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Are You Bad with Money? Here’s How to Get Better

Think you may be bad with money? You’re not alone. A lot of people feel this way at one point or another. And considering that many of us haven’t had much guidance on how to be good with money, it’s understandable.

No matter what you do in life, managing your money is considered imperative to success. But as important as it is, money skills are not taught in many schools and may not be handed down by parents or family.

But rather than just assume (and accept) that you’re just “bad with money,” it can be important to figure out exactly where you may be going wrong.

So we’ve gathered some telltale signs that you may have some work to do when it comes to money management — plus some key tips and strategies that can help you get better with money.

4 Signs You’re Bad With Money

Sometimes the signs are clear, like getting multiple notifications for overdraft fees in a week. Sometimes, however, being bad with money is less obvious. Here are some red flags that can indicate you’re heading down the wrong financial path.

You Tend to Live Paycheck to Paycheck

Even if you are able to pay your bills in full each month, if you’re often broke after paying them, it can be a sign that you’re not all that financially stable.

Whatever your income or budget is, it can be wise to always have at least a little bit of extra money to put into savings. If that extra doesn’t exist, then you could be walking a financial tightrope, where a major crisis could be waiting just around the corner.

You Don’t Have an Emergency Savings Fund

Not having a contingency fund (tucked away in a separate savings account) that can cover an unexpected expense, such as a medical bill, car repair, or sudden loss of income, is an indication that you’re living too close to the edge.

Although the specific dollar amount you should have in your emergency fund varies from person to person, many financial experts say you should try to have at least three months worth of living expenses set aside to cover the unexpected.

Without this cushion, a single large expense or loss of paycheck even for a couple of months could put you in a debt spiral that can be hard to get out from under.

You Only Make the Minimum Payment on Your Credit Cards

Paying the minimum on your credit cards may seem like you’re keeping up, but in reality you are gradually getting further and further behind.

If you don’t pay the card in full each month, every dollar you put on a card can end up costing you many times more in interest charges over time. Credit card debt that you can’t get rid of can be a clear sign that you’re not being as good with your money as could be.

You Often Overdraft Your account

If you’re gotten into the habit of spending almost everything you earn, it can be easy to overdraft your account. This often results in a high fee, which can make keeping up with your expenses even harder.

Overdrafts can also result from disorganization. Maybe you have the money, but didn’t transfer it over to your checking account in time. This can be a sign that you’re not keeping close enough tabs of your money.

Recommended: How to Avoid Overdraft Fees

How to Be Better With Money: 11 Tips

Becoming better at money management doesn’t have to happen overnight. In fact, the best approach to lasting change is often to take one small step at a time. This can be much easier to do and, as you start to see the rewards (more money, less stress), you will likely be inspired to keep going.

The following tips can help put you on the path to being good with money.

1. Setting Some Specific Money Goals

You likely have a few things you’d like to do in life that having enough money can help you accomplish. Maybe you want to take a great vacation next year, buy a home in a few years, or retire early.

Setting some concrete financial goals, both for the short- and long-term, can give you something to work towards — or, in other words, a reason to be better with your money.

Recommended: What is Financial Therapy?

Need a way to manage your money?
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2. Tracking Your Cash Flow

In order to get better with money, it can help to know exactly where you currently stand.

You can do this by gathering all your financial statements for the past several months, and then adding up all of your after-tax income to see how much is coming in each month.

Next, you can tally up how much you are spending each month. To do this, you may want to make a list of all your spending categories and then come up with an average amount you’ve been spending on each.

You may find it helpful to actually track your spending for a month or two, either by journaling or using an app that tracks spending right on your phone.

Ideally, you’ll want to have more coming in than going out each month. That means you have money you can siphon off into saving and investing, which can help you build wealth over time.

3. Coming Up With a Budget Method That Works for You

Once you have a clear picture of what’s coming and going out each month, you can create a plan for how you want to spend your money moving forward — in other words a budget.

While budgeting may sound onerous, it’s simply a matter of going through your expenses, seeing where you may be able to cut back, and then coming up with target spending amounts for each category.

One budgeting framework that may help you get started is a 50/30/20 budget breakdown. The idea is that 50% of your after-tax income should go to necessities, 30% goes to fun spending or “wants,” and 20% goes to savings goals.

These percentages may not work for everyone, especially if you live in an area with a high cost of living, but they can give you a general rule of thumb as you get started with budgeting.

Recommended: Determining The Right Budget Categories

4. Curbing Impulse Purchases

If you tend to shop without a plan, it can be easy to grab this and that without realizing how quickly these small costs can add up. A perfect example is going grocery shopping. But the same thing can happen if you are mindlessly browsing shops at the mall or online.

Making a list–and sticking to it — whenever you shop can help you avoid overspending. If you see something you really want but you weren’t planning to buy, it can be a good idea to put the purchase on pause for a day or two.

Once you have a cool head and a fresh perspective, you can then ask yourself if you’ll actually use this item and if you can afford it, meaning you can pay cash for it now. If not, it may be a good idea to skip it.

5. Thinking About Larger Spending Cuts

There are only so many lattes you can skip or cents per gallon you can save by heading to the cheaper gas station around the corner. So when you’re trying to find places to save money in your budget, you may also want to think bigger.

For example, you might decide to ditch your car in favor of biking to work — a move that means you save not only what you’d be spending on gas each month, but also insurance, registration, and likely a monthly car payment. (And you might even be able to ditch your gym membership, with all that moving around!) Or, you might consider moving to a less-trendy neighborhood or getting a roommate to help split the rent and other household expenses.

While lifestyle changes might be harder to enact up front, once you commit to them, they can help you save large amounts of money on a regular basis.

6. Automating Your Savings

Building an emergency fund and saving for future financial goals are key steps toward fiscal wellness. So once you have graduated from being at risk of overdrafting your accounts, a great next step can be to automate your savings.

That means setting up an automatic transfer of money from your checking account (or wherever your money is deposited) to one or more accounts designated for saving. This can be done on a monthly (or bi-monthly) basis, and can be timed to happen right after your paycheck hits.

If saving is a chore that you have to remember to do every month, you may get busy and forget. Why not let technology do the heavy lifting for you?

7. Bringing in More Income

Do you feel like you’re cutting back on spending as much as possible, but not getting anywhere? You may need to work on earning more money.

How exactly you go about this goal is up to you, of course. Maybe this means sitting down with a boss and creating a path towards earning more money. Or, it could mean picking up some freelance work in your profession, or starting a side hustle (like pet-sitting or signing up with a ride-share or delivery app).

8. Listing All of Your Debts

Many bad financial habits are born from the easy access consumers have to money that isn’t theirs — and the need to pay those debts back, with interest.

As with budgeting, the first step in conquering your debts is knowing exactly what you’re up against. To get the big picture, you may want to create a computer spreadsheet (or just make a chart with pen and paper) and then list each source of debt that you currently hold.

This includes student loans, credit cards, car loans, and any other debts you may have. You may also want to include the loan servicer, the size of the debt, the interest rate, and the amount and date of the monthly payment on each debt.

9. Knocking Down Debt One at a Time

If you’re paying the minimum on more than one high interest credit card, you may want to focus on getting rid of one entirely. It could be the debt with the highest interest rate, or it might be the smallest overall balance, to give you the psychological victory of kicking a source of debt to the curb.

Whichever one you choose, you can then put as much extra money as you can towards the balance (principal) of that debt, while paying the minimum amount due on all the others. Once you pay that debt off, you can move on to the next one.

10. Avoiding More Credit Card Debt

Getting better at managing your money can be hard to do when you’re adding to your credit card balance. Credit cards are notoriously difficult to pay back when you’re only making the minimum payments, and can be nearly impossible if you’re doing that while adding to the balance.

So, you may want to use your newfound money management skills to find ways around going further into credit card debt. Maybe there are more cuts that can be made to your budget or some overall shifts in lifestyle that could help. No matter how you do it, it can be helpful to focus on spending only the money you actually have.

11. Contributing More to Your 401(k)

You might think saving for retirement is something you don’t really need to focus on until you’re older. But the truth is that the earlier you start, the easier it will generally be to save enough to retire well. That’s thanks to the magic of compounding interest, which is when the interest you earn on your money earns its own interest.

If your company offers a 401(k), it can be a good idea to contribute at least a small percentage of each paycheck. If your employer offers matching funds, you may want to take full advantage of this perk by contributing the max amount your company will match.

Recommended: When to Start Saving for Retirement

The Takeaway

You don’t have to master all of the above concepts right away. Becoming a person who is “good with money” is a journey.

Instead, you may want to start with one area and move on to the next as you feel you have mastered each financial tool.

Looking for Something Different?

One simple step that can make it easier to manage your money is to open up a SoFi Money® cash management account. With SoFi Money, you can earn, save, and spend all in one account. And, it’s easy to track your weekly spending right in the dashboard of the SoFi app.

Learn how SoFi Money can help you keep better tabs on your personal finances.


SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
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 . The umbrella term “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.

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Swimming Pool Installation: Costs, Ideas, and Tips

If, as they say, the American Dream is to own your own home, then the sensational sequel, for many people, is to have your own swimming pool installed.

Few other home improvements have the same potential to turn a property into an oasis for parties, playtime for the kids, or simply hanging out and spoiling yourself.

But paying someone to build that backyard paradise could become a nightmare without the right swimming pool financing in place. (Unless you happen to have $30,000 to $60,000 lying around, of course. That’s the average cost of adding an inground pool.)

How to Finance a Swimming Pool

If you don’t have enough saved to pay upfront for a pool — or even if you do — you might be wondering what types of loans or other options are appropriate for this type of backyard remodel.

There are several pool financing choices available to homeowners — including personal loans and cash-out refinancing; home equity loans and home equity lines of credit; or credit cards and options offered through a pool company.

Before you take the plunge into financing a pool, you may want to consider the pros and cons of each type, including the overall costs of borrowing and whether you might qualify for a particular type of loan. Understanding some of the different ways you can finance a pool can help you decide what’s right for you. So, take a deep breath — we’re diving in.

Using a Cash-Out Refinance to Pay for a Pool

Homeowners who have enough equity built up in their house may want to check into doing a cash-out refinance.

With this strategy, borrowers replace their existing mortgage with a new mortgage for a larger amount. Then, they can use the lump-sum of cash they get back to pay for a pool (or pretty much anything they want).

Pros of a Cash-Out Refinance

When interest rates are low (as they are now), a cash-out refinance can have a few benefits.

•   Eligible homeowners typically can borrow up to 80% of their home’s equity, which could be enough to cover the cost of putting in a pool — and maybe even some extras, like a new barbecue or lounge chairs.

•   Borrowers with good or improved credit, or those who bought their home when interest rates were higher, may be able to refinance to a lower interest rate.

•   A mortgage interest tax deduction may be available on a cash-out refinance if the money is used for capital improvements on your property. (Consult with a tax professional for more details as they apply to your situation.)

Cons of a Cash-Out Refinance

There are some downsides to going the refi route, including:

•   Borrowers must go through the mortgage application process all over again to get a new loan, which usually means submitting updated information, getting an appraisal, and waiting for approval.

•   If your credit isn’t great (maybe your credit cards are maxed out from other improvements), you may not be able to get the new loan.

•   Borrowers may have to pay closing costs, generally from 2% to 6% of the total loan amount. (That’s the old loan plus the lump sum that’s being added.)

•   If the term on the new mortgage is longer than the remaining term on the original loan, it could mean more years of making payments (and paying more in interest overall).

•   Your mortgage is a secured loan, which means if you can’t make your payments, you could risk foreclosure.

Using a Home Equity Line of Credit to Finance a Pool

Another way borrowers can use their home’s equity to finance a pool is to take out a home equity line of credit (HELOC).

A HELOC is a revolving line of credit that uses your home as collateral. It works much like a credit card in that:

•   The lender gives you a credit limit to draw from, and you only repay what you borrow, plus interest.

•   As you pay back the money you owe, those funds become available to you again for a predetermined “draw” period. (Usually 10 years.)

Pros of a HELOC

Here’s why a HELOC can be a popular way to pay for home improvements:

•   Borrowers only pay interest based on the amount they actually borrow, not the entire amount for which they were approved, as you would with a regular loan.

•   The interest rates are generally lower than credit cards and unsecured personal loans.

•   The interest on HELOC payments might be tax deductible, according to IRS rules , if the funds were used to “buy, build, or substantially improve your home.”

•   A HELOC may be easier to obtain than some other types of loans, and the costs might be lower.

Cons of a HELOC

Just as with a credit card, if borrowers aren’t careful, a HELOC can become problematic. Here’s why:

•   HELOCs generally come with a variable interest rate, which means when interest rates increase, the monthly payments could go up. Although there may be a cap on how much the rate can increase, some borrowers might find it difficult to plan around those fluctuating payments.

•   HELOCs are easy to use — and overuse. Some of the same things that can make a HELOC appealing (easy access to cash, lower interest rates, and tax-deductible interest) could lead to overspending if borrowers aren’t disciplined.

•   Adding a HELOC could affect your ability to take out other loans in the future. When lenders are deciding whether to offer a loan, they look at a borrower’s existing debt load. If you add a HELOC to a mortgage, car loans, and maybe some credit cards and other debt, it could appear to increase the risk that you won’t be able to make payments.

•   Just as with a cash-out refinance, the borrowers’ home is used as collateral, which means the lender could foreclose if something happens and you can’t make your mortgage payments.

Using a Home Equity Loan for Pool Financing

A home equity loan is yet another way to tap into the money you’ve already put into your home. But unlike a HELOC, borrowers receive a lump sum of money.

Pros of a Home Equity Loan

Home equity loans have a few positives that make them worth considering for financing a swimming pool.

•   Unlike HELOCs, which typically come with a variable interest rate, home equity loans usually have a fixed interest rate. The borrower can expect a reliable repayment schedule for the duration of the loan.

•   Because it’s a secured loan, the lender may consider it a lower risk, so the loan may be easier to get and the interest rate may be lower than other options.

•   And, once again, there is a potential tax break. If the loan is used for capital improvements to the home, the interest may be deductible.

Cons of a Home Equity Loan

There are two main downsides to a home equity loan.

•   Borrowers may run into a long list of fees when closing on a home equity loan. Some aren’t that high, but they can add up.

•   Borrowers might put their home at risk for foreclosure if they can’t make their loan payments.

Using a Personal Loan

You don’t necessarily have to tap into your home’s equity to finance a swimming pool. Financial institutions offer unsecured personal loans that can be used for this purpose.

If you haven’t owned your home for long, or if your home hasn’t gone up much in value while you’ve owned it, a personal loan may be an option. Here are some pros and cons:

Pros of a Personal Loan for Pool Financing

Applying for an unsecured personal loan can be a much more straightforward process than getting a secured loan.

•   With a personal loan, borrowers don’t have to wait for a home appraisal or wade through the other paperwork necessary for a loan that’s tied to their home’s equity. There generally are fewer fees. And if the loan is approved, you may get your money faster.

•   Because your home isn’t being used as collateral, the lender can’t foreclose if you don’t make payments. (That doesn’t mean the lender won’t look for other ways to collect, however.)

Cons of a Personal Loan for Pool Financing

Cost is the big factor when comparing personal loans to other borrowing options.

While it may be easier and less expensive upfront to get an unsecured personal loan, interest rates may be higher for this type of loan than a loan that requires collateral. However, borrowers who have good credit and don’t appear to be a risk to lenders still may be able to obtain loan terms that work for their needs.

Should You Finance a Pool?

Installing a pool is an expensive home improvement, so you may want to (or have to) borrow some money to pay for all or part of the project.

If you do decide to borrow, it’s pretty easy to go online and research multiple lenders to find the best loan terms for you. Once you’ve estimated how much money you may need, you can shop lenders to find the best interest rate and loan length, and to get an idea of how much your monthly payments will be. You also can check on all the upfront costs of getting the loan. If timing is important, you also can ask how quickly you’ll find out if you qualify and how long it might take to get your money.

The Takeaway

If you’re considering using a loan or line of credit to pay for your pool project, there are several financing options.

Applying for a personal loan tends to be a simpler process than what might be required for other types of loans — and you won’t have to use your home as collateral. Another plus: Online personal loans, like those available through SoFi, can be ready in just a few days. But each type of financing has some pros and cons, so it can be useful to shop around and see what would work best for you.

Pool Financing FAQs

Q: What credit score is needed for pool financing?

A: Every lender has its own process for evaluating a borrower’s creditworthiness — and different types of loans can have varying requirements. If your credit score is in the fair range (below 670) you still may qualify for a personal loan with some lenders. But the better your credit, the better the chances are that you can qualify for more types of loans, lower interest rates and/or a higher loan amount.

Q: Is it smart to finance a pool?

A: Borrowers who have enough cash saved to pay upfront for a pool may still want to consider financing all or a part of their purchase if they want to keep that cash accessible for emergencies and other needs. Financing with a low-interest loan (when you can afford the payments) can make paying for a pool manageable. But before you borrow a large sum, you may want to consider how long you plan to live in your current home, how much pool maintenance might cost each month, if you’ll actually use the pool enough to make it a worthwhile purchase, and if the value added to your home is worth the investment.

Q: How hard is it to get pool financing?

A: A lot depends on your credit and how much you hope to borrow. Lenders want to be certain borrowers can pay their loans. If you have a track record of making late payments, or if you already have a high debt-to-income ratio, it may be difficult to qualify for a pool loan. You may choose to wait until your financial situation improves before you apply for a loan.

Q: Don’t pool companies usually offer financing?

A: Yes, but that financing likely will come from a financial institution the pool company works with — not the pool company itself. If you get a loan offer through a pool company, compare the rates and other terms to those offered by a few lenders before signing on the dotted line.

Q: What about using a credit card?

A: If you’re only financing a portion of the pool’s cost, you could consider using a card with a low- or zero-interest introductory rate. But if you can’t pay off the balance during the introductory period and the rate flips to a higher rate, financing the entire amount or even a chunk of the cost could get expensive.

Q: How long is the typical pool loan?

A: The length will depend on the type of loan you choose and could range from a few years (for a personal loan) to decades. Borrowers can shop for a repayment pace that suits their needs when they research pool loans.

Ready to dive in? Explore SoFi’s personal loans and see if we can help you build the pool of your dreams.


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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.

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

What Is a dApp? A Guide to Decentralized Applications

The invention of cryptocurrency, blockchain, and smart contracts has opened up a new world of technological possibilities.

Bitcoin, the first cryptocurrency, provided a way for people to transfer value independently of any third-party payment processor thanks to blockchain technology. This same concept has also been applied to more complex transactions, like those involving software applications.

Software applications that run independently of a central authority are known as dApps, or decentralized apps.

What is a dApp?

An application that has no central authority governing it, isn’t hosted on one centralized server, and runs on a distributed, decentralized peer-to-peer network is known as a decentralized application (dApp).

A dApp is, for the most part, similar to any other software application — for instance, it could function on a desktop or mobile device, and will have a graphical user interface (GUI) just like any other app.

What makes dApps different is how they function behind the scenes, with the app being powered by transactions taking place on a decentralized network. Most or all of the backend programming happens on a decentralized network like Ethereum.

How dApps Work with Ethereum

Most dApps run atop Ethereum. Other protocols exist that perform similar functions, such as Cardano and the Ouroboros consensus protocol, Tron, or EOS, but Ethereum is the dominant market player in this space.

The Ethereum protocol gives users the ability to deploy and run smart contracts. A smart contract is a virtual agreement contained in code that can run specific operations and interact with other smart contracts.

The use of smart contracts eliminates the need for a third party to handle transactions and contract execution between two parties. Replacing the middle man with a program can speed up processes, reduce the potential for fraudulent transactions, and reduce costs.

Where do smart contracts exist? On thousands of servers called “nodes” distributed around the world. The nodes continually work to make sure they all agree on the current state of the network and which transactions are valid.

What Makes dApps Different?

There are a few key characteristics that differentiate dApps from other programs:

•   dApps run on a blockchain

•   Their code is open-source and operates independently of any person or group

•   Many dApps generate tokens in an effort to bring value to their nodes

•   Users often must contribute tokens to gain access

•   Miners receive new tokens as a reward for contributing to the ecosystem

Not all dApps have a native token. The Crypto Kitties game, for example, was one of the first and most popular dApps of its time, beginning in 2018. Playing the game required ETH gas fees and the value exchanged between players were pictures of digital cats.

Any dApp running atop Ethereum will require gas fees, paid in ETH (the native token of the Ethereum network), to facilitate smart contract transactions. The same holds true of other smart contract protocols. Some dApp protocols may have their own native tokens as well.

Recommended: What is a Crypto Token? Tokens vs Coins

What Can dApps Be Used For?

DApps can be used for just about anything that requires two or more parties to agree on something. When the appropriate conditions are met, the contract will execute automatically.

4 Different Types of dApps

1. Money management applications

These allow users to make peer-to-peer transactions on a blockchain network. Dapps of this kind often have their own independent blockchains, and are commonly called cryptocurrencies.

One of the most popular use cases for decentralized applications in recent years has been decentralized finance (DeFi). Decentralized exchanges (DEXs), for example, allow for peer-to-peer trading of digital assets without the need for a single entity maintaining order books, user accounts, and security. Financial services like borrowing and lending can also take place thanks to dApps. This can provide access to loans for people with poor credit (as no credit check is required) and give investors a chance to earn yield on their idle investments.

Recommended: A Guide to Decentralized Finance (DeFi)

2. Applications that align real-world events with digital assets.

An example could be oracles that feed real-time price data to decentralized exchanges or other interested parties. Or a logistics company could use a location-tracking chip to verify that a cargo shipment has reached its destination, at which time payment for the shipment could be released. Such a transaction could be accomplished with crypto, with no action taken on part of the humans involved aside from both the buyer and seller entering into a smart contract agreement beforehand.

Such agreements wouldn’t require notarization by a formal authority, as there would be no way for participants to avoid their contractual obligations (assuming the smart contract code was written correctly).

3. Decentralized Autonomous Organizations (DAOs).

These are decentralized blockchain-based organizations with no leader. Such organizations run according to rules defined by code from day one. These programmatic rules can define who can be a member, how voting works, what activities members can engage in, and how funds or value can be exchanged. After deployment, a DAO operates autonomously.

Recommended: What Is a DAO and How Do They Work?

4. Oracles.

These are an interesting kind of dApp that can be used to compliment other dApps. Oracles like Chainlink are protocols that provide real-time data about something happening in the real world. Synthetic assets, for example, allow people in the DeFi world to trade crypto tokens that are designed to have the same price as a real, physical asset like gold or oil. Oracles provide the price data that allows this kind of trading to happen.

The Takeaway

A decentralized application, or dApp, is a software app that can run atop a blockchain protocol independently and autonomously, without the need for constant human intervention.

DApps have many potential use cases, some of which are still being developed. Decentralized finance (DeFi) and non-fungible tokens (NFTs) are a few of the latest examples, but they likely won’t be the last.

Interested in getting involved in crypto trading? With SoFi Invest®, you can trade crypto including Ethereum, Bitcoin, Litecoin, Cardano, Dogecoin, Solana, and Enjin Coin.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Poike


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.
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. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products 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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Understanding the Different Types of Mortgage Loans

Understanding the Different Types of Mortgage Loans

An important first step for aspiring homebuyers is to decide which type of home loan will best serve their needs. The interest rate, length, down payment, borrower qualifications, and extra fees associated with different types of mortgage loans will all play a role in the decision.

To help make the choice a bit easier, let’s talk about mortgage basics and compare the advantages and disadvantages of mortgage types.

Recommended: First-Time Home Buyer’s Guide

Fixed-Rate vs. Adjustable-Rate Loans

When it comes to understanding types of mortgage loans, the difference between an adjustable-rate mortgage and fixed-rate mortgage is the first thing to consider.

Pros

Cons

Fixed-Rate Mortgage Your monthly payment is fixed, and therefore predictable. If you take out a loan when rates are high, you’re locked in unless you can refinance.
Adjustable-Rate Mortgage The initial interest rate is usually lower, making this a good option for someone who can sell before the rate adjusts. Rate increases could be dramatic, leading to potentially much higher monthly payments.

Fixed-Rate Mortgage

Fixed-rate mortgage loans are exactly what they sound like: The interest rate is fixed for the entire life of the loan. The term can vary.

These loans offer a steady monthly payment and relatively low interest rate. Borrowers can usually make extra payments toward the principal if they want to pay off the mortgage faster, as prepayment penalties are rare.

Quick Tip: Check out our Mortgage Calculator to get a basic estimate of your monthly payment.

Pro: The monthly payment is fixed, and therefore predictable.

Con: If you take out a fixed-rate loan when interest rates are high, you’re locked into that rate for the entire term — unless you’re able to refinance later and get a lower rate.

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate home loan is by far the most common type of mortgage, according to Freddie Mac. However, because payments are made over a relatively long period, lenders tend to see them as riskier than shorter home loans, and thus ask for higher interest rates.

15-Year Fixed-Rate Mortgage

A 15-year loan may have a lower interest rate, and you will pay less in total interest than you would on a 30-year loan. On the flipside, the shorter term means monthly payments may be much higher.

Adjustable-Rate Mortgage

An adjustable rate mortgage (ARM) has an interest rate that fluctuates after an initial fixed-rate period of months to years. The variable rate is typically tied to a benchmark index rate that changes with market conditions.

ARMs are often expressed in two numbers, like 7/1 or 5/1. A 5/1 ARM typically has a rate that’s fixed for five years and then adjusts every year, up to a cap, if there is one.

Pro: The initial interest rate of an ARM is usually lower than the rate on a traditional fixed-rate loan, so it’s easy to be drawn to the teaser rate, but it could end up costing more in interest than a fixed-rate loan over the life of your mortgage. An ARM might work best for someone who expects to sell the property before the rate adjusts.

Con: Rate increases in the future could be dramatic — though there are limits to the annual and life-of-loan adjustments — typically leaving many adjustable-rate mortgage holders with much higher monthly payments than if they had committed to a fixed-rate mortgage.

To compare two ARMs, or an ARM with a fixed-rate mortgage, it’s a good idea to read up on indexes, margins, discounts, caps and more .

Check out local real estate
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Conventional vs. Government-Insured Loans

The most popular type of mortgage, a conventional loan, is originated by a bank or other private lender, and it is not backed or insured by the government. Then there are several types of government-insured loans, some requiring little or nothing down.

Pros

Cons

Conventional Loan A variety of property types can qualify, and there’s the option to put down less than 20% with PMI. There are stricter qualification requirements, and a higher down payment is required.
FHA Loan There are lower down payment and credit score requirements, plus the option to get a non-occupant co-signer. The MIP lasts for the life of the loan if the down payment is less than 10%.
VA Loan You don’t need to put money down or make monthly PMI payments. You’ll owe a one-time VA funding fee on purchase loans.
FHA 203(k) Loan You can use it to buy and rehab a property that doesn’t qualify for an FHA loan, and it requires as little as 3% down. You must qualify for the value of the property and the cost of planned renovations. Rates can be higher, and you’ll owe MIP.
Fannie Mae HomeStyle Loan No MIP is required, and you can cancel mortgage insurance once you meet certain requirements; rates are often lower than with the FHA 203(k). You must meet credit score thresholds.

Conventional Loan

Conventional loans usually have stricter requirements than government-backed home loans. Lenders typically look at credit scores and debt-to-income ratio, among other factors, in evaluating conventional loan applications.

Your down payment may be less than 20%, but if so, you’ll need to purchase private mortgage insurance (PMI) that insures the lender. PMI can be paid monthly or as an upfront premium that can be paid by you or the lender. PMI needs to stay in place until your loan-to-value ratio reaches 78%.

Pro: A variety of property types qualify for a conventional mortgage, and PMI can make it possible for borrowers to qualify for a conventional loan if they put down less than 20%.

Con: Conventional loans tend to have stricter requirements for qualification and may require a higher down payment than government loans.

FHA Loan

Federal Housing Administration (FHA) loans are not directly issued from the government. Certain lenders can issue FHA loans on behalf of the government, and the FHA insures the loans.

Qualifying for an FHA loan is often less difficult than qualifying for a conventional mortgage, so FHA mortgages can be a good choice for people with less-than-stellar credit scores or a high debt-to-income ratio.

With at least a 580 FICO® credit score, you might qualify to put just 3.5% down ; with a score of 500 to 579, you could put just 10% down.

FHA mortgages come with an additional insurance charge called a mortgage insurance premium (MIP) — upfront and annual.

Pros: FHA loans have lower down payment and credit score requirements. Additionally, FHA loans may allow a non-occupant co-signer to help borrowers qualify.

Cons: The MIP stays in place for the life of the loan if the down payment is less than 10%.

VA Loan

The U.S. Department of Veteran Affairs backs home loans for members and veterans of the U.S. military and eligible surviving spouses. Similar to FHA loans, the government doesn’t directly issue these loans; instead, they are processed by private lenders and guaranteed by the VA.

Most require no down payment. Although there’s no minimum credit score requirement on the VA side, private lenders may have a minimum of 580 to 660.

Pros: You don’t have to put any money down or deal with monthly PMI payments.

Cons: There’s a one-time VA “funding fee” on purchase loans, which ranges from 1.4% to 3.6% .

FHA 203(k) Loan

Got your eye on a fixer-upper? A 203(k) loan helps buyers finance both the purchase of a house and repairs. Current homeowners can also qualify for an FHA 203(k) loan to finance the rehabilitation of their existing home.

The generous credit score and down payment rules that make FHA loans appealing for borrowers often apply here, although some lenders might require a credit score above 580.

With a full 203(k), the lender will assign a loan consultant to ensure that the right contractor gets hired and the work gets done as promised. A limited 203(k) loan allows you to do cosmetic upgrades worth about $35,000 and is offered by more lenders.

Pros: An FHA 203(k) loan can be used to buy and rehab a property that wouldn’t qualify for a regular FHA loan. And it requires as little as 3.5% down.

Cons: These loans require you to qualify for the value of the property, plus the costs of planned renovations. The rate can be higher than that of a standard FHA loan. Additionally, you’ll pay an upfront and monthly mortgage insurance premium.

Fannie Mae HomeStyle Loan

For fixer-upper fans, an alternative is the Fannie Mae HomeStyle Loan, which requires only 3% to 5% down but a minimum credit score of 620.

Pros: No upfront MIP is required, and you may cancel mortgage insurance after 12 years or once you reach 20% home equity. The rate is often lower than that of an FHA 203(k).

Con: You must meet credit score thresholds.

Conforming vs. Nonconforming Loans

Both conforming and nonconforming mortgages are types of conventional mortgages.

Pros

Cons

Conforming Loans Interest rates and fees tend to be lower than for nonconforming loans. The amount you can borrow is limited.
Nonconforming Loans There may be no limit on loan size, and they may offer people with poor credit an opportunity to get a loan. They can have higher interest rates and requirements due to the added risk for lenders.

Conforming Loans

Mortgages that conform to the dollar limits set by the Federal Housing Finance Agency are called conforming loans. The limit changes annually, based on federal guidelines.

As of 2021, the conforming loan limit conforming loan limit is $548,250 for a single-family home in most of the U.S. and goes up to $822,375 in certain higher-cost areas.

Pros: Conforming loans may have lower interest rates and fees than nonconforming loans.

Cons: The amount that can be borrowed is limited.

Nonconforming Loans

Non-conforming loans aren’t as standardized as conforming loans, meaning rules can vary more from lender to lender. This can include features like eligibility, rates and others.

Pros: There may be no limit on loan size, allowing you to purchase a more expensive home. They also can offer people with poor credit who may not qualify for a conforming loan access to a home loan.

Cons: Because non-conforming loans tend to be a bit riskier for lenders, they generally come with higher interest rates and can have higher requirements.

Reverse Mortgage

Pros

Cons

Reverse Mortgage No monthly payment is needed, and there’s choice for how payments are made. Interest rates can be higher than with traditional mortgages, and there are fees involved.

A reverse mortgage allows homeowners 62 and older to turn part of their home equity into cash. There are several factors to weigh, including the youngest homeowner’s age, the loan rate and costs, the desires of heirs and payout type.

Pros: The homeowner doesn’t have to make any monthly payments, and they can choose a lump sum, a monthly disbursement or a line of credit — or some combination of the three.

Cons: The interest rate can be higher than traditional mortgage rates. The homeowner will also typically pay mortgage insurance, an upfront fee, an origination fee and third-party fees.

Jumbo Mortgage

Pros

Cons

Jumbo Mortgage Allow buyers to purchase a more expensive property, and there’s no mortgage insurance requirement. The application requirements can be steep, and interest rates and closing costs may be higher.

Another type of mortgage loan is a jumbo mortgage, which is a home loan above the amounts set by the conforming loan limits, mentioned above. As such, it is a type of non-conforming loan. Also known as a jumbo loan, a jumbo mortgage can be obtained through private lenders.

Pros: Jumbo loans make it possible for buyers to purchase a more expensive property. Plus, there’s no mortgage insurance requirement.

Cons: The application requirements for a jumbo loan can be steep, including a larger down payment, and interest rates and closing costs can run higher.

USDA Mortgage

Pros

Cons

USDA Mortgage There’s zero down payment and interest rates tend to be low. Buyers are restricted to certain areas and must be below income limits; they also must pay a guarantee fee.

A USDA mortgage is a type of mortgage loan offered to eligible rural homebuyers. The loans are issued through the USDA loan program by the United States Department of Agriculture as part of its rural development program.

Pros: There’s zero down payment required, and interest rates tend to be low due to the USDA guarantee.

Cons: Buyers are restricted to rural areas for this loan type, and there are income limits. Plus, you have to pay a guarantee fee, though it’s typically less expensive than mortgage insurance.

Interest-Only Mortgage

Pros

Cons

Interest-Only Mortgage Payments will be much lower during the introductory period, freeing up funds for other purposes. The homeowner won’t be building equity without principal payments, and payments will increase significantly after the introductory period.

As its name suggests, an interest-only mortgage is a mortgage type where you only make interest payments for a certain number of years at the start of the loan term. Your principal stays the same during this time. Once the initial time frame — usually 5 or 10 years — is over, your loan becomes fully amortized, meaning you start paying interest and principal each month from there on out. These loans don’t tend to be widely available.

Pros: Interest-only loans can make monthly payments lower during the introductory period, allowing you to use the money that would have gone to principal payment for other purposes.

Cons: Because the homeowner is not making payments toward the principal, they aren’t building any equity. Additionally, their payments will increase significantly once the introductory period ends.

The Takeaway

Among the smorgasbord of different mortgage types, which is best for you? With so many types of home loans, it’s a good idea to do your homework and shop around.

As you weigh all the types of mortgage loans out there, consider getting prequalified for a mortgage with SoFi. SoFi Home Loans come with competitive fixed rates and can call for as little as 5% down.

Check your rate in two minutes.


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.

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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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What Is Margin Debt & How Does It Affect the Stock Market?

What Is Margin Debt?

Margin debt is the amount that traders borrow from stock brokers when they want to trade on margin, or buy securities such as stocks or exchange-traded funds (ETFs) using leverage. It is not available on a cash-only account, in which a trader simply buys the stock they want and they cover the full amount using the cash in their account.

Leverage means that a trader buys more shares than the cash value of their account, and they borrow the remainder of the money from their broker using a margin account. The amount that they borrow from the broker is known as margin debt, and the amount that they pay in cash is known as the equity.

Debt margin trading gives the investor the opportunity to earn significant profits, beyond what they could earn if they only bought securities with cash they have on hand. But it also opens up the trader to larger risks of losses, because if the stock decreases in value they will be in margin debt and on the hook to pay for the difference between the cash they deposited and the amount the stock went down. Traders also have to pay additional fees and interest on any money they borrow from a broker for a margin trade.

Recommended: What is Margin Trading?

Margin Debt Definition

When engaging in margin trading, an investor could potentially borrow up to 100% of the cash they have in their account, allowing them to buy twice as much stock. This would mean they are 200% invested, or fully margined. Government regulations and brokerage rules, however, may limit the amount of margin to which a specific investor has access.

How Margin Debt Works

Traders can use margin debt for both long and short selling stocks. The Federal Reserve Board’s Regulation T places limitations on the amount that a trader can borrow for margin trades. Currently the limit is 50% of the initial investment the trader makes. This is known as the initial margin. In addition to federal regulations, brokerages also have their own rules and limitations on margin trades, which tend to be stricter than federal regulations. Brokers and governments place restrictions on margin trades because they are very risky but also because they can result in significant gains.

Example of Margin Debt

A trader wants to purchase 2,000 shares of Company ABC for $100 per share. They only want to put down a portion of the $200,000 that this trade would cost. Due to federal regulations, the trader would only be allowed to borrow up to 50% of the initial investment, so $100,000. In addition to this regulation, the broker might have additional rules. So the trader would need to deposit at least $100,000 into their account in order to enter the trade, and they would be taking on $100,000 in debt. The $100,000 in their account would act as collateral for the loan.

The broker may also require that the trader keeps a certain amount of cash in their account at all times for the duration of the trade. In the case that the value of the stock goes down, the trader will owe the broker money, and they will either have to deposit cash or sell some of their holdings.

An investor can keep margin debt and just pay off the margin interest until the stock in which they invested increases to be able to pay off the debt amount. The brokerage typically takes the interest out of the trader’s account automatically. In order for the investor to earn a profit or break even, the interest rate has to be less than the growth rate of the stock.

Recommended: Should I Still Invest If I Have Debt?

Advantages and Disadvantages of Margin Debt

There are several benefits and drawbacks of margin debt to purchase securities such as stocks or exchange-traded funds.

Advantages

•   Margin trading allows a trader to purchase more securities than they have the cash for, which can lead to significant profits. The trader can use the cash they have to enter more trades and create more opportunities to profit.

•   Traders can also use margin debt to short sell a stock. They can borrow the stock and sell it, and then buy it back later at a lower price.

•   Traders using margin can more easily spread out their available cash into multiple investments.

•   Rather than selling stocks, which can trigger taxable events or impact their investing strategy, traders can remain invested and borrow funds for other investments.

Disadvantages

•   Margin trading is risky and can lead to significant losses, making it less suitable for beginner investors.

•   The investor has to pay interest on the loan.

•   If a trader’s account falls below the required maintenance margin, such as because the stock drops in value, that might trigger a margin call. In this case the trader will have to deposit more money into their account or sell off some of their holdings. If a stock is very volatile, this can increase a trader’s debt and result in a margin call.

•   Brokers have a right to sell off a trader’s holdings without notifying the trader in order to maintain a certain balance in the trader’s account.

Is High Margin Debt a Market Indicator?

Stock market margin debt recently reached an all-time high, which leaves some traders wondering whether what that means for the markets or their investing strategies.

Some traders view margin debt as one measure of investor confidence in the markets. So, high margin debt can be an indicator that the market is near the top, but this is not always the case. It can be helpful for investors to look at whether total margin debt has been increasing year over year, rather than focusing on current margin debt levels. The Financial Industry Regulatory Authority (FINRA) publishes total margin debt levels.

There have been several instances in the past 50 years where year-over-year changes in total margin debt followed significant market runs and marked near the top of the market.

•   May 5, 1972: Margin debt up 55.8% year over year.

•   Dec. 3, 1999: Margin debt up 58.9%.

•   June 1, 2007: Margin debt up 67.5%

However, there have also been circumstances in which large increases in total margin debt did not indicate the peak of the market. So jumps in margin debt do not always indicate a coming market drop, while they may be an indication to keep an eye out for additional signs of market shifts.

Recommended: 5 Bullish Indicators for Stocks

The Takeaway

Margin trading can be a useful tool for trading, but it isn’t recommended for beginning traders due to its high risk level. It also may not be the best strategy for investors with a low appetite for risk, who should likely look for safer investment strategies.

If you want to get started trading stocks, one great way is with SoFi Invest® brokerage platform. It allows you to research, track, buy and sell stocks, ETFs, cryptocurrencies, and other assets all right from your phone.

Photo credit: iStock/PeopleImages


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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