What Is Buy Now, Pay Later?

Buy now, pay later (or BNPL) is a kind of installment payment plan. It can give consumers the option of making a big purchase today and spreading out payments over subsequent weeks or months, possibly interest-free. You may find these services offered under such names as Afterpay, Affirm, or Klarna.

Many of the country’s largest retailers — including Saks Fifth Avenue, Target, Walmart, and Amazon — offer buy now, pay later services. This kind of short-term financing can be helpful for shoppers hoping to buy an item over time, but there are pros and cons to purchasing this way.

Here, take a closer look at BNPL, its benefits and drawbacks, and whether it’s a good option for you.

What Is a Buy Now, Pay Later Plan?

Buy now, pay later is a way of purchasing an item in which you pay it off over time. It’s similar to layaway, but you get to take possession of the item right away rather than wait until it’s fully paid off.

For instance, if you are buying a new refrigerator with all the bells and whistles, using BNPL means you can get the fridge delivered ASAP and pay it off over time. With layaway, you’d have to wait until your series of payments were made and then, and only then, would you get the appliance.

A couple of other important points to note:

•   BNPL can come with fees and interest, depending upon the particular program you use. In this way, it may be similar to using a credit card and not paying the full balance off at the end of the month.

•   Most buy now, pay later services run a soft credit check (which won’t affect your score) or no credit check at all. Since they don’t require strong credit, these plans can be an appealing option for consumers with a poor credit rating or no credit history.

•   Buy now, pay later services make money by charging interest and fees on delinquent payments. These lenders also typically charge the merchants fees. Retailers are often okay with this because these financing programs allow customers to spend more at their store, either in person or online.

💡 Quick Tip: Did you know online banking can help you get paid sooner? Feel the magic of payday up to two days earlier when you set up direct deposit with SoFi.

The Rise of BNPL Services

You may wonder how popular buy now, pay later services are? Currently, there are approximately 79 million Americans paying for merchandise this way, and research indicates that the percent of adults using this method has risen from 18% in summer of 2022 to 20% in summer 2023. The fact that one in five people in the US are paying by BNPL shows that this has become a popular option.

How Buy Now, Pay Later Works

If you are wondering how BNPL works, here’s an example. Say you want to buy a $300 Vitamix Blender, but you hesitate to fork over the entire purchase price upfront. When you click on one of these buy now, pay later apps or sign up at checkout, you can purchase and receive the item right away. You are usually able to break up the $300 into several (often four) equal, interest-free payments. Typically the first payment is due at checkout, and the remaining three are each due two weeks apart.

Process of BNPL

When opting for BNPL (a form of a short-term loan), you’ll likely be asked for some credentials, such as name, address, phone number, birthdate, and Social Security number. A soft credit check, which does not impact your credit check, is typically conducted to approve or reject your request to use these installment payments. If you get the green light, payments are typically deducted via your credit card, debit card, or bank account.

You will see this kind of BNPL option offered in various ways, whether you’re shopping for handmade jewelry on Etsy or booking a vacation.

BNPL and Fees

Short-term BNPL programs often don’t involve the consumer paying any interest or fees over, say, four payments. However, with longer-term BNPLs, interest may be charged, potentially at a high rate. In addition, if you don’t make payments on time, you can be hit with fees.

Common BNPL Providers

If you’re curious about buy now, pay later providers, here are some of the names you may see:

•   Addi

•   Affirm

•   Afterpay

•   Apple

•   Klarna

•   Laybuy

•   Limepay

•   Mastercard

•   PayPal

•   Revolut

•   Splitit

•   Sunbit

💡 Quick Tip: Bank fees eat away at your hard-earned money. To protect your cash, open a checking account with no account fees online — and earn up to 0.50% APY, too.

Advantages of Buy Now, Pay Later

Now that you know what is buy now, pay later purchasing, here’s a closer look at the pros of this kind of payment service.

Enhancing Purchasing Power

Buy now, pay later can allow you to buy something pricey without paying for it upfront. You get to take the item home and have the subsequent payments paid via credit card, debit card, or bank account. Unlike layaway plans, you don’t have to wait until the item is fully paid for before taking possession.

Saving Money

Some BNPL programs may offer consumers the opportunity to save on a major purchase. For instance, if you were to buy a new couch with BNPL and pay it off over four months, drawing funds directly from your bank account, you might fare better financially than if you bought it with your credit card and didn’t pay your balance in full. In this scenario, BNPL could help you avoid paying interest on your credit card.

By reading the fine print of a BNPL offer, you may be able to avoid interest and late fees, depending on which service you use.

Quick Approval

If you apply for BNPL, you typically don’t need to wait more than a few seconds to be approved. This can be considerably quicker than seeking a line of credit via other means.

Recommended: Can You Build Credit With a Debit Card?

Considerations Before Using BNPL

Now that you know about the upsides of BNPL services, dig into the potential drawbacks.

Potential for Overspending

This type of payment plan can be so appealing, it may entice people who are already struggling to pay their bills to splurge. It can be quick to apply and be approved, and consumers may overlook the possibility of being charged interest and fees (or even being put in for collection) if payments are late.

Paying Interest and Fees

If a BNPL plan is paid off as planned, the shopper may not incur any interest or fees. But if funds aren’t paid on time or a longer-term plan is chosen, an interest rate of up to 36% may be assessed. Late fees can run anywhere from one dollar to 25% of the purchase price. As you see, it can wind up being a very expensive proposition if you cannot stick to the original schedule of paying for your item.

BNPL and Your Credit Score

The other factor to consider is that BNPL may mean that you miss the opportunity to build your credit score. For instance, if you make on-time payments with a credit card, it can contribute to building your score. Those payments are reported to the credit bureaus, but many BNPL providers do not update the bureaus about funds they receive on-time.

Possible Loss of Rewards

You can earn credit card rewards and cash back if you use your plastic to pay for a purchase. When you pay via a BNPL service, you miss out on that opportunity.

Comparing BNPL With Other Payment Options

If you’re contemplating using BNPL on a major purchase, take a moment to compare options.

Credit Cards vs BNPL

As noted above, BNPL plans may be able to help you avoid credit card interest fees if you pay the amount due on time and don’t wind up adding it to the balance on your plastic.

However, these plans could encourage you to overspend and possibly add to your credit card debt. In addition, if you pay your BNPL bills on time, you may be missing out on the opportunity to build your credit score. You may also not receive the cash back or other rewards that could be coming your way when you use your credit card.

Personal Loans vs BNPL

If you are making a single big purchase and feel confident you can stick with the terms of paying off a buy now, pay later plan, that may be a fine option.

However, if you are, say, redoing a kitchen and need to replace every major appliance, you may not want to wade into that many BNPL payments. If you can’t wait to save the money from your salary either, you might want to look into a personal loan, which can offer a more affordable interest rate vs. credit cards, and help you pay for what you need.

Worth noting that you will likely have a hard credit check vs. a soft pull if you go the personal loan route.

Is BNPL Right for You?

To decide if a BNPL is right for you, consider the following:

•   Is a buy now, pay later offer encouraging you to buy something you really cannot afford right now?

•   Do you feel confident you can fulfill the schedule of BNPL payments, avoiding interest and fees?

•   Do you really want or need to take the item home now vs. later via layaway?

•   Is it a concern that you will probably miss out on the opportunity to build your credit by paying with a credit card?

•   Are you comfortable with using BNPL vs. a credit card and thereby not reaping any of the rewards you might get via using plastic?

The Takeaway

Buy now, pay later plans can allow people to make purchases that they might not be able to easily afford otherwise. If you purchase an item this way, you will be spreading your payments out over a number of weeks or even months. This can be an attractive option; most of the time, there will be no interest.

However, your installment payments won’t build your credit history, and if you miss payments, you’ll likely be stuck with fees and may damage your credit score.

Another way to afford a major purchase is to simply save up in advance by putting some money aside each month in your bank account until you have enough to pay in full.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with up to 4.60% APY on SoFi Checking and Savings.


Photo credit: iStock/Mikolette

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
.

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, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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 website .

SOBK1023035

Read more
young woman in front of ocean

The Strategic Guide to Early Retirement

An early retirement used to be considered a bit of a dream, but for many people it’s now a reality — especially those who are willing to budget, save, and invest with this goal in mind.

If you’d like to retire early, there are concrete steps you can take to help reach your goal. Here’s what you need to know about how to retire early.

Understanding Early Retirement

Early retirement typically refers to retiring before the age of 65, which is when eligibility for Medicare benefits begins. Some people may want to retire just a few years earlier, at age 60, for instance. But others dream of retiring in their 40s or 50s or even younger.

Clarifying Early Retirement Age and Goals

You’re probably wondering, how can I retire early? That’s an important question to ask. First, though, you have to decide at what age to retire.

Schedule a few check-ins with yourself, and/or a partner or loved ones, to discuss what “early retirement” means. Is it age 50? Age 55? And what might your early retirement look like? Will you stop working completely? Work part-time? Or maybe you want to switch to a different field or start a business? Perhaps you dream of going back to school, volunteering, or traveling.

Early retirement is different for everyone. So the clearer you can get about the details now, the smarter you can be about how much money you need to make your plan work.

Insights into the Financial Independence, Retire Early (FIRE) Movement

There’s a movement of people who want to retire early. It’s called the FIRE movement, which stands for “financially independent, retire early.” FIRE has become a worldwide trend that’s inspiring people to work toward retiring in their 50s, 40s, and even their 30s.

Here’s how it works: In order to retire at a young age, people who follow the FIRE movement allocate 50% to 75% of their income to savings. However, that can be challenging because it means they have to sacrifice certain lifestyle pleasures along the way. For instance, they might not be able to eat out or travel.

Once they retire, FIRE proponents tend to use investments that pay dividends as passive income sources to help support themselves. However, dividend payments depend on company performance and they’re not guaranteed. So a FIRE adherent would likely need other sources of income in retirement as well.


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

Financial Planning for Early Retirement

In order to start planning to retire early, you need to calculate how much money you’ll need to live on once you stop working. How much would you have to save and invest to arrive at an amount that would allow you to retire early? Here’s how to help figure that out.

Estimating Retirement Costs and Income Needs

Many people wonder: How much do I need to retire early? There isn’t one answer to that question. The right answer for you is one that you must arrive at based on your unique needs and circumstances. That said, to learn whether you’re on track for retirement it helps to begin somewhere, and the Rule of 25 may provide a good ballpark estimate.

The Rule of 25 recommends saving 25 times your annual expenses in order to retire. Why? Because according to one rule of thumb, you should only spend 4% of your total nest egg every year. By limiting your spending to a small percentage of your savings, the logic goes, your money is more likely to last.

Here’s an example: if you spend $75,000 a year, you’ll need a nest egg of $1,875,000 in order to retire.

$75,000 x 25 = $1,875,000

With that amount saved, and assuming an annual withdrawal rate of 4%, you would have $75,000 per year in income.
Obviously, this is just an example. You might need less income in retirement or more — perhaps a lot less or a lot more, depending on your situation. If your desired income is $50,000, for example, you’d need to save $1,250,000.

Once you reach the traditional retirement age of 62, you would then be able to claim Social Security. (Age 67 is considered “full retirement” age for those born in 1960 and later, and you can wait to claim benefits until age 70.) The longer you wait to claim Social Security, the higher your monthly payments will be. You could add those Social Security benefits to your income or consider reinvesting the money, depending on your circumstances as you get older.

Recommended: Typical Retirement Expenses to Prepare For

Effective Savings Strategies

How do you save the amount of money you’d need for your early retirement plan?

Having a budget you can live with is critical to making this plan a success. The essential word here isn’t budget, it’s the whole phrase: a budget you can live with.

There are countless ways to manage how you budget. There’s the 50-30-20 plan, the envelope method, the zero-based budget, and so on. You could test a couple of them for a couple of months each in order to find one you can live with.

Another strategy for saving more is to get a side hustle to bring in some extra income. You can put that money toward your early retirement goal.

Adjusting Your Financial Habits

As you consider how to retire early, one of the first things you’ll need to do is cut your expenses now so that you can save more money. These strategies can help you get started.

Lifestyle Changes to Accelerate Savings

Take a look at your current spending and expenses and determine where you could cut back. Maybe instead of a $4,000 vacation, you plan a $2,000 trip instead, and then save or invest the other $2,000 for retirement.

You may be able to live more of a minimalist lifestyle overall. Rather than buying new clothes, for instance, search through your closets for items you can wear. Eat out less and cook at home more. Cut back on some of the streaming services you use. Scrutinize all areas of your spending to see what you can eliminate or pare back.

Debt Management Before Retirement

Obviously, it’s very difficult to achieve a big goal like saving for an early retirement if you’re also trying to pay down debt. It’s wise to work to pay off any and all debts you might have (credit card, student loan, personal loan, car loan, etc.).

That’s not only because being debt-free feels better — it also saves you money. For example, the interest rate you’re paying on credit card or store cards can be quite high, often above 15% or even 20%. If you owe $6,000 on a credit card at 17% interest, for example, when you pay that off, you’re essentially saving the interest that debt was costing you each year.

Health Care Planning: A Critical Component of Early Retirement

When you retire early, you need to think about health insurance since you’ll no longer be getting it through your employer. Medicare doesn’t begin until age 65, so start researching the private insurance market now to understand the different plans available and what you might need.

It’s critical to have the right health insurance in place, so make sure you devote proper time and attention to this task.

Investment Management for Future Retirees

Next up, you’ll need to decide what to invest in and how much to invest in order to grow your savings without putting it at risk.

Understanding Your Investment Options

How do you invest to retire early? You can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), target date funds, and more.

One major factor to consider is how aggressively you want to invest. That means: Are you ready to invest more in equities, say, taking on the potential for greater risk in order to possibly reap potential gains? Or would you feel more at ease if you invested using a more conservative strategy, with less exposure to risk (but potentially less reward)?

Whichever strategy you choose, you may want to invest on a regular cadence. This approach, called dollar-cost averaging, is one way to maximize potential market returns and mitigate the risk of loss.

Balancing Growth and Risk in Your Investment Portfolio

Because you have less time to save for retirement, you will likely want your investments to grow. But you also need to consider your risk tolerance, as mentioned above. Think about a balanced, diversified portfolio that has the potential to give you long-term growth without taking on more risk than you are comfortable with.

As you get closer to your early retirement date, you can move some of your savings into safer, more liquid assets so that you have enough money on hand for your living, housing, and healthcare expenses.

Retirement Accounts: 401(k)s, IRAs, and HSAs

If your employer offers a retirement plan like a 401(k) or 403(b), that’s the first thing you want to take advantage of — especially if your employer matches a percentage of your savings.

The other reason to save and invest in an employer-sponsored plan is that in most cases the money you save into the plan reduces your taxable income. So the more you save, the less you might pay in taxes.

The caveat here is that you can’t access those funds before you’re 59½ without paying a penalty. So if you plan to retire early at 50, you will need to tap other savings for roughly the first decade to avoid the withdrawal penalties you’d incur if you tapped your 401(k) or Individual Retirement Account (IRA) early.

Be sure to find out from HR if there are any other employee benefits you might qualify for, such as stock options or a pension, for instance.

Additionally, if your employer offers a Health Savings Account as part of your employee benefits, you might consider opening one.

A Health Savings Account allows you to save additional money: In 2023, the HSA contribution caps are $3,850 for individuals and $7,750 for family coverage.

Your contributions are considered pre-tax, similar to 401(k) or IRA contributions, and the money you withdraw for qualified medical expenses is tax free (although you’ll pay taxes on money spent on non-medical expenses).

Finally, consider opening a Roth IRA. The advantage of saving in a Roth IRA vs. a regular IRA is that you’re contributing after-tax money that can be withdrawn penalty- and tax-free at any time.

To withdraw your earnings without paying taxes or a penalty, though, you must have had the account for at least five years (as per the 5 Year Rule), and you must be over 59½.



💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

The Pillars of Early Retirement

Retiring early means you’ll need to have income coming in to help support you. You may have a pension, which can also help. Once you’ve identified the income you’ll be generating, you’ll need to withdraw it in a manner that will help it last over the years of your retirement.

Establishing Multiple Income Streams

Having different streams of income is important so that you’re not just relying on one type of money coming in. For instance, your investments can be a source of potential income and growth, as mentioned. In addition, you may want to get a second job now in addition to your full-time job — perhaps a side hustle on evenings and weekends — to generate more money that you can put toward your retirement savings.

The Role of Social Security and Pensions in Early Retirement

Social Security can help supplement your retirement income. However, as covered above, the earliest you can collect it is at age 62. And if you take your benefits that early they will be reduced by as much as 30%. On the other hand, if you wait until full retirement age to collect them, you’ll receive full benefits. If you were born in 1960 or later, your full retirement age is 67. You can find out more information at ssa.gov.

If your employer offers a pension, you should be able to collect that as another income stream for your retirement years. Generally, you need to be fully vested in the plan to collect the entire pension. The amount you are eligible for is typically based on what you earned, how long you worked for the company, and when you stop working there. Check with your HR department to learn more.

The Significance of Withdrawal Strategies: Rules of 55 and 4%

When it comes to withdrawing money from your investments after retirement, there are some rules and guidelines to be aware of. According to the Rule of 55, the IRS allows certain workers who leave their jobs to take penalty-free distributions from their current employer’s workplace retirement account, such as a 401(k) or 403(b), the year they turn 55.

The 4% rule is a general rule of thumb that recommends that you take 4% of your total retirement savings per year to cover your expenses. To figure out what you would need, start with your desired yearly retirement income, subtract the annual amount of any pension or additional revenue stream you might have, and divide that number by 0.4. The resulting amount will be 4%, and you can aim to withdraw no more than that amount every year. The rest of your money would stay in your retirement portfolio.

Monitoring Your Progress Towards Early Retirement

To stay on course to reach your goal of early retirement, keep tabs on your progress at regular intervals. For instance, you may want to do a monthly or bi-monthly financial check-in to see where you’re at. Are you saving as much as you planned? If not, what could you do to save more?

Using an online retirement calculator can help you keep track of your goals. From there you can make any adjustments as needed to help make your dreams of early retirement come true.

How to Manage Early Retirement When You Get There

The budget you make in order to save for an early retirement is probably a good blueprint for how you should think about your spending habits after you retire. Unless your expenses will drop significantly after you retire (for instance, if you move or need one car instead of two, etc.), you can expect your spending to be about the same.

That said, you may be spending on different things. Whatever your retirement looks like, though, it’s wise to keep your spending as steady as you can, to keep your nest egg intact.

The Takeaway

An early retirement may appeal to many people, but it takes a real commitment to actually embrace it as your goal. These days, many people are using movements like FIRE (financial independence, retire early) to help them take the steps necessary to retire in their 30s, 40s, and 50s.

You can also make progress toward an early retirement by determining how much money you’ll need for post-work life, budgeting, and cutting back on expenses . And by saving and investing wisely, you may be able to make your goal a reality.

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


Invest with as little as $5 with a SoFi Active Investing account.

FAQs

How much do you need to save for early retirement?

There isn’t one right answer to the question of how much you need to save for early retirement. It depends on your specific needs and circumstances. However, as a starting point, the Rule of 25 may give you an estimate. This guideline recommends saving 25 times your annual expenses in order to retire, and then following the 4% rule, and withdrawing no more than 4% a year in retirement to cover your expenses.

Is early retirement a practical goal?

For some people, early retirement can be a practical goal if they plan properly. You’ll need to decide at what age you want to retire, and how much money you’ll need for your retirement years. Then, you will need to map out a budget and a concrete strategy to save enough. It will likely require adjusting your lifestyle now to cut back on spending and expenses to help save for the future, which can be challenging.


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

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®
SoFi Invest refers to the two 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 and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit 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 Bank, N.A.

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.

SOIN1023142

Read more
drawer for wedding cards

Wedding Gift Etiquette: 8 Rules to Follow As a Guest

Getting invited to a wedding is an honor — it means you are seen as a valued part of the couple’s life. However, it also means you’ll need to start thinking about what to give as a wedding gift and, the thorniest of wedding etiquette issues, how much you should spend. You may also wonder when to give a wedding gift (do you really have a year?) and, if you’re not going to be able to attend, if you still need to send a gift.

Navigating the intricacies of wedding gift etiquette can be tricky for everyone. But don’t stress. What follows is a modern day guide to wedding gift etiquette that will help ensure you give an appropriate wedding gift without going broke.

8 Wedding Gift Rules to Follow

What follows are eight essential wedding gift etiquette rules and customs all guests need to know.

1. Spend an Appropriate Amount

Some people think that how much to spend on a wedding gift should be based on how much is being spent on you — in other words, cover your plate. For example, if you think a reception costs a couple $150 per person, that should be your gift value. But, the truth is, how much you spend on a wedding gift should depend more on your relationship to the couple, how far you’re traveling for the wedding, and your own financial situation.

On average, guests spent $160 on a wedding gift in 2022, according to The Knot. But that may not make sense for everyone. If you’re younger or just out of college, spending $50 on a friend’s wedding might be just right. If you are very close to the couple and attending with your spouse or a date, you might give $250 or more. There is no one “right” amount to give as a wedding gift.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

2. Budget for Other Expenses

When considering how much to spend on a wedding gift, you’ll also want to look at other costs related to the wedding. For example, you may be invited to other events that call for giving a gift, such as an engagement party and shower. In that case, you might allocate a certain percentage of your total gift budget for each event, such as 20% each for the engagement and shower gift and 60% on the wedding gift.

Also consider travel-related expenses and the cost of attire. If you are in the wedding party and have already maxed out your budget due to other costs, like hosting a bachelorette/bachelor party or buying a bridesmaid dress/groomsmen suit, then it is okay to simply give a small token gift for the ceremony.

Also keep in mind that if you’re invited to a destination wedding, your presence may actually be enough of a present. It’s likely that the couple will understand if you give a thoughtful handwritten note in lieu of a gift, or give them a smaller gift.

Recommended: Destination Weddings: 8 Awkward Money Questions, Answered

3. Use the Couple’s Wedding Registry

While you aren’t required to purchase a gift off the couple’s registry, doing so can make your life a lot easier. For one, the registry is a curated list of items the couple actually wants. It also typically offers gift ideas at a variety of price ranges, giving you a lot of flexibility. What’s more, you won’t have to worry about how you’ll actually get the gift to the couple (see rule # 6). You simply need to write a short note, input your credit card information, and hit “buy.” The store will do the rest. The registry is also a great resource for engagement and shower gifts.

Get up to $250 towards your holiday shopping.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $250 cash bonus. Plus, get up to 4.60% APY on your cash!1


4. Consider Chipping in on a Group Giftsticking to your budget. Just be sure that everyone who contributes to the gift signs the wedding card.

A group gift can be especially helpful for members of the wedding party, who may have already bought multiple shower and engagement gifts and paid for wedding attire and bachelorette/bachelor parties.

Recommended: Why Saving Money Is Important

5. Cash is Completely Acceptable

When it comes to wedding gift etiquette, it’s perfectly acceptable to give money as a wedding gift. In fact, many couples prefer cash gifts, and will even register for cash funds to help pay for their honeymoon or a down payment on a home. If giving cash through the registry isn’t an option or not your preference, you can also give cash by writing a check and inserting in an envelope with a thoughtful note.

If you do go the check route, it’s a good idea to write only one of their names on the check (to avoid potential confusion at the bank) and include both names on the memo line, and in your note, so it’s clear this is a gift for both of them. You can either mail your check in advance or bring it to the wedding (the one time you can break rule #6).

💡 Quick Tip: If your checking account doesn’t offer decent rates, why not apply for an online checking account with SoFi to earn 0.50% APY. That’s 7x the national checking account average.

6. Don’t Bring the Gift to The Wedding

In some communities and cultures, it’s customary to bring your gift to the wedding and there will be a table at the reception where you can leave it. Generally speaking, however, it’s not considered proper wedding gift etiquette to bring a gift to a wedding (the exception being a card with a check). While you should bring a shower gift to the actual shower, it’s easier for the couple if you send a wedding gift to their home.

7. Send a Gift Before (or Soon After) the Wedding

The old rule that you have up to a year to send a gift is no longer considered proper wedding gift etiquette. Thanks to digital registries, online shopping, and two-day free shipping, it’s generally expected that guests will send a gift before the wedding or within three months of the couple getting married. This is respectful, and also avoids the awkwardness of running into the couple six months after the reception knowing that you still haven’t given them a gift to acknowledge their wedding.

8. Send Something Even if You Don’t Go

A wedding invitation is a thoughtful gesture that tells you that the couple appreciates your friendship and wants to include you in their celebration. If you are close friends or family to the bride or groom, you generally want to recognize that honor with a thoughtful note and gift, even if you are not able to attend the wedding. It doesn’t have to be a large gift. You might choose an item of nominal value from their registry or for their new home.

There is an exception to this etiquette rule, however. if you are not particularly close to the couple, you can likely get away with simply dropping a thoughtful note in the mail — and skipping the gift.

Recommended: Understanding Discretionary Expenses

The Takeaway

Just like weddings themselves, wedding gift etiquette has evolved over time, which can make purchasing a wedding gift all the more confusing. To avoid running afoul of any etiquette rules, you generally want to pick out a gift from the registry or give a cash gift (either through registry or via check). As for how much to spend on a gift, consider your relationship to the couple, what you can feasibly afford, and other costs involved (such as traveling to attend the wedding).

Better banking is here with up to 4.60% APY on SoFi Checking and Savings.

FAQ

What is proper wedding gift etiquette?

Proper wedding gift etiquette involves several considerations. First, you’ll want to consult the couple’s gift registry to find out what they would like to receive. Giving a cash gift is also perfectly acceptable, and often preferred by couples. You might also consider going in on a group gift.

Ideally, you’ll want to send a physical gift before the wedding or within three months of the event. It’s fine to bring a card with a check to the celebration.

As for how much to spend, you’ll want to consider your budget, relationship to the couple, and how far you’re traveling for the wedding.

What should you avoid giving as a wedding gift?

According to proper wedding gift etiquette, you’ll want to avoid giving overly personal items (since everyone’s preferences are different) and anything that could potentially offend or cause discomfort to the couple. Also consider avoiding gifts that are overly extravagant or impractical, especially if they might burden the couple with maintenance or storage issues.

Is it rude to attend a wedding and not give a gift?

It’s customary to give a gift if you are attending a wedding. How much you spend, however, is flexible. If you have significant budget constraints, it’s perfectly okay to give a modest gift, along with a thoughtful note wishing the couple well.

Is it ever okay to not give a wedding gift?

If you are attending the wedding, it’s customary to give a gift to commemorate the couple’s special day. Even if you’re not attending the wedding, you generally still want to send a note and a gift. However, if you’re not attending the wedding and don’t know the couple well, it’s acceptable to send a thoughtful note without a gift.


SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


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.

SOBK1023021

Read more
Woman holding smartphone closeup

How to Prepare Financially for a Divorce

Going through a divorce can be an overwhelming experience. There’s already the emotional pain of divorce, and then partners must also divide up money and assets and break down the financial structure that they’ve built together.

Piled on top of the logistics of divorce, some people may find themselves managing money on their own for the first time in their lives. These added financial stressors can make a difficult situation even more challenging.

Fortunately, there are some simple things you can do prior to getting a divorce that can take some of the stress out of the process. While every couple’s situation is different, what follows is a basic roadmap for how to prepare for a divorce financially.

7 Steps to Financially Prepare for a Divorce

Divorces can range from being hard-fought battles in court to peaceful mediation that happen outside of the courtroom. Either way, when it comes to divorce and finances, the money eventually needs to be split up. Here’s how to make the process of dividing up assets go as seamlessly as possible.

💡 Quick Tip: Make money easy. Enjoy the convenience of managing bills, deposits, and transfers from one online bank account with SoFi.

Step 1: Gather Your Financial Statements

A good first step to preparing for a divorce is to gather current and past financial statements so you can get a full picture of your shared and individual accounts. Having quick access to all this information can also save time (and, in turn, money) when you consult a lawyer. Here’s what you may need:

•   Checking, savings and investment account statements (past year)

•   Current statements for retirement plans (IRAs, 401k plans, or pensions)

•   List of assets acquired before and during your marriage (real estate, vehicles, boats, etc.)

•   Debt statements and balances (mortgages, auto loans, personal loans, credit cards, and credit lines)

•   Credit card statements (past year).

•   Recent pay stubs

•   Income tax returns (past three years)

Step 2: Document Your Assets

Since you’ll be dividing up all of your assets, it’s a good idea to take inventory of all of the assets you own (both individually and jointly), such as your home, car, and anything items with a high value. Collect receipts, photos or videos of each item, and note whether the asset is owned by you, owned by your spouse, or shared. You’ll also want to assign a value to each asset (if you own valuable antiques or collectibles, you might need to hire a professional appraiser).

Step 3: Track Your Finances

You’ll also want to begin tracking how much you’ve been spending each month — and on what. This will not only help you build a budget post-divorce, but it is also critical for your attorney (and later the judge) in deciding how to split assets and debts, and whether to award spousal or child support.

You can use your bank and credit card statements to come up with average spending from the past couple of years, including household bills, food, clothing, entertainment, home maintenance, transportation, child care, and anything else that you spend money on. Once you have a sense of what you’ve been spending, do your best to project future expenses. You can use previous years as a guide but also factor in potential future expenses (like a child’s school tuition and extracurricular activities).

Recommended: How to Track Your Monthly Expenses: Step-by-Step Guide

Step 4: Prepare to Make Some Difficult Choices

Splitting financial accounts tends to be relatively straightforward, but dividing up “real” assets like your home and any other treasured joint possessions, can be more complicated, So it’s a good idea to think of anything that falls into that category and what will make the most sense for you and your spouse moving forward.

If you own your home, that is likely going to be the largest asset you’ll need to make a decision about. If the home is being supported by two incomes, neither you nor your spouse may be able to afford to stay there on your own. Often, the simplest choice is to sell the home and split the proceeds. However, if children are involved, and it’s financially feasible, one parent might opt to buy out the other to maintain some normalcy. What will work best for you and your spouse will depend on your unique personal and financial situation.

Step 5: Be Frugal

No doubt you’re aware that divorce can be expensive. The average cost of a divorce in the U.S. is $12,900. You could spend significantly less if there are no major contested issues, or it could run a lot more should you end up going to trial over several issues.

Either way, now is probably not a good time to run up large expenses, either individually, or as a unit. If you and your spouse don’t have money set aside for hiring a divorce attorney and other related expenses, try to agree about each spending a conservative and comparable amount, while continuing to use your joint and individual accounts.

This can be a good time to eliminate or pare back your expenses where possible. For example, you might cancel unused subscriptions and memberships, attempt to dine out less, and use the clothes that you own. There are tons of creative ways to be frugal — so you can do it in a way that aligns with your values.

💡 Quick Tip: Are you paying pointless bank fees? Open a checking account with no account fees and avoid monthly charges (and likely earn a higher rate, too).

Step 6: Seek Out the Right Professional Help

If you and your spouse want to minimize legal expenses and think you can amicably split your assets, you might consider consulting a mediator. A mediator acts as a neutral third party to help you negotiate an agreement on the splitting of assets and making other arrangements (in some cases, custody of children) and could save you significant time and money.

If mediation is not an option, you’ll need to find a divorce attorney to handle your legal affairs and represent your respective sides in the negotiations (you’ll each need your own attorney). You might also consider getting help from a qualified financial adviser to make sure that all assets are divided, transferred successfully into new accounts, and reinvested, if necessary (again, you’ll likely each want your own financial adviser).

Step 7: Separate Your Finances

As you move towards divorce, you’ll want to set up your own checking and savings accounts and get your paycheck automatically deposited there. You’ll also need to redirect any direct deposits and update any automatic payment information. You can then start using the new accounts for all your own personal future deposits and expenses. The old joint accounts will need to be split between you and your spouse.

You may also want to consider opening your own retirement account (if you don’t have one). This is especially important if you are expecting to get money from your spouse’s retirement account as part of your divorce. Transferring the funds directly into your retirement account can help you avoid paying taxes on the money now.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with up to 4.60% APY on SoFi Checking and Savings.

FAQ

How much money should I save for a divorce?

The average cost of a divorce is $12,900. However, you could spend significantly less. A divorce with no major contested issues runs, on average, $4,100. Or you might end up spending more. Divorces that go to trial on two or more issues can cost as much as $23,300.

Should you separate finances before a divorce?

If you know divorce is inevitable, it can be a good idea to start the financial separation process as soon as possible. If your money is in a joint account, you can begin by opening a new individual checking account and savings account. Next, you’ll need to redirect any direct deposits and update any automatic payment information. Use the new account for all your own personal future deposits and expenses. You might opt to keep one joint account open, however, to pay for household expenses until you are officially divorced.



SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


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.

[cd_ tax]

SOBK1023022

Read more

How Does an Adjustable-Rate Mortgage Work?

An adjustable-rate mortgage (also called an ARM) is a mortgage where the interest rate changes. Monthly payments may go up or down.

Borrowers may be looking to save money with this type of mortgage because there’s usually an introductory period where the interest rate is lower than what they could get with a fixed-rate loan. The monthly payment is lower as a result.

Adjustable-rate mortgages can make sense in certain situations, such as when buyers only plan to own a home for a few years or for those looking to buy a home in a high-interest-rate environment. However, they’re not your only option if you’re looking at getting a mortgage in a high-interest-rate environment.

In this article, we’ll cover

•   What exactly is an adjustable-rate mortgage and how do they work?

•   What are the different types of ARMs you can apply for?

•   Pros and cons of an ARM

•   How the variable rate on an ARM is determined

•   How an ARM compares with a fixed-rate mortgage

•   Examples of when it does and doesn’t make sense to get an ARM

What Is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage is a type of mortgage loan where the interest rate can change periodically throughout the life of the loan. This means your monthly payment might increase or decrease over time.

They typically come in shorter terms, such as five, seven, or ten years and adjustment periods (how often the interest rate is evaluated and changed) of six months or one year. They may be useful as a financing tool for short-term situations, but there are some things to consider before taking on a mortgage like this.

How Adjustable-Rate Mortgages Work


The terms of an adjustable-rate mortgage are determined at the outset of the loan. You’ll decide on a type of ARM, apply with the lender of your choice, and start making payments once the loan closes.

What’s different about an ARM from other home mortgage loans is the interest rate will adjust periodically and your monthly payment will change. It’s typical to see an introductory period (a number of years) where your interest rate doesn’t change, however.

Types of Adjustable-Rate Mortgages


If you’ve started to look into financing a home purchase, then you’ve probably seen loans labeled with different numerals. Maybe you’re wondering, what is a 5/1 ARM? When you’re choosing mortgage terms, the different types of ARMs you can get correspond to the different terms (with 5, 7, and 10 year ARMs being the most common) and adjustment periods (typically 1 year or six months). An ARM is labeled with two numbers, first with the number of years in the introductory period, followed by the period when the interest rate will reset. A 5/1 ARM, for example, has a 5-year introductory period followed by one adjustment per year to the interest rate.

Here are some other examples:

•   5/6: A five-year term with an adjustment period of six months.

•   7/1: A seven-year term with an adjustment period of one year.

•   7/6: A seven-year term with an adjustment period of six months.

•   10/1: A ten-year term with an adjustment period of one year.

•   10/6: A ten-year term with an adjustment period of six months.

Recommended: Is a 10-Year Mortgage A Good Option?

Pros and Cons of Adjustable-Rate Mortgages


If you’re considering an ARM, you’re probably weighing the lower payment against future financial positions you’ll need to take. There are some other pros and cons to consider.

Pros

•   Many different term lengths to choose from

•   Low annual percentage rate

•   May start with a lower monthly payment than a fixed-rate mortgage

•   May be slightly easier to qualify for

Cons

•   Interest rate can change

•   You could end up with a higher monthly payment

•   If you’re unable to afford the higher monthly payment, your home could be in danger of foreclosure

Recommended: Cost of Living by State

How the Variable Rate on ARMs Is Determined

To fully understand how does an adjustable-rate mortgage work, it helps to see what’s going on behind the scenes of an ARM and how the rate is determined. You’ll be looking at these four components:

   1. Index

   2. Margin

   3. Interest rate cap structure

   4. Initial interest rate period

Index

The cost of an ARM is tied to a market index, generally the secured overnight financing rate (SOFR). These can increase when the federal funds rate rises.

Margin

The margin is the percentage points added to the cost of the index. It is disclosed when you apply for the loan and can vary from lender to lender, so be sure to shop around!

The interest rate on your ARM is equal to the index plus the margin.

Interest rate cap structure

There are three types of rate caps: initial, periodic and lifetime. For the initial period, the cap is on how much interest you’ll be charged in the first period of your loan. For example, in a 5/1 ARM, you’ll have an interest rate that stays the same for the initial period of 5 years.

When your initial period is over, you’ll have periodic adjustments. These will have a separate cap for how much your interest rate can increase over the defined period (usually six months or a year).

You’ll also have a cap on how much your interest rate can increase over the life of the loan.

Initial interest rate period

The cost of an ARM is also determined by how long the interest remains constant for the initial period. ARMs with longer initial periods generally have higher rates. A 7/1 ARM will have a higher APR than a 5/1 ARM, for example.



💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Adjustable-Rate Mortgage vs. Fixed-Interest Mortgage

When it comes to fixed-rate vs adjustable-rate mortgages, the mortgages are structured very differently. Here’s a quick breakdown of the major differences:

Adjustable-Rate Mortgage

Fixed-Rate Mortgage

Interest rate adjusts Interest rate stays the same
Terms are usually shorter, such as 5 to 7 years Terms are usually longer, such as 15 or 30 years
Loans are often refinanced at a later date Loan can be paid off
May have lower interest rate initially Interest rate does not change
Monthly payment changes Predictable monthly payment
Interest rate you pay is tied to economic conditions Interest rate determined at the origination of the mortgage

The main difference between fixed-rate and adjustable mortgages is in how you pay interest on the loan. With a fixed loan, the interest is paid with regular monthly payments, which are fairly set (except for fluctuations with escrow items). With an adjustable-rate mortgage, the interest you pay can change.

The other major difference between the two types of mortgages is the term length. Fixed mortgages are often financed at 15- or 30-year terms. ARMs are usually held for shorter periods of time.



💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

Example of When Adjustable-Rate Mortgages Makes Sense


There are a few scenarios where an ARM makes sense.

•   If you’re only planning to keep the home (or keep the mortgage) for a few years.

•   Interest rates are very high.

In each of these situations, borrowers — including first-time homebuyers — don’t plan to hold onto the mortgage long-term. They’re looking to sell the property or refinance at a future date.

However, there are times where an ARM doesn’t make a lot of sense.

Example of When Adjustable-Rate Mortgages Doesn’t Make Sense


An ARM may not make sense when the interest rate for a fixed-rate mortgage is low. This was common just a few years ago, and buyers who have these low-interest, fixed-rate mortgages don’t need to worry about getting another mortgage.

If you’re considering purchasing a home with an ARM, you may also want to look at buying down the interest rate on a fixed-rate mortgage with points, especially if you plan on staying in the home long-term.

Can You Refinance an ARM?


Many borrowers get an ARM with the expectation that they will be able to refinance into a different mortgage at a later date. Refinancing any mortgage, including an ARM, will depend on your ability to qualify for it. If your credit score or income take a serious hit, for example, you may not be able to refinance an ARM to get a more attractive rate. It’s also possible market conditions may change and the property could decline in value to the point that it isn’t a good candidate for a refinance.

Adjustable-Rate Mortgage Tips


To keep your ARM manageable, you may want to consider some of the following tips:

•   Look at the rate cap structure. Make sure you can handle the monthly payment all the way to the cap rate, which is the limit on how much your interest rate will increase.

•   Watch for fees or penalties. If you pay off the ARM early, you may be subject to several thousand dollars in penalties or fees. Be aware of what you could be on the hook for.

•   Shop around for mortgage rates. The interest rate caps and margins will be different from lender to lender. Get a loan estimate to ensure you’re comparing apples to apples.

•   Work with someone you trust. It’s incredibly valuable to work with a lender you trust to give you good advice.

The Takeaway


Many borrowers may be considering an ARM at the moment, but you still need to make sure it’s the right financial tool for you. Adjustable-rate mortgages can increase when interest rates increase and make your monthly mortgage payments unmanageable. However, it is possible that an ARM could be the right solution for buyers who don’t plan on keeping the home long-term, or for those who believe they’ll be able to refinance into a less expensive mortgage in a few years.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.


SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is it ever a good idea to get an adjustable-rate mortgage?

You should get in contact with a lender if you’re wondering about whether or not an adjustable-rate mortgage is right for you. Some borrowers find it makes sense if they’re looking for financing that’s geared toward short-term situations.

What is the main downside of an adjustable-rate mortgage?

Adjustable-rate mortgages have interest rates that can rise periodically, either at 6 months or a year. You could end up with a higher mortgage payment.

What is the major risk of an ARM mortgage?

The major risk of an ARM is when it becomes unaffordable after an adjustment period. If a payment can’t be made, the risk is going down the path to foreclosure. This can happen after the introductory period ends or if an adjustment significantly raises the monthly payment.


Photo credit: iStock/Andrii Yalanskyi

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


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


*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

SOHL1023259

Read more
TLS 1.2 Encrypted
Equal Housing Lender