Terminology Archives

May

2021

What Are NFTs (Non-fungible Tokens)?

By Laurel Tincher | Growing Wealth, invest, Investing, Terminology | Comments Off

Non-fungible tokens (NFT) are cryptographic digital assets that each have uniquely identifiable metadata and codes. Their data is stored on the blockchain, ensuring they can’t be replicated or forged.

The tokens act as a representation, like an IOU, for either digital or tangible items. For instance, one could create NFTs that stand for digital artwork, virtual real estate in a game, collectible Pokemon cards, or even someone’s personal identification information.

Currently the majority of the NFT market is focused on collectibles like sports cards and digital art. But there are other highly priced NFTs on the market as well, such as a tokenized version of the first-ever tweet, created by Twitter CEO Jack Dorsey.

Let’s dive into the details about how NFTs work, what they’re important, and what makes them valuable.

What are NFTs Used For?

The concept of digital representations of material items is not new. But the addition of blockchain technology makes NFTs important. As part of a blockchain, NFTs are easily verifiable and unique, each one able to be traced back to the original issuer.

NFTs are revolutionizing gaming, art, and the collectibles market. They also have the potential to transform real estate, travel, and identity management. Millions of dollars have been spent on NFTs over the past few years, and their popularity is increasing amongst both collectors and crypto traders.

NFTs and Gaming

For the first time, immutable ownership and efficient sale of collectible and in-game items is possible. This opens up many opportunities for online gaming and world creation. For instance, within virtual worlds like Decentraland and The Sandbox, players can create pretty much any business one might create offline—design and sell hats, create avatars, or sell theme park tickets. Players can even create in-game currencies to sell to other users.

NFTs and Art

NFTs are revolutionizing the art world. Using an NFT exchange, artists can sell digital art directly to buyers, removing the need for a gallery or auction house. Typically, middle men can take a large percentage of sale profits, which means artists may be able to increase their profits using NFTs. It’s even possible for artists to earn royalties each time their artwork or music is sold. The most expensive digital art sold so far was a group of NFTs created by Beeple which sold for over $69 million.

NFTs and Identity Management

There are also use cases for NFTs in identity management. Currently people around the world travel with physical passports, which can easily be lost or stolen, and even replicated or forged. Storing identity information on the blockchain has the potential to eliminate these risks and may one day make travel processing more efficient.

NFTs and Real Estate

Another use case for NFTs is in real estate. Dividing up a property is difficult, but dividing digital real estate is easy. Multiple people can invest in and exchange property if it has been digitized. This principle can also be applied to other material assets.

NFTs and Supply Chain

NFTs can also help improve and validate supply chains. For instance, a coffee company could prove that their beans are fair trade. A wine company could create an NFT for each bottle of wine to keep track of every step of its production.

NFT Standards

Most NFT tokens are currently created using one of two Ethereum token protocols, ERC-721 or ERC-1155. These are essentially blueprints for tokens that were created by the Ethereum team. The blueprint creates a template for certain information that must be included for any new NFT, such as security and ownership information. By standardizing the way this information is created, NFTs are easily distributed and exchanged.

Starting with a blueprint, software developers can create NFTs that are compatible with large public exchanges and NFT wallets such as MyEtherWallet and MetaMask. This ensures that people can buy and sell the NFT and hold it in their own personal wallet.

Other blockchain networks such as Tron, Neo, and Eos are also building out NFT token standards. Each one has different token functionality, so software developers can choose which platform is best for the token they are creating.

What Makes NFTs Valuable?

As with any type of asset, supply and demand drives the price of NFTs. Since there are only so many of each collection of NFTs or individual NFTs, this can make the demand for them very high.

One might wonder what the value would be in owning a representation of a limited edition item as opposed to the real thing. NFTs are both easily verifiable and completely unique. This makes them easily tradable online. Their code is also useful because each NFT can be traced, including past transactions of that token. This provides security, transparency, and prevents fraudulent items from being sold.

Gamers, investors, and collectors have been flocking to the NFT market because they see the potential for market growth and significant profits.

Within certain online games, for example, real estate is a prized possession. If one owns a plot of land on a main road in a virtual world where they could open up a casino, that has the potential to make a lot of money. So that plot of land is very valuable.

Are NFTs Cryptocurrencies?

Cryptocurrencies, like physical money, are fungible assets, which can be exchanged and used for financial transactions because they are identical to one another. For example, one USD is always equal in value to another USD. Although NFTs are built on blockchain technology, they aren’t the same as cryptocurrencies, in that they can’t be exchanged with one another. Think of an NFT like a passport or a ticket to an event. Each one is unique.

An NFT that represents a baseball card can’t be directly exchanged for one that represents a piece of digital art. And even an NFT that represents one baseball card can’t be exchanged for one that represents a different baseball card. The reason for this is that each NFT is unique and contains specific identification information.

However, NFTs are similar to cryptocurrencies in that they have attributes and metadata that makes them easily transferable and identifiable.

Key Characteristics of NFTs

There are several characteristics of NFTs that make them different from other types of assets and that appeal to investors. They are:

•   Indivisible: Unlike Bitcoin or other forms of cryptocurrency, NFTs can only be bought and sold in their entirety. They can’t be divided into smaller portions.
•   Non-interoperable: Just as NFTs can’t be exchanged for one another, one type of NFT can’t be used in another NFT system or collection. NFTs used in online games, for instance, are like a playing card or game piece. Just as a Monopoly piece can’t be used in the game of Life, the owner of a CryptoKitties NFT can’t use that NFT in the Gods Unchained game.
•   Indestructible: Token information is securely stored on the blockchain using smart contracts. This means NFTs can’t be erased or copied.
•   Immutable: One important characteristic of NFTs is that the person who buys one actually has possession of it. They can sell it or hold it. It’s not held by a company the way iTunes holds music and licenses it out for users to listen to.
•   Verifiable: The creation, transaction, and identification information for NFTs can be traced and verified without a third party. This allows anyone interested in buying an NFT to make sure it’s legitimate and do their own vetting before purchase. It prevents the creation and sale of fraudulent tokens.
•   Extensible: Two NFTs can be combined to create a new, unique NFT.
•   Capable of storing metadata: NFT creators and owners can add metadata to NFTs. For instance, an artist could sign their digital artwork.

The Takeaway

The NFT market is still new and full of potential for creators and investors. However, before investing in cryptocurrencies, NFTs, or any other digital asset, it’s important to research and understand the market.

One way to get started investing in digital assets is with SoFi Invest®. Members can trade cryptocurrencies like Bitcoin, Ethereum, and Litecoin, right from the convenient mobile app.

Find out how to invest in crypto with SoFi Invest.

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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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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May

2021

Trade vs. Settlement Date: What’s the Difference?

By SoFi | Growing Wealth, invest, Investing, Terminology | Comments Off

There are two important dates to know when making an investment: the trade date and the settlement date.

When an investor’s buy or sell order gets confirmed in a brokerage account, the day this occurs is known as the trade date. But behind the scenes, the real transaction has yet to take place. A security goes through a settlement process in order for the transfer from a seller to a buyer to occur.

This delay between the day a transaction is made and the day the underlying security ownership has been settled is a period known as T+2 in financial markets. Here’s a closer look at this process.

Why Is There a Delay Between Trade and Settlement Dates?

Given modern technology, it seems reasonable to assume that everything should happen instantaneously.

But the current settlement rules go back decades, way back to the creation of the Securities and Exchange Commission (SEC) in 1934, when all trading happened in person and on paper.

Back then, a piece of paper representing shares of a security had to be in the possession of traders in order to prove they actually owned the shares. Moving this paper around sometimes took as long as five business days after the trade date, or T+5.

Recommended: A Brief History of the Stock Market

What is the T+2 Rule?

The T+2 rule refers to the fact that it takes two days beyond a trade date for a trade to settle. For example, if a trade is executed on Tuesday, the settlement date will be Thursday, which is the trade date plus two business days.

Note that weekends and holidays are excluded from the T+2 rule. That’s because in the U.S., the stock market is open from 9:30 a.m. to 4:00 p.m. Eastern time Monday through Friday.

The T+2 rule has been enforced by the SEC since 2017. Before then, the T+3 rule was in place.

What Investors Need to Know About T+2

This delay in settling applies to trading of almost all securities. An exception is Treasury bills, which can settle on the same day they are transacted.

Investors who plan on engaging in cash account trading need to know about trade vs. settlement date. Cash accounts are those in which investors trade stocks and exchange-traded funds (ETFs) only with money they actually have today. Meanwhile, margin trading accounts allow investors to trade using borrowed money or trade “on margin.”

An investor may notice two different numbers describing the cash balance in his or her brokerage account: the “settled” balance and the “unsettled” balance. Settled cash refers to cash that currently sits in an account. Unsettled refers to cash that an investor is owed but won’t be available for a few days.

T+1? T+0? Real-Time Settlement?

Market observers have called the T+2 rule to be reevaluated, as the settlement process may be able to be sped up and improve trading conditions.

In February, the clearinghouse for U.S. stock trades–the Depository Trust & Clearing Corp.–said in a report that the settlement process should be changed from two days to one. Clearinghouses are middlemen in financial markets that ensure the transfer of a security goes through. They stand ready in case one side of a transaction–either the buyer or seller–defaults.

The DTCC, which cleared $1.77 trillion of securities trades on average each day in 2020, was already researching settling. However in January, wild price swings in so-called meme stocks–those popular on social-media platforms like Reddit–led to trading restrictions of these shares. This, in turn, prompted greater scrutiny of regulations and rules around clearing and settlement.

Moving to T+1, T+0 or real-time settlement would need the approval of the SEC and collaboration of dozens of players across Wall Street. But the real-time transactions made possible in the cryptocurrency market by blockchain technology have escalated chatter for modernizing securities markets.

Potential Violations of the Trade Date vs. Settlement Date

Comprehending the difference between trade date vs settlement date can allow investors avoid potentially costly violations of trading rules.

The consequences of these violations could differ according to which brokerage an investor uses, but the general concept still applies. Violations all have one thing in common: They involve trying to use cash or shares that have yet to come under ownership in an investor’s account.

Cash Liquidation Violation

To buy a security, most brokerages require investors to have enough settled cash in an account to cover the cost. Trying to buy securities with unsettled cash can lead to a cash liquidation violation, as liquidating one security to pay for another requires settlement of the first transaction before the other can happen.

Let’s look at a hypothetical example. Say an investor named Sally wants to buy $1,000 worth of ABC stock. Sally doesn’t have any settled cash in her account, so she raises more than enough by selling $1,200 worth of XYZ stock she has. The next day, she buys the $1,000 worth of ABC she had wanted.

Because the sale of XYZ stock hadn’t settled yet and Sally didn’t have the cash to cover the buy for ABC stock, a cash liquidation violation occurred.

Investors who face this kind of violation three times in one year can have their accounts restricted for up to 90 days.

Free Riding Violation

While a free ride might sound like a good thing, in this case it’s definitely not. Free riding violations occur when an investor buys stock using funds from a sale of the same stock.

For example, say Sally buys $1,000 of ABC stock on Tuesday. Sally doesn’t pay her brokerage the required amount to cover this order within the two-day settlement period. But then, on Friday, after the trade should have settled, she tries to sell her shares of ABC stock, since they are now worth $1,100.

This would be a free riding violation. Sally can’t sell shares she doesn’t yet own in order to purchase those same shares.

Incurring just one free riding violation in a 12-month period can lead to an investor’s account being restricted.

Good-Faith Violation

Good-faith violations happen when an investor buys a security and sells it before the initial purchase has been paid for with settled funds. Only cash or proceeds from the sale of fully paid-for securities can be called “settled funds.”

Selling a position before having paid for it is called a “good-faith violation” because no good-faith effort was made on the part of the investor to deposit funds into the account before the settlement date.

For example, if Sally sells $1,000 worth of ABC stock Tuesday morning, then buys $1,000 worth of XYZ stock Tuesday afternoon, she would incur a good-faith violation (unless she had an additional $1,000 in her account that did not come from the unsettled sale of ABC).

As we can see by these examples, it’s not hard for active traders to run into problems if they don’t comprehend cash account trading rules, all of which derive from trade date vs. settlement date. Having adequate settled cash in an account can help avoid issues like these.

The Takeaway

The trade date is the day an investor or trader books an order to buy or sell a security. But it’s important for market participants to also be aware of the settlement date, which is when the trade actually gets executed.

For many securities in financial markets, the T+2 rule applies, meaning the settlement date is usually two days after the trade date. An investor therefore will not legally own the security until the settlement date.

While there’s been chatter that the settlement process needs to speed up to either T+1 or real-time settlement, it’s still important for investors and traders to know these rules so they don’t make violations that lead to restricted trading or other penalties.

Don’t have a plan when it comes to where to begin investing? SoFi Invest® can help. There are no account minimums, and we even have financial planners ready to answer all of your questions, from financial planning to account rules.

Get started with SoFi Invest today.

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May

2021

What Is Monetary Policy?

By SoFi | mortgage, Terminology | No Comments

Monetary policies are how a central bank or similar government organization manages the supply of money—as well as the interest rates—in an economy.

In the U.S. the central bank is known as the Federal Reserve. The Fed has a dual mandate: first, to maintain stable prices, and second, to promote full employment.

Read on to learn more about monetary policy and the integral role that the Fed plays.

Overview of Fed Monetary Policy

The U.S. Federal Reserve sets the level of the short-term interest rates in the country, which then has an impact on the availability and cost of credit. We’ll discuss how the short-term rates the central bank sets has a direct impact on a key interest rate for banks.

The Fed also has an indirect effect on longer-term interest rates, currency exchange rates, and prices of bonds and stocks, as well as other assets. Through these channels, monetary policy can influence household spending, business investment, production, employment, and inflation.

A country’s economy sometimes experiences inflation, which is when the prices of goods and services overall are rising. The central bank can use monetary policy to tame inflation, mainly by raising interest rates. In the U.S., inflation was rampant in the 1970s and early 1980s. Since then, consumer prices have stayed relatively stable.

In more rare instances, the economy has been in a period of deflation when overall prices have fallen. Then the central bank typically responds by loosening monetary policy, either by lowering interest rates or the more extreme measure of buying assets directly. A sharp period of deflation occurred after World War I, as well as during the first several years of the Great Depression.

Recommended: What Is Fiat Currency?

What Is the Fed Funds Rate?

The Federal Reserve System has a committee, the Federal Open Market Committee (FOMC), which meets several times a year to review key economic factors. The FOMC watches for signs of recession or inflation. It then sets what’s called the federal funds rate–what banks charge one another on an overnight basis.

It may seem counterintuitive that banks would loan money to each other, but here’s why they do. Banks are required to meet the reserve requirement set by the Fed. This is the smallest amount of cash a bank must have on hand, either in its own vault or in one of the regional Fed banks.

For example, the Fed, in the era of the housing bubble of 2008, lowered the federal funds rate to 0.25% to encourage banks to lend. This was part of the Fed’s strategy to mitigate the expanding financial crisis. In contrast to that rate, in 1980, the federal funds rate was 20%, the highest in our nation’s history.

Rates set by the Fed have an impact on the overall financial market. For example, when rates are low, it’s less expensive and easier to borrow, which can boost the market’s liquidity. Overall, when rates are low, the economy grows. When high, it typically retracts.

How Monetary Policy Can Affect You

If a bank doesn’t have enough to meet its reserves, it borrows the funds from a bank with excess cash. The lending bank can benefit financially because it would earn interest in the amount of whatever the federal funds rate is that day.

This system helps ensure that each bank has enough cash on hand for its business needs that day, and it also caps that bank’s lending ability because the bank needs to keep a certain amount of cash in a vault, rather than lending it out.

Then, banks can decide to set their prime interest rates, or the rates that they charge their best customers—those who are considered low risk. So, if the federal funds rate goes up, your bank may decide to charge a higher interest rate on loans—if it goes down, a lower rate.

Moves made by the Fed can have a significant impact on the personal finances of people in the U.S. As the federal funds rate changes, it’s likely that banks’ prime rates will change in response—which in turn affects what consumers are likely to be charged on mortgage loans, car loans, personal loans, credit cards, and so forth.

This can affect consumers who owe money on a variety of loan types, but this is often more the case for people who have short-term variable interest rate loans. As the federal funds rate and the prime interest rates at banks go up or down, so can the monthly loan payment. In addition, a credit card rate could be tied to the prime rate plus a certain percentage.

Famous Fed Decisions

If you want information in significant detail, you can see meeting minutes from the Federal Reserve going back to 1936. You can also see the entire history of rate changes since 1954.

An entire book could be written about Federal Reserve policies and the Great Depression —a decade-long, deep economic downturn when production numbers plunged and unemployment figures skyrocketed. It’s been acknowledged that mistakes the Fed made contributed to this economic disaster.

During this time period, the Fed was largely decentralized and leaders disagreed on how to address the growing economic challenges. Some policies were implemented that unintentionally hurt the economy. The Fed raised interest rates in 1928 and 1929 to limit securities speculation, and economic activity slowed. The Fed made the same error in judgment in 1931.

In 1973, President Richard Nixon stopped using the gold standard to support the U.S. dollar. When inflation rates tripled, the Fed doubled its interest rates and kept increasing them until the rate reached 13% in July 1974. Then, in January 1975, it was significantly dropped to 7.5%.

This monetary policy didn’t effectively address the inflation, and in 1979, then Fed Chairman Paul Volcker raised rates and kept them higher to end inflation. This might have contributed to the country’s recession, but the inflation problem was solved.

Recommended: History of Fed

Monetary Policy vs Fiscal Policy

Both monetary policy and fiscal policy are tools government organizations use to manage a nation’s economy. Monetary policy typically refers to the action of central banks, such as changes to interest rates that then affect money supply. As mentioned, in the U.S. that would be the Federal Reserve.

Meanwhile, fiscal policy typically refers to tax and spending by the federal government. In the U.S., fiscal policy is decided by Congress and the presidential administration.

For instance, when the Covid-19 pandemic wreaked havoc on the U.S. economy, forcing many businesses to shut down, U.S. fiscal policy put together stimulus packages that included supplemental unemployment benefits, stimulus checks, and small-business loans. These measures were intended to prop up the economy during a difficult time.

In recent years, the rise and popularity of digital currencies like Bitcoin have spurred central banks to explore virtual money of their own. Central bank digital currencies (CBDC) are digital versions of the fiat currency issued by a sovereign nation. While such money is still in its early stages, the emergence of CBDC could give central banks a more direct way of implementing monetary policy in an economy.

Recommended: What Is a CBDC?

The Takeaway

Monetary policies are a key way that central banks try to influence a country’s economy. The main tools that central banks, like the U.S. Federal Reserve use are interest-rate levels and money supply.

On a macroeconomic level, monetary policy can be a powerful, important way to fend off recessions or tame inflationary pressure. On a more microeconomic level, the monetary policy interest rates that a central bank sets also affect loans that everyday consumers take from their banks.

Understanding how monetary policy works can help investors gauge the future of economic growth and consequently, the direction of financial markets. Central bank decisions and interest-rate changes have an impact on the prices of bonds, stocks and commodities. With SoFi Invest, investors can monitor price actions in all these asset classes using the Active Investing platform.

Get started investing with SoFi Invest today.

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May

2021

What Does an Investment Broker Do?

By SoFi | Growing Wealth, invest, Investing, Terminology | Comments Off

One of the most common ways investors interact with assets is by trading stocks and bonds through a broker. The broker—or brokerage firm—is the middleman between the buyer and seller, and can help make a transaction go smoothly.

But an investment broker is not strictly necessary. Some companies offer a direct stock plan, allowing investors to purchase shares straight from the company without a broker. In order to decide if you need an investment broker, it’s essential to know what they are, what they do, and how to shop around for one that fits your needs.

This article will cover everything you need to know about brokerage firms and how they might help you meet your investment goals.

What Exactly Is an Investment Broker, Anyway?

Investment brokers are the companies that enable individuals to buy and sell securities, like stocks, on an exchange market.

Reputable brokers act as a boon to both buyers and sellers: They ensure that each party actually has money to buy assets with, or the assets to sell.

Brokers settle trades by delivering securities and payments to each party, while also taking care of all the bookkeeping and tax-related documentation required. In many cases, going through a brokerage firm is the easiest and most accessible way for individuals to get started with investing.

Pros and Cons of Using a Brokerage Firm

As with any financial service, there are both benefits and drawbacks to using a brokerage firm to facilitate your trades.

Pros of Using a Broker

Accessibility

Thanks to the magic of the internet, you can sign up for a brokerage account in minutes and start trading stocks as soon as your account is funded. That means employing a broker is one of the easiest ways to get started on an investment journey as soon as possible.

Simplicity

When you buy and sell through a broker, a lot of the tedious footwork—like keeping tabs of your interest earnings for tax purposes—is taken care of for you. Depending on the level of brokerage firm you go with, you may also have access to professional financial advice and other advisory services that could help you make the most of your portfolio.

Cons of Using a Broker

Fees and commissions

Although they’ll vary based on the specifics you choose and the type of account you open, some brokers charge maintenance fees as well as trade fees, or commissions, which can nickel-and-dime away at your nest egg. That said, there are ways to minimize your investment fees or even eliminate them entirely. Some brokers offer a certain number of commission-free assets, and SoFi Invest® offers active investment services without commission.

Required portfolio minimums

Although it’s not true of every brokerage firm, some require you to keep a minimum amount of money in your account in order to use their services. These minimums might be $500 or more, which can be a barrier to entry for some beginner investors.

Different Kinds of Brokerage Accounts

Not all brokers are created equal. There are many kinds of brokerage accounts to choose from. The best product for you will depend on your individual financial goals as well as your budget. Here’s what you need to know to help make an informed decision.

Full-Service Brokerage Accounts

Along with the ability to buy and sell assets, a full-service brokerage account might also include advice from human financial planners, and portfolio management to help you make the best investment decisions possible. However, these perks don’t come cheap. Full-service brokerage accounts and wealth-management companies usually calculate their charges as a percentage of your total portfolio, and may have account minimums as high as $500,000. They may also collect trade commissions and annual management fees.

Discount Brokerages

These brokerages offer less in the way of consultation and guidance, allowing you to DIY your investment portfolio on the cheap. Many of them have $0 account minimums and may charge less than $10 per trade—or even offer totally commission-free assets.

Both full-service and discount brokerages typically offer both cash and margin accounts. In a cash account, you’ll need to have the actual cash money to buy your assets, whereas in a margin account, the broker will lend you some capital to make purchases, using the securities you already own as collateral.

Different Types of Investment Accounts

Aside from deciding what type of brokerage you’d like to do business with (and how much you’re willing to pay for financial services), you’ll also need to decide what type of investment account works best for your goals.

Maybe you’re investing for a shorter-term objective, like purchasing a house—or maybe you’re trying to ensure you’ll have a comfortable retirement. Either way, there are specific investment account types, or “vehicles,” designed to help you get there.

Personal Investment Account

Think of this as a default investment vehicle. It may be a good choice if you’re looking to grow wealth and want to be able to add or withdraw funds on your own terms without waiting to reach a certain age or life circumstance. You do pay taxes on earnings, however, so there are no tax advantages to this type of account. If you don’t make any specific investment vehicle choices when you open your brokerage account, this is most likely the one you’re getting.

Individual Retirement Account (IRA)

This type of investment account is designed specifically for retirement goals, and is available to both self-employed people and those who are employed by a company. IRAs carry certain tax incentives; for example, contributions to traditional IRAs are deductible, while Roth IRAs allow for tax-free distributions. However, you can’t access the funds without paying a penalty until you reach age 59.5 or meet certain circumstantial requirements, such as purchasing your first home.

A broker may offer other savings or investment vehicles, such as a 529 account, which is a tax-incentivized plan to help people save for educational costs. For full details on the type of accounts available, it makes sense to check with your broker directly.

Alternatives to Investing Through a Traditional Broker

Although using a broker to invest in the stock market might be a smart money move for some, there are other ways to get started with investing, including the following options.

Automated Investing

Automated investment products, or robo-advisors, are platforms that utilize a combination of computer algorithms and human financial planners to create and manage diversified portfolios at low costs to users.

Your funds will be invested in a diversified portfolio, and the platform typically offers goal-planning tools and rebalancing services to help keep your funds moving in the right direction.

If you don’t want to pay the high prices for a full-service broker, but the idea of DIYing your portfolio makes you more than a little nervous, this third option may be just right for you.

Buying Stocks Directly From the Source

Depending on whose stocks you’re interested in purchasing, you may be able to buy them directly from the issuer without needing to go through a brokerage firm.

It pays to read the fine print, however: Buying stocks directly may save you money on trade commissions, but you may also be subject to proprietary fees from the company itself, or minimum purchase amounts.

For investors who go this route, it can still be helpful to diversify your assets. If all of your investments are tied up in a single company, you may not be in a great position if that company begins to falter—whereas if you’ve invested in several different firms and other asset classes, you will likely have a wider margin for error.

Choosing Alternative Investments

Although the stock market is one of the most popular and generally low-effort ways to invest, there are plenty of other ways to try turning your money into more money.

You might consider exploring alternative investments. For example, you could invest in real estate and sell property at a profit, or turn a condo into a passive income source by putting it up for lease. Or you might invest in art; the value of paintings is disconnected from the behavior of the stock market, giving it the potential to rise even during a crash.

That said, many alternative investments require significantly more time, work, and know-how than crafting a diversified portfolio of stock market assets. And as always, every investment involves risk. There’s no such thing as a sure thing.

The Takeaway

If you’ve decided stock market investments are the right move for you and your money, going through a broker can be a relatively simple and low-cost way to gain access to the market. For some investors, the accessibility and simplicity of using a broker may outweigh any potential downsides, like fees or required account minimums.

For investors looking to get started buying and trading stocks, ETFs, crypto, and more, SoFi Invest has options to suit different goals and preferences. SoFi’s automated investment account can be opened with a contribution as low as $1. And for a more hands-on experience, try active investing, with no account minimums or commission fees.

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SOIN19114

May

2021

What to Know about FHA 203K Loans

By SoFi | Home Ownership, mortgage, Terminology | No Comments

Buying a fixer-upper is sometimes romanticized by pop culture. While it’s fun to dream, the reality of home renovation is that it can be laborious and draining, especially if the home needs serious help.

Repair work requires energy and resources, and it can be difficult to secure a loan to cover both the value of the home and the cost of repairs—especially if the home is currently uninhabitable. Most lenders won’t take that sort of chance.

But if you have your heart set on buying a fixer upper, an FHA 203(k) loan can help.

The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), insures loans for the purchase and substantial rehab of homes. It is also possible to take out an FHA 203(k) loan for home repairs only, though it might not be your best option if that’s all you need.

If you have the vision to revive a dreary house, here’s info about FHA 203(k) loans and other home improvement loan options.

What Is an FHA 203(k) Home Loan?

Section 203(k) insurance lets buyers finance both the purchase of a house and its rehabilitation costs through a single long-term, fixed- or adjustable-rate loan.

Before the availability of FHA 203(k) loans, borrowers often had to secure multiple loans to obtain a mortgage and a home improvement loan.

The loans are provided through HUD-approved mortgage lenders and insured by the FHA. The government is interested in rejuvenating neighborhoods and expanding homeownership opportunities.

Because the loans are backed by the federal government, you may be able to secure one even if you don’t have stellar credit. Rates are generally competitive but may not be the best, because a home with major flaws is a risk to the lender.

The FHA 203(k) process also requires more coordination, paperwork, and work on behalf of the lender, which can drive the interest rate up slightly. Lenders also may charge a supplemental origination fee, fees to cover review of the rehabilitation plan, and a higher appraisal fee.

The loan will require an upfront mortgage insurance payment of 1.75% of the total loan amount (it can be wrapped into the financing) and then a monthly mortgage insurance premium.

Applications must be submitted through an approved lender .

What Can FHA 203(k) Loans Be Used For?

Purchase and Repairs

Other than the cost of acquiring a property, rehabilitation may range from minor repairs (though exceeding $5,000 worth) to virtual reconstruction.

If a home needs a new bathroom or new siding, for example, the loan will include the projected cost of those renovations in addition to the value of the existing home. An FHA 203(k) loan, however, will not cover “luxury” upgrades like a pool, tennis court, or gazebo (so close!).

If you’re buying a condo, 203(k) loans are generally only issued for interior improvements. However, you can use a 203(k) loan to convert a property into a two- to four-unit dwelling.

Your loan amount is determined by project estimates done by the lender or the FHA. The loan process is paperwork-heavy. Working with contractors who are familiar with the way the program works and will not underbid will be important.

Contractors will also need to be efficient: The work must begin within 30 days of closing and be finished within six months.

Temporary Housing

If the home is indeed unlivable, the 203(k) loan can include a provision to provide you with up to six months of temporary housing costs or existing mortgage payments.

Who Is Eligible for an FHA 203(k) Loan?

Individuals and nonprofit organizations can use an FHA 203(k) loan, but investors cannot.

Most of the eligibility guidelines for regular FHA loans apply to 203(k) loans. They include a minimum credit score of 580 and at least a 3.5% down payment.

Applicants with a score as low as 500 will typically need to put 10% down.

Your debt-to-income ratio typically can’t exceed 43%. And you must be able to qualify for the costs of the renovations and the purchase price.

Again, to apply for any FHA loan, you have to use an approved lender. (It’s a good idea to get multiple quotes.)

Common Home Improvement Loan Options

The FHA 203(k) provides the most comprehensive solution for buyers who need a loan for both a home and substantial repairs. However, if you need a loan only for home improvements, there are other options to consider.

Depending on the improvements you have planned, your timeline, and your personal financial situation, one of the following could be a better fit.

Recommended: Looking to upgrade your home this year? Check out our Home Improvement Cost Calculator to estimate your budget and ROI.

Other Government-Backed Loans

In addition to the standard FHA 203(k) program, there is a limited FHA 203(k) loan of up to $35,000. Homebuyers and homeowners can use the funding to repair or upgrade a home.

Then there are FHA Title 1 loans for improvements that “substantially protect or improve the basic livability or utility of the property.” The fixed-rate loans may be used in tandem with a 203(k) rehabilitation mortgage.

The owner of a single-family home can apply to borrow up to $25,000 with a secured Title 1 loan.

With Fannie Mae’s HomeStyle® Renovation Mortgage, homebuyers and homeowners can combine their home purchase or refinance with renovation funding in a single mortgage. There’s also a Freddie Mac renovation mortgage, but standard credit score guidelines apply.

Cash-Out Refinance

If you have an existing mortgage and equity in the home, and want to take out a loan for home improvements, a cash-out refinance from a private lender may be worth looking into.

You usually must have at least 20% equity in your home to be eligible, meaning a maximum 80% loan-to-value (LTV) ratio of the home’s current value. (To calculate LTV, divide your mortgage balance by the home’s appraised value. Let’s say your mortgage balance is $225,000 and the home’s appraised value is $350,000. Your LTV is 64%, which indicates 36% equity in the home.)

A cash-out refi could also be an opportunity to improve your mortgage interest rate and change the length of the loan.

Recommended: How Does Cash-Out Refinancing Work?

PACE Loan

For green improvements to your home, such as solar panels or an energy-efficient heating system, you might be eligible for a PACE loan .

The nonprofit organization PACENation promotes property-assessed clean energy (or PACE) financing for homeowners and commercial property owners, to be repaid over a period of up to 30 years.

Home Improvement Loan

A home improvement loan is an unsecured personal loan—meaning the house isn’t used as collateral to secure the loan. Approval is based on personal financial factors that will vary from lender to lender.

Lenders offer a wide range of loan sizes, so you can invest in minor updates to major renovations.

Home Equity Line of Credit

If you need a loan only for repairs but don’t have great credit, a HELOC may provide a lower rate. Be aware that if you can’t make payments on the borrowed funding, which is secured by your home, the lender can seize your home.

The Takeaway

If you have your eye on a fixer-upper that you just know can be polished into a jewel, an FHA 203(k) loan could be the ticket, but options may make more sense to other homebuyers and homeowners.

SoFi offers cash-out refinancing, turning your home equity into renovation money.

Or maybe a home improvement loan of $5,000 to $100,000 seems like a better way to turn your home into a haven.

Check your rate today.

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What to Know about FHA 203K Loans

What Is an FHA 203(k) Home Loan?

What Can FHA 203(k) Loans Be Used For?

Purchase and Repairs

Temporary Housing

Who Is Eligible for an FHA 203(k) Loan?

Common Home Improvement Loan Options

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Cash-Out Refinance

PACE Loan

Home Improvement Loan

Home Equity Line of Credit

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