Deed of Trust vs Mortgage: What Are the Differences You Should Know?

If you finance a home, the lender will have you sign a deed of trust or a mortgage. A mortgage involves you and the lender, but a deed of trust adds a neutral third party that holds title to the real estate.

Many states allow either choice. Thanks to an easier foreclosure process, many lenders prefer a deed of trust to a mortgage.

First, some mortgage basics.

Mortgage Loans 101

A mortgage is a loan that’s used to purchase a piece of real estate. First, the borrower applies for a loan from among the different mortgage types.

Once approved, they sign a mortgage note, promising to pay the lender back over a specified time with agreed-upon terms. The real estate serves as collateral for the loan.

You may hear a mortgage note referred to as a promissory note. In any case, it’s a legally binding document.

Mortgage Transfer

A mortgage transfer takes place when a borrower assigns what is typically an assumable mortgage to another person. Most mortgage loans are non-transferable. That said, in the case of marital separation, divorce, death, or other unusual circumstance, a mortgage transfer is sometimes permitted.

FHA, VA, and USDA loans, insured by the government and issued by private lenders, are assumable if the buyer qualifies.

Mortgage Foreclosure

When a borrower defaults on making mortgage loan payments as agreed upon, the lender may start legal proceedings to take ownership of the property and resell it to recover funds owed to the financial institution.

A mortgage foreclosure can take place when a borrower doesn’t meet other terms of the agreement, but failing to make payments is the most common reason. A variety of mortgage relief programs help borrowers stave off foreclosure.

What Is a Deed of Trust?

Some states incorporate a deed of trust into their home loan process, while financial institutions in other states can choose to do so or not. A deed of trust is an agreement that’s signed at a home’s closing that states how a neutral third party — typically the title company — will hold legal title to the home until the borrower pays the loan off.

Terms to know include the following:

•   Trustor: the borrower

•   Beneficiary: the financial institution loaning the money

•   Trustee: a third party that will legally hold the title until the loan is paid off

Deed of Trust Transfer

If the borrower pays off the mortgage loan, the third-party trustee dissolves the trust involved and transfers the title of the real estate to the borrower.

If the borrower sells the home before the balance owed is paid in full, the trustee takes the sales proceeds and pays the lender what is still owed and gives the borrower/trustor the rest of the money.

Deed of Trust Foreclosure

As with a mortgage, there are clauses in the deed of trust agreement that will trigger foreclosure proceedings. In this case, the trustee will sell the property and distribute the funds appropriately.

Similarities Between a Mortgage and a Deed of Trust

Both a mortgage and a deed of trust are used when someone buys a home and takes out a loan to complete the purchase. Under each structure, the lender has the option to foreclose on the home if terms and conditions agreed upon by the buyer are not met.

In states where either option is allowed, the lender will decide which one to use.

Key Differences Between a Mortgage and a Deed of Trust

Here’s the big one: ease of foreclosure by a private trust company when a deed of trust is in place.

Mortgage Deed of Trust
Number of parties Two: borrower and lender Three: trustor (borrower), beneficiary (lender), trustee
Transfers Uncommon Part of the transaction when loan is paid off
Foreclosure Typically involves court Typically handled outside court system, which is usually faster and less costly

How to Determine If You Have a Mortgage or a Deed of Trust

Although deed of trust versus mortgage differences may seem reasonably small, it can make sense to be clear about which one you have. Look at a mortgage statement to find your loan servicer and ask.

A longer route: Mortgages and deeds of trust are publicly filed documents, so you could seek out the local government agency that manages these kinds of records and get a copy.

The Takeaway

Deed of trust vs mortgage? They are the two main systems for securing home loans. One key difference is the presence of a neutral third party in deeds of trust. The trustee holds legal rights over the real estate securing the loan.

It’s easy to get lost in the forest of mortgage matters. The SoFi mortgage help center can lend a hand.

And here are tips on shopping for a mortgage.

When you’re serious about your search, check out the advantages of a SoFi Mortgage and apply for a home mortgage in minutes.

FAQ

Who can be listed on a deed of trust or mortgage?

On a deed of trust, all three parties are listed: the trustor (borrower), beneficiary (lender), and trustee (third party that holds the title until the loan is paid in full). With a mortgage, there is no third party involved.

How are mortgages and deeds of trust recorded in public records?

A deed of trust will be filed and recorded in public records in the county where the house exists. A similar process takes place for mortgage deed recordings. The recorded documents could be located at a county clerk’s office, a public recorder’s office, or an office of public records.

Is your title separate from deed of trust and mortgage?

Yes. A title is a concept rather than a physical document like a deed of trust or a mortgage note, and it refers to a person’s legal ownership of a home or other property. When a property is sold, the title is transferred from the current owner to the buyer.

Does a mortgage involve a trustee like a deed of trust?

No. Deeds of trust require a trustee, but a mortgage does not.


Photo credit: iStock/zimmytws

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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

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

You’ll likely hear the terms home loan and mortgage used interchangeably, but home loan covers a variety of mortgages, home refinances, and home equity loans.

This piece will focus on the difference between a typical mortgage, used to buy a home, and home equity loans, which are used to tap the equity you’ve gained.

What Is a Mortgage?

Mortgages are loans used when buying a home or other real estate. When you take out a mortgage, your lender is allowing you to borrow the money you need to buy a home in exchange for charging you interest. You’ll repay the loan and interest in monthly installments.

Mortgages are secured loans, meaning the property is used as collateral. If you fail to make mortgage payments, your lender can foreclose on the home to recoup its money.

In order to take out a mortgage, you’ll typically need to make a down payment equal to a percentage of the purchase price. Your down payment is the portion of the cost of the home that you aren’t financing and provides immediate equity in the property.

Buyers may put down 20% on conventional mortgages to avoid private mortgage insurance (PMI), but many buyers put down much less. In fact, the median down payment for all homebuyers was 13% in 2021, according to a National Association of Realtors® report. A mortgage calculator can help you determine what effect the size of your down payment will have on your monthly payments.

When shopping for a home, you can seek mortgage pre-approval. After investigating your financial history, your lender will provide you with a letter stating how much money you can likely borrow and at what interest rate.

Types of Mortgages

There are several types of mortgages available. Mortgage insurance, in the form of PMI or mortgage insurance premiums (MIP), may be part of the deal. It’s good to understand PMI vs MIP.

•   Conventional mortgages are funded by private lenders like banks and credit unions. They are not backed by a government agency. You’ll typically need to pay PMI if you don’t make a 20% down payment; mortgage insurance is canceled when 22% equity is reached. Conventional conforming loans adhere to lending limits set each year by the Federal Housing Finance Agency.

•   Jumbo loans are mortgages that exceed the lending limits set for conventional loans. So a jumbo loan is a “nonconforming” loan. Conventional lenders issue jumbo loans, and the Department of Veterans Affairs guarantees a VA jumbo loan, possibly with no down payment.

•   FHA loans are made by private lenders and guaranteed by the Federal Housing Administration. You may qualify to make a down payment of as little as 3.5%. Upfront and annual MIPs are required, usually for the life of the loan.

•   USDA loans are backed by the U.S. Department of Agriculture and help low- to moderate-income households buy property in designated rural and suburban areas. No down payment is required. An upfront and annual guarantee fee are required.

•   VA loans are designed for active-duty and veteran military service members and some surviving spouses. VA loans don’t require a minimum down payment in most cases. There’s no MIP; there is a one-time funding fee.

What Is a Home Equity Loan?

A home equity loan is frequently known as a second mortgage. Home equity loans allow homeowners to borrow against the portion of their home they own outright.

As with typical mortgages, home equity loans are secured using the home as collateral.

The amount you’re able to borrow will be determined by a few factors, including your credit history and how much equity you’ve built: the current value of your house less any outstanding debt.

It’s common for lenders to allow you to borrow up to 80% of the equity you’ve established. The loan arrives in a lump sum. You repay the home equity loan with interest over a set period of time. If you miss payments, your lender can foreclose on the house.

The borrower may pay closing costs based on the loan amount.

Another way to tap home equity is with a cash-out refinance, when you take out a new loan to pay off your old one and free up equity.

Similarities Between Home Equity Loan and Mortgage

When you apply for a mortgage as part of the home-buying process, or a home equity loan as a homeowner, lenders will look into your financial history to help them establish terms and the interest rate for the loan. For example, they will examine your credit reports, often awarding more favorable terms and interest rates to those with higher scores.

Mortgages and home equity loans are both secured loans.

Differences Between Home Equity Loan and Mortgage

A mortgage must be used to purchase an intended property. There are fewer limitations on the money received from a home equity loan.

Mortgage interest can be deducted if you itemize your deductions. However, you can only deduct interest on a home equity loan if you use the loan to buy, build, or substantially improve your main or second home. So if you want to buy a boat, that deduction won’t hold water.

When You Should Consider a Mortgage

If you don’t have the cash to buy a home outright, you will have to finance the purchase with a mortgage. However, there are some considerations you may want to take into account. For example, the larger your down payment, the more equity you will have in your home and the smaller your monthly mortgage payments will be.

Because you have more equity in the home, the bank will see you as less risky. As a result, larger down payments also tend to translate into lower interest rates. So, consider putting down as much as you can afford to.

Also, even if you have the cash to pay for a home in full, you may consider a mortgage anyway. You may not want to tie up cash that could be used for other purposes, such as in an emergency. You may be able to invest that money and earn a return that’s higher than the interest rate you’d pay on the loan.

When You Should Consider a Home Loan

Many people choose to take out home equity loans to make home improvements. That can increase the value of your home, putting you ahead if you ever choose to sell.

You may also consider a home equity loan when consolidating other debt, including high-interest credit card debt. The average interest rate for a home equity loan remains significantly lower than the average credit card rate. As a result, it can make financial sense to pay off the more expensive debt with a new, cheaper loan.

Home Loans With SoFi

Home equity loan vs. mortgage? One uses a home as a tool; the other gets a buyer into a home. If you’re looking for a home equity loan, a mortgage, or a refinance, it’s a good idea to compare rates and terms.

Give SoFi’s menu of home loan options a look. SoFi offers fixed-rate mortgages and refinancing at competitive rates, and home equity loans through Spring EQ.

Check your rate with no effect on your credit score.*

FAQ

Is a home loan the same as a mortgage?

Yes. “Home loan” is an umbrella term that covers a wide variety of mortgages, home equity loans, and home refinances.

Why is a home loan called a mortgage?

“Mortgage” comes from the old French mort gage, meaning a death pledge — a morbid origin for the pledge you make to a lender to pay back the money you borrow.

Is a mortgage cheaper than a home loan?

Mortgages are a type of home loan. Your interest rate will depend on the type and size of your loan, your down payment, and your financial history, such as your credit score.


Photo credit: iStock/Brandon Ruckman

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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.
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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Joint Credit Cards: What to Know and How to Apply

Joint Credit Cards: What to Know and How to Apply for One

A joint credit card account is a way for you and a spouse, partner, family member, or trusted friend to co-own a line of credit. A joint credit card is in both of your names, meaning both parties are equally responsible for the debt that the card accrues.

Joint credit cards can make sharing finances with a domestic partner easier, but if you’re not on the same page about using the card and paying off debt, it could mean trouble for your credit score and your relationship. In this guide, we’ll take a closer look at how joint credit cards work, their pros and cons, how they differ from authorized users, and how to get a joint credit card.

What Is a Joint Credit Card Account?

A joint credit card allows two people to fully share in the responsibility of spending with a credit card and paying it off. Each cardholder receives a physical card to use, and each also has full access to credit card statements and payments.

Otherwise, a joint credit card operates just like a traditional credit card — with a credit limit and interest rate on borrowed funds. If you carry over a balance month to month, that balance will accrue interest, and both joint account owners are equally on the hook for paying it back, even if one person is doing most of the spending.

Because a joint credit card is in both owners’ names, it impacts both users’ credit scores. Making regular monthly payments in full and maintaining a low credit utilization could improve both cardholders’ scores. On the other hand, late payments and accumulated debt might bring credit scores down.

Recommended: When Are Credit Card Payments Due

Ways You Can Share a Credit Card

Joint credit card accounts are just one type of shared credit card. Before deciding to apply for a joint credit card, consider whether adding someone as an authorized user on a credit card might be a better option for your situation.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Authorized User

Instead of applying for a credit card with a co-owner, you can make someone an authorized user on an existing credit card. Unlike with a joint account credit card, only one person serves as the cardholder and bears the full responsibility of the card.

The authorized user, on the other hand, can get their own physical card and use it as they see fit. However, the authorized user cannot make larger changes to the card, like requesting an increase in credit limit.

Some, though not all, credit card issuers report authorized users’ activity to the three major credit bureaus. Assuming the main cardholder uses the card responsibly (meaning they make on-time payments and keep credit utilization low), this can reflect well on the authorized user and potentially improve their credit score.

Adding an authorized user can be a good solution for spouses or domestic partners with shared expenses. If one partner has a strong credit score but the other is struggling, the struggling partner might benefit from becoming an authorized user on the other’s card. Additionally, parents who want their children to learn about using a credit card or find comfort knowing their teenage kids have a spending option in emergencies might also benefit from a card with an authorized user.

A caveat: If the main credit cardholder mismanages their credit card and the card issuer reports authorized users to the credit bureaus, this could potentially lower the authorized user’s score rather than helping to build it.

Recommended: What is the Average Credit Card Limit

Joint Cardholder

As previously mentioned, joint cardholders share equal responsibility for how the card is used and paid off. Just as there are pros and cons of joint bank accounts, this arrangement can have benefits and drawbacks. A joint credit card enables spouses and domestic partners to approach their finances on equal footing, but a poorly managed card can have major negative impacts on the other.

Sharing a joint credit card requires implicit trust between the co-owners. Partners who disagree about managing finances might not find a joint credit card a good option.

Recommended: Comparing Joint and Separate Bank Accounts in Marriage

Differences Between Authorized Users and Joint Accounts

Let’s take a closer look at the differences between authorized users and joint accounts.

Privileges

Joint cardholders share the same level of privileges on a credit card. Authorized users, however, cannot increase the credit limit or add additional authorized users. On top of that, primary cardholders can sometimes impose spending limits on authorized users.

Number of Users

Two co-owners share a joint credit card account. With an authorized credit card, there is a single primary cardholder and one or more authorized users. The max number of permissible authorized users varies by card issuer. SoFi, for example, lets you add up to five.

Responsibility

Both co-owners share equal responsibility for a joint credit card account. Authorized users are not responsible for payments, but how the credit card is managed can impact the authorized user’s credit score.

Impact on Credit Score

Both joint credit cards and cards with authorized users can impact credit scores of everyone attached to the card. Authorized users just have less control over how the card is managed, so they must put their faith in the hands of the primary cardholder.

Recommended: How to Avoid Interest On a Credit Card

Pros of a Joint Credit Card Account

What are the benefits of a joint credit card? Here are some potential perks of this setup:

•  Equal control: Spouses and domestic partners who want equal control of their finances can benefit from a joint credit card, which affords them equal access to spending, statements, and payments.

•  Convenience of one shared card: If you share finances with a partner, having one credit card with one payment date might be easier than juggling multiple cards and due dates.

•  Potential to boost credit score or get a better rate: If one co-owner lacks a credit history or has a lower credit score, being a co-owner on a well-managed joint credit card could boost their score. The person with the lower score might even qualify for a card with a better rate by applying with a joint cardholder.

Cons of a Joint Credit Card Account

There are some drawbacks to joint credit cards, however:

•  Shared repercussions for mismanagement: If one co-owner maxes out the card or misses a payment they said they would make, both cardholders share the burden, which can include late fees, a credit score impact, or growing interest. And if your partner decides not to do anything about the growing credit card debt, you could be on your own in paying off their shopping spree.

•  Difficulty of removing someone: Removing someone from a joint credit card can be challenging. Your only option for getting out of a bad situation might be paying off and closing the card.

•  Possibility of damage to the relationship: If you and a partner do not share the same financial philosophy, entangling your debts might do more harm than good. Couples who already fight about making financial decisions may find that sharing a joint credit card is detrimental to their relationship.

Recommended: What Happens to Credit Card Debt When You Die?

Applying for a Joint Credit Card

Does a joint account sound right for your situation? Here’s how to apply for a joint credit card:

1.   Find a credit card issuer with a joint credit card option: Not every credit card issuer offers joint cards. Understand that your options will be more limited than if you applied for a credit card by yourself. Just as you would if you were choosing a joint bank account, take the time to compare a few options and find a joint credit card you’re both happy with.

2.   Understand the qualification requirements: Read the fine print to make sure you and your co-owner can qualify. It’s not just your own credit score and credit history you have to consider; credit card issuers will be reviewing both applicants to determine if you can get a joint credit card.

3.   Fill out the application: Have all of the necessary information for both applicants handy. It’s a good idea to apply together at a computer, if possible.

4.   Set the ground rules: Make sure both of you are on the same page about how you will use the card and who is responsible for making on-time payments. If you’re not sure where to start, check out these basic credit card rules, which can promote healthy card usage.

The Takeaway

Joint credit cards give both co-owners equal responsibility for credit card usage and payments. Using a joint credit card can be a good way to combine finances and help boost a partner’s credit score. However, applicants might benefit from going the authorized user route instead. Understanding the risks of both options is important before completing a joint credit card application or making someone an authorized user on an existing card.

Still looking for the right credit card? Apply for a SoFi Credit Card to get up 3% cash back rewards on all purchases when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back rewards when redeemed for a statement credit. Plus, if you make on-time monthly minimum due amount payments 12 months in a row, you can lower your APR by 1%. The card also allows you to add up to five authorized users.

Make credit work for you and your family with the SoFi Credit Card.

FAQ

Do joint credit cards affect both credit scores?

Joint credit cards affect both users’ credit scores equally. A well-managed card that is paid off in full each month might boost both users’ scores. On the other hand, regularly late payments and a high credit utilization could bring both scores down.

Can I add someone to my credit card as a joint account holder?

Not every credit card issuer offers joint account credit cards. However, most allow you to add authorized users to existing credit cards. Contact your credit card issuer to learn more.

What requirements are needed to get a joint credit card account?

Requirements for getting a joint credit card account will vary by credit card issuer. Credit card companies typically consider factors like age, credit score, and income to determine whether you can get a joint credit card.


Photo credit: iStock/gorodenkoff

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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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How to save for your dream wedding

How To Save For Your Dream Wedding

A wedding should be one of the most memorable days of your life — but it doesn’t have to break the bank. The average wedding costs nearly $30,000, and that’s not including the engagement rings. Whether you long for a fairy tale wedding or you prefer something more scaled back, there are ways to save for your dream day that will ensure you have the magical moment you’ve always wanted without having to incur massive amounts of debt.

Set a Budget

Do you want a big lavish wedding worthy of the royals? A destination wedding? Or maybe you want something more intimate with just a few friends and family? There are different levels of spending when it comes to weddings, and deciding what is most important to you can help you determine just how much you’ll need to save. Is the venue a priority? The number of people? The food? The DJ (or band)? It’s smart to start by making a list and getting a solid estimate of the costs for each of your need-to-haves and your want-to-haves. And it’s also wise to leave a little wiggle room for unexpected wedding costs. Little things like the marriage license, dress or suit alterations, and even insurance costs, can start to eat into your budget pretty quickly.

Start a Savings Plan

Before you’ve locked in the date, you and your partner can start a savings plan. Some couples open a separate bank account and set up automatic monthly transfers to that account to collect wedding funds. When savings are automated, you often don’t notice the missing funds. And by picking an account with a high-yield interest rate, your money can make money while you continue to plan and save.

And if you’re thinking about a loan, yes, there are people who finance their weddings, but the real question is: do you want to start your marriage with debt or do you want to have a healthy savings strategy in place to use even after the dream wedding is over? If you are leaning toward financing your wedding, be sure to weigh the pros and cons and thoroughly check out all of your options, which can range from credit cards to personal loans.

Put the Wedding First

Sure, you may want to go on vacation, eat at fancy restaurants, and buy those new clothes, but that will put you further from your goal. Instead of spending on those luxuries now, cutting back and putting that money into your shared dream wedding account can help you get to your savings goal quicker. And there are some simple ways to cut back that won’t make you feel deprived. For example, you can take local day trips or regional vacations instead of traveling afar. Eating out just once a month and cooking at home more can cut costs. You could even get swanky and hold cocktail hour with friends at your house instead of going to happy hour. Your new bank account will thank you.

Recommended: The Cost of Being in Someone’s Wedding

Do It Yourself

One way to keep your spending low is to plan the majority of the wedding yourself. If you already have experience managing projects, then this should be within the realm of your abilities. Researching the typical steps and fees associated with weddings before making any concrete decisions can be helpful. If that feels daunting, you may want to keep in mind that wedding planners cost an average of $1,500. And while there are advantages to using a planner (they already have a contact list of professionals and know their rates, saving you a lot of time and energy), the downside is you could be getting a one-size-fits-all experience instead of the personalized ceremony and party you may want.

Comparison Shop

Just like other big expenses, getting more than one quote for each service you need can help you find the best price point to fit your needs and wants. Does your preferred venue charge a premium for a wedding, but a lower price for a party? You may want to consider negotiating the price. Calling multiple DJs and catering services can help you ensure you are not overpaying. New York City is going to have very different rates than, say, Asheville, North Carolina. This might even be a factor in deciding when to have your wedding, too. For a better idea of how much costs can vary, you can check out this comparison of costs by state.

You can wind up saving a ton of money by doing away with an expensive venue altogether and looking for a free or really inexpensive location, like parks, gardens and even beaches.

And if you’re able to hold your celebration on a weekday or during off-season, you’re likely to find some additional savings. For example, you can pick Friday instead of Saturday; or you can have a fall or winter event to help lower your costs.

Reassess the Dress

Maybe your dream wedding includes a Vera Wang gown, but your bank account can’t swing that. Or maybe you want something a little simpler. Consider shopping for a vintage dress and having it altered. Or if you want a more modern look, you don’t necessarily have to buy brand new—wedding dresses are usually only worn once and then either sit in the back of a closet or get sold or donated. Resellers often offer beautiful dresses at a fraction of the initial cost.

Consider this: Dresses less than three years old are usually sold for half their original price. And that Vera Wang might not be out of reach after all if you buy it used. Designer brands can sell for 60 to 70 percent of their original cost.

Where not to Cut Costs

While you might not have much of an appetite on your big day, your guests likely will, so it’s a good idea not to scrimp on the food. It doesn’t have to be a five-star, multi-course meal, but if you want to create a memorable experience for all, it’s smart to offer quality food that doesn’t leave anyone grumbling about “wedding food.”

And what good is a dream wedding if you have bad or no photos to remember it? A good photographer can capture all of the moments of both you and your guests. These are photos that you will cherish when you are older and wiser, that will adorn your dresser and be sent out to family, so skimping here is best avoided if you can. The average cost of a wedding photographer is about $2,500, but It could end up being the best you put toward your special day.

The Takeaway

Saving for your dream wedding might seem impossible, but it’s within your grasp if you’re willing to put in the time and effort. With some ingenuity and careful planning, you don’t have to break the bank. By cutting a few costs and saving those nickels and dimes, the wedding you’ve always wanted can be had.

And should you need a bit of financial assistance to put your wedding savings over the top, a personal loan is a perfectly reasonable option. With low rates and no fees, SoFi can put those final funds at your fingertips the day of your approval, giving you the ability to cover those last costs and turn your attention toward enjoying your big day.

Learn how SoFi can help you finance your big day.


Photo credit: iStock/standret

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.
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.
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 Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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Guide to Opening a Certificate of Deposit (CD) Account for Your Child

Guide to Opening a Certificate of Deposit (CD) Account for Your Child

A certificate of deposit (CD), or time deposit, can be a good option as a savings vehicle for a child. They allow you to deposit money for a specific term (e.g. a few months to a few years), and pay a fixed rate of interest.

CDs are relatively safe investments; they are federally insured for up to $250,000, and can offer minimal but steady growth for a period of years. They also offer parents the chance to explain the value of compound interest to their child.

Any adult can open a custodial account for a child who will assume management of the account when they reach adulthood. There are some pros and cons you should know before opening a CD account for a child, including how CDs compare to other investment vehicles for your child.

Understanding Certificate of Deposits

A certificate of deposit savings option is a bank product much like a savings account. The CD or account holder deposits the funds and agrees not to withdraw the money for a period of time, in effect, loaning the money to the bank. The bank pays the CD holder interest on the amount based on the total amount deposited and the maturity date of the CD (the term). Meanwhile, the bank invests the funds to make a return elsewhere.

You can open a CD with a bank or a credit union; this can be done in person or online. Most CDs are federally insured up to $250,000, no matter where the account is held.

If the account holder decides to withdraw the funds before the end of the term, they are typically charged an early withdrawal penalty, often forfeiting a portion of the interest. For example, if you deposit $1,000 in a 2-year CD, and you want to withdraw the funds after one year, you would only be entitled to the amount of interest earned up until that point, minus any fees or penalties.

CDs are considered a conservative investment, but the interest earned on a CD is minimal because they are low risk. When opening a CD account for a child, it’s important to consider whether the peace of mind and a lower return is what you’re after, or whether you’d like an investment that offers more growth (but possibly more risk).

Can a Child Have a Certificate of Deposit?

All things considered however, a CD for kids is a good choice because it can be a solid start to an investment plan for your child, and a way to help explain the dynamics of saving and what it means to earn interest on your principal deposit.

That said, minors cannot hold CDs. An adult must acquire a CD for the child and then transfer it when the child reaches adulthood. Depending on how much time you have, the custodial adult can also consider CD laddering, which is a technique where you hold several CDs with separate maturity dates to create steady returns.

Another point to remember about a CD for kids is that funds held in CDs and other savings accounts can affect a child’s eligibility for future financial aid. This is an important consideration, which could affect how much a family might pay for college tuition.

Who Would Own the CD?

A minor cannot apply for a CD, but they do own it. That means that the account cannot be given to anyone else.

An adult, usually a parent or legal guardian, can open a custodial account for a minor under the Uniform Gifts to Minors Act (UGMA). A custodial account allows one person to deposit funds into an account for another. The account can be transferred to the child once they reach adulthood. The age of adulthood is not federally mandated. However, in most states, it is age 18.

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How to Give a Certificate of Deposit to a Minor

Here’s how to set up a CD for a minor child, and transfer the account to them when they reach adulthood.

Select the Bank Where You Want to Purchase the CD

Decide which bank or credit union you want to hold the CD for your minor child. Compare interest rates based on the amount you intend to deposit and the term for the CD. Also, look at any penalties and fees the bank might charge.

List Yourself as the Custodian and the Child as the Owner

Fill out the form online or in person stating that you will be the custodian and the minor will be the owner of the CD. You will be asked to provide identifying information such as your Social Security number and the child’s Social Security number.

Deposit the Money in the CD

Deposit the desired amount into the CD account, taking into consideration how different amounts and terms might affect the interest rate paid.

Discuss What to Do With the Funds

Opening a CD account for a child presents a “teachable moment,” in that the minor child, who is the owner of the CD, needs to think through what the money can be used for once the CD reaches maturity. When the CD matures, you can cash it out, or renew the CD. If the child is of legal age at that point, the account is transferred to the child, you may have to contact the bank to remove your name from the account.

Recommended: What are no penalty CDs?

Are CDs a Good Choice to Help My Child Save?

CDs are among the low risk investment options, and a good way to help a child save. Anyone can open a CD, and they do not have to be related to the child.

That said, CDs are also low-yield investments, and funding a 529 college savings plan might offer more growth potential over time, if that’s your goal.

For longer-term savings, opening a Roth IRA may also be a good choice for parents hoping to provide financial security for their child.

Tax Implications of CDs for Kids

Opening a CD for kids isn’t complicated from a tax perspective. Taxes are typically due on earnings when the CD matures, but a child will likely be in a lower tax bracket than an adult, so the earnings could be taxed at a lower rate.

Specifically, if all of a child’s earnings are less than $1,050, including interest, dividends, or other earnings, the earnings are not taxed. Any earnings between $1,050 and $2,100 are taxed at the child’s rate. Any amount over $2,100 in earnings is taxed at the parent’s rate.

The custodian of a CD should be aware that they can give up to $15,000 each year to a child without owing gift taxes.

Financial Aid Implications of CD Earnings

There are some implications regarding financial aid. If a child is applying to college and has savings in a UGMA, those assets will have to be disclosed on the Free Application for Federal Student Aid (FAFSA). It may be that the student will have to pay more of their college costs than if their money had been put in a 529 college savings account.

Is a CD a good investment for a child? That depends on the length of time between the opening of the CD account, and when the child reaches the age of majority. CDs don’t earn a lot of interest, and a growth-oriented investment might earn more and grow faster if the child is younger.

If the child is a teenager, a CD will provide a guaranteed amount of money, and there is no risk of loss if the market drops.

Where Can I Find a CD for a Child?

Most banks and credit unions offer CDs, and they allow custodians to open accounts for a child. Online banks can be convenient and secure. Many offer competitive interest rates and low fees. Be sure to compare the interest rates and APY of each bank and be sure to understand the penalties that will apply if you withdraw the funds early.

The Takeaway

There are many ways to help your child save. Which one is the best depends on the ultimate use of the funds. CDs are safe, they are federally insured up to $250,000, and they may offer higher interest rates than regular savings accounts. However, other options to consider are a 529 savings account if your child is headed to college, a Roth IRA, or even a trust fund.

CDs are easy to open; most banks and credit unions offer these products. They earn interest on the amount invested as long as the funds are not withdrawn before the CD’s term. If the custodian does withdraw funds before the maturity date, the bank will charge a penalty.

Most online banks also offer CDs, and any adult can open a custodial account online for a child; they do not have to be a family member. The child is named as the owner of the account, and they will assume management of the account when they reach adulthood according to state laws.

When you’re comparing rates on different accounts, don’t overlook SoFi’s online banking app. This new all-in-one account outdoes the competition with no account or overdraft fees and up to 1.25% APY. And the new Checking and Savings is easy to manage from your phone or computer.

FAQ

What is the best way to save money for a child?

The best way to save money for a child depends on your goals. Some options include a savings account or a custodial CD, a 529 college savings account, a Roth IRA (for longer-term growth), or even a trust fund.

Can you buy a CD as a gift?

Yes. Under the Uniform Gifts to Minors Act (UGMA) any adult can gift a CD to a child.

Can I open a CD for my child?

Yes. Opening a CD account for a child is easy using a custodial account. The child will be named as the owner and you as the custodian. The owner (the child) will assume full legal ownership of the CD when they reach adulthood. The account cannot be given to anyone else but the named holder.


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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