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Understanding Student Loan Requirements

Whether you apply for federal or private loans, there are several student loan requirements you’ll need to meet. Those requirements can vary depending on what type of loan you want.

It’s important to know exactly what the requirements are before applying because while student loans can help you pay for college, getting approved isn’t a given. Read on to learn the requirements for different types of federal loans as well as private loans.

Federal Student Loan Requirements

There are four different types of federal student loans available to college students and their parents. In general, the requirements for you or your student may include:

• You’ve demonstrated financial need (for most programs)

• You’re a U.S. citizen or an eligible non-citizen

• You have a valid Social Security number

• You’re enrolled or accepted for enrollment in an eligible degree or certificate program

• You’re attending or planning to attend school at least half-time

• You maintain satisfactory academic progress

• You complete and sign the Free Application for Federal Student Aid (FAFSA®) form

• You agree to use the loan for educational purposes only

• You’re not in default on a federal student loan and don’t owe money on a federal grant

• You have a high school diploma or General Educational Development (GED) certificate, you completed a high school education in a homeschool setting approved by your state, or you’re enrolling in an eligible career pathway program and meeting an “ability-to-benefit” alternative

Depending on the type of loan, though, there may be additional requirements that you or your student need to meet. Read on for a quick breakdown of some additional requirements by loan type.

Direct Subsidized Loans

With Direct Subsidized Loans , the federal government covers your interest costs while you’re still in school. To qualify, you need to be an undergraduate student enrolled at least half-time at a participating school that will lead to a degree or a certificate, and you must show financial need through the FAFSA form.

Direct Unsubsidized Loans

With a Direct Unsubsidized Loan, you do not need to demonstrate financial need, and you are responsible for paying interest on the loan during all periods. To qualify, you must be an undergraduate, graduate, or professional student who is enrolled at a participating school at least half-time. Typically, the program must result in a degree or certificate.

Direct PLUS Loans

You can apply for a Direct PLUS Loan if you’re a graduate or professional student, or a parent of an undergraduate student. You generally can’t have an adverse credit history, which means, as stated by the office of the Department of Education, that you may not qualify if you have any of the following on your credit report:

• Accounts with a total outstanding balance over $2,085 that are 90 or more days delinquent, or that have been placed in collection or charged off within the last two years

• Default determination within the last five years

• Bankruptcy discharge within the past five years

• Repossession during the last five years

• Foreclosure within the last five years

• Charge-off/write-off of federal student loans during the last five years

• Wage garnishment within the last five years

• Tax lien within the past five years

That being said, if you do have an adverse credit history, you may still be able to receive a Direct PLUS Loan if you meet either of the following requirements and also complete credit counseling:

• You get an endorser who does not have an adverse credit history.

• You demonstrate to the Department of Education that you have extenuating circumstances relating to your adverse credit history.

Direct Consolidation Loans

A Direct Consolidation Loan allows you to consolidate multiple federal loans into one loan. To qualify, you must have one or more eligible loans and meet other requirements, including:

• The loans must be in repayment or in the six-month grace period after you leave school.

• In general, you must have at least one loan that isn’t already a consolidated loan.

• If one or more loans are in default, you must make at least three consecutive monthly payments or agree to repay the Direct Consolidation Loan under one of the available income-driven repayment plans.

• If your wages are being garnished to make payments on a defaulted federal loan, you can’t consolidate it until the wage garnishment order has been lifted or the judgment has been vacated.

Private Student Loan Requirements

While federal student loans often have the same requirements across the board because the Department of Education is the lender on all of them, that isn’t the case with private student loans. With private student loans, requirements can vary by lender, which means you may qualify for a loan from one private student loan company and not with another.

The requirements for a private student loan can also depend on what type of student loan you’re applying for, such as undergraduate loans, graduate loans, or specialized loans.

In general, all private student lenders require a credit check and a minimum annual income. This means that if you don’t have a credit history, you may need to get a cosigner with an established credit history and a solid income to apply for the loan with you.

Each lender has different requirements when it comes to lending student loans. Common requirements among major private student loan companies include:

• Being a U.S. citizen, permanent resident, or international student.

• Having a Social Security number (some don’t require this for international students).

• If you’re an international student, you generally must have a cosigner.

• Attending an eligible school.

• Being enrolled in a degree program and attending at least half-time (some allow you to be less than half-time).

Depending on the lender, there may be other student loan qualification requirements and limitations, so it’s important to shop around to compare lenders and read the terms to make sure you qualify.

Also, look for private student lenders that allow you to get prequalified with just a soft credit check. This can give you an idea of your approval chances and show you possible loan terms you might qualify for without dinging your credit score.

The Takeaway

As you can see, there are a number of varying requirements you may have to meet in order to qualify for a student loan. The requirements for different types of federal student loans tend to have more overlap, as they all have the same lender, while requirements for private student loans can vary from lender to lender.

If you’re getting ready to apply for a loan to fund your education, make sure to explore your options and compare terms and rates. SoFi offers undergraduate student loans with fixed or variable rates and a number of repayment options.

View your interest rate in just a few minutes — no strings attached.

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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

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.

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Strategies to Pay Back Federal Student Loans

The prospect of paying back your student loans may seem daunting, but there are strategies you can take to pay off your federal student loan debt. This includes choosing from the number of repayment plan options available or opting to refinance your student loans. Of course, before you start making payments, you’ll want to know when you need to pay off your loans — and how — so you can determine an appropriate plan of action.

Read on for a full explanation of the strategies that could help you when it comes time to start paying back federal student loans.

When Do You Have To Pay Back Federal Student Loans?

Before you start worrying about how to pay off your federal student loans, you should know when you have to pay them back. If you just graduated or left school, you may have some time before you’re required to start paying back your student loans.

New grads generally have a grace period of six months before they are required to start throwing their hard-earned cash at their federal student loans. The exact length of the grace period depends on the type of loan and your specific circumstances.

Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, and Unsubsidized Federal Stafford Loans all have a six-month grace period. This means that if you graduate in the spring, you may not need to make federal student loan payments until around October, depending on the date you graduate. If you’re a winter grad, you can expect to start repayment around June.

Unfortunately for graduate students, Direct PLUS Loans don’t have a grace period, which means that you’re on the hook for making payments 60 days after your final loan disbursement (though you may be able to get a six-month deferment). You may also lose your grace period if you consolidate your federal student loans with the government during your grace period. One caveat — if you’re a member of the armed forces on active duty, you may be eligible to extend your grace period during a deployment.

Private student loans are a different story, as these are loans from private lenders that set their own terms when it comes to loan grace periods. This means that private student loans may not offer a grace period at all, or that it may be shorter or longer than the federal student loan grace period.

How Do I Pay Back My Federal Student Loans?

Even though you may not be required to start paying off your student loans while they’re in a grace period, you might want to think about starting payments early.

Why start making payments before they’re due? During a grace period, some loans may still be accruing interest. That means that every month you wait to start making payments is another month that the total loan amount grows larger. Starting loan payback as soon as possible may help save on those capitalizing interest costs.

Figuring out how to pay federal student loans can be confusing. Paying back federal student loans starts with getting to know your loan servicer. There are several different loan servicers throughout the country who are responsible for managing federal student loans. Luckily, most loan servicers have robust websites where you can manage your student loan payments.

Your loan servicer’s website should allow you to view your loans, choose a payment plan, and set up automatic payments. Generally, you can make payments directly through the website, which means that you can avoid having to write out a check and worrying that it will get lost in the mail on the way to your loan service provider.

Choosing a Loan Repayment Plan

One integral loan repayment strategy is choosing a student loan repayment plan. If you are paying off federal loans, you may be able to choose between a few different repayment plans depending on which best fits your financial situation, such as:

The Standard Repayment plan: The Standard Repayment plan is the default loan repayment plan for federal student loans. Under the Standard plan, you pay a fixed amount every month for up to ten years in order to pay off the full balance of your loan.

The Extended Repayment plan: Extended Repayment plans work similarly to the Standard Repayment plan, but the term of the loan is longer. Extended Repayment plans generally have terms up to 25 years. The longer term allows for lower monthly payments, but you may end up paying more over the life of your loan thanks to additional interest charges.

For qualified applicants, there are also loan repayment options that are tied to the amount of your discretionary income. With income-driven repayment plans , the amount you owe on your student loans is tied to the amount of money you make. Income-based repayment plans are generally capped at 20 or 25 years, and any remaining balance on your loan may be forgiven after that term.

While you’ll automatically be put onto the Standard Repayment Plan if you do nothing else, you may want to consider choosing a different repayment plan depending on your financial situation. For example, if you’re itching to pay off your student loans as soon as possible, the Standard Repayment plan may work for you, but if you’re worried about affording loan payments, you may decide that you’re more comfortable with an income-driven repayment plan.

Refinancing Student Loans

Another strategy you may consider for paying back federal student loans is student loan refinancing. For some grads, loan refinancing may help save money over the term of your loan.

What are the benefits of refinancing with a private lender instead of just paying off the federal loans you currently owe? Student loan refinancing combines all of your current federal and private student loans into one new loan from a private lender, hopefully with better terms.

This means that you may be able to snag a lower monthly payment or even a shorter repayment term, both of which could save some serious cash over the life of your loan — depending on the term you choose, of course.

There are downsides to refinancing though. If you refinance your federal loans, they will no longer be eligible for any federal repayment assistance, like the Public Service Loan Forgiveness Program or any federal repayment plan. You also won’t be eligible anymore for federal repayment protections and will lose any remaining grace periods.

The Takeaway

As you can see, you have a number of options for paying back your federal student loans. You will want to consider your financial situation and which options you’re eligible for in order to choose the repayment plan that makes the most sense for you.

If loan repayment plans don’t seem like the right path for you, refinancing your student loans could be an option worth exploring.

Finding the right strategy to pay off your student loans can help you take control of your finances. See if refinancing with SoFi is right for you.

SoFi Student Loan Refinance
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.


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The Ultimate Moving Checklist

So, you’ve decided to move. Be it for a new job, a fresh start, or just for an adventure in an exciting new locale, moving is a great way to kick off change in your life.

But before you start assembling boxes, folding clothes, and bubble wrapping your most prized possessions, there are a few key steps — some financial and some practical — you might want to take to ensure a seamless transition. Here’s a moving checklist that might help you get from your old home to your new place with relative ease.

3 Months Before the Move

Pick a Date and Make a Moving Budget

Pick a day to move. Assuming your new place is ready to go and you’ve already discussed the move with your current landlord or have sold your current home, a good first step is to decide on a moving day.

The least expensive times to move are typically during the week and in the mornings. Moving companies might offer better rates on a Monday, Tuesday, Wednesday, or Thursday because they aren’t typically as busy as on weekends.

Beyond the day of the move, you might also consider attempting to schedule your move in the morning because the temperatures aren’t as hot then, making the job just a bit easier for your movers (and for you, if you’re assisting). And, as an added bonus, it could help you get to your new home by the afternoon if your new home is close by, which means you’ll have the entire day to unpack.

Choose a moving company. Once you’ve picked the day it’s time to pick the mover. You could send out a few quote requests to local movers, check out the reviews online, and go with your gut on who you believe will take the best care of your belongings. Ask if the mover offers moving insurance. If not, it may be a good idea to seek out a third-party moving insurance vendor.

Create a budget. You know those movers above? Yeah, they can cost a lot of money. According to Zillow , the average per-hour cost to move fewer than 100 miles with the help of two movers is between $80 to $100 per hour on average. For a move 100 miles or more you should expect to pay anywhere from around $2,000 to $5,000 (or more).

When you create your moving budget, factor in the cost of movers; any penalties you might incur for leaving a lease early; ending a phone, cable, or internet package early; any and all repairs you need to make for your new home; and the transportation cost to get to your new place. Then, add in the cost of any additional items you need to buy for your new place.

Inform the important people in your life. Now might be the time to share the news of your move. Yes, tell your family and friends, but also tell other important people about your departure schedule, such as your children’s school and your employer. That way they have plenty of time to make plans.

Beyond people, you may also want to contact a few government agencies. For example, the Postal Service recommends setting up mail forwarding about two weeks in advance of a move. The service may be in place in a few as three days, but it’s smart to have some wiggle room.

If you’re moving to a new state, you may also want to set up an appointment at your new state’s department of motor vehicles, as you may be required to get a new driver’s license or register your vehicle in that state. And, if you’re moving during election season, reach out to your new area’s voter registration office to ensure you’re all set up to cast your ballot.

Need help financing your move?
Check out SoFi’s relocation loans.

1 Month Before the Move

Evaluate Your Belongings and Declutter

Walkthrough. You might want to do a walkthrough of your current home and look at each and every item you own. Then grab two sticky note pads with different colors, one to represent the things you want to keep and one to represent the things that must go. Every single item should get a sticky note. If you’re long distance house hunting, your real estate agent may be able to arrange a virtual walkthrough for you so you’ll have an idea of the kind of space you’ll be moving your belongings into.

Start selling. Instead of simply throwing away the things you no longer want, you could try to sell them online. After all, your trash could certainly be another person’s treasure. And this way you could have a few dollars in your pocket to spend on buying new things for your new home.

Donate unwanted, but still usable, items. Want to donate a few items? You can drop off clothing donations to thrift stores or a local homeless shelter. If you’re hoping to donate large items like furniture you may need to schedule a pickup and delivery.

Call your current and new cable and internet provider. Now might be a good time to call your current cable company and let them know about the move. If it offers service in your new location you could ask about switching over the service on the day you move. If it doesn’t, give them a cancel date for the day you move to ensure the service has ended and you aren’t paying a double bill. For your new place, you can research which companies are available, call around for a quote, pick your favorite, and set up an appointment for the day you move. This way you have service the second you walk in the door.

Cancel other subscription services. Are you a part of a local gym, CSA, or delivery service? Consider canceling these recurring payments so you aren’t charged for an extra month.

Three Weeks to One Week Before the Move

Collect Boxes and Start Packing

Collect boxes. As the moving date closes in, it’s time to get packing. If you’re looking to save a pretty penny, you could head to a local coffee shop, grocery store, restaurant, or shop and ask what days they typically get deliveries and if you can come to take the used boxes off their hands. Then, over the next three weeks, stop in and collect as many boxes as you can.

Buy the moving supplies you need. You will still need to buy a few items to get packing, including heavy-duty packing tape, a marker for labeling things, and bubble wrap for fragile items. If you’re not hiring a moving company, you might consider renting a dolly, which can make moving heavy items much easier, and furniture pads to protect your belongings from scratches and dings. Sheets and towels can also be used to protect furniture and as padding inside of boxes.

Start packing. At this point, it’s probably safe to start packing the things you aren’t currently using — out of season clothes, most of your dishes, extra blankets, towels, framed photos, and decorations. You’ll want to leave out the essentials so you’re not looking through boxes to find things you use on a daily basis.

1 Week Before the Move

Tie Up Any Loose Ends

Finalize important details. At this point, you’ve already cancelled your local subscriptions and memberships, but there will still be a few loose ends to tie up. Have you arranged to transfer banks yet? Do you have a vet picked out near your new home in case Fido gets sick right after you move? Think about how you can make the transition into your new life as seamless as possible.

Confirm bookings. You’ll have a lot of things to do before moving, but it’s important to take some time to double check all of your bookings. Confirm when your movers are coming, what time your flights are booked, and that you’ve arranged for your new utilities to turn on. There are a lot of moving parts that come with a move, so it’s easy to get booking details mixed up or to let things fall through the cracks.

1 Day Before the Move

Pack Your Final Belongings and Say Goodbye

Pack up. Pack up any of the remaining items you’ve left behind and make sure they are all ready to roll for the move.

Create a folder of important documents. Have a folder ready for the move that includes your old lease (if you’re renting), along with the new signed lease, the contract for the movers, and all receipts from the move.

Say goodbye — your way. Order your favorite takeout, have friends over for wine, and give thanks to everything this home has provided for you. It deserves it.

Move-In Day Checklist

Embrace a Blank Slate

Get everything from A to Z. On move-in day, the priority should be finalizing your move. There will be plenty of time later to rearrange furniture and to organize your new walk-in closet. Focus on making sure all of your belongings make it from Your old home to your new one, so you can start fresh tomorrow without making a trip back to grab that last box you forgot.

Clean up. As tempting as it can be to start unpacking right away, a great time to give your new home a deep clean is before the contents of those boxes are strewn about. Once you unpack, it won’t be so easy to clean the inside of every cabinet and to vacuum every inch of carpet. This may not be one of the most fun things to do when moving, but it can be a good way to make your new house more homey.

Unpacking Checklist

Unpack and Get To Know Your New Home

Unpack. Now that the hustle and bustle of the move is over, you can focus on unpacking and taking your time to find the right spots for all of your belongings. Unpacking in the reverse order of how you packed allows you to access your most-needed belongings first.

Think ahead. While you’re unpacking, you’ll get a lot more familiar with your new home and all of its needs. Keep a pen and paper ready so you can create a post-moving to do list. Take note of any repairs you want to make now and create a maintenance checklist you can refer back to in the future.

The Takeaway

Moving is stressful, as you can see by reviewing this checklist, and the last thing you want to do is worry about money. As we outlined above, moving can be expensive. According to HomeAdvisor , the average move in 2021 will cost $1,513, with a typical range of $829 to $2,220. A high-end move could cost upwards of $11,000.

If you don’t have that kind of cash on hand, you could consider applying for an unsecured personal loan to help cover the cost. SoFi offers low rates and no fees on its unsecured personal loans, which can be used to pay for moving expenses as well as other expenses that life brings your way.

Enjoy your move without having to unpack all your finances, too. See if a relocation loan from SoFi is right for you.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

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.

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What Is an Interest-Only Mortgage?

If you’re in the market for a home loan, one of the options you may encounter is the interest-only mortgage. These loans let you pay just the interest for a set period of time, normally five to 10 years.

After that, you’ll need to start repaying both the principal and interest. So your monthly payments are likely to start off low and could end up significantly higher.

Here’s how interest-only mortgages work.

Types of Interest-Only Mortgages

There are two types of interest-only mortgages: fixed-rate and adjustable-rate mortgages. Here’s a look at the two options.

Fixed-rate Interest-Only Mortgages

Fixed-rate interest-only home loans are rare. With a fixed-rate mortgage you lock in an interest rate at the beginning of a loan period, and that rate does not change. These can be particularly useful tools when interest rates are low, as they allow you to guarantee that low rate over the course of the loan.

With a fixed-rate interest-only loan, you’ll pay a fixed interest rate during the interest-only period. After that, you’ll continue making payments at the same rate while adding in principal payments.

Recommended: What is considered a “good” mortgage rate?

Adjustable-Rate Interest-Only Mortgages

The most common interest-only loan programs today are adjustable-rate mortgages. ARMs often start out with a fixed rate that is adjusted after an initial period, often three to 10 years, based on current interest rates. New rates may be higher or lower depending on the interest rate environment.

This type of interest-only ARM is often referred to as a hybrid.

Let’s say you take out a 5/1 interest-only, hybrid ARM for a term of 30 years and an interest-only period of 10 years.

The “5” refers to how many years the rate is initially fixed, while the “1” describes how often the rate will adjust after that. So in this case, you’d have the option to make interest-only payments for the first 10 years, but the interest rate can adjust every year after the first five years.

When the initial 10 years are up, you’ll begin paying principal plus interest for the remaining 20 years, and the interest rate will continue to adjust annually.

The loan agreement generally sets maximum and minimum rates. The initial, yearly, and lifetime rate caps can vary depending on the loan program.

If you’re considering taking out an interest-only ARM, it’s a good idea to weigh the above factors as you shop for interest rates, compare the length of interest-only periods, note when rates can be adjusted and the rate caps at each adjustment, and whether the loan has any prepayment penalty.

It’s important to read ARM disclosures carefully and ask for clarification on anything you are not sure of.

Recommended: How does a 5/1 ARM work?

Interest-Only Loan Costs

As with any mortgage, when you take out an interest-only loan, you can expect to pay closing costs, such as the origination fee, the appraisal fee, and the title insurance premium.

That said, perhaps the most important thing to understand when considering the cost of an interest-only mortgage is that you will likely end up paying more in interest than you would with a mortgage that’s fully amortized from the start with no interest-only period.

By paying only interest for years, your loan balance remains untouched.

Who Might Want an Interest-Only Loan?

An interest-only mortgage may have its perks, but these loans also come with risks that borrowers should be aware of. You may want to consider one of these loans if:

You need short-term cash flow. A very low payment during the interest-only period could help free up cash flow. For example, perhaps you can only afford a low payment for the next several years because you’re starting a family. But after that, you’re confident that your income will rise enough that you’ll be able to afford the full mortgage payment.

You plan to own the home for a short time. If you move frequently or you’re buying a home as a short-term investment, an interest-only mortgage may work.

You’re buying a second home that you’ll turn into your primary residence. People nearing retirement, for example, might buy a vacation property that they’ll move into full time when they retire in a few years and sell their home.

Interest-only mortgages can have downsides, including:

Potentially higher payments than a conventional loan. During the interest-only period, you’re not putting a dent in your loan principal. Depending on interest rates, your monthly payments after the initial period could be higher than they would be with a conventional fixed-rate mortgage.

Your mortgage could go underwater. Since you’re not gaining equity in your home by paying down your mortgage, you could find yourself owing more than your house is worth if home values decline.

Rates are unpredictable. The 1-Year LIBOR rate, a common benchmark interest rate index used to make adjustments to ARMs, is considered one of the more volatile indexes. (The London Interbank Offered Rate was formalized in 1986 to provide financial institutions with benchmarks for setting interest rates. Every day, 18 international banks submit ideas of the rates they think they would pay if they borrowed money from another bank on the interbank lending market in London. An average is calculated after the four highest and four lowest submissions are removed.)

Qualifying for an Interest-Only Loan

Interest-only mortgages are nonqualified, meaning Fannie Mae and Freddie Mac don’t back them. The Federal Housing Administration, Veterans Affairs, and U.S. Department of Agriculture don’t offer them either, so they can be hard to come by.

As with any mortgage, lenders considering you for an interest-only home loan will review factors like credit history, down payment, employment, income, assets, and home value.

However, because you plan to make only interest payments for a set period of time, you’ll be building no equity in the home initially, meaning you’ll have less skin in the game. Lenders see this as risky, so they’ll want to make sure you’ll be able to make loan payments after the interest-only period. They may require high credit scores and a large down payment to qualify for an interest-only mortgage.

The Takeaway

An interest-only mortgage, usually an ARM, could make sense in certain situations, but a borrower could end up paying much more in interest in the long run compared with having a fully amortized loan.

If you’re interested in a fixed-rate home loan, investment property loan, or refinance of an interest-only mortgage, SoFi offers a range of mortgage opportunities.

Check your rate in just a few clicks.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See for more information.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What Are Vanilla Options? Definition & Examples

What Are Vanilla Options? Definition & Examples

Once you’ve started investing, you may want to learn about different assets beyond stocks and bonds. Among the alternative assets you might consider, are options, and vanilla options are a great way to get started with this type of investment.

Options give investors the — you guessed it — option to purchase or sell a stock at a certain price over a certain period. Options are derivative financial instruments, which means they are based on an underlying asset. Vanilla options are the most basic type of option contract, and they’re often standardized and traded on exchanges.

Vanilla Option Definition

Vanilla options, in contrast to exotic options, which have customization features, have simple and straightforward terms of the strike price, or the price for which an investor buys or sells a stock, and the period in which they can exercise their option. The last day that an investor may exercise an option is known as the expiry date.

How Do Vanilla Trades Work?

Let’s look at how options trading works with vanilla trading.

Each option has a strike price. If that price for purchase is lower than the market value of the stock, investors call that option “in the money.”

Investors pay a premium to own an option. This premium reflects several factors, including:

• How close the strike price is to the market price

• The stock’s volatility

• How length of time before the option expires

Investors don’t have to wait until the option expires to complete the trade, and they are typically under no obligation to exercise the option.

Recommended: Popular Options Trading Terminology to Know

What are the Different Types of Vanilla Options?

When it comes to options for vanilla stock options, there are two types, calls and puts.


A vanilla call option gives an investor the option to buy an asset at a certain price within a certain period. A call option is a bit like a down payment; the investor pays the premium so that, later, they can buy the stock at a good price and profit from it.

However, an investor can pay the premium and never exercise the option. If they decided not to exercise it, they would either lose what they paid for the premium, or they could sell the call option to someone else before it expires.


In contrast, a put option allows an investor to sell an asset at a fixed price within a certain time period. If a stock tanks in value over the period that option is exercisable, the investor can still sell it for the put price and not lose as much of his investment. But if the stock’s value goes higher than the put price in the market, the vanilla options are worthless because the investor could sell it at the market price and realize more of a profit.

Characteristics of Vanilla Options

Like all investments, vanilla options include a level of risk and volatility. But they can also provide the opportunity for profit.


Whether you are interested in a vanilla call or put, you will pay a premium, in addition to what you would pay to purchase the stock with a call. The premium isn’t refundable, so if you don’t exercise the option, you’ve lost what you paid for the premium.


The volatility of an option determines its price. The higher the volatility of the option, the higher the premium because there is more opportunity for profits (as well as the risk of loss).

One way to reduce volatility is to use an options trading straddle where you buy a put and call option simultaneously.

Risk Level

Like most other types of investments, options are not without risk. If a stock is lower in price on the market than a call option, the option is worthless. And if a stock has a higher price on the market, the put option won’t net more return on investment.

However, a vanilla option may be less risky than buying a stock outright, since the only thing you’re guaranteed to spend is the premium.

Pros and Cons of Vanilla Options Trading

Trading vanilla options can have potentially great returns…or large losses. Here are the pros and cons.



Minimizes risk; no obligation to exercise Risky; may lose premium investment and more
Option to control more shares than buying them outright May be complex to understand
May offer large returns Fluctuations in market may render option worthless


Options may be less risky than buying a stock outright, since you’re only buying the option to purchase or sell a stock at a certain price. The premium is all you invest initially.

Typically you can purchase more shares through options than you could buying them on the market, so if you’re looking for larger investment opportunities, options could provide them.

And while they’re volatile, there is the potential for larger returns.


That being said, you don’t always see large returns. You can lose your entire investment if the option is out of the money when it expires.

Options can be complicated or confusing for new investors. Not only should you fully understand the risks you take with this investment tool, but you also should understand options taxation.

Examples of Vanilla Options

If you’re considering vanilla options as part of your options trading strategy, here are a few examples to illustrate how they work for both calls and puts.

Example of a Vanilla Put Option

A put is a bit like insurance in case your stock you’re holding goes down in value. It’s one way that investors might short a stock. Here’s an example.

Let’s say you own 100 shares of a stock that is currently trading at $25 per share. You buy a put option at a premium of $1 per share that expires in two months at a strike price of $25. So in total, you paid $100 for a premium for 100 shares.

In a month, the stock price drops to $18 per share. This is a good time to exercise that premium because your strike price allows you to sell the shares for $25 rather than $18. You wouldn’t gain any money because you’re essentially selling the stocks for what you paid for them ($25), and you would even lose a little (that $1 per share premium), but the alternative would be to lose even more if you waited and the price dropped more or you didn’t have the option.

Example of a Vanilla Call Option

A call option allows you to purchase a stock at a certain price within a specified time period. Bullish investors who expect a stock to go up in price typically purchase call options.

For our example, let’s say you’re interested in a stock that trades at $53, and you can buy a call option for this stock within one month to purchase the stock at $55 per share. The option is for 100 shares of this stock.

The premium for this option is $0.15 per share. So you would pay $15 for the premium. You aren’t obligated to purchase the stock. If the stock trades at more than $55.15 (option price plus premium), you can realize a profit.

Let’s say in two weeks, that stock is trading at $59. It is, as they say, “in the money.” Now would be a great time to exercise your option because you can realize $3.85 per share and $385 for 100 shares. You can sell the shares immediately to cash in on that profit or hold onto it to see if the stock price continues to rise.

The Takeaway

Vanilla stock options are a way to diversify your investment portfolio and increase your investing savvy. While SoFi does not offer options trading, it does allow you to build a portfolio of stocks, exchange-traded funds, and even IPOs or cryptocurrency. You can get started by opening an account on the SoFi Invest brokerage network.

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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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