand how and what you may pay for their expertise and advice.

Here’s a closer look at how working with a fee-based vs. fee-only financial advisor compares.

What Is a Fee-Based Financial Advisor?

Fee-based financial planners can charge fees directly to their clients but they can also be paid through commissions. Those commissions are generated when a fee-based financial advisor sells a financial or investment product.

For example, a fee-based financial planner may charge you an hourly fee to consult with you on your investments, but may also get paid a commission for selling you a life insurance policy, annuity or mutual fund.

The commission they receive may depend on which product you buy. For example, they may get paid 50% commission if you buy a life insurance policy from company A, but only a 30% commission if you buy a life insurance policy from company B.

When discussing fee-based financial planners, you may hear other terms like fee-and-commission or fee-offset. These are different ways to describe similar payment structures.

Fee-and-commission means an advisor may charge you a small fee while also receiving commissions from product sales. Advisors who use a fee-offset model may charge you a fee, then offset it by the commissions they earn on the products you purchase. Whether you’re hiring a fee-based, fee-and-commission or fee-offset financial advisor, their earnings primarily hinge on what they sell to you.

Recommended: How Much Does a Financial Advisor Cost?

What Is a Fee-Only Financial Planner?

Fee-only financial advisors only get paid based on the services they provide, hence their name. Their income isn’t drawn primarily from commissions they earn on products.

A fee-only financial planner can use different types of fee structures when working with clients. For example, you may pay any of the following ways when working with a fee-only financial advisor:

•  Flat-rate

•  Annual fee

•  Hourly fees

•  Package fees

•  Percentage of assets under management

In terms of what is the typical fee-only financial advisor fee, it can depend on the fee structure and the range of services provided. The average fee for advisors that charge based on a percentage of assets under management is around 1%. So for every $100,000 you have invested, $1,000 would go toward fees.

What’s important to know about working with a fee-only financial advisor is that commissions don’t drive their earnings. At the end of the day, what they earn is based on what they’re doing to help you achieve your financial goals.

Fee-Based vs. Fee-Only Financial Advisors: Which Is Better?

When weighing whether it makes more sense for you to work with a fee-based financial advisor or fee-only advisor, cost is an important factor. After all, the more you pay in advisory fees, the less you get to keep out of your investment returns.

But that isn’t the only consideration to keep in mind. It’s also important to weigh the value and quality of the financial advice you’re receiving. Specifically, you should understand what fee-based and fee-only advisors are or are not obligated to do for you.

Recommended: Tips For Creating a Financial Plan

Suitability Rule for Fee-Based Financial Planners

Fee-based financial planners and fee-only investment advisors are held to different standards when it comes to the ethical guidelines they’re required to follow. A fee-based financial advisor is held to a suitability standard, which means they’re only obligated to recommend investment products that are suitable for your situation.

This leaves the door open for fee-based advisors to recommend products that can yield the highest commission, as long as they’re deemed “suitable”. That doesn’t necessarily mean a fee-based advisor will sell you a subpar product. But it does mean that fees can play a part in what they choose to recommend.

Fee-Only Advisors and Fiduciary Duty

Fee-only investment advisors have what is called a fiduciary duty to their clients. This duty makes advisors legally obligated to act in the client’s best interest at all times. This means that fee-only financial planners cannot sell you a specific product just because they will get a commission from the company.

In fact, the National Association of Personal Financial Advisors (NAPFA), the professional association for fee-only financial planners, actually requires that members take an oath swearing that they do not “receive a fee or other compensation from another party based on the referral of a client or the client’s business.”

Fiduciary advisors are also required to disclose potential conflicts of interest and/or past disciplinary actions. When you’re working with a fee-only financial planner, you have the reassurance of knowing that their services and practices must follow these guidelines.

Is a Fee-Based or Fee-Only Advisor Right for You?

The downside of working with a fee-only financial planner is, of course, the fee.

Fees can be cost-prohibitive for many would-be investors who are anxious to enter the market but unsure how to get started. Some fee-only financial planners require that you invest a large amount before they will even take you on as a client, which can be another potential barrier to entry.

This means that fee-only financial planners are not always accessible to diverse types of investors, and instead focus on investors putting large amounts of money into the market every year. In that scenario, a fee-based financial advisor may be the more attractive option.

But the trade-off is forgoing the fiduciary standard for the less stringent suitability standard. So you have to decide what you’re more comfortable with when it comes to both fees and the ethical standards an advisor is held to.

Recommended: Are Financial Advisors Worth It?

What About Automated Advisors?

If you don’t have a lot of money to start investing and you’re looking for a way to keep fees as low as possible, you may consider an automated advisor in lieu of a human advisor.

Automated or robo advisors help investors build and rebalance their investment portfolios using a specific algorithm. This algorithm can take into account things like your age, risk tolerance and overall financial goals to help determine the optimal portfolio makeup for your situation.

When it comes to fees, robo advisors can be more affordable than hiring a fee-based or fee-only financial advisor. Depending on the advisory platform, you may pay no fee at all up to a certain amount of assets, say $10,000 or less. Once you reach a minimum threshold, you may pay anywhere from 0.25% to 0.50% per year, based on your account balance.

Compared to what you may pay for a fee-only advisor or even a fee-based advisor, that can seem like a bargain. But there’s one important thing to remember: automating your investments using an algorithm means you don’t get the benefit of personalized advice the way you would with a human advisor.

Recommended: Are Robo-Advisors Safe and Worth It?

The Takeaway

Fee-based and fee-only financial planners can help you further your investment goals. And robo-advisors can help you build a portfolio on autopilot. But there is another way to get where you want to go financially.

You could try a platform like SoFi Invest® online trading, which offers investment technology paired with the comfort that comes with having a human right there by your side to help. It’s easy to create a customized investment plan that fits your needs while having access to financial planners when you need it.

SoFi’s financial planners are credentialed, and when you work with a SoFi financial planner, you know they will always have your best interests in mind. Perhaps most importantly, SoFi Invest has zero management fees and it’s easy to get started investing today.

Find out more about SoFi Invest today.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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LTV 101: Why Your Loan-to-Value Ratio Matters

Are you thinking about taking out a home loan or refinancing your mortgage? If so, knowing your loan-to-value (LTV) ratio, or the loan amount divided by the value of the property, is important.

Let’s break down LTV: what it is, how to calculate it, and why it matters. (Hint: It could help save you a lot of money.)

LTV, a Pertinent Percentage

The relationship between the loan amount and the value of the asset securing that loan constitutes LTV.

To find the loan-to-value ratio, divide the loan amount by the value of the property.

LTV = (Loan Value / Property Value) x 100

Here’s an example: Say you want to buy a $200,000 home. You have $20,000 set aside as a down payment and need to take out a $180,000 mortgage. So here’s what your LTV calculation looks like:

180,000 / 200,000 = 0.9 or 90%

Here’s another example: You want to refinance your mortgage (which means getting a new home loan, hopefully at a lower interest rate). Your home is valued at $350,000, and your mortgage balance is $220,000.

220,000 / 350,000 = 0.628 or 63%

As the LTV percentage increases, the risk to the lender increases.

Why Does LTV Matter?

Two major components of a mortgage loan can be affected by LTV: the interest rate and private mortgage insurance (PMI).

Interest Rate

LTV, in conjunction with your income, financial history, and credit score, is a major factor in determining how much a loan will cost.

When a lender writes a loan that is close to the value of the property, the perceived risk of default is higher because the borrower has little equity built up—and therefore, little to lose.

Should the property go into foreclosure, the lender may be unable to recoup the money it lent. Because of this, lenders prefer borrowers with lower LTVs and will often reward them with better interest rates.

Though a 20% down payment is not essential for loan approval, someone with an 80% LTV is likely to get a more competitive rate than a similar borrower with a 90% LTV.
The same goes for a refinance or home equity line of credit: If you have 20% equity in your home, or at least 80% LTV, you’re more likely to get a better rate.

If you’ve ever run the numbers on mortgage loans, you know that a rate difference of 1% could amount to thousands of dollars paid in interest over the life of the loan.

Let’s look at an example, where two people are applying for loans on identical $300,000 properties.

Person One, Barb:

•  Puts 20%, or $60,000, down, so their LTV is 80%. (240,000 / 300,000 = 80%)

•  Gets approved for a 4.5% interest rate on a 30-year fixed-rate mortgage

•  Will pay $197,778 in interest over the life of the loan

Person Two, Bill:

•  Puts 10%, or $30,000, down, so their LTV is 90%. (270,000 / 300,000 = 90%)

•  Gets approved for a 5.5% interest rate on a 30-year fixed-rate mortgage

•  Will pay $281,891 in interest over the life of the loan

Bill will pay $84,113 more in interest than Barb, though it is true that Bill also has a larger loan and pays more in interest because of that.

So let’s compare apples to apples: Let’s assume that Bill is also putting $60,000 down and taking out a $240,000 loan, but that loan interest rate remains at 5.5%. Now, Bill pays $250,571 in interest;

The 1% difference in interest rates means Bill will pay nearly $53,000 more over the life of the loan than Barb will.

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PMI or Private Mortgage Insurance

Your LTV ratio also determines whether you’ll be required to pay for PMI. PMI protects your lender in the event that your house is foreclosed on and the lender assumes a loss in the process.

Your lender will charge you for PMI until your LTV reaches 78% (by law, if payments are current) or 80% (by request).

PMI can be a substantial added cost, ranging from 0.5% to 2.25% of the value of the loan per year. Using our example from above, a $270,000 loan at 5.5% with a 1% PMI rate translates to $225 per month for PMI, or about $18,800 in PMI paid until 20% equity is reached.

How Does LTV Change?

LTV changes when either the value of the property or the value of the loan changes.

If you’re a homeowner, the value of your property fluctuates with natural market pressures. If you thought the value of your home increased significantly since your last appraisal, you could have another appraisal done. You could also potentially increase your home value through remodels or additions.

The balance of your loan should decrease over time as you make monthly mortgage payments, and this will lower your LTV. If you made a large payment toward your mortgage, that would significantly lower your LTV.

Whether through an increase in your property value or by reducing the loan, decreasing your LTV provides you with at least two possible money-saving options: removal of PMI and refinancing to a lower rate.

The Takeaway

The loan-to-value ratio affects two big components of a mortgage loan: the interest rate and private mortgage insurance. A lower LTV percentage typically translates into more borrower benefits.

Whether you’re on the hunt for a new home loan or a refinanced mortgage, it’s a good idea to shop around for the best deal. Check out what SoFi has to offer.

See if a SoFi mortgage or refi is a good fit in just a few clicks.


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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

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

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How Do Reverse Mortgages Work?

Traditionally considered a last-ditch source of cash for eligible homeowners, reverse mortgages are becoming more popular.

Older Americans, particularly retiring baby boomers, have increasingly drawn on this financial tool to fund home renovations, consolidate debt, pay off medical expenses, or simply improve their lifestyles.

So what is a reverse mortgage? It’s a loan that allows homeowners to turn part of their home equity into cash. Available to people 62 and older, a reverse mortgage can be set up and paid out as a lump sum, a monthly payment, or a line of credit.

The reverse mortgage loan and interest do not have to be repaid until the last surviving borrower dies, sells the house, or moves out permanently. In some cases, a non-borrowing spouse may be able to remain in the home.

Reverse mortgages aren’t for everyone. They eat up home equity and incur fees and interest. Depending on your age, home equity, and goals, alternatives like personal loans, a cash-out refinance, or a home equity loan may be a better fit.

What is the Most Common Kind of Reverse Mortgage?

Usually when people refer to a reverse mortgage, they mean a federally insured home equity conversion mortgage (HECM), which can also be used later in life to help fund long-term care. The current loan limit is $822,375.

HECM reverse mortgages are made by private lenders but are governed by rules set by the Department of Housing and Urban Development (HUD).

If the borrower moves to another home for a majority of the year or to a long-term care facility for more than 12 consecutive months, the reverse mortgage loan needs to be paid back if no other borrower is listed on the loan. That was the status quo at least.

A new HUD policy offers protections to a non-borrowing spouse when a partner moves into long-term care. The non-borrowing spouse may remain in the home as long as he or she continues to occupy the home as a principal residence, is still married, and was married at the time the reverse mortgage was issued to the spouse listed on the reverse mortgage.

In 2021 HUD also removed the major remaining impediment to a non-borrowing spouse who wanted to stay in the home after the borrower’s death. They will no longer have to provide proof of “good and marketable title or a legal right to remain in the home,” which often meant a probate filing and had forced many spouses into foreclosure.

To qualify for this kind of reverse mortgage loan, you must meet with an HECM counselor. To find one, you can search for a counselor on the HUD site.

The counselor may cover eligibility requirements, the financial ramifications if you decide to go forward, and when the loan would need to be paid back, including circumstances under which the outstanding amount would become immediately due and payable.

The counselor may also share alternatives. The goal is that you will be able to make an informed decision about whether a reverse mortgage is right for your situation.

Nearly 42,000 HECMs were awarded in 2020.

How Does a Reverse Mortgage Work?

To qualify for an HECM, all owners of the home must be 62 or older, and have paid off their home loan or have a considerable amount of equity.

Borrowers must use the home as their primary residence or live in one of the units if the property is a two- to four-unit home. Certain condominium units and manufactured homes are also allowed.

The borrower cannot have any delinquent federal debt. Plus, the following will be verified before approval:

•  Income, assets, monthly living expenses, and credit history

•  On-time payment of real estate taxes, plus hazard and flood insurance premiums, as applicable

The reverse mortgage amount you qualify for is determined based on the lesser of the appraised value or the HECM mortgage loan limit (the sales price for HECM to purchase), the age of the youngest borrower or age of an eligible non-borrowing spouse, and current interest rates.

Generally, the older you are and the more your home is worth, the higher your reverse mortgage amount could be, depending on other eligibility criteria. Borrowers or their

Loan Costs

An HECM loan includes several charges and fees. They include:

•  Mortgage insurance premiums

  Upfront fee: 2% of the home’s appraised value or the Federal Housing Administration (FHA) lending limit (whichever is less)

  Annual fee: 0.5% of the outstanding loan balance

•  Origination fee (the greater of $2,500 or 2% of the first $200,000 of the home value, plus 1% of the amount over $200,000. The origination fee cap is $6,000)

•  Third-party charges

•  Service fees

•  Interest

Your lender can let you know which of these are mandatory.

Many of the costs can be paid out of the loan proceeds, meaning you wouldn’t have to pay them out of pocket. However, financing the loan costs reduces how much money will be available for your needs.

A lender or agent services the loan and verifies that real estate taxes and hazard insurance premiums are kept current, sends you account statements, and disburses loan proceeds to you.

In return, they could charge you a monthly service fee of up to $30 if the loan interest rate is fixed or adjusts annually. If the interest rate can adjust monthly, the maximum monthly service fee is $35.

Third-party fees could include an appraisal fee, surveys, inspections, title search, title insurance, recording fees, and credit checks.

Two Other Types of Reverse Mortgages

The information provided so far answers the questions “What is a reverse mortgage?” and “How do reverse mortgages work?” for HECMs, but there are also two other kinds: the single-purpose reverse mortgage and the proprietary reverse mortgage.

Here’s more info about each of them.

Single-Purpose Reverse Mortgage

This loan is offered by state and local governments and nonprofit agencies. It’s the least expensive option, but the lender determines how the funds can be used. For example, the loan might be approved to catch up on property taxes or to make necessary home repairs.

Check with the organization giving the loan for specifics about costs, as they can vary.

Proprietary Reverse Mortgage

If a home is appraised at a value that exceeds the maximum for an HECM ($822,375), a homeowner could pursue a proprietary reverse mortgage.

Counseling may be required before obtaining one of these loans, and a counselor can help a homeowner decide between an HECM and a proprietary loan.

Typically, proprietary reverse mortgages can only be cashed out in a lump sum. The costs can be substantial and interest rates higher. This type of reverse mortgage, unlike an HECM, is not federally insured, so lenders tend to approve a lower percentage of the home’s value than they would with an HECM.

One cost a borrower wouldn’t have to pay with a proprietary mortgage: upfront mortgage insurance or the monthly premiums.

In some cases, the costs associated with this type of mortgage may cause a homeowner to decide to sell the home and buy a new one.

Pros and Cons of Reverse Mortgages

If you’re nearing retirement, it’s easy to see why reverse mortgages are appealing.

Unlike most loans, you don’t have to make any monthly payments. The HECM loan can be used for anything, whether that’s debt, health care, daily expenses, or buying a vacation home (although this is not true for the single-purpose variety).

How you get the money from an HECM is flexible. You can choose whether to get a lump sum, monthly disbursement, line of credit, or some combination of the three.

You can pay back the loan whenever you want, even if that means waiting until you’re ready to sell the house. If the home is sold for less than the amount owed on the mortgage, borrowers may not have to pay back more than 95% of the home’s appraised value because the mortgage insurance paid on the loan covers the remainder.

The money from a reverse mortgage counts as a loan, not as income. As a result, Social Security and Medicare are not affected, and payments are not subject to income tax.

An HECM can be used to buy a new primary residence. You’d make a down payment and then finance the rest of the purchase with the reverse mortgage.

Then again:

Reverse mortgage interest rates can be higher than traditional mortgage rates. The added cost of mortgage insurance also applies, and, like most mortgage loans, there are origination and third-party fees you will be responsible for paying, as described above.

Taking out a reverse mortgage generally means reducing the equity in your home. That can mean leaving less for those who might inherit your house.

You’ll need to keep up property taxes and insurance, repairs, and any association dues. If you don’t pay insurance or taxes, or if you let your home go into disrepair, you risk defaulting on the reverse mortgage, which means the outstanding balance could be called as immediately “due and payable.”

Interest accrued on a reverse mortgage isn’t deductible until it’s actually paid (usually when the loan is paid off). And a deduction of mortgage interest may be limited.

Alternatives to Reverse Mortgages

A reverse mortgage payout depends on the borrower’s age, the value of their home, the mortgage interest rate, and loan fees, and whether they choose a lump sum, line of credit, monthly payment, or combination.

If the payout will not provide financial stability that allows an individual to age in place, there are other ways to tap into cash. Here are suggestions:

Cash-out refi. If you meet credit and income requirements, you may be able to borrow up to 80% of your home’s value with a cash-out refinance of an existing mortgage. Closing costs are involved, but this product lets you turn home equity into cash and possibly lock in a lower interest rate.

Personal loan. A personal loan could provide a lump sum without diminishing the equity in your home. This kind of loan does not use your home as collateral. It’s generally a loan for shorter-term purposes.

Home equity line of credit (HELOC). A HELOC, based in part on your home equity, provides access to cash in case you need it but requires interest payments only on the money you actually borrow. Some lenders will waive or reduce closing costs if you keep the line open for at least three years. HELOCs usually have a variable interest rate.

Home equity loan. A fixed-rate home equity loan allows you to borrow a lump sum based on your home’s market value, minus any existing mortgages. You make a monthly principal and interest payment each month. Again, lenders may reduce or waive closing costs if you keep the loan for, usually, at least three years.

The Takeaway

A reverse mortgage makes sense for some older people who need to supplement their cash flow. But many factors must be considered: the youngest homeowner’s age, home value, equity, loan rate and costs, heirs, and payout type. Retirees have options.

SoFi offers a cash-out refinance, which involves taking out a home loan with new terms for more than you owe and pocketing the difference in cash.

SoFi also provides fixed-rate unsecured personal loans of $5,000- $100,000.

Need a financial boost? Consider a personal loan or a refinance with SoFi.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

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