solar panel installation

How to Invest in Energy Stocks

Investors are newly attuned to the energy sector, given the global energy crisis that began in 2022 and has continued into 2023 — raising concerns but also increasing investment opportunities in some sectors.

After all there are many different kinds of energy companies, including exploration and production, oilfield services, pipelines, storage and transportation of oil and gas, and renewable energy such as solar, wind, or geothermal heat.

Energy stocks make up one of the 11 sectors in the S&P 500, which consists of the 500 largest stocks in the U.S. For an investor looking for the top energy stocks, this is the list to watch.

How to Choose an Energy Sector Stock

The energy industry is large and complex. In the oil and natural gas industries alone, there are upstream (production), midstream (transport), and downstream (finished product applications) companies in which an investor might choose to invest their money.

For some investors, the source of the energy can impact their interest in owning stock.

Coal used to be a major fuel source, but the global energy crisis or 2022-23 has sparked significant growth in installations of renewable power, with total capacity predicted to almost double worldwide in the next five years, according to a 2022 report by the U.S. Energy Information Administration (EIA).

Beyond more commonly known wind, solar energy, and geothermal energies, other sources of renewable energy include hydropower, biodiesel, ethanol, wood and wood waste, and municipal solid waste.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

How to Invest in Individual Energy Sector Stocks

One way to invest in the energy industry is to buy individual stocks of oil and gas companies or renewable energy companies. When an investor owns individual energy stocks, they have the freedom to buy and sell them as frequently they choose, and also to engage in options trading strategies.

Recommended: Sustainable Investing Guide

When investing in a particular stock, the more hands-on learning the investor can do about the company, the better informed they’ll be. In considering renewable energy stocks or other energy stocks, an investor might want to examine the company’s finances — including cash flow, debt, and other factors such as the price-to-earnings ratio and the dividend payout ratio. Investors might also research the history of the stock and how it has performed over the past 10, five or even one year.

Investors might also compare individual energy stocks with other similar ones that are involved in other aspects of the industry.

The Downside of Buying Individual Energy Sector Stocks

Choosing individual energy sector stocks — whether from oil and gas companies or solar and wind farms — can be challenging and require an investor’s time in researching a company’s financials for a clearer overall picture.

Additionally, buying individual shares of a company can be risky since stock prices can be volatile. There are many factors that can impact an energy stock price, such as the price of crude oil, the price of natural gas, geopolitical issues, decisions made by OPEC, supply and demand from various industries and consumers, and other economic issues.


💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

How to Invest in Energy ETFs

Some investors prefer to invest in exchange-traded funds (ETFs) which are composed of dozens or even hundreds of stocks in an industry.

This diverse investment bundle generally lowers the amount of risk for an investor, vs owning individual stocks.

One advantage of investing in an energy ETF is that an investor can start by buying just one or two shares of the ETF and gradually add more shares as their budget allows.

With energy sector ETFs, investors can choose to invest in ETFs that focus on oil and natural gas, or solar companies, or more generally on renewable energy or clean energy.

Additionally, investors can look for buzzwords like green investing that may indicate an overlap of industries and missions.

The Takeaway

Energy stocks — whether shares in oil or natural gas companies, or solar or other renewable energy stocks — can be a vital part of a diverse investment portfolio. Investors can focus on a particular part of the sector that interests them, or else invest broadly in the sector.

As with other sectors, when it comes to investing in energy sector stocks, investors might choose to buy individual shares, or they might invest in an energy sector ETF. The decision comes down to personal opinion and comfort level.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.


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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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Woman renovating house

How Do FHA 203(k) Loans Work?

If you have your heart set on buying a fixer-upper, a 203(k) loan can help. Repair work requires energy and money, 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. With a 203(k) loan, the Federal Housing Administration (FHA) 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, which could prove helpful given how costly this work can be.

Read on for more information about FHA 203(k) loans and the FHA 203(k) process, as well as your other home improvement loan options.

Key Points

•   FHA 203(k) loans allow buyers to finance both the purchase and rehabilitation of a home through one mortgage.

•   These loans are insured by the FHA and aim to revitalize neighborhoods and expand homeownership.

•   There are two types of FHA 203(k) loans: the limited 203(k) for minor repairs up to $35,000, and the standard 203(k) for substantial renovations requiring a minimum of $5,000.

•   Eligibility for a 203(k) loan requires a minimum credit score of 580 for a 3.5% down payment, or 500 with a 10% down payment.

•   The application process involves coordination with a HUD-certified consultant and detailed project estimates from contractors.

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

The loans are provided through mortgage lenders approved by the U.S. Department of Housing and Urban Development (HUD) and insured by the FHA. This government loan helps to rejuvenate neighborhoods and expand homeownership opportunities. Some buyers use FHA loans to purchase and rehabilitate a HUD Home, a property that is in the government’s possession. These loans are also popular with first-time homebuyers thanks to lenient credit requirements and a low minimum down payment.

Because 203(k) FHA 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 the review of the rehabilitation plan, and a higher appraisal fee.

Additionally, 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.

How an FHA 203(k) Loan Works

As mentioned above, you can take out a 15- or 30-year fixed-rate mortgage or an adjustable rate mortgage through an FHA-approved lender. The amount for which you’re approved will depend on how much your home is expected to be worth after all of the renovations are completed, as well as the cost of the work.

Additionally, the amount you’re approved for will depend on which type of FHA 203(k) loan you get — either the limited (also called streamline) or the standard. (Note that both of these options also have a 203(k) refinance option for current homeowners.)

Types of FHA 203(k) Loans

Streamlined or Limited 203(k) Loan

The limited 203(k) FHA loan allows you to finance up to $35,000 into your mortgage for any repairs or home improvements, including emergency home repairs such as replacing a roof or flooring. There is no minimum repair amount. However, the streamlined 203(k) loan does not cover major structural work.

Standard 203(k) Loan

If you’re buying a real fixer-upper and looking to tackle larger jobs or major structural repairs, you’ll likely want to go for the standard 203(k) loan. A minimum repair cost of $5,000 is required, and you must use a 203(k) consultant, a HUD-certified professional who will oversee the project and make sure FHA standards are met.

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

Purchase and Repairs

For a standard FHA 203(k) loan, other than the cost of acquiring a property, rehabilitation may range from minor repairs (though exceeding $5,000 in 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.

You could do either a remodel or a renovation with the funds, the former of which is making updates to an existing room or structure, while the latter is more extensive and can include changing the function or partially the structure of a home. An FHA 203(k) loan, however, will not cover “luxury” upgrades like a pool, tennis court, or gazebo.

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.

Project estimates done by the lender or the FHA will determine your loan amount. 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.

Mortgage LoanMortgage Loan

Temporary Housing

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

Pros and Cons of FHA 203k Loans

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

Individuals and nonprofit organizations looking for a home mortgage loan can use an FHA 203(k) loan, but investors usually cannot. (The only way to use a 203(k) loan to finance an investment property is to buy a property with multiple units and live in one of the units.)

FHA 203(k) Loan Qualification Requirements

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. Those with credit scores of less than 500 are not eligible for FHA-insured loans.

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

Recommended: How to Qualify for a Mortgage

How to Apply for a 203(k) Loan

To apply for any FHA loan, you have to use an approved lender, a list of which you can find on HUD.gov. It’s a good idea to get multiple quotes.

Once you have a lender, they will assign you a 203(k) consultant who will help you to plan the work that needs to be done on the property you’ve selected and determine how much it will cost. To do so, the consultant will perform a home inspection to identify necessary repairs and improvements, including any health or safety issues.

After that, you will need to find a contractor to write out an estimate for the cost of the labor and materials. Once the lender approves that estimate, they will appraise your home. Your loan can then close and work on your home can begin.

Pros and Cons of 203(k) Rehab Loans

Before you move forward with 203(k) rehab loans, it’s important to understand the benefits as well as the downsides. Here are the major pros and cons to consider:

203(k) Rehab Loans: Pros and Cons

Pros

Cons

•   Combines purchase and renovations into one loan

•   Allows you to borrow more than your home is currently worth

•   Relatively low credit score and down payment requirements

•   Can cover temporary housing or mortgage payments if home is uninhabitable

•   Application process can be involved

•   May need to work with a HUD consultant

•   Cannot be used for investment properties unless you also live in the property

•   Requires upfront and monthly mortgage insurance premiums

How Much Can You Borrow with an FHA 203(k) Loan?

The maximum amount you can borrow with a standard FHA 203(k) loan is 110% of the home’s proposed future value or the purchase price plus your anticipated renovation costs, whichever is less. The total value of the home must still fall within the FHA’s mortgage limits for your area, however. (As noted above, the most you can borrow with a limited FHA 203(k) loan is $35,000.

203(k) Loans vs Conventional Home Rehab Loans

As you consider whether an FHA 203(k) loan may be your best bet from among the many types of mortgage loans, you may be wondering how it compares to a conventional home rehab loan. Both can provide financing to cover the cost of renovating, but there are some key differences to keep in mind — namely, the credit score and down payment requirements as well as what types of improvements can be financed.

203(k) Loans vs Conventional Home Rehab Loans: How They Compare

203(k) Loans

Conventional Home Rehab Loans

•   Lower credit score and down payment requirements

•   Requires an intensive application process and possibly a HUD consultant

•   Has limitations on what improvements can be done

•   May require a higher credit score and down payment

•   Can carry higher interest rates

•   Allows you to make luxury improvements

Alternatives to 203(k) Rehab Loans

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 alternatives could be a better fit.

Other Government-Backed Loans

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

FHA Title 1 Loans: There also 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.

Fannie Mae’s HomeStyle® Renovation Mortgage: 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. Need more details? Our complete guide to government home loans can help.

Cash-Out Refinance

If you have an existing mortgage and equity in the home, and want to take out a loan for home improvements, cash-out refinancing 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.)

A cash-out refi could also be an opportunity to improve your mortgage interest rate and change the length of the loan. To examine whether this approach is right for you, check out your cash-out refinancing rate.

PACE Loan

For green improvements to your home, such as installing 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 or major renovations. A home improvement loan of $5,000 to $100,000 may be an option worth considering to turn your home into a haven.

Home Equity Line of Credit

If you need a loan only for repairs but don’t have great credit or wish to fund more than $35,000 in repairs, 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.

Recommended: Guide to Buying, Selling, and Updating 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. However, other loan options may make more sense to other homebuyers and homeowners.

Stop wondering if homeownership is within reach and how to get there. SoFi’s Mortgage Loan Officers can help you navigate the application process from start to finish.

Consider your mortgage loan options and check your rate today.
 

FAQ

Is it hard to qualify for an FHA 203(k) loan?

An FHA 203(k) loan is easier to qualify for than other types of mortgage because you can have a down payment of as little as 3.5% and a credit score of 580. With a higher down payment, a credit score of 500-580 could be adequate.

Who qualifies for FHA 203(k)?

To qualify for an FHA 203(k) loan, you’ll need a credit score of at least 500, a down payment of 3.5% (10% if your credit score is below 580), and you will need to use the property you are buying and renovating as your primary residence. You’ll also need to use a professional contractor to make improvements. (This is not a loan for DIY renovators.)

How much can you borrow on a 203(k) loan?

The most you can borrow with a standard FHA 203(k) loan is the lower of either: 110% of the home’s proposed future value or the purchase price plus expected renovation cost. A limited FHA 203(k) loan has a ceiling of $35,000.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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Daily Simple Interest: What Are Daily Simple Interest Loans?

Daily Simple Interest: What Are Daily Simple Interest Loans?

If you have a daily simple interest (DSI) loan, the word “daily” indicates that interest is calculated every day. Thus, the amount you owe on a DSI loan increases with each passing day.

However, because DSI loans use a simple interest calculation, interest does not compound. It’s important to learn how to calculate daily simple interest so you know how much you will owe on a DSI loan.

Daily Simple Interest (DSI) Explained

When you take out a loan, you likely expect to pay interest in addition to the original amount of the loan. However, the way interest is calculated is not the same for all loans.

With daily simple interest, only the remaining balance (principal) on the loan is used in the calculation. This is different from compound interest, where interest that accrues is added to the principal and thus included in subsequent interest calculations.

Because DSI loans calculate interest daily and only use the principal in the calculation, paying on time will help you pay off the loan more quickly than making late payments. Paying early will be even more beneficial, as will paying more than the minimum.

How to Calculate Daily Simple Interest

If you take out a loan with daily simple interest, it means interest will be calculated every day on the loan. In addition, interest is only calculated using the principal of the loan.

Simple interest is calculated as:

I = P * R * T

And:

P = Principal
R = Daily interest rate
T = Time between payments

The last part of the formula, T, is the time between payments. That refers to the amount of time that interest has been accruing. For example, if you pay interest every month, then 30 days may have passed since your last payment. Thus, we multiply the daily interest by 30 and then multiply that rate by the principal to determine how much interest you owe.

What Happens if I Don’t Pay the Daily Simple Interest on My Personal Loan?

If you pay the daily simple interest on your personal loan late, more of the payment will go toward interest, and less of it will go toward reducing the remaining balance. This is because more time has passed, and the loan has accrued more interest than it would have if you had paid on time.

For example, suppose you have a $3,000 loan with a 5% annual simple interest rate, calculated daily. On this loan, you would have $12.33 of interest after 30 days. If you pay $75 toward that loan, you pay the $12.33 interest and reduce the principal by $62.67. But suppose you wait 60 days to pay instead. Interest is still accruing on the original $3,000 principal, so you now owe $24.66 in interest. Now, your $75 payment only reduces the principal by $50.34.

Recommended: Is There a Grace Period for Personal Loans?

Comparing Daily Simple Interest vs Fixed Interest

Daily simple interest and fixed interest are not mutually exclusive. In fact, DSI loans are usually fixed-rate loans. In other words, the interest rate does not change for the life of the loan. This is common with auto loans and short-term personal loans.

One difference you might see is with mortgages. These loans are usually calculated monthly instead of daily. As a result, paying a few days early won’t reduce how much interest you owe. That said, paying more than the minimum on the mortgage can reduce how much you owe overall.

Comparing Daily Simple Interest vs Variable Interest

DSI loans are usually fixed-rate loans, so your payments won’t change for the life of the loan. Variable interest loans, however, have a rate that fluctuates according to market rates. Monthly payments fluctuate along with the rate, so it may be hard to predict how much you’ll have to pay every month.

Nevertheless, interest rates can be lower on variable-rate loans, especially at the beginning of the loan term. Variable-rate loans are common with mortgages, which again means interest is often calculated monthly instead of daily.

How Do Daily Simple Interest Loans Work?

With DSI loans, you generally make monthly payments. Some of each payment goes toward interest and the rest reduces the principal. The only thing that makes DSI loans somewhat complicated is the fact that their interest is calculated every day. However, this daily calculation also means early payments can help reduce the total amount you pay on a DSI loan.

For example, suppose you take out a $5,000 personal loan with a 36-month term and 12% annual simple interest, calculated daily. We will also assume your monthly payment is $120. If you make your first payment after 30 days, $49.32 goes toward interest, and $70.68 goes toward the principal. However, if you instead make your first payment after 15 days, only $24.66 goes toward interest, and $95.34 goes toward the principal.

Increasing how much you pay also helps you reduce the principal on a DSI loan more quickly. Using the above example, if you paid $240 instead of $120, the interest owed would be the same after both 30 days and 15 days. In other words, all of that extra $120 would go toward reducing the loan’s principal.

Pros and Cons of Daily Simple Interest Loans

Daily simple interest loans can be beneficial for some borrowers, but they aren’t without their downsides.

Pros of Daily Simple Interest Loans

•  Interest does not compound — only the principal is used to calculate interest

•  Early payments can save you money on interest

•  Payments are usually the same amount every month

Cons of Daily Simple Interest Loans

•  Interest rates may be lower on variable-rate loans

•  Late payments mean interest keeps accruing

Pros

Cons

No compound interest Late payments lead to more interest
Early payments can reduce interest paid Rates can be higher than variable-rate loans
Consistent monthly payments

Examples of Daily Simple Interest Loans

Two of the most common daily simple interest loans are auto loans and personal loans.

Auto Loans

When you finance a new vehicle, the interest on that loan is often calculated using daily simple interest. For example, suppose you have a $25,000 auto loan with 6% interest and a six-year term.

On this loan, your interest for the first 30 days would be $123.29. If you paid $500 after 30 days, $376.71 goes toward the principal, bringing it to $24,623.29. After 30 more days then, the interest charge is $121.43, leading to a slightly higher principal reduction of $378.57. With each monthly payment, you reduce the principal more.

Personal Loans

Personal loans can be used for a variety of needs; two personal loan examples are covering unex pected medical bills and paying for urgent home repairs.

While there are different types of personal loan, they often use daily simple interest. For example, if you take out a $5,000 personal loan with daily simple interest and don’t make a payment for 30 days, the loan will accrue interest for each of those 30 days. However, the principal after 30 days will still be $5,000.

On the other hand, if you made a $250 payment after 15 days, your principal would be reduced to $4,750. Then, interest would be calculated using $4,750 as the principal for the remaining 15 days that month. Hence, you would immediately reduce how much interest the loan accrues each day.

Recommended: Getting Approved for a Personal Loan

More Personal Loan Tips From SoFi:

With a daily simple interest (DSI) loan, interest accrues daily but doesn’t compound. Early payments lead to less interest owed, while late payments increase your interest. DSI personal loans can seem expensive, but they’re a better alternative to more expensive forms of borrowing, such as credit cards.

SoFi Personal Loans have a low fixed interest rate, and loans are available from $5K all the way up to $100K. You can use them for whatever you want: home projects, credit card consolidation, even unplanned events.

SoFi Personal Loans are “good debt,” available whenever and wherever the need arises.

FAQ

How do you calculate daily simple interest?

You calculate daily simple interest by multiplying the principal, the daily interest rate, and the number of days since your last payment. This formula is expressed as I = P*R*T.

Is simple interest charged daily?

Simple interest does not have to be charged daily; it can also be charged monthly or annually. However, daily simple interest is always charged daily.

How does a daily interest rate work?

Daily interest is simply a fraction of the annual interest rate. For example, on a non-leap year, the daily interest on a 15% daily simple interest loan would be 15%/365 = 0.041%. Thus, 0.041% is the amount of interest charged per day.


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


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Pros & Cons of Buying Mid-Cap Stocks

Mid-cap stocks are shares of publicly traded companies with market capitalizations of about $2 billion to $10 billion. The range also indicates where they fall in the spectrum of valuation between small-cap and big-cap (sometimes called large-cap) companies.

Because the stocks are approximations based on a company’s current value, their classification might change over time. There are also pros and cons to investing in mid-cap stocks — as there are when investing in stocks of all types and sizes.

Market Capitalization Investing

Market capitalization is a company’s total value: the number of outstanding shares a company has multiplied by the current price per share. For example, a company with 40 million shares selling at $100 a share would have a market cap of $4 billion.

When investing, the case can be made for including small-, mid-, and big-cap stocks in your portfolio. But when thinking about the numbers involved — small-cap companies have a value of less than $2 billion, and large-cap companies have a value of over $10 billion — understand that the values also govern potential growth.

In other words, small-cap stocks might grow into mid-cap stocks. But a large-cap stock can only stay a large-cap stock unless the value goes down. (Investors have informally come up with valuation categories for nano cap stocks, micro-cap stocks, and mega-cap stocks, but there isn’t a broad consensus about their cutoff values.)

Either way, when investing, the hope is generally for stocks to increase in value or appreciate — and the prevailing wisdom is that small- and mid-cap stocks are appealing because they have room to grow.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Market Cap As a Basic Investor Tool

Knowing the market cap of a company can help investors compare the company to others of similar size. An investor choosing auto-manufacturing stocks could look at mid-cap companies in that particular market sector and compare how they are doing against one another.

To dig even deeper into the basics, it’s good to understand the difference between stocks and bonds. Bonds are a type of debt instrument, whereas stocks represent ownership in a company. Generally, stocks have the potential to offer the highest gains, while bonds are generally safer.

Investing In Mid-Cap Stocks

Finding an investment strategy that makes sense for you is largely about understanding the trade-offs involved. There’s really no such thing as a sure thing in finance, and probably the only way to think about the “best” mid-cap stocks is to look for ones that will offer a return on investment — and ideally a large one, sooner rather than later.

Beyond that, here’s a look at a couple of possible advantages and disadvantages of investing in mid-cap stocks.

Growth, Earnings, Capital

Pro: Whether mid-cap stocks are the sole investments being targeted for a portfolio or they’re part of a more diverse selection, a good argument for them is that they are often companies that are trying to expand.

These are established companies in industries that are experiencing rapid growth, or are expected to. And thanks to that growth, the average mid-cap company’s earnings often grow at a faster rate than the average small cap, and with less stock volatility and risk.

Most mid-cap companies are small caps that have burgeoned, and some are on their way to becoming large-cap businesses. Growth eases the ability to access financing to fuel expansion, so mid-caps typically have an easier time obtaining financing than small caps do.

Investing in mid-cap stocks can be the happy medium between small-cap growth and large-cap stability.

Con: Mid-cap stocks can be more vulnerable than large-cap ones. Being middle tier, by definition, means such companies don’t have as much capital to sustain them through market downturns as big-cap companies do.

And because they are also not massive companies like large-cap companies with a value over $10 billion, it also means they are not as diversified as bigger-cap companies. If the market for that company disappears, the company is also at risk.

Performance

Pro: Because $2 billion to $10 billion is a sizable range of valuations, it means that mid-cap stocks often outperform large- and small-cap stocks just because it’s a markedly wide net of stocks. There are no guarantees that that will happen, of course, which is very important to keep in mind. And, naturally, historical performance is not necessarily an indicator of what will happen in the future.

Con: Investment risk is risk, and even those who don’t dabble in investing likely know that something that seems low risk isn’t the same as something that is not a risk. It doesn’t matter how many reports you read — there are always exceptions. It’s still a good idea to read up on different strategies and try to develop a sense of why some investments are riskier than others.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Researching Mid-Cap Stocks

Many mid-cap companies are household names, and you’d likely recognize a whole host of them. Even so, it’s best for anyone interested in investing in mid-cap stocks to do their homework — look at who’s running the company, who’s already invested, and what the stated goals in earnings and annual reports are.

And it might be smart to consult a financial professional if you need guidance.

It’s tempting to think of a “hot tip” as something you must rush to get in on, but it’s worth taking a breath and considering what you might be overlooking by fixating on something that seems lucrative but also requires urgent action. Again, do your homework.

The Takeaway

Market capitalization is a way for investors to understand the value of different companies and compare their performance and outlook, and mid-cap stocks — which can be seen as lying between small-cap growth and big-cap stability — are one investment strategy to consider.

But there are pros and cons to investing in mid-cap stocks, as there are when investing in other types of stocks. It’s always best to do as much research as you deem necessary before making decisions, and even consider consulting with a financial professional.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.


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SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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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.

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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Why your debt-to-income ratio matters

Why Your Debt to Income Ratio Matters

Imagine you’re a lender, and a wellness entrepreneur comes to you to borrow thousands or hundreds of thousands of dollars. The loan seeker is the picture of health, drives a Tesla S, and lives in a solar-powered manse. But what if the would-be borrower is overextended, and not in a yoga-like way?

You’re going to want to compare their current income to their debts to help gauge how likely you are to be paid back.

Makes sense, right? A debt-to-income ratio helps to determine whether someone qualifies for a loan, credit card, or line of credit and at what interest rate.

A low DTI ratio demonstrates that there is probably sufficient income to pay debts and take on more. But what’s “low” or “good” in most lenders’ eyes?

First, a Debt to Income Ratio Refresher

In case you don’t know how to calculate the percentage or have forgotten, here’s how it works:

DTI = monthly debts / gross monthly income

Let’s say monthly debt payments are as follows:

•   Auto loan: $400

•   Student loans: $300

•   Credit cards: $300

•   Mortgage payment: $1,300

That’s $2,300 in monthly obligations. Now let’s say gross monthly income is $7,000.

$2,300 / $7,000 = 0.328

Multiply the result by 100 for a DTI ratio of nearly 33%, meaning 33% of this person’s gross monthly income goes toward debt repayment.

What Is Considered a Good DTI?

The federal Consumer Financial Protection Bureau advises homeowners to consider maintaining a DTI ratio of 36% or less and for renters to consider keeping a DTI ratio of 15% to 20% or less (rent is not included in this ratio).

In general, mortgage lenders like to see a DTI ratio of no more than 36%, though that is not necessarily the maximum.

For instance, DTI limits can change based on whether or not you are considering a qualified or nonqualified mortgage. A qualified mortgage is a home loan with more stable features and without risky features like interest-only payments. Qualified mortgages limit how high your DTI ratio can be.

A nonqualified mortgage loan is not inherently high-risk or subprime. It is simply a loan that doesn’t fit into the complex rules associated with a qualified mortgage.

Nonqualified mortgages can be helpful for borrowers in unusual circumstances, such as having been self-employed for less than two years. A lender may make an exception if you have a high DTI ratio as long as, for example, you have a lot of cash reserves.

In general, borrowers looking for a qualified mortgage can expect lenders to require a DTI of 43% or less.

Under certain criteria, a maximum allowable DTI ratio can be as high as 50%. Fannie Mae’s maximum DTI ratio is 36% for manually underwritten loans, but the affordable-lending promoter will allow a 45% DTI ratio if a borrower meets credit score and reserve requirements, and up to 50% for loans issued through automated underwriting.

In the market for a personal loan? Some lenders may allow a high DTI ratio because a common use of personal loans is credit card debt consolidation. But most lenders will want to be sure that you are gainfully employed and have sufficient income to repay the loan.

Front End vs Back End

Some mortgage lenders like to break a number into front-end and back-end DTI (28/36, for instance). The top number represents the front-end ratio, and the bottom number is the back-end ratio.

A front-end ratio, also known as the housing ratio, takes into account housing costs or potential housing costs.

A back-end ratio is more comprehensive. It includes all current recurring debt payments and housing expenses.

Lenders typically look for a front-end ratio of 28% tops, and a back-end ratio no higher than 36%, though they may accept higher ratios if a credit score, savings, and down payment are robust.

How Can I Lower My Debt-to-Income Ratio?

So what do you do if the number you’ve calculated isn’t your ideal? There are two ways to lower your DTI ratio: Increase your income or decrease your debt.

Working overtime, starting a side hustle, getting a new job, or asking for a raise are all good options to boost income.

Strangely enough, if you choose to tackle your debt by only increasing your payments each month, it can have a negative effect on your DTI ratio. Instead, it can be a good idea to consider ways to reduce your outstanding debt altogether.

The best-known debt management plans are likely the snowball and avalanche methods, but there’s also the fireball method, which combines both strategies.

Instead of canceling a credit card, it might be better to cut it up or hide it. In the world of credit, established credit in good standing is looked upon more favorably than new.

The Takeaway

Your debt-to-income ratio matters because it affects your ability to borrow money and the interest rate for doing so. In general, lenders look at a lower DTI ratio as favorable, but sometimes there’s wiggle room.

If you’re struggling with student loan debt, refinancing might be a good option if you can lower your interest rate. And if you’re trying to pay off high-interest credit card debt, one method is to consolidate the debt with a fixed-rate personal loan. This can lower your monthly payment, thus changing your DTI ratio.

Check your rate on SoFi’s student loan refinancing and personal loans.


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


SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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