Feb
22
2024
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Overweight Stock, Explained

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Overweight Stock, Explained

When a financial analyst rates a stock as overweight, it means that the analyst believes an overweight stock will likely outperform other stocks in its industry over the next six to 12 months. Conversely, if they describe a stock as underweight, they believe that it will perform poorly in the future.

It may be helpful to think of these terms as pointers: as if an industry specialist were saying, “You might want to overweight Stock X in your portfolio” or “maybe you should under-weight Stock Y.” These ratings are typically the result of factors in the news or pertaining to a specific company’s prospects. But the terms “overweight” and “underweight” also refer to a stock’s weighting in a relevant index or benchmark.

What Is an Overweight Stock?

As noted, an overweight stock is one that analysts believe will outperform others in its sector or market segment in the near future. Similarly, overweight stock is a moniker that may also describe a specific security’s weighting in a portfolio, and one that analysts think investors should buy more of – so, its meaning can be contextual in certain situations.

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Types of Ratings and Where They Came From

To understand stock ratings related to weight, it’s important to know that market indexes assign a weight to the investments they track to be sure that the index accurately reflects the performance of that market sector.

For example, the S&P 500® tracks 500 large-cap U.S. companies. The companies in the index — called the constituents — are weighted by market capitalization. A company’s market cap is calculated by multiplying the current share price by the total number of outstanding shares.

Companies in that index are weighted based on the proportion of the overall index their market cap represents. Other indexes may use a different weighting system. The Dow Jones Industrial Average, for example, tracks 30 blue chip companies and weights them based on stock price. Companies with a higher share price are given more weight than those with lower prices.

Because of these different weighting systems, it’s important to understand that an overweight to a particular stock with regards to one index may not be the same when it comes to another.

Overweight Stocks

When an analyst rates Stock X as overweight, it’s generally a positive sign. First, they believe Stock X is likely to outperform its benchmark index, or even the market as a whole, depending on market conditions, so investors should consider holding more of the stock.

Bear in mind that an “overweight stock” rating doesn’t necessarily mean that stock is a juggernaut. In a down market, being overweight could simply mean the company might not lose as much ground as its peers, or it might grow less slowly than its peers.

Underweight Stocks

When an analyst rates Stock Y as underweight, the analyst believes that Stock Y is likely to underperform its benchmark, and investors should consider holding less of this stock.

Equal Weight Stocks

When an analyst gives an equal weight rating to a stock, that simply means it’s in line with the overall benchmark. Again, when considering these ratings it’s important to keep in mind the overall context of the market, and what these ratings mean to analysts.

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Example of an Overweight Stock

A very simple example of an overweight stock could be when a stock, Stock X, is selling for $50, but experts and analysts think it’s undervalued and should trade for $75, it could be overweight.

Further, an overweight stock rating can be taken in two ways: First, that the stock will outperform its benchmark index and second that investors may want to take advantage of the increase in price.

When an analyst indicates their belief that a stock will appreciate, they may also state a potential time frame and price target for the stock. So, if Stock X is trading at $75 per share, and the company releases new earnings data that’s positive, an analyst might rate the stock as overweight, with a price target of $100 per share in the coming year.

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The Downside of Weighting Stocks

One critique of this rating system is that no analyst, of course, can recommend how many shares investors should buy. It’s simply not possible for analysts to know whether Investor A’s portfolio might benefit from an additional 100 shares of Stock X, while Investor B might want to buy 1,000 shares of Stock X.

As a result, it’s incumbent on individual investor’s themselves to keep an eye on how relevant an overweight stock rating might be for their specific allocation. Buying more of Stock X could, in theory, create an imbalance and reduce a portfolio’s overall diversification. So while an overweight stock might be a good thing, an overweight portfolio usually is not.

How Can Investors Interpret Overweight Stocks?

At first glance, the terms overweight and underweight may seem more or less synonymous with “buy” and “sell” — in that case, why don’t analysts use these more straightforward terms?

In fact, the terms overweight and underweight do have a slightly different connotation than simply to buy or sell a security. Rather, the terms suggest a recommendation that a portfolio hold more or less of a particular position than an index or other benchmarks would suggest.

It may mean acquiring more, or selling some, of a particular investment. But it wouldn’t necessarily mean buying something new or selling all of a position. For example, if your portfolio has an allocation to tech stocks, and an analyst recommends overweighting one of those stocks, you may want to buy more of that company. Or you may not need more growth in your tech holdings, so you might look for an overweight stock.

Also, analysts aren’t always comfortable giving specific directions to buy or sell certain securities. The terms overweight and underweight are more like offering guidance: “Here’s what I think of Stock X or Stock Y. I’ll let the investor take it from here.”

In many cases an overweight or underweight recommendation might not be very useful for investors. For example, if an analyst recommends an overweight to a certain commodity but an investor’s portfolio doesn’t hold any commodities, this information may not have much bearing on their situation.

Can a Portfolio Be Considered Overweight?

Overweight can refer to a portfolio that holds more of a stock or other investments than it theoretically should. For individual investors, this might mean that more of a portfolio is allocated to stock than the investor intended.

For example, say an investor has a portfolio allocation in which 70% of its allocation is held in stock and 30% is held in bonds. If the stock market goes up, the proportion of the portfolio held in stock may grow beyond the 70% mark. At that point, the portfolio may be described as overweight in stocks, and an investor may want to rebalance to bring it in line with their initial allocation plan.

It may come as no surprise that the opposite of an overweight allocation is an underweight allocation. For example, if the stock allocation in the portfolio above fell below 70%, that allocation could be described as underweight in stocks.

The term can also apply in a narrower sense. For example, a stock portfolio could hold too much stock in one company, sector, or geographical region. In each case the holding could be described as overweight.

Professional fund managers may also use overweight to describe portfolios they work with that are off track with their index, including mutual funds, exchange-traded funds, and index funds. From time to time, a fund may get out of line with its benchmark index by holding more or less of an investment that index tracks.

For example, say an index fund is built to track the S&P 500. To track the index, fund managers will usually attempt to hold every stock in the index. Additionally, they will try to match the proportion of each individual company their fund holds to the index as well. So if stock A represents 5% of the original index, the fund will also hold 5% of stock A.

Some funds have a little bit of wiggle room in terms of how far they can stray from the index. Some might be allowed to hold more or less stocks if they think the stocks will outperform or underperform. When they hold more than the index, the managers are taking an overweight position. And when they hold less than the index, the managers are taking an underweight position.

The Takeaway

Overweight stocks are those that may be undervalued by the market. When an analyst gives a stock an overweight rating, broadly speaking it could be a good thing. If the analyst is correct, and the stock is indeed poised to perform better than its benchmark — maybe even better than the market as a whole — investors may want to buy that stock.

But the necessary caveat is that it all depends on context — the context of the market, and the context of an investor’s portfolio overall. You don’t want to buy a stock that could throw your allocation off, and make your portfolio overweight in a way that’s not ideal.

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

FAQ

Is overweight stock good?

An overweight stock can be good for investors looking for a relative deal, but it may not be a good thing if the investor already owns shares of the stock.

What is the difference between overweight and outperform stocks?

Outperform stocks and overweight stocks are similar, and the terms are often used interchangeably. But generally, “outperform” may describe a stock that’s undervalued or expected to offer solid returns in the future, but perhaps perform not quite as well as an “overweight” stock.

What is the difference between buy and overweight?

On an analysts’ rating system, “buy” and “overweight” stocks are rated differently, with “buy” being a higher rating – though both ratings are positive.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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 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.

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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Feb
21
2024
A Guide to Callable Bonds

Callable Bonds (or Redeemable Bonds), Explained

By | Growing Wealth, invest, Investing | Comments Off on Callable Bonds (or Redeemable Bonds), Explained

Callable bonds give issuers the option to redeem the bond before it matures. They’re also referred to as redeemable bonds. Bond investors lend their money to entities or issuers for a certain period of time and in return investors receive interest on the principal. These entities typically return the borrowed principle to the bond investors by the bond’s maturity date.

An exception to this process of bond investing is using callable bonds, which allows the issuer to pay off its loans early by buying back its bonds before they reach their date of maturity. You can define a callable bond as one with a built-in call option.

What Is a Callable Bond?

Callable bonds, also referred to as redeemable bonds, allow the issuer the right, but not the obligation, to redeem the bond before it reaches its maturity date. The entity that issues callable bonds has the right to prepay, or in other words, the bond is callable before its maturity date.

Issuers may use callable bonds when they expect interest rates to fall. That way, they can redeem their bonds and issue new ones at a lower coupon rate, reducing their overall interest expenses.


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How Do Callable Bonds Work?

When the issuer calls the bond, it pays investors the call price or the face value of the bond, along with the accrued interest to date. After that, the issuer no longer has to make payments on the bond.

Businesses may prefer callable bonds, since they have built-in flexibility that could lower costs in the future. For example, if market rates are 5% when a company first issues its bonds but they drop to 2.5%, a bond issuer paying 5% would call their bonds and get new ones at 2.5%.

Some bonds have call protection which forbids the issuer to buy it back for a certain period of time. During this period, the company can not call their bonds. However, at the end of this period, the issuer can redeem the bond at its specified call date.

Callable bond prices correlate to interest rates, since falling interest rates make callable bonds less valuable.

Finding the Value of Callable Bonds

The main difference between a non-callable bond and a callable bond is that a callable bond has the call option feature. This feature impacts the calculation of the value of the bond. To find the value of callable bonds, take the bond’s coupon rate and add 1 to it.

For example, a callable bond with a 7% coupon would be 1.07. Next, raise 1.07 to the number of years until the bond is callable. If the bond is callable in two years, you would raise 1.07 to the power of two, which would be 1.1449. Then, multiply that number by the bond’s par value or face value.

If the bond’s par value is $10,000, you would multiply $10,000 by 1.1449 to get 11,449, which is the value of the callable bond.

Recommended: How to Buy Bonds: A Guide for Beginners

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Types of Callable Bonds

Bonds have different types of issuers. Municipalities and corporations both may issue callable bonds. Here’s a look at three common types of callable bonds.

1. Optional Redemption Callable Bonds

Some municipal bonds have a redeemable option 10 years after the issue of the bond was issued. However, bonds with higher yields might have a protection or waiting period according to the bond’s maturity date. For example, a five-year bond might not be able to be recalled until two years after it is issued.

2. Sinking Fund Redemption Callable Bonds

This requires the issuer to recall a certain amount or all of the bonds according to a fixed schedule. A sinking fund is money that a company reserves on the side to pay off a bond.

3. Extraordinary Redemption Callable Bonds

Extraordinary redemption is when the issuer recalls the bond before maturity if certain specified events in the bond contract occur such as a business scenario that impacts bond revenue.

Callable Bond Example

A callable bond with a par value of $1,000 and a 5% coupon rate issued on January 1, 2022 has a maturity date of January 1, 2030. The annual interest payments investors would receive is $50. This bond has a protection feature which doesn’t allow the issuer to recall the bond until January 1, 2026, but after that date, the bond can be redeemed.

The issuer believes interest rates will decrease within the next four years and decides to recall the bond on January 1, 2026. If the investor bought the callable bond through their broker at its $1,000 par value, and the issuer chooses to redeem it when the protection period expires in 2026, they would calculate the value of the callable bond as follows:

•   Take the coupon rate and add 1 to it, to make 1.05.

•   Next, multiply 1.05 to the fourth power since the issuer will hold on to it for four years.

•   This calculation will yield 1.2155.

•   Next, multiply 1.255 by the bond’s par value of $1,000 to get $1,215, the value of the callable bond.

Interest and Callable Bonds

From the perspective of the callable bond issuer, falling interest rates are an opportunity to recall your bonds and lower your interest rate. While the investor is compensated at the outset with a higher yield or coupon rate for investing in callable bonds, they must be aware of the added risks associated with this investment.

If interest rates stay the same or increase, there’s a lower chance the issuer will recall its bonds. But if investors believe interest rates will drop prior to the bond’s maturity date, they should be compensated for this additional risk. The investor must determine if the higher yield from callable bonds is worth the risk of investment because the call feature is an advantage to the issuer, not the investor.


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

Pros and Cons of Callable Bonds

Like any other investment, callable bonds have benefits and risks. It’s important to keep in mind the pros and cons of investing in callable bonds when considering a long-term investing strategy.

Callable bonds are financial instruments that may carry more risk for investors than noncallable bonds (bonds only paid out at maturity) because there is the chance of the bond being called prior to it reaching maturity.

Pros

 Cons
Companies issue callable bonds at higher interest rates to compensate for the risk of early redemption. This means the possibility of greater investment returns. If an issuer calls its bonds early as a result of lower interest rates, bond investors risk not being able to find bonds with lower coupon rates. This could pose a challenge for income-seeking investors who want a reliable stream of passive income from bond investing.
One of the benefits of callable bonds is the option to call the bond early. Instead of waiting until the bond reaches maturity, the issuer can recall the bond earlier to suit their financial business needs. Callable bond investors who pay a premium, or more than a bond’s face value risk only getting back the face value of the bond. This means the investor would lose their money on the premium they already paid.
Callable bonds have benefits that mostly favor the issuer. When interest rates fall, the company can redeem the bonds early and issue new bonds at a lower rate to save on interest payments. Another risk is the bond’s maturity. The longer it takes for the bond to mature, the greater the likelihood for the bond to be called early, especially if there is a change in interest rates. Investing in bonds with a shorter maturity date carries lower interest rate risk.

The Takeaway

Again, callable bonds give issuers the option to redeem the bond before it matures. They’re also referred to as redeemable bonds. Callable bond investors lend their money to entities or issuers for a certain period of time and in return investors receive interest on the principal.

Some investors might consider buying callable bonds as one way to diversify an investment portfolio or to achieve higher yield, however, it’s important for investors to keep the risks associated with this investment top of mind. In an environment where interest rates are falling, callable bonds may not work for long-term investors looking for income.

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

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

FAQ

Are callable bonds a good investment?

Callable bonds may be a good investment depending on an investor’s strategy, risk tolerance, and time horizon, but the overriding interest rate environment may also determine how good of an investment they are as well.

What does it mean if a bond is callable?

If a bond is callable, it means that bonds can be redeemed or paid off by their issuer before they reach their maturity date.

What is the call rule on a callable bond?

The call rule on callable bonds refers to the ability of a bond to be redeemed or repaid by its issuer prior to its maturity date.

What happens to callable bonds when interest rates rise?

When interest rates rise, callable bonds are less likely to be called, though there are no guarantees.

Are callable bonds cheaper?

Generally, callable bonds tend to be less expensive than normal bonds because of the call option, which are of value to their issuer, and may lead to a relative discount for the buyer.

Do callable bonds have higher yields?

Callable bonds do tend to have higher yields, but often not greatly so, and there’s no guarantee that the yields would be higher than those of other types of bonds.

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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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 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.

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

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Feb
20
2024

How Much a $1 Million Mortgage Will Cost You

By | Family Finances, Home Ownership, mortgage | Comments Off on How Much a $1 Million Mortgage Will Cost You

What is the monthly payment on a $1 million mortgage at recent interest rates? If we remove property taxes, property insurance, and mortgage insurance from the equation, you can expect to spend between $6,653 and $8,988 a month on principal and interest alone depending on which loan term you choose. But that’s not the whole story. There’s more you’ll need to know about a $1 million mortgage payment.

Cost of a $1 Million Mortgage

The cost of a $1 million mortgage varies depending on which home mortgage loan you choose and a few other factors, such as interest rate and property taxes. As you may know, different types of mortgage loans have different expenses, such as mortgage insurance, which can change your monthly payment.

Monthly Payments for a $1 Million Mortgage

The monthly payment on a $1 million mortgage is influenced by a variety of factors, which include:

•   Interest rate

•   Fixed vs variable interest rate

•   Mortgage insurance

•   Property insurance

•   Loan term

•   Type of loan

•   Property taxes

Removing all variables except a 7% interest rate, a $1 million mortgage payment would be between $6,653 and $8,988 per month. If you’re a first time home buyer considering a $1 million mortgage, make sure you understand the true cost of buying and owning a home. Remember that your property taxes and some insurance costs may be dictated by your home’s location. (You may want to analyze the cost of living by state. Some of the best affordable places to live in the U.S. may surprise you.)

If these variables are new to you, a home loan help center may smooth out any confusion you may have.

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Where to Get a $1 Million Mortgage

You can get a $1 million mortgage with mortgage lenders such as banks, credit unions, and online lenders. However, they’ll need to offer jumbo home loans since $1 million exceeds the conventional loan limit of $766,550 in most areas. When comparing lenders, look at both interest rates and fees. Loan origination fees, in particular, can vary greatly between lenders.


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What to Consider Before Applying for a $1 Million Mortgage

The monthly payment for a $1 million mortgage isn’t the only thing you should consider. Also keep in mind the total amount you’ll spend on interest for each loan term. For a 30-year loan with a 7% interest rate, you’ll spend $1,395,086 on interest. If you opt for a 15-year loan, you’ll spend just $617,890. This means if you can afford a 15-year loan, you’ll save $777,196.

While you’re home shopping, use a mortgage calculator to see the amount of money you’ll spend monthly and over the life of the loan. You may also want to use a home affordability calculator to incorporate your monthly debts and spending habits into the equation. While you may be able to technically afford a large monthly payment, would the expense leave room for dining out, vacations, and retirement contributions?

During the early years of your mortgage loan, more of your monthly payment typically goes toward paying off the interest on the loan, with a smaller proportion paying down the principal you owe. An amortization schedule shows how the proportions shift and you build equity more quickly in the second half of the loan term. Here are sample schedules for 30-year and 15-year loan terms:

Amortization Schedule, 30-year, 7%

Year Beginning Balance Monthly Payment Total Interest Paid Total Principal Paid Remaining Balance
1 $1,000,000 $6,653.02 $69,678.20 $10,158.10 $989,841.90
2 $989,841.90 $6,653.02 $68,943.87 $10,892.43 $978,949.47
3 $978,949.47 $6,653.02 $68,156.46 $11,679.84 $967,269.63
4 $967,269.63 $6,653.02 $67,312.12 $12,524.18 $954,745.45
5 $954,745.45 $6,653.02 $66,406.75 $13,429.55 $941,315.90
6 $941,315.90 $6,653.02 $65,435.92 $14,400.38 $926,915.52
7 $926,915.52 $6,653.02 $64,394.92 $15,441.38 $911,474.14
8 $911,474.14 $6,653.02 $63,278.66 $16,557.64 $894,916.50
9 $894,916.50 $6,653.02 $62,081.71 $17,754.59 $877,161.91
10 $877,161.91 $6,653.02 $60,798.23 $19,038.07 $858,123.83
11 $858,123.83 $6,653.02 $59,421.96 $20,414.34 $837,709.50
12 $837,709.50 $6,653.02 $57,946.21 $21,890.09 $815,819.40
13 $815,819.40 $6,653.02 $56,363.77 $23,472.53 $792,346.88
14 $792,346.88 $6,653.02 $54,666.94 $25,169.36 $767,177.52
15 $767,177.52 $6,653.02 $52,847.44 $26,988.85 $740,188.66
16 $740,188.66 $6,653.02 $50,896.42 $28,939.88 $711,248.78
17 $711,248.78 $6,653.02 $48,804.35 $31,031.95 $680,216.83
18 $680,216.83 $6,653.02 $46,561.05 $33,275.25 $646,941.58
19 $646,941.58 $6,653.02 $44,155.58 $35,680.72 $611,260.86
20 $611,260.86 $6,653.02 $41,576.22 $38,260.08 $573,000.78
21 $573,000.78 $6,653.02 $38,810.39 $41,025.91 $531,974.88
22 $531,974.88 $6,653.02 $35,844.63 $43,991.67 $487,983.20
23 $487,983.20 $6,653.02 $32,664.47 $47,171.83 $440,811.37
24 $440,811.37 $6,653.02 $29,254.41 $50,581.89 $390,229.48
25 $390,229.48 $6,653.02 $25,597.84 $54,238.46 $335,991.02
26 $335,991.02 $6,653.02 $21,676.94 $58,159.36 $277,831.66
27 $277,831.66 $6,653.02 $17,472.59 $62,363.71 $215,467.96
28 $215,467.96 $6,653.02 $12,964.32 $66,871.98 $148,595.97
29 $148,595.97 $6,653.02 $8,130.14 $71,706.16 $76,889.81
30 $76,889.81 $6,653.02 $2,946.49 $76,889.81 $0

Amortization Schedule, 15-year, 7%

Year Beginning Balance Monthly Payment Total Interest Paid Total Principal Paid Remaining Balance
1 $1,000,000 $8,988.28 $68,761.41 $39,097.98 $960,902.02
2 $960,902.02 $8,988.28 $65,935.02 $41,924.38 $918,977.65
3 $918,977.65 $8,988.28 $62,904.30 $44,955.09 $874,022.55
4 $874,022.55 $8,988.28 $59,654.49 $48,204.90 $825,817.65
5 $825,817.65 $8,988.28 $56,169.76 $51,689.64 $774,128.02
6 $774,128.02 $8,988.28 $52,433.11 $55,426.28 $718,701.74
7 $718,701.74 $8,988.28 $48,426.34 $59,433.05 $659,268.68
8 $659,268.68 $8,988.28 $44,129.92 $63,729.47 $595,539.21
9 $595,539.21 $8,988.28 $39,522.91 $68,336.48 $527,202.73
10 $527,202.73 $8,988.28 $34,582.86 $73,276.53 $453,926.19
11 $453,926.19 $8,988.28 $29,285.69 $78,573.70 $375,352.50
12 $375,352.50 $8,988.28 $23,605.59 $84,253.80 $291,098.70
13 $291,098.70 $8,988.28 $17,514.88 $90,344.51 $200,754.19
14 $200,754.19 $8,988.28 $10,938.87 $96,875.52 $103,878.66
15 $103,878.66 $8,988.28 $3,980.73 $103,878.66 $0

How to Get a $1 Million Mortgage

Anyone who has ever bought a home will tell you there are tips to qualify for a mortgage. The biggest ones include saving up for a large down payment, paying down your debts, and working on your credit score before applying for a mortgage. Paying off balances lowers your debt to income (DTI) ratio and helps you qualify for better mortgage terms. The maximum DTI is usually around 43%, but it can vary with each lender and borrower.


💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

The Takeaway

If you need to borrow $1 million to buy a home, a 15-year mortgage will require around a $9,000 a month mortgage payment, whereas a 30-year mortgage requires around $6,650. Assuming a 7% interest rate, homebuyers can expect to spend between $617,890 and $1,395,086 on interest alone.

Keep in mind that property taxes, home insurance, and mortgage insurance will increase your monthly payment. If you’re in the market to buy a $1 million house, principal and interest will comprise a majority of your monthly costs.

When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.

SoFi Mortgage Loans: We make the home loan process smart and simple.

FAQ

How much is $1,000,000 mortgage a month?

You can expect to spend around $6,653 a month with a 30-year mortgage term and $8,988 a month with a 15-year term. This assumes you have a 7% interest rate (and doesn’t take into account property taxes, mortgage insurance, and property insurance).

How much income is required for a $1,000,000 mortgage?

Housing costs should be at or below 30% of your income. If you were to choose a 30-year mortgage, this suggests that your income should be around $265,000 a year. Choose a 15-year mortgage, and your income should be around $360,000.

How much is a down payment on a $1,000,000 mortgage?

Because a $1,000,000 mortgage typically means a jumbo loan, you may need to make a down payment of at least 10%. That means your minimum down payment would be $111,112 on a home priced around $1,112,000.

Can I afford a $1,000,000 house with $70K salary?

No, a $70,000 salary would not be enough to cover the cost of a mortgage on a $1,000,000 house. Assuming you make around $5,800 a month (before taxes), this would not be enough to cover the minimum payment required of either loan term.

Photo credit: iStock/Paul Bradbury

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

*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.

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Feb
16
2024
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9 Golden Rules of Investing

By | Growing Wealth, invest, Investing | Comments Off on 9 Golden Rules of Investing

While each investor may have their own approach to investing, there are some best practices that have been honed over time by those with years of experience.

That’s not to say that one investing strategy is right and another is wrong, or that any strategy is more likely to succeed than another. When it comes to putting your money in the market, there are no guarantees and no crystal balls. But understanding some basic guidelines that have stood the test of time can be beneficial.

Basic Investing Principles

Following are a few fundamentals that hold true for many people in many situations. Bearing these in mind won’t guarantee any outcomes, but they can help you manage risk, investing costs, and your own emotions.

1. The Sooner You Start, the Better

In general, the longer your investments remain in the market, the greater the odds are that you might see positive returns. That’s because long-term investments benefit from time in the market, not timing the market.

Meaning: The markets inevitably rise and fall. So the sooner you invest, and the longer you keep your money invested, the more likely it is that your investments can recover from any volatility or downturns.

In addition, if your investments do see a gain, those earnings generate additional earnings over time, and then those earnings generate earnings, potentially increasing your returns. This is similar to the principle of compound interest.

2. Make It Automatic

One of the easiest ways to build up an investment account is by automatically contributing a certain amount to the account at regular intervals over time. If you have a 401(k) or other workplace retirement account you likely already do this via paycheck deferrals. However, most brokerages allow you to set up automatic, repeating deposits in other types of accounts as well.

Investing in this way also allows you to take advantage of a strategy called dollar-cost averaging, which helps reduce your exposure to volatility. Dollar cost averaging is when you buy a fixed dollar amount of an investment on a regular cadence (e.g. weekly or monthly).

The goal is not to invest when prices are high or low, but rather to keep your investment steady, and thereby avoid the temptation to time the market. That’s because with dollar cost averaging (DCA) you invest the same dollar amount each time, so that when prices are lower, you buy more; when prices are higher, you buy less.

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

3. Take Advantage of Free Money

If you have access to a workplace retirement account and your employer provides a match, contribute at least enough to get your full employer match. That’s a risk-free return that you can’t beat anywhere else in the market, and it’s part of your compensation that you should not leave on the table.

Recommended: Investing 101 Guide

4. Build a Diversified Portfolio

By creating a diversified portfolio with a variety of types of investments across a range of asset classes, you may be able to reduce some of your investment risk.

Portfolio diversification involves investing your money across a range of different asset classes — such as stocks, bonds, and real estate — rather than concentrating all of it in one area. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.

Taking portfolio diversification to the next step — further differentiating the investments you have within asset classes (for example, holding small-, medium-, and large-cap stocks, or a variety of bonds) — may also be beneficial.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

5. Reduce the Fees You Pay

No matter whether you’re taking an active, passive, or automatic approach to investing, you’re going to have to pay some fees to managers or brokers. For example, if you buy mutual or exchange-traded funds, you will typically pay an annual fee based on that fund’s expense ratio.

Fees can be one of the biggest drags on investment returns over time, so it’s important to look carefully at the fees that you’re paying and to occasionally shop around to see if it’s possible to get similar investments for lower fees.

6. Stick with Your Plan

When markets go down, it can feel like the world is ending. New investors might find themselves pondering questions like How can investments lose so much value so quickly? Will they ever go back up? What should I do?

During the crash of early 2020, for example, $3.4 trillion in wealth disappeared from the S&P 500 index alone in a single week. And that’s not counting all of the other markets around the world. But over the next two years, investors saw big gains as markets hit record highs.

The takeaway? Investments fluctuate over time and managing your emotions is as important as managing your portfolio. If you have a long time horizon, you may not need to be overly concerned with how your portfolio is performing day to day. It’s often wiser to stick with your plan, and don’t impulsively buy or sell just because the weather changes, so to say.

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

7. Maximize Tax-Advantaged Accounts

Like fees, the taxes that you pay on investment gains can significantly eat away at your profits. That’s why tax-advantaged accounts, those types of investment vehicles that allow you to defer taxes, or eliminate them entirely, are so valuable to investors.

The tax-advantaged accounts that you can use will depend on your workplace benefits, your income, and state regulations, but they might include:

•   Workplace retirement accounts such as 401(k), 403(b), etc.

•   Health Savings Accounts (HSAs)

•   Individual Retirement Accounts (IRAs), including Roth IRAs, SEP IRAs, SIMPLE IRAs, etc.

•   529 Accounts (college savings accounts)

Recommended: Benefits of Health Savings Accounts

8. Rebalance Regularly

Once you’ve nailed down your asset allocation, or how you’ll proportion out your portfolio to various types of investments, you’ll want to make sure your portfolio doesn’t stray too far from that target. If one asset class, such as equities, outperforms others that you hold, it could end up accounting for a larger portion of your portfolio over time.

To correct that, you’ll want to rebalance once or twice a year to get back to the asset allocation that works best for you. If rebalancing seems like too much work, you might consider a target-date fund or an automated account, which will rebalance on your behalf.

9. Understand Your Personal Risk Tolerance

While all of the above rules are important, it’s also critical to know your own personality and your ability to handle the volatility inherent in the market. If a steep drop in your portfolio is going to cause you extreme anxiety — or cause you to make knee-jerk investing decisions – then you might want to tilt your portfolio more conservatively.

Ideally, you’ll land on an asset allocation that takes into account both your risk tolerance and the amount of risk that you need (and are able) to take in order to meet your investment goals.

If, on the other hand, you get a thrill out of market ups and downs (or have other assets that make it easier for you to stomach short-term losses), you might consider taking a more aggressive approach to investing.

The Takeaway

The rules outlined above are guidelines that can help both beginner and experienced investors build a portfolio that helps them meet their financial goals. While not all investors will follow all of these rules, understanding them provides a solid foundation for creating the strategy that works best for you.

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

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

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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 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.

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

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

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Feb
14
2024
What Is a SIMPLE IRA? How Does it Work?

The Ultimate Guide to SIMPLE IRAs for Employees and Small Businesses

By | Growing Wealth, invest, Investing | Comments Off on The Ultimate Guide to SIMPLE IRAs for Employees and Small Businesses

If you’re exploring retirement plans, you may be wondering, what is a SIMPLE IRA? A SIMPLE IRA is one type of tax-advantaged retirement savings plans to help self-employed individuals and small business owners put money away for their future.

You may already be familiar with traditional individual retirement accounts (IRAs). A SIMPLE IRA, or Saving Incentive Match Plan for Employees, is one type of IRA.

What Is a SIMPLE IRA?

SIMPLE IRA plans are employer-sponsored retirement accounts for businesses with 100 or fewer employees. They are also retirement accounts for the self-employed. If you’re your own boss and self-employed, you can set one up for yourself.

For small business owners, SIMPLE IRAs are an easy-to-manage, low-cost way to contribute to their own retirement while at the same time helping employees to contribute to their savings as well.

How Does a SIMPLE IRA Work?

Now that you know the answer to the question, what is a SIMPLE IRA?, you are probably wondering how this plan works. A SIMPLE IRA is one of the different types of retirement plans available. In order for an employee to participate, they must have earned at least $5,000 in compensation over the course of any two years prior to the current calendar year, and they must expect to make $5,000 in the current calendar year.

It is possible for employers to set less restrictive rules for SIMPLE IRA eligibility. For example, they could lower the amount employees are required to have made in a previous two-year time. However, they cannot make participation rules more restrictive.

Employers can exclude certain types of employees from the plan, including union members who have already bargained for retirement benefits and nonresident aliens who don’t receive their compensation from the employer.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Boost your retirement contributions with a 1% match.

SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.

Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.

SIMPLE IRA vs Traditional IRA

When it comes to a SIMPLE IRA vs. Traditional IRA, the two plans are similar. However, there are some key differences between the two. A SIMPLE IRA is for small business owners and their employees. A traditional IRA is for anyone with an earned income.

The eligibility criteria is different for the two plans. To be eligible for a SIMPLE IRA, an employee must have earned at least $5,000 in compensation over the course of two years prior — and expect to make $5,000 in the current calendar year. With a traditional IRA, an individual must have earned income in the past year.

And while both types of IRAs are tax deferred, a traditional IRA allows individuals to make tax deductible contributions, while only an employer or sole proprietor can make tax deductible contributions to a SIMPLE IRA.

One of the biggest differences between the two plans is the contribution amount. Individuals can contribute $6,500 in 2023 to a traditional IRA (or $7,500 if they are age 50 or older) and $7,000 in 2024 (or $8,000 if they are 50 or over), while those who have a SIMPLE IRA can contribute $15,500 in 2023 and $16,000 in 2024 (plus an extra $3,500 for those age 50 and older for both 2023 and 2024).

SIMPLE IRA vs 401(k)

SIMPLE IRAs have some similarity to 401(k)s. Both are employer-sponsored plans that eligible employees can contribute to. Contributions made to both are made with pre-tax dollars, and the money in the accounts grows tax-deferred. Both types of plans give the employer the option to make matching contributions to employees’ plans.

One major difference between the two plans is that while self-employed individuals can’t open a 401(k), they can set up a SIMPLE IRA for themselves.

Additionally, individuals can contribute much more to a 401(k) than they can to a SIMPLE IRA. In 2023, those with a 401(k) can contribute $22,500 to the plan, plus an extra $7,500 for those 50 and older. In 2024, they can contribute 23,000 to their 401(k) and an additional $7,500 if they’re 50 or older. In comparison, in 2023, individuals can contribute $15,500 to a SIMPLE IRA, plus $3,500 extra for those 50 and up. For 2024, they can contribute $16,000, plus an additional $3,500 if they are 50 or older.

SIMPLE IRA Contribution Rules

Employer Contribution and Matching Rules

When an employer sets up a SIMPLE IRA plan, they are required to contribute to it each year. They have two options: They can either make matching contributions of up to 3% of an employee’s compensation, or they can make a nonelective contribution of 2% for each eligible employee, up to an annual limit of $330,000 in 2023 and $345,000 in 2024.

If the employer chooses the latter option, they must make a contribution to their employees’ accounts, even if those employees don’t contribute themselves. Contributions to employee accounts are tax deductible.

Employee Contributions

Eligible employees can choose to contribute to the plan, as well. In 2023, SIMPLE IRA contribution limits are up to $15,500 in deferrals. Those 50 and older can contribute an extra $3,500 in catch-up contributions, which brings their annual maximum contributions up to $19,000. In 2024, eligible employees can contribute up to $16,000, while those 50 and older can contribute an additional $3,500. Those contribution levels may change over time, as the government adjusts them to account for inflation.

Contributions reduce employees’ taxable income, which gives them an immediate tax benefit, lowering their income taxes in the year they contribute. Contributions can be invested inside the account and may grow tax-deferred until the employee makes withdrawals when they retire.

IRA withdrawal rules are particularly important to pay attention to as they can be a bit complicated. Withdrawals made after age 59 ½ are subject to income tax. If you make withdrawals before then, you may be subject to an additional 10% or 25% penalty. Account holders must make required minimum distributions from their accounts when they reach age 73.

Establishing and Operating a SIMPLE IRA Plan

SIMPLE IRAs are relatively easy to put in place, since they have no filing requirements for employers. Employers cannot offer another retirement plan in addition to offering a SIMPLE IRA.

If you’re interested in opening a SIMPLE IRA, banks and brokerages may have a plan, known as a prototype plan, that’s already been approved by the IRS.

Otherwise you’ll need to fill out one of two forms to set up your plan:

•   Form 5304-SIMPLE allows employees to choose the financial institutions that will receive their SIMPLE IRA contributions.

•   You can also fill out Form 5305-SIMPLE, which means employees will deposit SIMPLE IRA contributions at a single financial institution chosen by the employer.

Once you have established the SIMPLE IRA, an account must be set up by or for each employee, and employers and employees can start to make contributions.

Notice Requirements for Employees

There are minimal paperwork requirements for a SIMPLE IRA. Once the employer opens and establishes the plan through a financial institution, they need to notify employees about it. This should be done by October 1 of the year the plan is intended to begin. Employees have 60 days to make their elections.

Eligible employees need to be notified about the plan annually. Any changes or new terms to the plan must be disclosed. At the beginning of each annual election period, employers must notify their employees of the following:

•   Opportunities to make or change salary reductions.

•   The ability to choose a financial institution to receive SIMPLE IRA contribution, if applicable.

•   Employer’s decisions to make nonelective or matching contributions.

•   A summary description provided by the financial institution that acts as trustee of SIMPLE IRA fund, and notice that employees can transfer their balance without cost of penalty if the employer is using a designated financial institution.

Participant Loans and Withdrawals

No loans are allowed to participants in a SIMPLE IRA. Withdrawals made before age 59 ½ are subject to a possible 10% or 25% penalty.

Rollovers and Transfers to Other Retirement Accounts

For the first two years of participating in a SIMPLE IRA, participants can only do a tax-free rollover to another SIMPLE IRA. After two years, they may be able to roll over their SIMPLE IRA to other non-Roth IRAs or an employer-sponsored plan such as 401(k).

💡 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.

The Advantages and Drawbacks of a SIMPLE IRA Plan

While SIMPLE IRAs may offer a lot of benefits, including immediate tax benefits, tax-deferred growth, and employer contributions, there are some drawbacks. For example, SIMPLE IRAs don’t allow employees to save as much as other retirement plans such as 401(k)s and Simplified Employee Pension (SEP) IRAs.

In 2023, employees can contribute up to $22,500 to a 401(k) account, with an extra $7,500 in catch-up contributions for those 50 and older. In 2024, they can contribute up to $23,000 to a 401(k), plus an additional $7,500 for those 50 and over. Individuals with a SEP IRA account can contribute up to 25% of their employee compensation, or $66,000, whichever is less, in 2023. They can contribute up to $69,000 or up to 25% of their compensation, whichever is less in 2024.

The good news is, employees with SIMPLE IRAs can make up some of that lost ground. Employers may be wondering about the merits of choosing between a SIMPLE and traditional IRA, but they can actually have both.

Employers and employees can open a traditional or Roth IRA and fund it simultaneously. For 2023, total contributions to IRAs can be up to $6,500, or $7,500 for those ages 50 and older. For 2024, total IRA contributions can be up to $7,000, or $8,000 for those 50 and over.

Here some pros and cons of starting and funding a SIMPLE IRA at a glance:

Pros of a SIMPLE IRA

 Cons of a SIMPLE IRA
Easy to set up, with less paperwork than other retirement accounts, such as 401(k)s. Lower contribution limits than other plans, such as 401(k)s and SEP IRAs.
Employers have lower upfront and management costs to run the plan. Withdrawals made before age 59 ½ are subject to a possible 10% or 25% penalty.
Contributions are tax deductible for employers and employees. There is no Roth option that would allow employees to fund the retirement account with after-tax dollars that would translate to tax-free withdrawals in retirement.
There are no filing requirements with the IRS.

Eligibility and Participation in a SIMPLE IRA

As mentioned previously, there are some rules about who can participate in a SIMPLE IRA. Here’s a quick recap.

Who Can Establish and Participate in a SIMPLE IRA?

Small business owners with fewer than 100 employees and self-employed individuals can set up and participate in a SIMPLE IRA, along with any eligible employees.

Employers can’t offer any other type of employer-sponsored plan if they set up a SIMPLE IRA.

Employees’ Eligibility and Participation Criteria

In order for an employee to be eligible to participate, they must have earned at least $5,000 in compensation over the course of any two years prior to the current calendar year, and they must expect to make $5,000 in the current calendar year.

Employees can choose less restrictive requirements if they choose. They may also exclude certain individuals from a SIMPLE IRA, such as those in unions who receive benefits through the union.

Investment Choices and Account Maintenance

The employer chooses investment options for the SIMPLE IRA and maintains the plan. Employees then select the investment options they want.

Investment Choices Under a SIMPLE IRA

Typically, there are more investment choices with a SIMPLE IRA than there with a 401(k). Investment options can include stocks, mutual funds, exchange-traded funds (ETFs), and bonds.

Understanding SIMPLE IRA Distributions

There are particular rules for SIMPLE IRA distributions, and it’s important to be aware of them. This is what you need to know.

Withdrawal Rules and Tax Consequences

As discussed previously, withdrawals made before age 59 ½ are subject to income tax plus a potential 10% or 25% penalty. Withdrawals made after age 59 ½ are subject to income tax only and no penalty. Account holders must make required minimum distributions from their accounts when they reach age 73.

The 2-Year Rule and Early Withdrawal Penalties

There is a two-year rule for withdrawals from a SIMPLE IRA. If you make a withdrawal within the first two years of participating in the plan, the penalty may be increased from 10% to 25%.

The Takeaway

SIMPLE IRAs are one of the easiest ways that self-employed individuals and small business owners can help themselves and their employees save for retirement, whether they’re experienced retirement investors or they’re opening their first IRA.

These accounts can even be used in conjunction with certain other retirement accounts and investment accounts to help individuals save even more.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

Photo credit: iStock/shapecharge

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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 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.

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.

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.

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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