InvestZ Archives

Oct

2025

Overhead shot of two people managing finances with a laptop, pile of bills, and a credit card.

Pros and Cons of Automatic Bill Payment

By Janet Siroto | Budgeting & Goals, money | Comments Off

Table of Contents

What Is Automatic Bill Payment?
Advantages of Automatic Bill Payment
Disadvantages of Automatic Bill Payment
How to Set Up Automatic Bill Payment
FAQ

Ever forgotten a bill and been hit with a costly late fee? Automatic bill pay can take care of your payments for you, saving you from that headache. Once it’s set up, funds are debited from your bank account or charged to your credit card automatically, which can save you time, stress, and (potentially) money. Still, there are some downsides to consider before you turn everything over to automation. Below, we explore what automatic bill payment is, its pros and cons, and how to use it effectively.

Key Points

• Automatic bill payment streamlines financial management, reducing time spent on bill-paying tasks.

• Automating payments helps prevent late fees and penalties from creditors.

• Consistent on-time payments can positively influence your credit profile.

• Risks such as overdrafts and unnoticed errors or fraud can occur.

• Regularly monitoring accounts can help you catch issues early and effectively manage your subscriptions.

What Is Automatic Bill Payment?

Automatic bill payment is a service that allows you to schedule recurring payments to be made automatically, typically from your bank account. Instead of manually paying each bill, the system deducts the amount owed on a preset date (usually the bill’s due date), which ensures your payments are made on time. In some cases, you may have the option to set up automatic bill payment using your credit card.

You can establish automatic bill payment in one of two ways:

• Through your bank: Many banks offer a service called “bill pay,” which allows you to set up and manage all of your payments from one account dashboard.

• Directly with the payee: You can set up “autopay” through a company, creditor, or service provider by providing them with your bank account or credit card information and authorizing them to make recurring withdrawals from your account.

However you set up automatic payments, it’s important to remember that, once activated, automatic payments continue until you modify or cancel them.

Advantages of Automatic Bill Payment

Automatic bill payment can simplify your financial life. Here’s a look at some of its biggest advantages.

Convenience and Time Savings

One of the most obvious benefits of autopay is convenience. Instead of remembering specific bill due dates, logging in to different websites, or sending paper checks through the mail, automatic payments allow you to “set it and forget it.” Having all your payments managed in the background saves time, which can free you up to focus on other financial goals, like saving or investing.

Avoiding Late Fees

Missing a due date then scrambling to make the payment isn’t only stressful — it can cost your money. Many lenders and utility providers charge late fees if you make your payment late. The rules and grace periods for late payments vary by company, but credit card issuers will often charge a fee if you’re as little as one day late paying your bill. Automatic payments solve this issue by ensuring bills are paid on time, every time.

Improved Credit Score Management

Payment history is the most important factor in your credit scores, accounting for 35% of your FICO® score. Automating bills like credit cards, mortgage payments, and car or student loans helps establish a consistent on-time payment record, which can have a positive impact on your credit profile over time.

Automatic bill payments can also help you avoid late or missed payments, which can negatively impact your credit. Once a creditor reports a late payment to the credit bureaus, it appears on your credit report and will stay there for seven years from the date you missed the payment.

Disadvantages of Automatic Bill Payment

While autopay offers clear benefits, it’s not without drawbacks. Automation can sometimes create new problems if not managed carefully. Here are some disadvantages to keep in mind.

Potential Overdrafts or Insufficient Funds

Autopay only works if you have enough money in your account. If you forget a payment is coming up and don’t have enough funds to cover it, your bank may temporarily cover the transaction and hit you with an overdraft fee (which average around $27).

If you don’t have overdraft coverage, the bank will decline any payment that exceeds your available balance and may charge a non-sufficient funds, or NSF, fee (often around $18). And since the payment didn’t go through, you may also get hit with a late fee from your provider or creditor.

To minimize this risk, you may want to align your payment dates with your income schedule or keep a small “cushion” balance in your checking account to cover automatic deductions.

Errors/Fraud May Go Overlooked

Because automatic payments happen behind the scenes, it can be easier to miss incorrect or unauthorized charges. Companies can and do make billing errors. If you’re not looking at your monthly statement, you could be overcharged for services or get hit with incorrect fees without realizing it. It’s also possible that a fraudulent transaction could go unnoticed until it’s too late to dispute it.

To avoid this issue, it’s important to monitor your bank and credit card statements to catch mistakes and potential bank fraud early, even after automation.

Forgotten Subscriptions

If you rely solely on automatic payments, you may go months without realizing you’re paying for things you no longer use, such as streaming services, gym memberships, or free trials you meant to cancel. Over time, these forgotten payments can add up to a significant sum, and put a strain on your monthly budget. This is another reason why it’s important to continue reviewing your bank and credit card statements each month.

How to Set Up Automatic Bill Payment

Setting up automatic bill payment is relatively easy, but the process differs depending on whether you do it through a company or with your bank.

To set up autopay directly with the service provider, you typically need to:

1. Log in to your account online or through the app.

2. Look for an option like “Payment Settings” or “Billing Preferences.”

3. Add a payment method.

4. Select the payment amount (such as minimum amount due, full balance, or a set amount) and payment date.

5. Review and confirm your settings.

To set up bill pay with your bank, the steps usually include:

1. Log in to your online or mobile banking account.

2. Navigate to the “Bill Pay” or “Pay Bills” section.

3. Add the payee (many banks have a list of common billers you can select from to simplify the process).

4. Set the payment amount and frequency.

5. Select the date you want the payment to be processed.

Example of Automatic Bill Payment

As an example of automatic bill pay, let’s say your gym charges $65 a month, but offers a $5 discount if you sign up for autopay. You agree and enter your bank account details in your online gym account. The gym automatically bills on the 15th of each month, so you can’t customize the payment date. Now, $60 is automatically deducted from your account each month — no reminders needed. However, it’s still smart to check your bank activity regularly and cancel autopay promptly if you end your membership.

The Takeaway

Automatic bill pay is a valuable financial tool for anyone seeking convenience, organization, and peace of mind. It can help you save time, avoid fees, maintain a strong credit profile, and reduce stress related to money management.

However, it’s not completely hands-off. Automation generally works best when paired with good financial habits, such as monitoring your online accounts, budgeting carefully, and reviewing statements for errors and unexpected charges.

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FAQ

Do automatic payments hurt your credit?

Automatic payments, like manual payments, could hurt your credit if you pay your bills late or experience insufficient funds.

What is the difference between bill pay and ACH?

Bill pay usually refers to sending funds electronically. One common way that funds may be transferred (but not the only way) is via the Automated Clearing House network, which is known as ACH.

What is the safest way to set up automatic payments?

The safest way to set up automatic payments is to do so through your bank or credit card; it’s not recommended that you use your debit card as you’ll have less protection if there’s a problem. Also, check your balance and statements carefully to make sure you have enough money in the bank to cover your autopayments and also scan for any incorrect or fraudulent transactions.

Should I use autopay for utilities?

Whether you should use autopay for utilities depends on your situation and financial habits. If you know you’ll be able to cover the amount every month, it could be a real convenience. However, utility costs can sometimes fluctuate greatly, like the cost of heating a home in winter, which might cause pricing spikes and lead to your overdrafting. You want to be sure you can always afford to cover bills that are on automatic bill payment.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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Oct

2025

What Are Index Options?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

Table of Contents

What Is An Index Call Option?
What Is An Index Put Option?
Differences Between Index Options and Stock Options
What Are Options Trading Levels?
What Happens to Index Options On Expiry?
How to Trade Index Options
Frequently Asked Questions

While stock options derive their value from the performance of a single stock, index options are derivatives of an index containing multiple securities. Indexes can have a narrow focus on a specific market sector, or may track a broader mix of equities. They’re listed on option exchanges and regulated by the Securities and Exchange Commission (SEC) in the U.S.

Like stock options, the prices of index options fluctuate according to factors like the value of the underlying securities, volatility, time left until expiration, strike price, and interest rates. Unlike stock options, which are typically American-style and settled with the physical delivery of stocks, index options are typically European-style and settled in cash.

Key Points

• Index options are derivatives based on market indexes, typically cash-settled and European-style.

• Index options are typically cash-settled and can only be exercised at expiration, unlike stock options which are often exercised early and settled with shares.

• Authorization from a brokerage is required to trade index options, and understanding risks is crucial.

• Index options offer broad market exposure, with trading hours and settlement methods differing from stock options.

• Trading levels range from simple covered calls and protective puts to high-risk naked options, each with specific requirements.

What Is An Index Call Option?

An index call option is a financial derivative that reflects a bullish view on the underlying index. They provide the buyer the right to receive cash if the index rises above the strike price on expiration. An investor who buys an index call option typically believes that the index will rise in value. If the index increases in value, the call option’s premium may also increase before expiration.

Before trading index options, it may be a good idea to make sure you have a solid understanding of what it means to trade options in a broader sense. It can be a complex, technical segment of the financial market.

💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

What Is An Index Put Option?

An index put option is a contract that reflects a bearish outlook. An investor who buys this derivative typically expects that its underlying index will decline in value during the life of the contract.

Differences Between Index Options and Stock Options

In addition to the fact that index options are based on the value of an underlying index as opposed to a stock, there are several other key differences between trading index options and stock options.

Trading Hours

Broad-based index options typically stop trading at 4:15pm ET during regular trading hours, with certain contracts on indexes eligible to continue trading from 4:15pm to 5:00pm ET. Some index options offer global trading hours from 8:15am-9:15am ET the following day.

When significant news drops after the market closes, it may affect the prices of narrow-based index options and stock options. Broad-based indexes may be less likely to be affected, as they typically reflect a more diversified mix of sectors within the index.

Recommended: When Is the Stock Market Closed?

Settlement Date and Style

While stock options use the American-style of exercise, which allows holders to exercise at any point leading up to expiration, most index options have European-style exercise, which allows exercise only at expiration (with some exceptions). That means the trader can’t exercise the index option until the expiration date. However, traders can still close out their index option positions by buying or selling them throughout the life of the contract.

As for settlement date, most stock index options usually stop trading on the Thursday before the third Friday of the month, with the settlement value typically determined based on Friday morning prices and processed that same day. Stock options, by contrast, have their last trading day on the third Friday of the month, with settlement typically processed the following business day.

Settlement Method

When settling stock options, the underlying stock typically changes hands upon the exercise of the contract. However, traders of index options typically settle their contracts in cash.

That’s because of the large number of securities involved. For example, an investor exercising a call option based on the S&P 500 would theoretically have to buy shares of all the stocks in that index.

What Are Options Trading Levels?

Some options trading strategies are more straightforward and may involve relatively lower investment risk compared to others. But there are ways to use options that can get rather complicated and may carry substantial risk. These strategies can typically be used with index options, though they may be subject to different expiration rules and brokerage approval standards. Some basic strategies (like buying puts) are widely accessible, while more complex trades involving spreads or uncovered positions also exist.

To help ensure investors are aware of the risks associated with various strategies, brokerages have something called options trading levels. Brokerages have enacted these levels to try to deter new investors from trading options they may not fully understand and experience significant losses in a short period.

If a brokerage determines that an investor faces a lower risk of seeing significant losses, and has the level of experience needed to manage risk, they can assign that investor a higher options trading level. Higher options levels open up a user’s account to additional investment strategies, which may enable them to trade different types of options.

Most brokerages offer four or five trading levels. Reaching all but the highest level usually requires completing a basic questionnaire to assess an investor’s knowledge.

Options Trading Level 1

This is the lowest level and typically allows a user to trade the simplest options only, such as covered calls and protective puts. A covered call is when an investor writes an out-of-the-money call option on stocks they own, and a protective put is when an investor buys put options on stocks already held.

These strategies require the trader to hold shares of the underlying stock, which may make these trades less risky than many others. There is also only one option leg to worry about, which can make executing the trade much simpler in practice.

Options Trading Level 2

Level 2 typically grants the right to buy calls and puts. The difference between level 2 and level 1 is that traders at level 2 can take directional positions. Most new traders are typically approved to start at this level.

Options Trading Level 3

At level 3, more complex strategies may become available. This level usually includes approval and margin to trade debit spreads. Though relatively complicated to execute, debit spreads may limit risk since the trader’s maximum loss is usually capped at the cash paid to buy the necessary options.

Options Trading Level 4

Level 4 may include permission to trade credit spreads, and is sometimes included in level 3 (in which case the brokerage would have only 4 levels). A credit spread functions similarly to a debit spread, although the trader receives a net premium upfront.

Calculating potential losses can be more complicated at this level. It is here that novice traders may inadvertently take on tremendous risk.

Options Trading Level 5

Level 5 involves the highest risk and may permit traders to write call options and put options without owning shares of the underlying stock. These trades expose investors to potentially unlimited losses and may be suitable only for very experienced options traders.

The most important requirement of level 5 is that an investor maintains sufficient margin in their account. That way, if an options trade moves against the investor, the broker can use the margin account to help cover potential losses.

Recommended: What Are Naked Options?

What Happens to Index Options On Expiry?

Most index options have a European-style exercise, although some index option series may differ. This means traders can only execute them at expiration. Investors may want to research which type of settlement their index options have before making a trade.

Upon expiration, the Options Clearing Corporation (OCC) may assign the option to one or more Clearing Members who have short positions in the same options. The Clearing Members may assign the option to one of their customers.

The index option writer is then responsible for paying any cash settlement amount. Settlement usually takes place on the next business day after expiration.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

How to Trade Index Options

Trading index options may be one type of investment to consider as part of a broader diversified portfolio. For the most part, trading index options works like trading any other option. The big difference is that the underlying security will be an index, rather than a stock.

Here are a few basic steps that investors can consider when starting to trade index options.

• Request authorization from your brokerage for options trading

• Review how option chains are reflected in your brokerage account

• Study different option trading strategies and consider those that align with your level of expertise

• Before trading, develop a strategy for managing risk and closing out positions, if needed.

• Place a trade through your brokerage platform’s options account and monitor your trades.

The Takeaway

Index options are similar to stock options in that they are both financial derivatives. They are rooted in indexes, though, which typically reflect a segment or sector. Trading options and index options is a more complex strategy involving higher risk, and may not suit every investor’s risk tolerance.

Index investing with index options could appeal to investors looking to hedge their portfolios with alternative or derivative-based investments.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

Frequently Asked Questions

What are examples of index options?

Examples of index options include contracts based on the S&P 500 (SPX), Nasdaq-100 (NDX), and Russell 2000 (RUT). These index options let traders take positions on overall market segments rather than individual stocks. Index options are typically cash-settled and European-style, meaning they may only be exercised at expiration.

What is the difference between stock options and index options?

Stock options are tied to individual companies and often involve share delivery. Index options, on the other hand, track a broader market index and are usually cash-settled. Most stock options are American-style, whereas index options are commonly European-style, meaning they can only be exercised at expiration.

What is the risk of index options?

Index options carry risks, including the potential for significant losses. Sudden shifts in economic conditions can affect their value, given that they track broad market movements. Strategies like selling uncovered options can involve high risk and aren’t suitable for all investors.

What are S&P 500 index options?

S&P 500 index options (SPX) are contracts based on the S&P 500. They’re cash-settled, European-style, and commonly used to hedge or speculate on overall market performance. SPX options are popular for their liquidity and broad market exposure.

Photo credit: iStock/kate_sept2004

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SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

SOIN-Q325-017

Oct

2025

The Ultimate List of Financial Ratios

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Are Financial Ratios?
21 Key Financial Ratios
Liquidity Ratios
Solvency Ratios
Profitability Ratios
Efficiency Ratios
Coverage Ratios
Market-Prospect Ratios
Ratio Analysis: What Do Financial Ratios Tell You?
FAQ

Financial ratios compare specific data points from a company’s balance sheet to capture aspects of that company’s performance. For example, the price-to-earnings (P/E) ratio compares the price per share to the company’s earnings per share as a way of assessing whether the company is overvalued or undervalued.

Other ratios may be used to evaluate other aspects of a company’s financial health: its debt, efficiency, profitability, liquidity, and more.

The use of financial ratios is often used in quantitative or fundamental analysis, though they can also be used for technical analysis. For example, a value investor may use certain types of financial ratios to indicate whether the market has undervalued a company or how much potential its stock has for long-term price appreciation.

Meanwhile, a trend trader may check key financial ratios to determine if a current pricing trend is likely to hold.

With either strategy, informed investors must understand the different kinds of commonly used financial ratios, and how to interpret them.

Key Points

• Financial ratios serve as tools for evaluating aspects of a company’s financial health, assisting both business owners and investors in decision-making.

• Key financial ratios include earnings per share (EPS), price-to-earnings (P/E), and debt to equity (D/E), each providing insights into profitability, valuation, and leverage.

• Liquidity ratios, such as the current ratio and quick ratio, help assess a company’s ability to meet short-term obligations, crucial for evaluating newer firms.

• Profitability ratios, including gross margin and return on assets, gauge how effectively a company generates income from its operations and assets.

• Coverage ratios, like the debt-service coverage ratio and interest coverage ratio, measure a company’s capacity to manage its debt obligations, providing insights into financial stability.

What Are Financial Ratios?

A financial ratio is a means of expressing the relationship between two pieces of numerical data, which then provides a measurable insight. When discussing ratios in a business or investment setting, you’re typically talking about information that’s included in a company’s financial statements.

Financial ratios can provide insight into a company, in terms of things like valuation, revenues, and profitability. Various ratios can also aid in comparing two companies.

For example, say you’re considering investing in the tech sector, and you are evaluating two potential companies. One has a share price of $10 while the other has a share price of $55. Basing your decision solely on price alone could be a mistake if you don’t understand what’s driving share prices or how the market values each company.

That’s where financial ratios become useful for understanding the bigger picture of a company’s health and performance. In this example, knowing the P/E ratio of each company — again, which compares the price-per-share to the company’s earnings-per-share (EPS) — can give an investor a sense of each company’s market value versus its current profitability.

Recommended: How to Read Financial Statements

21 Key Financial Ratios

Investors tend to use some financial ratios more often or place more significance on certain ratios when evaluating business or companies, whether investing online or through a brokerage.

Bear in mind that most financial ratios are hard to interpret alone; most have to be taken in context — either in light of other financial data, other companies’ performance, or industry benchmarks.

Here are some of the most important financial ratios to know when buying stocks.

1. Earnings Per Share (EPS)

Earnings per share or EPS measures earnings and profitability. This metric can tell you how likely a company is to generate profits for its investors. A higher EPS typically indicates better profitability, though this rule works best when making apples-to-apples comparisons for companies within the same industry.

EPS Formula:

EPS = Net profit / Number of common shares

To find net profit, you’d subtract total expenses from total revenue. (Investors might also refer to net profit as net income.)

EPS Example:

So, assume a company has a net profit of $2 million, with 12,000,000 shares outstanding. Following the EPS formula, the earnings per share works out to $0.166.

2. Price-to-Earnings (P/E)

Price-to-earnings ratio or P/E, as noted above, helps investors determine whether a company’s stock price is low or high compared to other companies, or to its own past performance. More specifically, the price-to-earnings ratio can give you a sense of how expensive a stock is relative to its competitors, or how the stock’s price is trending over time.

P/E Formula:

P/E = Current stock price / Current earnings per share

P/E Example:

Here’s how it works: A company’s stock is trading at $50 per share. Its EPS for the past 12 months averaged $5. The price-to-earnings ratio works out to 10 — which means investors are willing to pay $10 for every one dollar of earnings. In order to know whether the company’s P/E is high (potentially overvalued) or low (potentially undervalued), the investors typically compare the current P/E ratio to previous ratios, as well as to other companies in the industry.

3. Debt to Equity (D/E)

Debt to equity or D/E is a leverage ratio. This ratio tells investors how much debt a company has in relation to how much equity it holds.

D/E Formula:

D/E = Total liabilities / Shareholders equity

In this formula, liabilities represent money the company owes. Equity represents assets minus liabilities or the company’s book value.

D/E Example:

Say a company has $5 million in debt and $10 million in shareholder equity. Its debt-to-equity ratio would be 0.5. As a general rule, a lower debt to equity ratio is better as it means the company has fewer debt obligations.

4. Return on Equity (ROE)

Return on equity or ROE is another financial ratio that’s used to measure profitability. In simple terms, it’s used to illustrate the return on shareholder equity based on how a company spends its money.

ROE Formula:

ROE = Net income – Preferred dividends / Value of average common equity

ROE Example:

Assume a company has net income of $2 million and pays out preferred dividends of $200,000. The total value of common equity is $10 million. Using the formula, return on equity would equal 0.18 or 18%. A higher ROE means the company generates more profits.

Liquidity Ratios

Liquidity ratios can give you an idea of how easily a company can pay its debts and other liabilities. In other words, liquidity ratios indicate cash flow strength. That can be especially important when considering newer companies, which may face more significant cash flow challenges compared to established companies.

5. Current Ratio

Also known as the working-capital ratio, the current ratio tells you how likely a company is able to meet its financial obligations for the next 12 months. You might check this ratio if you’re interested in whether a company has enough assets to pay off short-term liabilities.

Formula:

Current Ratio = Current Assets / Current Liabilities

Example:

Say a company has $1 million in current assets and $500,000 in current liabilities. It has a current ratio of 2, meaning for every $1 a company has in current liabilities it has $2 in current assets. Generally speaking, a ratio between 1.5 and 2 indicates the company can manage its debts; above 2 a company has strong positive cashflow.

6. Quick Ratio

The quick ratio, also called the acid-test ratio, measures liquidity based on assets and liabilities. But it deducts the value of inventory from these calculations.

Formula:

Quick Ratio = Current Assets – Inventory / Current Liabilities

Example:

Quick ratio is also useful for determining how easily a company can pay its debts. For example, say a company has current assets of $5 million, inventory of $1 million and current liabilities of $500,000. Its quick ratio would be 8, so for every $1 in liabilities the company has $8 in assets.

7. Cash Ratio

A cash ratio tells you how much cash a company has on hand, relative to its total liabilities, and it’s considered a more conservative measure of liquidity than, say, the current or quick ratios. Essentially, it tells you the portion of liabilities the company could pay immediately with cash alone.

Formula:

Cash Ratio = (Cash + Cash Equivalents) / Total Current Liabilities

Example:

A company that has $100,000 in cash and $500,000 in current liabilities would have a cash ratio of 0.2. That means it has enough cash on hand to pay 20% of its current liabilities.

8. Operating Cash Flow Ratio

Operating cash flow can tell you how much cash flow a business generates in a given time frame. This financial ratio is useful for determining how much cash a business has on hand at any given time that it can use to pay off its liabilities.

To calculate the operating cash flow ratio you’ll first need to determine its operating cash flow:

Operating Cash Flow = Net Income + Changes in Assets & Liabilities + Non-cash Expenses – Increase in Working Capital

Then, you calculate the cash flow ratio using this formula:

Formula:

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

Example:

For example, if a company has an operating cash flow of $1 million and current liabilities of $250,000, you could calculate that it has an operating cash flow ratio of 4, which means it has $4 in operating cash flow for every $1 of liabilities, in that time frame.

Solvency Ratios

Solvency ratios are financial ratios used to measure a company’s ability to pay its debts over the long term. As an investor, you might be interested in solvency ratios if you think a company may have too much debt or be a potential candidate for a bankruptcy filing. Solvency ratios can also be referred to as leverage ratios.

Debt to equity (D/E), noted above, is a key financial ratio used to measure solvency, though there are other leverage ratios that are helpful as well.

9. Debt Ratio

A company’s debt ratio measures the relationship between its debts and its assets. For instance, you might use a debt ratio to gauge whether a company could pay off its debts with the assets it has currently.

Formula:

Debt Ratio = Total Liabilities / Total Assets

Example:

The lower this number is the better, in terms of risk. A lower debt ratio means a company has less relative debt. So a company that has $25,000 in debt and $100,000 in assets, for example, would have a debt ratio of 0.25. Investors typically consider anything below 0.5 a lower risk.

10. Equity Ratio

Equity ratio is a measure of solvency based on assets and total equity. This ratio can tell you how much of the company is owned by investors and how much of it is leveraged by debt. An equity ratio above 50% can indicate that a company relies primarily on its own capital, and isn’t overleveraged.

Formula:

Equity Ratio = Total Equity / Total Assets

Example:

Investors typically favor a higher equity ratio, as it means the company’s shareholders are more heavily invested and the business isn’t bogged down by debt. So, for example, a company with $800,000 in total equity and $1.1 million in total assets has an equity ratio of 0.70 or 70%. This tells you shareholders own 70% of the company.

Profitability Ratios

Profitability ratios gauge a company’s ability to generate income from sales, balance sheet assets, operations and shareholder’s equity. In other words, how likely is the company to be able to turn a profit?

Return on equity (ROE), noted above, is one profitability ratio investors can use. You can also try these financial ratios for estimating profitability.

11. Gross Margin Ratio

Gross margin ratio compares a company’s gross margin to its net sales. This tells you how much profit a company makes from selling its goods and services after the cost of goods sold is factored in — an important consideration for investors.

Formula:

Gross Margin Ratio = Gross Margin / Net Sales

Example

A company that has a gross margin of $250,000 and $1 million in net sales has a gross margin ratio of 25%. Meanwhile, a company with a $250,000 gross margin and $2 million in net sales has a gross margin ratio of 12.5% and realizes a smaller profit percentage per sale.

12. Operating-Margin Ratio

Operating-margin ratio, sometimes called return on sales (ROS), measures how much total revenue is composed of operating income, or how much revenue a company has after its operating costs. It’s a measure of how efficiently a company generates its revenue and how much of that it turns into profit.

Formula:

Operating Margin Ratio = Operating Income / Net Sales

Example:

A higher operating-margin ratio suggests a more financially stable company with enough operating income to cover its operating costs. For example, if operating income is $250,000 and net sales are $500,000, that means 50 cents per dollar of sales goes toward variable costs.

13. Return on Assets Ratio

Return on assets, or ROA, measures net income produced by a company’s total assets. This lets you see how efficiently a company is using its assets to generate income.

Formula:

Return on Assets = Net Income / Average Total Assets

Example:

Investors typically favor a higher ratio as it shows that the company may be better at using its assets to generate income. For example, a company that has $10 million in net income and $2 million in average total assets generates $5 in income per $1 of assets.

Efficiency Ratios

Efficiency ratios or financial activity ratios give you a sense of how thoroughly a company is using the assets and resources it has on hand. In other words, they can tell you if a company is using its assets efficiently or not.

14. Asset Turnover Ratio

Asset turnover ratio measures how efficient a company’s operations are, as it is a way to see how much sales a company can generate from its assets.

Formula:

Asset Turnover Ratio = Net Sales / Average Total Assets

A higher asset turnover ratio is typically better, as it indicates greater efficiency in terms of how assets are being used to produce sales.

Example:

Say a company has $500,000 in net sales and $50,000 in average total assets. Their asset turnover ratio is 10, meaning every dollar in assets generates $10 in sales.

15. Inventory Turnover Ratio

Inventory turnover ratio illustrates how often a company turns over its inventory. Specifically, how many times a company sells and replaces its inventory in a given time frame.

Formula:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Example:

Investors use average inventory since a company’s inventory can increase or decrease throughout the year as demand ebbs and flows. As an example, if a company has a cost of goods sold equal to $1 million and average inventory of $500,000, its inventory turnover ratio is 2. That means it turns over inventory twice a year.

16. Receivables Turnover Ratio

Receivables turnover ratio measures how well companies manage their accounts receivable, and collect money from customers. Specifically, it considers how long it takes companies to collect on outstanding receivables, and convert credit into cash.

Formula:

Receivables Turnover Ratio = Net Annual Credit Sales / Average Accounts Receivable

Example:

If a company has $100,000 in net annual credit sales, for example, and $15,000 in average accounts receivable its receivables turnover ratio is 6.67. This means that the company collects and converts its credit sales to cash about 6.67 times per year. The higher the number is, the better, since it indicates the business is more efficient at getting customers to pay up.

Coverage Ratios

Coverage ratios are financial ratios that measure how well a company manages its obligations to suppliers, creditors, and anyone else to whom it owes money. Lenders may use coverage ratios to determine a business’s ability to pay back the money it borrows.

17. Debt-Service Coverage Ratio

Debt-service coverage reflects whether a company can pay all of its debts, including interest and principal, at any given time. This ratio can offer creditors insight into a company’s cash flow and debt situation.

Formula:

Debt-Service Coverage Ratio = Operating Income / Total Debt Service Costs

Example:

A ratio above 1 means the company has more than enough money to meet its debt servicing needs. A ratio equal to 1 means its operating income and debt service costs are the same. A ratio below 1 indicates that the company doesn’t have enough operating income to meet its debt service costs.

18. Interest-Coverage Ratio

Interest-coverage ratio is a financial ratio that can tell you whether a company is able to pay interest on its debt obligations on time. This is sometimes called the times interest earned (TIE) ratio. Its chief use is to help determine whether the company is creditworthy.

Formula:

Interest Coverage Ratio = EBIT ( Earnings Before Interest and Taxes) / Annual Interest Expense

Example:

Let’s say a company has an EBIT of $100,000. Meanwhile, annual interest expense is $25,000. That results in an interest coverage ratio of 4, which means the company has four times more earnings than interest payments.

19. Asset-Coverage Ratio

Asset-coverage ratio measures risk by determining how much of a company’s assets would need to be sold to cover its debts. This can give you an idea of a company’s financial stability overall.

Formula:

Asset Coverage Ratio = (Total Assets – Intangible Assets) – (Current Liabilities – Short-term Debt) / Total Debt

You can find all of this information on a company’s balance sheet. The rules for interpreting asset coverage ratio are similar to the ones for debt service coverage ratio.

So a ratio of 1 or higher would suggest the company has sufficient assets to cover its debts. A ratio of 1 would suggest that assets and liabilities are equal. A ratio below 1 means the company doesn’t have enough assets to cover its debts.

Recommended: What Is a Fixed Charge Coverage Ratio?

Market-Prospect Ratios

Market-prospect ratios make it easier to compare the stock price of a publicly traded company with other financial ratios. These ratios can help analyze trends in stock price movements over time. Earnings per share and price-to-earnings are two examples of market prospect ratios, discussed above. Investors can also look to dividend payout ratios and dividend yield to judge market prospects.

20. Dividend Payout Ratio

Dividend payout ratio can tell you how much of a company’s net income it pays out to investors as dividends during a specific time period. It’s the balance between the profits passed on to shareholders as dividends and the profits the company keeps.

Formula:

Dividend Payout Ratio = Total Dividends / Net Income

Example:

A company that pays out $1 million in total dividends and has a net income of $5 million has a dividend payout ratio of 0.2. That means 20% of net income goes to shareholders.

21. Dividend Yield

Dividend yield is a financial ratio that tracks how much cash dividends are paid out to common stock shareholders, relative to the market value per share. Investors use this metric to determine how much an investment generates in dividends.

Formula:

Dividend Yield = Cash Dividends Per Share / Market Value Per Share

Example:

For example, a company that pays out $5 in cash dividends per share for shares valued at $50 each are offering investors a dividend yield of 10%. This can be compared to the dividend yield of another company when choosing between investments.

Ratio Analysis: What Do Financial Ratios Tell You?

Financial statement ratios can be helpful when analyzing stocks. The various formulas included on this financial ratios list offer insight into a company’s profitability, cash flow, debts and assets, all of which can help you form a more complete picture of its overall health. That’s important if you tend to lean toward a fundamental analysis approach for choosing stocks.

Using financial ratios can also give you an idea of how much risk you might be taking on with a particular company, based on how well it manages its financial obligations. You can use these ratios to select companies that align with your risk tolerance and desired return profile.

Test your understanding of what you just read.

The Takeaway

Learning the basics of key financial ratios can be helpful when constructing a stock portfolio. Rather than focusing only on a stock’s price, you can use financial ratios to take a closer look under the hood of a company, to gauge its operating efficiency, level of debt, and profitability.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

FAQ

Which ratios should you check before investing?

Many investors start with basics like the price-to-earnings (P/E) ratio, the debt-to-equity (D/E) ratio, and the working capital ratio. But different ratios can provide specific insights that may be more relevant to a certain company or industry, e.g., knowing the operating-margin ratio or the inventory-turnover ratio may be more useful in some cases versus others.

What is the best ratio when buying a stock?

There is no “best” ratio to use when buying a stock, because each financial ratio can reveal an important aspect of a company’s performance. Investors may want to consider using a combination of financial ratios in order to make favorable investment decisions.

What is a good P/E ratio?

In general, a lower P/E ratio may be more desirable than a higher P/E ratio, simply because a higher P/E may indicate that investors are paying more for every dollar of earnings — and the stock may be overvalued.

Photo credit: iStock/MStudioImages

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-093

Oct

2025

Wash Trading: What Is It and How Does It Work?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Wash Trading?
How Does Wash Trading Work?
Example of a Wash Trade
Is Wash Trading Illegal?
Difference Between Wash Trading & Market Making
How to Detect & Avoid Wash Trading
FAQ

Wash trading is an illegal practice in which an investor buys and sells the same or a nearly identical stock or security within a certain period of time. Wash trading is a prohibited activity under the Commodity Exchange Act (CEA) of 1936 and the Securities Exchange Act of 1934.

Wash trading is basically an attempt at market manipulation and a way to portray false market activity. Read on to learn about the implications of wash trading and how it works.

Key Points

• Wash trading is a prohibited practice in which investors engage in buying and selling the same or similar securities to create the illusion of trading activity.

• This practice can be a form of market manipulation and a way to portray false market activity.

• The goal of wash trading is often to influence pricing or trading activity.

• Wash trading is illegal and may result in penalties from regulatory agencies.

• A wash sale is different from wash trading. The wash sale rule prohibits an investor from taking a tax deduction on a loss when they purchase the same or substantially identical security within 30 days before or after the sale.

What Is Wash Trading?

Wash trading occurs when an investor buys and sells the same or a similar security investment around the same time. This is also called round-trip trading, since an investor is essentially ending where they began — with shares of the same security in their portfolio.

Wash trades can be used as a form of market manipulation. Investors may buy and sell the same securities in an attempt to influence pricing or trading activity. The goal may be to spur buying activity to send prices up or encourage selling to drive prices down.

Some investors and brokers might work together to influence trading volume, usually for the financial benefit of both sides. The broker, for example, might benefit from collecting commissions from other investors who want to purchase a stock being targeted for wash trading. The investor, on the other hand, may realize gains from the sale of securities through price manipulation.

Wash trading is different from insider trading, which requires the parties involved to have some special knowledge about a security that the general public doesn’t. However, if an investor or broker possesses insider knowledge they could potentially use it to complete wash trades.

How Does Wash Trading Work?

Essentially, a wash trade means an investor is buying and selling shares of the same security at around the same time. But the definition of wash trades goes further and takes the investor’s intent (and that of any broker they may be working with) into account. There are generally two conditions that must be met for a wash trade to exist:

• Intent. The intent of the parties involved in a wash trade (i.e., the broker or the investor) must be that at least one individual involved in the transaction must have entered into it specifically for that purpose.

• Result. The result of the transaction must be a wash trade, meaning the same asset was bought and sold at the same time or within a relatively short time span for accounts with the same or common beneficial ownership.

Beneficial ownership means accounts that are owned by the same individual or entity. Trades made between accounts with common beneficial ownership may draw the eye of financial regulators, as they can suggest wash trading activity is at work.

Wash trades don’t necessarily have to involve actual trades, however. They can also happen if investors and traders appear to make a trade on paper without any assets changing hands.

💡 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.

Example of a Wash Trade

Here’s a wash trade example:

Say an investor owns 100 shares of a stock and sells those shares at a $5,000 loss on September 1. On September 5, they purchase 100 shares of the same stock, then resell them for a $10,000 gain. This could be considered a wash trade if the investor engaged in the trading activity with the intent to manipulate the market.

Is Wash Trading Illegal?

Yes, wash trading is illegal. The Commodity Exchange Act prohibits wash trading. Prior to the passage of the Act, traders used wash trading to manipulate markets and stock prices. The Commodity Futures Trade Commission (CFTC) also enforces regulations regarding wash trading, including guidelines that bar brokers from profiting from wash trade activity.

It’s important to distinguish between wash trading and a wash sale, which is an IRS rule. The IRS wash sale rule does not allow investors to deduct capital losses on their taxes from sales or trades of stocks or other securities in particular circumstances.

Under the IRS rules, a wash sale occurs when an investor sells or trades stocks at a loss and within 30 days before or after the sale they:

• Purchase substantially identical stock or securities

• Acquire substantially identical stock or securities in a fully taxable trade

• Acquire a contract or option to buy substantially identical stock or securities, or

• Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA

Wash sale rules also apply if an investor sells stock and their spouse or a corporation they control buys substantially identical stock. When a wash sale occurs, an investor is not able to claim a tax deduction for those losses.

Essentially, the IRS wash sale rule is a tax rule. Wash trading is a form of intentional market manipulation.

Difference Between Wash Trading & Market Making

Market making and wash trading are not the same thing. A market maker is a firm or individual that buys or sells securities at publicly quoted prices on-demand, and a market maker provides liquidity and facilitates trades between buyers and sellers. For example, if you’re trading through an online broker you’re using a market maker to complete the sale or purchase of securities.

Market making is not market manipulation. A market maker is, effectively, a middleman between investors and the markets. While they do profit from their role by maintaining spreads on the stocks they cover, this is secondary to fulfilling their purpose of keeping shares and capital moving.

Recommended: What Is a Brokerage Account?

How to Detect & Avoid Wash Trading

The simplest way to avoid wash trading as an investor is to be aware of what constitutes a wash trade. Again, this can mean the intent to manipulate the markets by placing similar trades within a short timeframe.

Investors may notice red flags that may signal wash trading, such as multiple trades that have identical quantities and prices, repeated buying and selling between certain traders, and unusual trading patterns or volumes. Financial institutions and regulators also monitor trading data to identify or help prevent manipulative or abusive trading.

To avoid a wash sale, conversely, an investor could be mindful of the securities they are buying and selling and the timeframe in which those transactions are completed. So selling XYZ stock at a loss, then buying it again 10 days later to sell it for a profit would likely constitute a wash sale if they executed the trade and attempted to deduct the initial loss on their taxes.

It’s also important to understand how the 30-day period works. The 30-day rule extends to the 30 days prior to the sale and 30 days after the sale. So effectively, an investor could avoid the wash sale rule by waiting 61 days to replace assets that they sold in their portfolio.

💡 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.

The Takeaway

Wash trading involves selling certain securities and then replacing them in a portfolio with identical or very similar securities within a certain time period. This is typically done with the intent to manipulate the market. Wash trading is illegal.

Wash trading is not to be confused with the wash sale rule. For investors, understanding when the IRS wash sale rule applies can help them comply with tax guidelines. Those who are unclear about it, may wish to consult with a financial or tax professional.

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

FAQ

What’s considered wash trading

Wash trading is an illegal practice in which an investor buys and sells the same or a nearly identical security with the intent of falsely implying increased trading activity. It’s a form of market manipulation that could deceive other investors into making trades.

What’s the difference between wash trading and the wash sale rule?

Wash trading is an illegal practice with an intent to manipulate the market. The wash sales rule is a tax rule that says an investor cannot sell stock or securities for a loss and then buy substantially identical shares within 30 days before or after the sale and claim the deduction of the sale on their taxes.

Is a wash sale illegal?

No, a wash sale is not illegal. A wash sale is a tax rule that does not allow investors to claim a tax deduction if they sold a stock for a loss and then bought a substantially similar stock or security within 30 days before or after the sale.

How do day traders avoid wash sales?

To properly follow the IRS wash sales rule, an investor can wait for more than 30 days before or after the sale of a stock or security for a loss — meaning for a total of 61 days — before purchasing one that’s identical or substantially identical and then claiming the deduction for the sale on their taxes.

Photo credit: iStock/mapodile

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-105

Oct

2025

Small origami houses made of $1 and $5 dollar bills are arrayed on a persimmon-colored background.

7 Tips for Buying a Home in the Off-Season

By Pam O’Brien | Budgeting & Goals, Home Ownership, mortgage | Comments Off

Spring has been a traditional house-hunting season. That’s when parents of school-age kids often look for a place to call home — one they can settle into before classes begin in September.

And summer certainly has its merits for looking at houses, from the comfort of walk-throughs in warm weather to seeing gardens in full bloom.

But buying a house in winter can be a wise move. The so-called “off season” bestows some very real benefits for those who are looking for a new place. These may include everything from less competition (and fewer bidding wars) to faster closing schedules.

With mortgage rates remaining persistently elevated and home prices in many areas still at record highs, homebuyers are looking for every opportunity to capture savings, especially in hot markets in the Northeast in California. The winter ahead might be a good time to bundle up and rev up a home search. Read on to learn seven smart benefits of shopping for a house in winter. You just might snag a great deal on your dream house.

Key Points

• Less competition and fewer bidding wars make winter home purchases advantageous.

• Winter conditions reveal a home’s true state, offering clearer inspection insights.

• Movers are more available and may be cheaper during the winter months.

• Real estate agents can provide more focused attention to buyers in winter.

• Purchasing a home by late December may result in immediate tax benefits.

Table of Contents

Why You Should Buy a Home in Winter
Having Less Competition for Homes
Profiting from a Buyer’s Market in Winter
Closing on Your Purchase Faster in Winter
Understanding a Home’s Condition More Clearly
Hiring Movers Can Be Easier in Winter
Getting More Time and Attention from Real Estate Agents
Taking Advantage of Last-Minute Tax Savings

Why You Should Buy a Home in Winter

Wondering why you should consider buying a house in winter, when the days may be short, the trees bare, and the weather nasty? Here are some very good reasons.

1. Having Less Competition for Homes

Not everyone wants to or is able to shop for houses during the winter months. Freezing temperatures and inclement weather can keep would-be homebuyers away.

During the winter season, parents are busy managing school schedules and events, and many people are also busy traveling and hosting guests over the holidays.

But there’s an upside: Fewer people shopping for homes could mean less competition for those in the market for a house. And diminished competition might mean winter homebuyers can be more discerning in their choices. There’s less pressure to snap up a house for fear another buyer will get to it first. In addition, you may be less likely to end up in a bidding war with a slew of other interested buyers, which can drive up costs. You might contend with counter offers. But while there are often fewer houses for sale during the winter, buyers may be more likely to land their desired home closer to the asking price (or even below).

💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

2. Profiting from a Buyer’s Market in Winter

With some buyers distracted by the jam-packed holidays, it can be trickier to sell a home in the wintertime. Some sellers only put their homes on the market in the winter because they really have to.

The seller’s snag, though, can be a boon for buyers, as winter homesellers may be more motivated to get the sale completed faster than their summertime counterparts.

Motivated winter sellers might be willing to negotiate on things like price, closing costs, and the closing date. Perhaps they need to relocate for work or another time-sensitive reason and are eager to get the deal done.

In some cases, houses that are on the market in the winter have been there since the summer selling season. Homes like these are sometimes referred to as “stale listings.” The seller may be ready to take what would previously be deemed a too-low offer, just to move ahead with a deal.

3. Closing on Your Purchase Faster in Winter

Closing is when the title of a property legally changes hands from the seller to the buyer. When buyers and sellers are negotiating the sale of a home, they work together to set a closing date when the house title will officially transfer between the parties.

Real estate agents often work with mortgage brokers to find a suitable day that will allow enough time for the deal to be executed properly.

In warmer months, banks, inspectors, and appraisers are usually handling a lot of new buyers. In practice, this glut of interested buyers could mean mortgage brokers are backed up for weeks or even months.

In the winter, when fewer interested buyers are typically calling, things can slow down for lenders. As a result, cold-weather buyers might be able to close on their homes faster and get settled in more quickly.

4. Understanding a Home’s Condition More Clearly

Visiting a property in person can tell a buyer a lot about a home. But, in the summertime, some of a house’s less attractive qualities can be masked by warm weather, blossoming gardens, and the brilliant summer sun.

Seeing a house in the winter can give buyers a chance to understand how it holds up under tougher conditions. Is the house too gloomy in low light? Does cold air creep in from the windows? Does ice jam up the gutters causing the roof to leak? Does a long driveway that needs to be shoveled seem less appealing in the winter than in June? You could be destined for some home maintenance costs. Getting a chance to suss out potential problems like these can provide a fuller picture of what actually living in a property might be like year-round.

Keep in mind, though, that some aspects of a home can be harder to grasp in the winter months. For example, it’s tough to test out an air conditioning unit in the wintertime. And snow could cover up foundation issues.

💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

5. Hiring Movers Can Be Easier in Winter

Let’s say you do find a new home and move forward with buying a house in winter. Moving costs in the winter can be cheaper than in the summer. Fewer people buying homes means less demand for movers, which in turn could mean more competitive pricing.

With lighter schedules, moving companies may also be more flexible and able to accommodate your desired moving dates. (It can be helpful to stay flexible with move dates in the winter, since a big snowstorm might mean sudden delays.)

Still, if you move when snow is falling, that will obviously slow down your move and make it pricier. Try to reschedule if inclement weather is in the forecast.

6. Getting More Time and Attention from Real Estate Agents

Movers aren’t the only people who are less busy in the winter months. Fewer people shopping for houses could mean there’s less work for real estate agents.

Agents may have more time in the winter to spend helping individual buyers find the house that meets their exact needs. Also, when it comes time to negotiate, agents may have more hours to go to bat for their clients to secure a better deal.

7. Taking Advantage of Last-Minute Tax Savings

Buying a house by late December (rather than waiting until the following spring) may allow buyers to take advantage of last-minute savings on that year’s taxes.

The mortgage interest deduction allows homeowners to subtract mortgage interest from their taxable income, lowering the amount of taxes they owe. Married couples filing jointly and single filers can deduct the interest on mortgages up to $750,000. Married taxpayers filing separately can deduct up to $375,000 each. While you may not accumulate a lot of interest paid if you purchase toward the end of the year, you might be able to deduct anything you pay for mortgage points.

However, you cannot deduct mortgage interest in addition to taking the standard deduction. To take the mortgage interest deduction, you’ll need to itemize. Itemizing only makes sense if your itemized deductions total more than the standard deduction. For the 2025 tax year, the standard deduction is $15,000 for single filers and $30,000 for those married, filing jointly.

The Takeaway

No matter what season you may be house-hunting, it’s important to figure out how to finance a potential purchase before you find the home that’s “The One.”

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is the best time to purchase a home?

Late fall and early winter, roughly November through February, is considered the best time of year to buy a home. Although inventory may be lower than in the spring, sellers may be more willing to bargain because there are fewer shoppers in the winter months.

How do you negotiate a house price?

One of the best negotiation tools is research. You can look up comparable properties’ sale prices or enlist your real estate agent to help with this. It may also help to get an inspection of the property you wish to buy, so you can negotiate based on its results. Seeking preapproval for a home mortgage loan from a lender could give you a leg up in the negotiation process, as being preapproved shows you are serious about making a purchase.

What are red flags when buying a house?

The list of potential red flags when buying a home can be frighteningly long and includes structural problems, electrical or plumbing problems, poor drainage, or pest infestation. But dealbreaking problems can arise outside the home as well. Neighborhood woes or homeowners association (HOA) conflicts can also squelch a transaction. Have a home inspected before buying and consult a knowledgeable real estate agent for perspective on the severity of the problem.

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

*SoFi 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.

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

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