How Much a $400,000 Mortgage Will Cost You

The monthly payments on a $400,000 mortgage could range from about $2,300 to more than $3,700, depending on the loan’s interest rate, term, and other factors. But hopeful homebuyers would be wise to consider how much that mortgage could cost over time as well as what the monthly payments might be. Read on for a breakdown of what some of your home-buying costs might be, and how they could affect the total cost of a $400,000 mortgage.

What Will a $400,000 Mortgage Cost?

There are several different costs you may run into when taking out a mortgage. Most of the time, they can be divided into three main categories.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.


Closing Costs

Closing costs are expenses you’ll pay upfront when you get a loan. They can include things like loan processing fees, third-party services such as appraisals and title insurance, and government fees and taxes. You also may decide to pay mortgage points (also called discount points) upfront on your loan to lower the interest rate. Closing costs can vary significantly from one loan type and lender to the next, but they generally range from 3% to 6% of the mortgage amount.

Monthly Payments

Monthly mortgage payments, which are paid over the life of your loan, typically include two main parts:

•   Principal: This portion of your mortgage payment goes directly toward paying back the amount you borrowed.

•   Interest: This is the fee the lender will charge you for borrowing money. The amount of interest you pay each month will be calculated by multiplying your interest rate by your remaining loan balance.

Escrow

Some homebuyers may also have a third amount, called escrow, included in their closing costs and/or monthly payments. Lenders often collect and hold money in an escrow account so they can be sure critical bills like homeowners insurance and property taxes are paid on time. (Curious about the most budget-friendly places to buy? Check out this list of the most affordable cities in each state.)


💡 Quick Tip: SoFi’s Lock and Look + feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

What Would the Payment Be on a $400,000 Mortgage?

We’ll keep things simple and eliminate the costs associated with an escrow account to calculate what the payment on a $400,000 mortgage’s monthly payments might be.

Let’s say you wanted to purchase a home for $500,000, and you had $100,000 for a down payment. If your lender offered you a 7% annual percentage rate (APR) on a 15-year loan for $400,000, you could expect your monthly payment — principal and interest — to be about $3,595. If you had a 30-year loan with a 7% APR, your payment could be about $2,661.

Here are some more examples that show the difference between a 15-year loan vs. a 30-year loan, using SoFi’s Mortgage Calculator:

APR Payment with 15-year Loan Payment with 30-year Loan
5.5% $3,268 $2,271
6.5% $3,484 $2,528
7.5% $3,708 $2,796

Where Can You Get a $400,000 Mortgage?

Homebuyers may have a few different options when deciding where to go for a mortgage, including online banks and lenders, and traditional banks and credit unions. Because the rates and terms lenders offer may vary, it can be a good idea to shop around for a mortgage that’s the right fit for your individual needs.

Before you start looking for quotes, though, you may want to sit down and review the different types of mortgages you can qualify for. How would a 15-, 20-, or 30-year mortgage affect your monthly payments? Are you looking for a fixed or adjustable mortgage rate? Would you be better off with a conventional mortgage or a government-backed loan? (Some loans may have more flexible requirements for down payment amounts or a borrower’s credit score.)

Once you start comparison shopping, you can note the pros and cons of various offers and narrow down your choices. You also may want to read some online reviews of the lenders you’re considering.

Recommended: 2024 Home Loan Help Center

How Much Interest Will You Pay on a $400,000 Mortgage?

The interest rate your lender offers can make a big difference to the overall cost of your mortgage. So can the mortgage term you choose.

On a $400,000 mortgage at a 7% APR, for example, your total interest costs could range from $247,156 to $558,036, depending on the length of the loan you choose (15 vs. 30 years).

Spreading out your mortgage payments over a longer term can lower your monthly payment, but you can expect to pay more for the loan overall. Your financial circumstances at the time you take out your loan may dictate which is a priority for you. (If you go for a longer loan, and your situation changes, you may decide to refinance your home mortgage to a shorter term down the road.)


💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

How Does Amortization Work on a $400,000 Mortgage?

Though your payment will remain the same every month (if you have a fixed-rate loan), the amount you’ll pay toward interest vs. principal will change over the life of your home loan. In the first years, the majority of your payment will go toward interest. But as your balance goes down, more of your payment will go toward principal.

Your lender can provide you with a mortgage amortization schedule that shows you how the proportions will change as you make payments on your loan.

Here’s what the amortization schedules for a $400,000 mortgage with 30- and 15-year terms might look like. (Keep in mind that your payments may include other costs besides principal and interest.)

Amortization Schedule, 30-Year Loan at 7% APR

Year Amount Paid Interest Paid Principal Paid Remaining Balance
1 $31,934.52 $27,871.28 $4,063.24 $395,936.76
2 $31,934.52 $27,577.55 $4,356.97 $391,579.79
3 $31,934.52 $27,262.58 $4,671.94 $386,907.85
4 $31,934.52 $26,924.85 $5,009.67 $381,898.18
5 $31,934.52 $26,562.70 $5,371.82 $376,526.36
6 $31,934.52 $26,174.37 $5,760.15 $370,766.21
7 $31,934.52 $25,757.97 $6,176.55 $364,589.66
8 $31,934.52 $25,311.46 $6,623.06 $357,966.60
9 $31,934.52 $24,832.68 $7,101.84 $350,864.76
10 $31,934.52 $24,319.29 $7,615.23 $343,249.53
11 $31,934.52 $23,768.78 $8,165.74 $335,083.80
12 $31,934.52 $23,178.48 $8,756.04 $326,327.76
13 $31,934.52 $22,545.51 $9,389.01 $316.938.75
14 $31,934.52 $21,866.78 $10,067.74 $306,871.01
15 $31,934.52 $21,138.98 $10,795.54 $296,075.46
16 $31,934.52 $20,358.57 $11,575.95 $284,499.51
17 $31,934.52 $19,521.74 $12,412.78 $272,086.73
18 $31,934.52 $18,624.42 $13,310.10 $258,776.63
19 $31,934.52 $17,662.23 $14,272.29 $244,504.35
20 $31,934.52 $16,630.49 $15,304.03 $229,200.31
21 $31,934.52 $15,524.16 $16,410.36 $212,789.95
22 $31,934.52 $14,337.85 $17,596.67 $195,193.28
23 $31,934.52 $13,065.79 $18,868.73 $176,324.55
24 $31,934.52 $11,701.76 $20,232.76 $156,091.79
25 $31,934.52 $10,239.14 $21,695.38 $134,396.41
26 $31,934.52 $8,670.78 $23,263.74 $111,132.66
27 $31,934.52 $6,989.04 $24,945.48 $86,187.18
28 $31,934.52 $5,185.73 $26,748.79 $59,438.39
29 $31,934.52 $3,252.05 $28,682.47 $30,755.92
30 $31,934.52 $30,755.92 $1,178.60 $0

Amortization Schedule, 15-Year Loan at 7% APR

Year Amount Paid Interest Paid Principal Paid Remaining Balance
1 $43,143.76 $27,504.57 $15,639.19 $384,360.81
2 $43,143.76 $26,374.01 $16,769.75 $367,591.06
3 $43,143.76 $25,161.72 $17,982.04 $349,609.02
4 $43,143.76 $23,861.80 $19,281.96 $330,327.06
5 $43,143.76 $22,467.90 $20,675.85 $309,651.21
6 $43,143.76 $20,973.24 $22,170.51 $287,480.69
7 $43,143.76 $19,370.54 $23,773.22 $263,707.47
8 $43,143.76 $17,651.97 $25,491.79 $238,215.68
9 $43,143.76 $15,809.16 $27,334.59 $210,881.09
10 $43,143.76 $13,833.14 $29,310.61 $181,570.48
11 $43,143.76 $11,714.28 $31,429.48 $150,141.00
12 $43,143.76 $9,442.24 $33,701.52 $116,439.48
13 $43,143.76 $7,005.95 $36,137.80 $80,301.67
14 $43,143.76 $4,393.55 $38,750.21 $41,551.47
15 $43,143.76 $1,592.29 $41,551.47 $0

How to Get a $400,000 Mortgage

If you’re feeling intimidated by the whole home-buying process, breaking it down into some manageable steps may make things a little less overwhelming.

First, Determine What You Can Afford

Reviewing your income, debts, monthly spending, and how much you’ve saved for a down payment can be a good place to start. This will help you decide how much of a down payment you can handle and how much house you can afford.

Compare Different Loans and Lenders

Once you know what you can afford, you can start looking for the loan type, interest rate, loan term, and lender that meet your needs.

Consider Getting Preapproved

If you’ve decided on a loan and lender, it can be a good idea to go through the preapproval process. Getting a letter from your lender that says you’re preapproved for a certain loan amount lets sellers know you’re a serious buyer. (And it can come in handy if you get into a bidding war for your dream home.)

Get Ready to Go House Hunting

When you have your loan lined up, you can look for and potentially make an offer on a house. And since you already know how much you can afford, you can target homes in that range.

Submit a Full Mortgage Application

Once your offer is accepted and you’re ready to move forward, your lender will ask you to complete a more formal loan application and provide additional financial information and documentation.

Prepare for Closing

While you’re waiting for a final loan approval and a closing date, you can shop for homeowners insurance, get a home inspection, and make sure you have all the money you need for your down payment and closing costs.

Take Ownership of Your New Home

At the closing you can sign all the necessary paperwork, hand over the funds needed to make the purchase, and — congratulations! — get the keys to your new home.

Recommended: First-Time Homebuyer Guide

The Takeaway

Researching the different costs you might have to pay if you plan to take out a $400,000 mortgage can help you stick to your budget and avoid unpleasant surprises.

The choices you make about the type of loan you get, the interest rate, loan term, and other costs, will all play part in how much you pay every month — and over the length of the loan. So it can be a good idea to run the numbers before you decide on a particular lender or loan.

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

How much is a $400,000 mortgage a month?

The monthly payment for a $400,000 mortgage could range from about $2,300 to more than $3,700, depending on several factors, including the interest rate and loan term.

How much income is required for a $400,000 mortgage?

Lenders will look at several factors besides your income to determine if you can afford a $400,000 mortgage. You can expect to be asked about your debt, credit history, assets, and the down payment you plan to make.

How much is a down payment on a $400,000 mortgage?

Your down payment may vary depending on the price of the house you choose, the type of loan you get, and if you want to avoid paying private mortgage insurance as part of your borrowing costs. Traditionally, lenders like to see a 20% down payment, which on a $500,000 home would be a $100,000 down payment and a $400,000 mortgage. But many lenders accept lower down payments.

Can I afford a $400,000 mortgage with a $70,000 salary?

Since your housing costs (monthly payments, insurance, etc.) would likely be more than half your monthly salary, it could be a challenge to afford a $400,000 mortgage on a $70,000 salary.


Photo credit: iStock/svetikd

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*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.

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

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What Is a Guaranteed Minimum Income Benefit (GMIB)?

What Is a Guaranteed Minimum Income Benefit (GMIB)?

A guaranteed minimum income benefit (GMIB) is an optional rider that can be included in an annuity contract to provide a minimum income amount to the annuity holder. An annuity is an insurance product in which you pay a premium to the insurance company, then receive payments back at a later date. There are a number of different types of annuities, with different annuity rates.

A GMIB annuity can ensure that you receive a consistent stream of guaranteed income. If you’re considering buying an annuity for your retirement, it’s helpful to understand what guaranteed minimum income means, and how it works.

GMIBs, Defined

A guaranteed minimum income benefit (GMIB) is a rider that the annuity holder can purchase, at an additional cost, and add it onto their annuity. The goal of a GMIB is to ensure that the annuitant will continue to receive payments from the contract — that’s the “guaranteed minimum income” part — without those payments being affected by market volatility.

Annuities are one option you might consider when starting a retirement fund. But what are annuities and how do they work? It’s important to answer this question first when discussing guaranteed minimum income benefits.

As noted, an annuity is a type of insurance contract. You purchase the contract, typically with a lump sum, on the condition that the annuity company pays money back to you now or starting at a later date, e.g. in retirement.

Depending on how the annuity is structured, your money may be invested in underlying securities or not. Depending on the terms and the annuity rates involved, you may receive a lump sum or regular monthly payments. The amount of the payment is determined by the amount of your initial deposit or premium, and the terms of the annuity contract.

A GMIB annuity is most often a variable annuity or indexed annuity product (though annuities for retirement can come in many different types).

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How GMIBs Work

Let’s look at two different types of annuities for retirement: variable and indexed.

•   Variable annuities can offer a range of investment types, often in the form of mutual funds that hold a combination of stocks, bonds, and money market instruments.

•   Indexed annuities offer returns that are indexed to an underlying benchmark, such as the S&P 500 index, Nasdaq, or Russell 2000. This is similar to other types of indexed investments.

With either one, the value of the annuity contract is determined by the performance of the underlying investments you choose.

When the market is strong, variable annuities or indexed annuities can deliver higher returns. When market volatility increases, however, that can reduce the value of your annuity. A GMIB annuity builds in some protection against market risk by specifying a guaranteed minimum income payment you’ll receive from the annuity, independent of the annuity’s underlying market-based performance.

Of course, what you can draw from an annuity to begin with will depend on how much you invest in the contract, stated annuity rates, and to some degree your investment performance. But having a GMIB rider on this type of retirement plan can help you to lock in a predetermined amount of future income.

Pros & Cons of GMIBs

Guaranteed minimum income benefit annuities can be appealing for investors who want to have a guaranteed income stream in retirement. Whether it makes sense to purchase one can depend on how much you have to invest, how much income you’re hoping to generate, your overall goals and risk tolerance.

Weighing the pros and cons can help you to decide if a GMIB annuity is a good fit for your retirement planning strategy.

Pros of GMIBs

The main benefit of a GMIB annuity is the ability to receive a guaranteed amount of income in retirement. This can make planning for retirement easier as you can estimate how much money you’re guaranteed to receive from the annuity, regardless of what happens in the market between now and the time you choose to retire.

If you’re concerned about your spouse or partner being on track for their own retirement, that income can also carry over to your spouse and help fund their retirement needs, if you should pass away first. You can structure the annuity to make payments to you beginning at a certain date, then continue those payments to your spouse for the remainder of their life. This can provide reassurance that your spouse won’t be left struggling financially after you’re gone.

Cons of GMIBs

A main disadvantage of guaranteed minimum income benefit annuities is the cost. The more riders you add on to an annuity contract, the more this can increase the cost. So that’s something to factor in if you have a limited amount of money to invest in a variable or indexed annuity with a GMIB rider. Annuities may also come with other types of investment fees, so you may want to consult with a professional who can help you decipher the fine print.

It’s also important to consider the quality of the annuity company. An annuity is only as good as the company that issues the contract. If the company were to go out of business, your guaranteed income stream could dry up. For that reason, it’s important to review annuity ratings to get a sense of how financially stable a particular company is.

Examples of GMIB Annuities

Variable or indexed annuities that include a guaranteed minimum income benefit can be structured in different ways. For example, you may be offered the opportunity to purchase a variable annuity for $250,000. The annuity contract includes a GMIB order that guarantees you the greater of:

•   The annuity’s actual value

•   6% interest compounded annually

•   The highest value reached in the account historically

The annuity has a 10-year accumulation period in which your investments can earn interest and grow in value. This is followed by the draw period, in which you can begin taking money from the annuity.

Now, assume that at the beginning of the draw period the annuity’s actual value is $300,000. But if you were to calculate the annuitized value based on the 6% interest compounded annually, the annuity would be worth closer to $450,000. Since you have this built into the contract, you can opt to receive the higher amount thanks to the guaranteed minimum income benefit.

This example also illustrates why it’s important to be selective when choosing annuity contracts with a guaranteed minimum income benefit. The higher the guaranteed compounding benefit the better, as this can return more interest to you even if the annuity loses value because of shifting market conditions.

It’s also important to consider how long the interest will compound. Again, the more years interest can compound the better, in terms of how that might translate to the size of your guaranteed income payout later.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

The Takeaway

As discussed, guaranteed minimum income benefits (GMIB) are optional riders that can be included in an annuity contract to provide a minimum income amount to the annuity holder. Annuities can help round out your financial strategy if you’re looking for ways to create guaranteed income in retirement.

Annuities may be a part of a larger investment and retirement planning strategy, along with other types of retirement accounts. To get a better sense of how they may fit in, if at all, it may be a good idea to speak with a financial professional.

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

What are guaranteed benefits?

When discussing annuities for retirement, guaranteed benefits are amounts that you are guaranteed to receive. Depending on how the annuity contract is structured, you may receive guaranteed benefits as a lump sum payment or annuitized payments.

What is the guaranteed minimum withdrawal benefit?

The guaranteed minimum withdrawal benefit is the amount you’re guaranteed to be able to withdraw from an annuity once the accumulation period ends. This can be the annuity’s actual value, an amount that reflects interest compounded annually or the annuity contract’s highest historical value.

What are the two types of guaranteed living benefits?

There are actually more than two types of guaranteed living benefits. For example, your annuity contract might include a guaranteed minimum income benefit, guaranteed minimum accumulation benefit or guaranteed lifetime withdrawal benefit.


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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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Investing in Options vs Stocks: Trading Differences to Know

Buying Options vs Stocks: Trading Differences to Know


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.

Stocks and options are two of the most popular investment types that investors might include in their portfolio. There are reasons to invest in each, and they both come with their own risks, timelines, pros, and cons.

When deciding whether to invest in stocks vs. options, or any type of security or asset, it’s important to consider your personal investing goals, experience, risk tolerance, and investing horizon.

What Are the Differences Between Options and Stocks?

Stocks

Options

Common types of Investors Beginners and long-term investors Experienced and active traders
Potential Downsides Risks, Taxes, Fees Risks, Costs, Complexity
Type of Investment Equity Derivative

Options

Options, or stock options, are a type of derivative investment. Rather than buying shares of a company, options contracts give buyers the right, but not the obligation, to buy or sell shares at a specified price, (known as the strike price in options terminology,) at a specified time in the future.

A call option gives the buyer the right, but not the obligation, to buy a stock at a specified price, at a specified time in the future. The options investor does not have any ownership of the company’s shares unless they choose to exercise the option and buy the shares.

A put option gives the buyer the right, but not the obligation, to sell a stock at a specified price, at a specified time in the future.

Over the time period of the option, the contract gets exponentially less valuable. This is known as time decay.

Investors may exercise their right to buy or sell a stock, or sell their option position to make a potential profit. Options trading strategies can get complicated, involving buying and selling multiple options on the same underlying security.

Recommended: A Guide to Options Trading

Stocks

Stocks are portions of ownership in companies, also known as shares. Investors can buy shares in companies and become fractional owners of that company in proportion to the number of outstanding shares that company has. For instance, if a company has 100,000 shares and an investor buys 10,000, they own 10% of the company.

Investors who purchase stocks typically hope to buy them at a lower price then sell them later at a higher price to make a profit. There are also other ways investors can earn profits on stocks. For instance, some stocks pay out dividends to owners. Every month, quarter, or year, an investor can earn money based on the number of shares they own.

Recommended: How to Start Investing in Stocks

5 Key Differences in Stocks vs Options

Both stocks and options are popular investments, and there can be a place for both of them in a diversified portfolio. Here’s a look at some of of the differences to keep in mind when it comes to trading options vs. stocks:

1. Risk

Both stocks and options have associated risks. For stocks, the risk is that the value of the security will fall lower than the investor expected. For options, there are additional risks, including the risk that they could exacerbate losses or could expire without being exercised.

2. Ownership

When an investor buys stock, they become partial owners of that company. When they buy options, they do not.

3. Quantities

When buying stock, the number of shares an investor buys is the total number they have, and they can purchase any number of shares, including fractional shares. When buying options, each contract represents 100 shares of stock.

4. Timeline

Options are contracts that are only valid for a certain period of time until the expiration date. They lose value over time until they are worthless when the contract expires. When an investor buys stock, they can hold it as long as they want.

5. Time Commitment

Investors can buy stock and hold onto it without doing much additional work, whereas options traders are often more hands-on and prefer an eye on the market for the duration of the contract.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

When to Consider Trading Stocks

There are several reasons to consider trading stocks, depending on your goals, timeline, and risk tolerance. Like any asset, stocks come with their share of risks and downsides. Some of the pros and cons of stocks include:

Pros

It can be relatively easy to start investing in stocks. There are several other benefits as well:

•   Investors don’t have to sell their stocks on any particular date, so they can choose the best time to sell.

•   Some stocks pay out dividends to investors.

•   Stocks are easier to research than options since they have market history.

•   Being an owner of a company may allow investors to vote on certain corporate issues that can affect their investment.

•   Stocks typically have more liquidity than options, meaning it’s easier for traders to buy and sell them at any given time.

Cons

Like all securities, there are risks involved with investing in stocks. Those include:

•   Whether you buy and sell stocks quickly as a day trading strategy, or hold onto them for years, you will need to pay short or long-term capital gains taxes if you sell for a profit.

•   While trading stocks can be very profitable, it’s generally considered a long-term strategy.

•   It can be emotionally challenging to watch the market, and one’s portfolio, go up and down in value over months or years.

•   Making a big profit on stocks can require a large upfront investment.

•   When investing in stocks, traders risk losing all the money they put in.

•   Stocks of certain companies are very expensive, making it difficult for smaller traders to even buy one.

When to Consider Trading Options

Like stocks or any investment, options come with their share of risks and downsides. Some of the main pros and cons of trading options are:

Pros

Options trading can be complicated, but there can be significant upside potential. Benefits include:

•   Options may be an inexpensive way to participate in the market.

•   Options provide investors with leverage. Essentially the investor has some control and access to shares.

•   Options can help hedge against market volatility.

Cons

Since fewer traders buy and sell options than stocks, there can be lower liquidity making it difficult to get out of an options contract. Other drawbacks include:

•   If an investor buys a stock option, they must pay a premium to enter into the contract. If the stock doesn’t move the way they hope it will and they choose not to exercise the option, they lose that premium they had put in.

•   Options lose value over time.

•   Trading options may require more ongoing management than stocks.

💡 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.

The Takeaway

Stocks and options are two popular types of investments traders use to earn profits and build a diversified portfolio. Depending on your investment strategy, you might invest in a combination of the two. Note that both have their own associated risks and potential benefits.

Options trading, however, is typically something that experienced investors delve into, and often requires traders to actively invest, rather than leave their portfolios idle. If you’re interested in options, it may be a good idea to speak with a financial professional for guidance.

Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

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.


Photo credit: iStock/fizkes

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.

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.
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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What Is Excess Margin & How Do You Use It?

What Is Excess Margin & How Do You Use It?

The excess margin in a trading account indicates how much available funds it contains above the required minimum amounts. Knowing your excess margin helps determine how many securities you can trade on margin, as well as how much you can withdraw from your account to use for other purposes.

In other words, knowing your excess margin helps an investor get a better idea of their overall buying power, which can be critical in guiding investing decisions.

What Is Excess Margin?

Excess margin is a trading account‘s equity above the legal minimum required for a margin account, or the amount of equity above the broker’s maintenance margin requirement.

Excess margin is generated from cash or securities a trader deposits in a margin account above required levels. Excess margin can be used as collateral for margin loans, or it may be withdrawn from the account. It is important to monitor your excess margin ratio so you can keep your account in good standing.

Special Memorandum Account

A special memorandum account (SMA) is where excess margin generated from a margin trading account is held. Trading margin is also sometimes called usable margin, available margin, or “free” margin — but to be clear, “free” margin isn’t free in the sense that it doesn’t involve interest charges or fees, it’s “free” in that it’s not tied up in a current position.

Excess margin, on the other hand, is only the margin above the required minimum.

💡 Quick Tip: When you trade using a margin account, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.

Understanding Trading Margin Excess

Trading margin excess tells you how much buying power you have, but no trader should feel compelled to use all of it just because it is there. Excess cash margin can be thought of as funds left over after you have taken positions during the trading day. You can use excess margin to buy new positions or add to an existing holding.

Understanding how to trade excess margin requires a grasp of how margin accounts work. A margin account allows you to borrow from a broker if you meet initial margin requirements. You will need the greater of either the $2k minimum margin requirement or 50% of the security’s purchase price in your account to buy on margin. For example, if you were to purchase 10 shares of a stock trading at $30, 50% is $1,500.

Since that is less than $2,000, you’ll need to deposit $2,000 in order to purchase the 10 shares on margin. On the other hand, if you wanted to purchase 10 shares of a stock selling for $50, 50% is $2,500 — and you would need to deposit $2,500, not $2,000, in order to make your purchase on margin.In the United States, Regulation T set by the Federal Reserve states that a trader with a margin account can borrow up to 50% of the purchase price of a stock (assuming the stock is fully marginable).

There are also maintenance margin requirements set at 25% by the Financial Industry Regulatory Authority (FINRA) — your equity relative to your account value must not fall below that threshold. Finally, a broker might set stricter margin requirements than the governing authorities.

The value of assets in a margin account that exceeds these requirements is the excess margin deposit. Since you are trading with leverage, the maintenance margin excess amount indicates how much is left that you can borrow against — it is not actual cash remaining in your account. According to FINRA, maintenance margin excess is the amount by which the equity in the margin account exceeds the required margin.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.


*For full margin details, see terms.

Risks and Benefits of Excess Margin

An account is in good standing as long as it has margin levels above those set by regulators and the broker. There are dangers with trading excess margin securities, though. Since you trade with leverage in a margin account, there is the risk that your account value could drop dramatically if the market goes against you. Your account can be in good standing one day, but then face a margin call the next day.

If your account violates margin requirements, you will be faced with a margin call. To meet the call, you must deposit cash, deposit marginable securities, or liquidate securities you own. If you do not meet the call, your broker can perform a forced sale. In extreme cases, your account’s trading privileges can be suspended.

On the upside, there is potential to make larger profits by trading on margin. Returns are amplified by leverage. You can also benefit from declining share prices by short selling (it’s worth noting that margin requirements are different for short selling — 30% in most cases). There are other benefits when trading on margin so long as you maintain excess margin. You can use your margin account for loans by borrowing against your assets, often at a competitive interest rate. Margin trading also lets you diversify a concentrated portfolio.

Excess Margin Risks vs Benefits

Risks

Benefits

Trading with leverage can amplify losses Trading with leverage can amplify returns
A broker can perform a forced sale if you face a margin call Excess margin tells you how much money you can use for new purchases or to withdraw from the account
You can lose more than what you put in during extreme events You can hold a diversified portfolio and short positions

What Is an Excess Margin Deposit?

An excess margin deposit is the collateral held in a margin account that is above required margin levels. When the value of your excess margin deposit drops under the required margin amount, you might face a margin call. An excess margin deposit is calculated as the difference between an account’s value and its minimum maintenance requirement. Required margin levels are often higher for equity and options trading accounts versus futures trading accounts.

Managing excess margin securities is important when trading. If you trade positions without understanding risk, then you are more likely to eventually get hit with a margin call. A way to manage excess margin is to trade securities and positions sizes that fit your risk and return preferences.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Excess Margin Deposit Example

An example helps illustrate what excess margin is. Let’s say your margin trading account has $50,000 of unmargined securities. The Reg T requirement dictates that your initial margin is $25,000 (a 50% margin requirement), so excess initial margin is $25,000. Assuming a 25% maintenance margin requirement, $12,500 of equity must be kept after opening the account.

With $25,000 of equity, there is $12,500 of excess margin above the 25% maintenance margin requirement. You can buy more securities with that amount or withdraw it to use for other purposes.

If the account value drops to $45,000, then your equity has fallen to $20,000 ($45,000 of stocks minus the $25,000 loan). Assuming the account has a 25% maintenance requirement, the account would need to have equity of at least $11,250 (25% of $45,000). With $20,000 of equity, the account meets the requirements and is in good standing.

The Takeaway

Excess margin is your margin trading account’s equity above all margin requirements. It is a balance that tells you how much more securities you can buy on margin. The excess cash margin also indicates how much you can pull from the account to use for other purposes.

Excess margin, conceptually, is related to an investor’s buying power, which is why it’s important to understand. There are also rules and regulations in the mix, such as Regulation T, which investors need to keep in mind, too, and risks related to margin calls.

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).

Get one of the most competitive margin loan rates with SoFi, 10%*

FAQ

What happens if you go over margin?

If you go over margin, you might be faced with a margin call. A margin call happens when your excess margin deposit falls below zero. Satisfying a margin call involves depositing more cash or securities or liquidating existing holdings to bring the account’s excess margin ratio back within proper limits.

What is excess intraday margin?

Excess intraday margin is the amount of funds in a margin trading account above the intraday margin requirement. It is a balance that tells you how much money is in the account above an intraday margin requirement. Intraday margin is also referred to as day trading margin if you engage in pattern day trading. Note: There are different requirements for a pattern day trader.

Can margin trading put you in debt?

In extreme circumstances, trading excess margin securities can put you in debt due to positions losing value and margin interest being owed. Margin calls issued by brokers help to reduce this risk since the calls require the trader to deposit more funds into the account or liquidate existing holdings. If the trader does not act, the broker might automatically sell securities. If the trader has borrowed too much and market movements are drastically against the trader, equity can turn negative.


Photo credit: iStock/Geber86

*Borrow at 10%. 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.
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.

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.
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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Guide to IRA Margin Accounts

Guide to IRA Margin Accounts

An IRA margin account is a retirement account that allows investors to trade securities with unsettled cash. It’s a more lenient structure versus a cash account, where you must wait for trades to settle before using the money for further trading. But an IRA margin account isn’t a true margin account in that you can’t use leverage.

Nonetheless, an IRA margin account offers a few advantages, including the ability to defer or avoid short-term capital gains tax, and you’re protected against good faith violations. That said, there are still restrictions, so before setting up an IRA margin account, it may be beneficial to learn more about how these accounts work.

What Is an IRA Margin Account?

An IRA margin account presents a more flexible option to invest for retirement than a traditional IRA. First, you can trade with unsettled funds, meaning that if you close a position you don’t have to wait the standard two days after you trade, you can use those funds right away.

There are also tax benefits. In a traditional IRA margin account capital gains taxes are deferred until funds are withdrawn. This is similar to a regular IRA, where you don’t pay taxes on contributions or gains until you withdraw your money.

But can you use margin in a Roth IRA? Yes, and there may be even more tax benefits when using limited margin in a Roth IRA. You don’t pay any capital gains because Roth accounts are tax-free, since Roth contributions are made with after-tax money.

As noted, an IRA margin account, also called a limited margin account, lets investors trade with unsettled cash. However, a limited margin IRA is just that — limited. It is not a true margin account and does not allow you to short stocks or use leverage by borrowing money to trade with margin debits. In that sense, it is different from margin trading in a taxable brokerage account.

You can use limited margin in several IRA types. In addition to having margin IRAs with traditional and Roth accounts, rollover IRAs, SEP IRAs, and even small business SIMPLE IRAs are eligible for the margin feature. While mutual funds are often owned inside an IRA, you cannot buy mutual funds on margin.

💡 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.

How Does Limited Margin Work?

Limited margin works by allowing investors to trade securities without having to wait for funds to settle. You can think of it like an advance payment from positions recently sold.

The first step is to open an IRA account and request that the IRA margin feature be added. Once approved, you might have to request that your broker move positions from cash to margin within the IRA. This operational task will also set future trades to the margin type.

IRA margin accounts will state your intraday buying power — you should use this balance when day trading stocks and options in the IRA.

An advantage to trading in limited margin IRAs is that you can avoid or defer capital gains tax. Assuming you earn profits from trading, that can be a major annual savings versus day trading in a taxable brokerage account. If you trade within a pre-tax account, such as a traditional or rollover IRA, then you simply pay income tax upon the withdrawal of funds. When using Roth IRA margin, your account can grow tax-free forever in some cases.

The drawback with an IRA margin account versus day trading in a taxable account is you are unable to borrow money from your broker to create margin debits. You are also unable to sell securities short with an IRA margin account. So while it is a margin account, you do not have all the bells and whistles of a full margin account that is not an IRA.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.


*For full margin details, see terms.

Who Is Eligible for a Margin IRA?

Some brokerage firms have strict eligibility requirements such as a minimum equity threshold (similar to the minimum balances required in full margin accounts). When signing up, you might also be required to indicate that your investment objective is the “most aggressive.” That gives the broker a clue that you will use the account for active trading purposes.

Another restriction is that you might not be able to choose an FDIC-insured cash position. That’s not a major issue for most investors since you can elect a safe money market fund instead.

IRA Margin Calls

An advantage to having margin in an IRA is that you can more easily avoid margin calls by not having to wait for cash from the proceeds of a sale to settle, but margin calls can still happen. If the IRA margin equity amount drops below a certain amount (often $25,000, but it can vary by broker), then a day trade minimum equity call is issued. Until you meet the call, you are limited to closing positions only.

To meet the IRA margin call, you just have to deposit more cash or marginable securities. Since it is an IRA, there are annual contribution limits that you cannot exceed, so adding funds might be tricky.

💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.

Avoiding Good Faith Violations

A good faith violation happens when you purchase a security in a cash account then sell before paying for the purchase with settled cash. You must wait for the funds to settle — the standard is trade date plus two days (T+2 settlement) for equity securities. Only cash and funds from sale proceeds are considered “settled funds.” Cash accounts and margin accounts have different rules to know about.

A good faith violation can happen in an IRA account without margin. For example, if you buy a stock in the morning, sell it in the afternoon, then use those proceeds to do another round-trip trade before the funds settle, that second sale can trigger a good faith violation. Having margin in an IRA prevents good faith violations in that instance since an IRA margin account allows you to trade with unsettled funds.

Pros and Cons of Limited Margin Trading in an IRA

Can IRA accounts have margin? Yes. Can you use margin in a Roth IRA? Yes. Should your IRA have the limited margin feature added? It depends on your preferences. Below are the pros and cons to consider with IRA margin accounts.

Pros

Cons

You are permitted to trade with unsettled cash. You cannot trade using actual margin (i.e. leverage).
You can avoid good faith violations. You cannot engage in short selling or have naked options positions.
You take on more risk with your retirement money.

The Takeaway

An IRA margin account allows people investing in individual retirement accounts to trade securities a bit more freely versus a cash account. The main benefit to having an IRA with limited margin is that you can buy and sell stocks and options without waiting for lengthy settlement periods associated with a non-margin account.

But remember: Unlike a normal margin account, this type doesn’t allow you to use leverage. That means a margin IRA doesn’t permit margin trading that creates margin debit balances. You are also not allowed to have naked options positions or engage in selling shares short.

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).

Get one of the most competitive margin loan rates with SoFi, 10%*

FAQ

Is an IRA a cash or a margin account?

An IRA can either be a cash account or a limited margin account. While a cash account only lets you buy and sell securities with a traditional settlement period, a limited margin IRA might offer same-day settlement of trades. You are not allowed to borrow funds or short sell, however.

Is day trading possible in an IRA?

Yes. You can day trade in your IRA, and it can actually be a tax-savvy practice. Short-term capital gains can add up when you day trade in a taxable brokerage account. That tax liability can eat into your profits. With a limited margin IRA that offers same-day settlement, however, you can buy and sell stocks and options without the many tax consequences of a non-IRA. The downside is that, in the case of losses, you cannot take advantage of the $3,000 capital loss tax deduction because an IRA is a tax-sheltered account. Another feature that is limited when day trading an IRA is that you cannot borrow funds to control more capital. A final drawback is that you are limited to going long shares, not short.

Can a 401(k) be a margin account?

Most 401(k) plans do not allow participants to have the margin feature. An emerging type of small business 401(k) plan — the solo brokerage 401(k) — allows participants to have a margin feature. Not all providers allow it, though. Also, just because the account has the margin feature, it does not mean you can borrow money from the broker to buy securities.


Photo credit: iStock/Drazen_

*Borrow at 10%. 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.
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.

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.

SOIN0124108

Read more
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