The potential for the U.S. to slip into recession was the topic du jour Monday as stocks kicked off the week with a wobbly, uneven session.
Over the weekend, former Goldman Sachs chief Lloyd Blankfein told CBS’ Face the Nation that recession was “a very, very high risk factor.” That opinion was met by a number of other calls Monday morning.
Wells Fargo Investment Institute, for instance, says “our conviction is that the chances of an outright recession in 2022 remain low” but believes odds are growing that 2023 could see an economic contraction. UBS strategists say the chances are different depending on where you look – their global economists say “hard data” points to a sub-1% chance of recession over the next 12 months, but the yield curve implies 32% odds.
“There’s no crystal ball to predict what’s next, but historical trends can come into play here. With the [S&P 500] closing 15% below its weekly record, there’s only been two times in the past 60-plus years that the market didn’t fall into bear territory after a similar drop,” adds Chris Larkin, Managing Director of Trading at E*Trade. “This doesn’t mean it’s bound to happen, but there is room for potential downside.”
Larkin says to keep an eye on major retail earnings this week – which will kick off in earnest with Walmart’s Tuesday report – to get a pulse check on the American consumer.
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Monday itself was a fairly quiet affair. Exxon Mobil (XOM, +2.4%) and Chevron (CVX, +3.1%) were among a number of plays from the energy sector (+2.7%) that popped after U.S. crude oil futures jumped another 3.4% to $114.20 per barrel.
Twitter (TWTR, -8.2%) shares dropped after Tesla (TSLA, -5.9%) CEO Elon Musk spent the weekend questioning how much of Twitter’s traffic comes from bots. Wedbush analyst Daniel Ives said the move feels more like a “‘dog ate the homework’ excuse to bail on the Twitter deal or talk down a lower price.” TWTR stock has now given up all its gains since Musk announced his stake in the social platform.
The major indexes finished an up-and-down session with mostly weak results. The Dow Jones Industrial Average managed to eke out a marginal gain to 32,223, but the S&P 500 declined 0.4% to 4,008, while the Nasdaq Composite retreated 1.2% to 11,662.
Also worth noting: Warren Buffett’s Berkshire Hathaway will file its quarterly Form 13F soon. Check back here tonight as we examine what Buffett has been buying and selling.
Other news in the stock market today:
The small-cap Russell 2000 closed out the session with a 0.5% dip to 1,783.
Gold futures gained 0.3% to settle at $1,814 an ounce.
Bitcoin was off 1.6% to $29,551.92 (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
JetBlue Airways (JBLU, -6.1%) ramped up its hostile takeover attempt of Spirit Airlines (SAVE, +13.5%) on Monday, urging SAVE shareholders to vote against a buyout offer from fellow low-cost air carrier Frontier Group Holdings (ULCC, +5.9%). JBLU last month offered to buy Spirit Airlines for $33 per share – a premium to the $21.50 per share ULCC offered in February – but SAVE’s board of directors rejected the bid citing concerns over regulatory approval. JBLU followed up in early May with an “enhanced superior proposal,” including paying a $200 million, or $1.80 per SAVE share, reverse break-up fee should regulators block the deal.
Warby Parker (WRBY) fell 5.3% after the eyeglass maker reported a loss of 30 cents per share in its first quarter. This was much wider than the per-share loss of 3 cents the company reported in the year-ago period and missed the consensus estimate for breakeven on a per-share basis. Revenue of $153.2 million also fell short of analysts’ expectations. WRBY did maintain its full-year revenue guidance of $650 million to $660 million. “We remain cautiously optimistic on shares as WRBY continues to show ability to grow the top line, open new stores, and is recession resistant as a lower cost option for non-discretionary spend,” says CFRA Research analyst Zachary Warring (Buy). “We see the company leveraging SG&A to become profitable in the second half of 2022.”
Check Out Europe’s Dividend Royalty
If you’re seeking out more stable opportunities amid an uncertain U.S. market … well, the rest of the world is admittedly looking pretty shaky, too. But that doesn’t mean there aren’t a few morsels worth a nibble.
BCA Research notes that while there’s negative news around the globe, “European benchmarks already discount a significant portion of the negative news.” And looking ahead, inflation there is expected to peak over the summer “as the commodity impulse is decelerating” – that should help stagflation fears recede and help European shares.
Graham Secker, Morgan Stanley’s chief European and U.K. equity strategist, chimes in that his firm remains “overweight [European] stocks offering a high and secure dividend yield.”
We’ve previously highlighted our favorite European dividend stocks, which on the whole tend to produce higher yields than their U.S. counterparts.
But we’d also like to shine the spotlight on Europe’s twist on an American income club: the Dividend Aristocrats. The S&P Europe 350 Dividend Aristocrats have somewhat different qualifications than their U.S. brethren, but in general, they’ve proven their ability to provide stable and growing dividends over time.
Read on as we look at the European Dividend Aristocrats.
Follow these 13 actionable tips to stretch your money!
Whether you own or rent, there’s no doubt your budget has been feeling the effects of recent inflation. And while you’re powerless to improve the current economic changes, that doesn’t mean you can’t take action to combat higher prices. High inflation decreases your purchasing power, forcing you to spend more and get less in return. As a result, higher prices make it difficult to save money and reach your financial goals. Perhaps you’re not ready to take drastic measures like moving to a smaller apartment or taking public transportation. Instead, start with minor changes that will stretch your money so you get more bang for your buck.
1. Set financial goals
Goal setting is an important — yet often overlooked — step when trying to make progress with your finances. Don’t worry if it feels premature based on your current affairs. Setting goals and executing a plan to achieve them is powerful.
Keeping a specific goal in mind makes you more intentional with your working, saving and spending. In addition, focusing on your financial goals will give you the necessary clarity to make sound money decisions and the motivation to push forward.
2. Live on a budget
Getting good at making your money go further requires a certain level of financial awareness. Once your paycheck hits your bank account, do you have a plan for how you’ll spend your money, or do you go with the flow?
Having a plan is crucial, and a budget is a spending plan. The act of creating a budget is simply making a plan for how you’ll spend your money. Learning to live on a budget means you consistently create a spending plan and take steps to stick to that plan throughout the budget period.
Budgeting is a marathon
The first step to successful budgeting is to expect a learning curve. Becoming a budgeting master is a valuable skill that takes time to develop. So, commit to pushing through the tough months even when it feels like you’re doing it all wrong.
Budget your way
A quick Google search on “how to budget” will display many budgeting types and options — don’t get overwhelmed. As your budgeting prowess grows, you’ll begin to learn what methods do and do not work for you.
Approach budgeting as one-size-fits-some rather than one-size-fits-all. There are many different ways to budget. And, when used consistently, each of them will move you closer to reaching your goals. You may realize you prefer to manage your money with digital tools or use a budget binder to organize a more traditional paper budget.
Humans have a pesky habit of overcomplicating things, but budgeting doesn’t require anything elaborate or complicated. If you’ve tried percentage-based budgeting and it was an epic fail, there are simpler options to help you stretch your money further.
We’ve discovered that many folks gain more control over their finances when they manage their money using a zero-based (or zero-sum) budget.
In its simplest form, a zero-based budget looks like INCOME – EXPENSES = 0.
Assign every dollar of your income to carry out a specific financial “job.” Each dollar must serve a purpose, and it’s up to you to decide whether that purpose — spend, save, invest or give. Once you’ve given each of your dollars their assignments and your total income minus your total expenses equals zero, you have implemented a proper zero-based budget.
3. Track your spending
If you often wonder where your money went, it’s time to track your spending. While you may have a general idea of where your money goes each month, how clear are you on the specifics? For example, do you know how much money you actually spent on groceries, fuel and dining out last month?
Get clear on exactly how much you’re spending in each budget category. Having a better grasp on your spending is especially important when deciding how much rent or car payment you can afford each month.
Grab your phone or a notebook and add an entry each time you spend money. Exclude fixed expenses as you’ll be tracking those in your actual budget. Instead, focus on logging your Target trips, grocery runs and coffee pitstops.
Track your spending for a solid month, if possible. If you can’t swing a month, aim for at least two full weeks. At the end of your tracking period, enter your spending data on a spreadsheet or grab a few highlighters to color-code your spending.
Total each category to see exactly how much you’ve spent and compare it to your budget. The information you’ll gather from this exercise is invaluable and helpful when you want to stretch your money in a more balanced way. Your total spend numbers will point to where most of your spending is.
Your spending should reflect your values and priorities. If you discover this is not the case for you, what adjustments you need to make will be clear.
4. Avoid overspending
Overspending can creep up on you. What may feel like $10 swipes of your card a few times a week can quickly amount to high credit card balances or going over budget.
Consider these simple changes to reduce overall spending:
Order groceries online to avoid impulse purchases
Reduce online shopping frequency (e.g., order from Amazon only once per month)
Keep a running “wishlist” of items you want or need. When you come across a great deal, check your list — if the thing is on your list, buy it. If it’s not, move on.
Unsubscribe from retail emails that tempt you to spend
Add a personal spending category to your budget. Allocating a specific amount of money to spend in any way you see fit, guilt-free.
It’s not about money
Overspending is often misleading. The reality is overspending is rarely about the actual spending and is almost always caused by an emotional trigger. Therefore, the key to curbing overspending is identifying your trigger(s) and avoiding it (them).
Think back to the last time you felt shame or guilt for overspending. Then, go deeper to understand the underlying emotion that drove your spending? Were you tired? Did you have a bad day at work? Did you fight with your partner?
Retail therapy may feel helpful because we get a boost of adrenaline when we spend. However, you only perpetuate the problem when you avoid dealing with the emotions driving your spending habits. Instead, pay attention to exactly how you’re feeling the next time you experience the urge to spend money.
Once you’ve identified your spending triggers, create a plan to avoid them and break your pattern of overspending.
5. Negotiate your bills
A great way to stretch your dollar is to negotiate your bills each year. You’ll be shocked by how many of your service providers are willing to lower your rates with a simple request.
Review your monthly expenses and make a list of providers to contact. You can call the company or use their live chat feature if they have one. Explain to the representative that you want to reduce your monthly payment and inquire about their best deal. Expect a few “nos” and many a “yes,” especially if you’re kind and polite when requesting a discount.
This strategy is perfect for saving money on your:
Cell phone bill
Car insurance bill
Credit card and bank fees
Other insurance premiums
Regarding medical expenses, your best bet is to contact the billing department and offer to pay them a percentage of the total balance. Often, the provider is willing to accept a fraction of the amount owed to settle the account.
6. Pay off debt
Debt payments, especially those with high-interest rates, can eat up your income quickly. Creating a debt payoff plan will give you a road map to paying off your debt and keeping the money you previously sent to your debtors each month.
In addition, if you have a good payment history, contact your credit card servicers and request a lower interest rate. Refinancing is also an excellent option for securing a lower mortgage payment or reducing your minimum payment on personal loans or federal student loans.
Avoid future debt
As you work to get out of debt, it’s good practice to avoid taking on future debts. Trading old debt for new debt is counterproductive and will keep you stuck in a perpetual debt cycle.
7. Plan ahead
Planning into the next quarter, or even an entire year, can help you maximize your savings. In addition, saving a full three to six months of living expenses as an emergency fund will prepare you for any emergencies you experience.
Maintaining an emergency fund will protect your finances against increased expenses in the future, possible sickness, accidents or loss of income.
Forecast your upcoming expenses for the next 6-12 months and determine which you can begin saving for now. Items, such as Christmas gifts, birthdays, tuition, vacations, annual bills, etc., are all expenses you can save for, using sinking funds.
Save a small amount each month (or paycheck) until you save enough money to cover the expenses in full. Keep your sinking funds in a separate savings account to avoid accidental spending.
8. Try a savings challenge to stretch your money
Challenges and competitions are very motivating. And when otherwise unpleasant activities feel like a game, even adults can find enjoyment. Get started with a simple challenge, such as saving each five-dollar bill you receive or tossing your loose change into a jar for a predetermined time.
Are you competitive by nature? Ask some close friends or family members to join you. You’ll all benefit from holding each other accountable and boosting the competition factor.
9. Plan your meals
More than any other suggestion on this list, meal planning has the potential to stretch your money further. You’ve likely noticed your grocery bill increasing month after month. Plan out your meals and use that plan to create a shopping list.
Making a mental note of meals you’re hungry for while grocery shopping does not constitute meal planning. More often than not, heading to the grocery store without an intentional plan will cause you to go over budget.
Food waste accounts for 30-40 percent of the food supply in the United States (as of 2021). Shopping for groceries without planning often leads to a fridge full of unused fresh fruit and produce at the end of the week. If your food budget is $1,000 per month, that means $300-$400 of that budget will probably be wasted, if you’re not planning.
10. Stretch your money by ditching your cable
One of the easiest ways to maximize your money is to cancel your cable service. Today, 56 percent of U.S. homes no longer rely on cable or satellite boxes for content.
We’re fortunate to have the unique opportunity to stop paying for dozens of channels we don’t watch and customize our viewing experience. In addition, the number of available streaming services has exploded in recent years, with live sports and bundles finally being an option without cable packages.
Have an attachment to traditional cable and refuse to go without it? Keep your subscription but use tip No. 5 to negotiate a better deal.
11. Get a programmable thermostat
Unfortunately, energy costs are on the rise, too. Depending on your location, you’ll experience increased costs throughout the summer months (even if you’re trying to stretch your money). However, an Energy Star Certified programmable thermostat can cut your utility costs by up to 8 percent per year (around $50/year).
Not only will a programmable thermostat save you money but buying a “smart” model that works with Amazon’s Alexa or Google’s Home systems will also offer the convenience of allowing you to control the temperature with your voice.
Double your savings
Some programmable thermostats can cost upwards of $200, but more affordable options are available. In addition, many natural gas and electricity providers offer rebates for switching to a programmable thermostat.
In some instances, the rebate amount may even exceed the thermostat price. Contact your providers before purchasing your thermostat to determine which models qualify for rebates in your area.
12. Use an app
Looking for more convenient ways to stretch your money? There’s an app for that! Using mobile apps to save money or earn cashback on purchases are easy ways to combat higher prices.
Apps are available to save money on groceries, household items and even fuel. Other apps offer cashback when shopping online and in-store with your favorite retailers. There are even apps that will reward you for exercising.
Keep in mind that using cashback apps won’t make you rich. But using them consistently will help you save money on your everyday purchases, plus earn cashback rewards you can redeem for gift cards or cash.
13. Get a side hustle
There’s no doubt that cutting costs and saving money is a solid strategy to help stretch your money. But, focusing on increasing your income at the same time will boost your finances into overdrive. Plus, finding new, creative ways to earn small amounts of money in your free time will diversify your income and put you on the fast track to reaching your financial goals.
Monetize your passion
Here’s the good news: we live in an era where you can make money in countless unique, exciting ways. You no longer have to work overtime at a job you hate to make your rent payments each month.
People are turning their passions into full-time incomes from side hustles, such as pet-sitting, baking and even posting on social media. Brainstorm a list of your favorite hobbies and different ideas to monetize them.
The bottom line
Rest assured, if you’re feeling increased financial pressure, you’re not alone. Understand that maintaining financial stability in these uncertain economic times is still possible. Lowering your expenses and making a margin in your budget will allow you to spend your money on the things that matter most.
Licensed master plumbers have the highest earning potential. The top 10% of plumbers can earn ,920 a year, according to the Bureau of Labor Statistics.
And on the high end, earning potential for master plumbers nearly reached 0,000 for the top 10%.
How Much School Do Plumbers Need?
How to Become a Plumber in 4 Steps
Potential education topics at a vocational school might include plumbing theory, water distribution, blueprint reading, draining and venting, pipe cutting and soldering and even electrical basics.
If you are currently a high school student interested in becoming a plumber, take all the math courses you can. In addition, choose classes like physics and shop to help you build an effective knowledge and skills base.
Becoming a plumber is all about licensure, so college is not a requirement. However, plumbers typically need to have their high school diploma or general equivalency diploma (GED) to start an apprenticeship. A diploma or GED is also important if you plan to take any plumbing courses at a community college (more on that below).
1. Get Your High School Diploma or GED
To be considered a journeyman plumber, you will need to pass your state’s licensing exam. In general, you will need to renew this license every three to five years and take continuing education courses to maintain your licensed status.
A plumber’s skill set is varied. As a plumber, you will need the technical knowledge to diagnose plumbing problems and make repairs. You will also need to be proficient in using a wide variety of tools, including saws, hammers, screwdrivers, wrenches and torches. Remaining in top physical condition is crucial, as you will frequently do heavy lifting and perform tasks that require stamina, often in very hot or cold environments.
Most states require you to operate as a journeyman plumber for a set number of years (between two and five) before you can seek licensure as a master plumber. To earn your license, you’ll need to pass a written and practical exam.
2. Become an Apprentice
Upon completing your apprenticeship, you can apply to become a licensed journeyman plumber. Once you reach this status, you will be able to work unsupervised on commercial and residential projects.
Becoming a plumber does not require the college career path. Instead, you will complete high school and find work as an apprentice. After a few years, you can get licensed as a journeyman plumber and then a master plumber.
We’ve found the answers to the most commonly asked questions about becoming a plumber, including how long it takes until you’re repairing leaky sinks on your own.
To earn a plumbing license, you must first complete a four- to five-year apprenticeship and then pass the journeyman exam; an apprenticeship includes classroom instruction but no formal school program. Some plumbers choose to attend a year or two of plumbing trade school before their apprenticeship.
A plumbing apprenticeship program includes on-the-job training and some classroom instruction, but many plumbers choose to attend a vocational school as a first step. Plumbing trade schools may offer special certification or even a two-year associate degree.
3. Become a Journeyman Plumber
In general, you can find a plumbing apprenticeship program through trade unions, community colleges, trade schools and even private businesses. You might need to pass an exam or interview with a licensed plumber.
How Long Does It Take to Become a Plumber?
How Much Money Do Plumbers Make?
4. Become a Master Plumber
Ready to stop worrying about money?
Depending on your state, you may be able to earn special endorsements and certifications. For example, in the Lone Star State, in addition to your Texas plumbing license, you can obtain endorsements for medical gas piping installation, multipurpose residential fire protection sprinkler installation and water supply protection installation and repair.
Scroll on to learn how to become a plumber — and what you can expect out of the career.
Wondering how to become a plumber? Our guide covers the education, apprenticeship and licensing requirements on your journey to getting certified as a licensed plumber — and offers a peek into the day-to-day, job outlook and typical salary.
Optional: Go to a Trade School
Earning a special degree or certification can give you a leg-up when applying for competitive apprenticeships.
In high school, math will be crucial to your role as a plumber. Each day, plumbers use concepts from algebra and geometry, and they’re regularly calculating using various units of measure.
At the journey level, you can work for a plumbing company or start your own business.
How Much Do Plumbers Make?
Plumbers can work on both residential and commercial projects. The day-to-day duties might include remodeling bathrooms and kitchens, replacing and repairing water and drain lines, installing new water heaters, installing new faucets, installing new toilets and installing water filtration systems.
In 2021, the median pay for plumbers was ,880, but the top 10% earned ,920.
As a master plumber, you’ll reach peak earning potential and can even run your own plumbing business.
What Do Plumbers Do?
If you want to work in a supervisory capacity or be able to employ additional plumbers for your business, you will need to become a licensed master plumber.
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Plumbing apprenticeships generally last four to five years, during which time you’ll receive roughly 2,000 hours of on-the-job training in the plumbing trade, plus technical instruction. During this time, you’ll learn about local plumbing codes and regulations, how to read blueprints and OSHA safety regulations.Advanced education may cover topics like plumbing fixtures and drainage systems. Unlike pursuing a college degree, however, plumbing apprenticeships are paid.
The median pay for plumbers last year was ,880, according to the Bureau of Labor Statistics. Though the labor is tough, hours can be long and the work can be dangerous, becoming a licensed plumber may be well worth it if you have the necessary skills and dedication.
Frequently Asked Questions (FAQs) About Becoming a Plumber
Becoming a licensed plumber takes at least four to five years, as this is the general length of an apprenticeship. Some aspiring plumbers choose a year or two of vocational school before their apprenticeship. After completing an apprenticeship, you can earn your journeyman and then master plumber license.
As an apprentice plumber, you won’t be able to tackle projects yourself. Instead, you will shadow a journeyman plumber or a master plumber, depending on the program.
License laws and types vary by state. Determine the state that you wish to operate in as a plumber, and research those specific guidelines. The steps below offer a more general look at how to become a plumber.
Plumbers need to be able to cut and solder pipes, diagnose and troubleshoot issues with plumbing systems and interpret (or even draw) blueprints. If you run your own plumbing company, you will also need to handle advertising, scheduling, taxes and billing — or hire someone to do that for you.
An apprenticeship offers on-the-job experience and classroom education. Programs vary by state and organization in terms of structure, length and application process.
Skilled plumbers fulfill a crucial need in society, and demand for plumbers continues to grow. Though the manual labor is often grueling, a career in plumbing can be quite lucrative — and doesn’t require expensive schooling and massive student loan debt.
Once you have your diploma or GED, the next step to becoming a licensed plumbing contractor is either attending plumbing school or completing an apprenticeship. Plumbing school is typically optional (but we’ve got more details below); many plumbing hopefuls skip straight to an apprenticeship. <!–
Contributor Timothy Moore is a writer and editor in Cincinnati, Ohio. He focuses on banks, loans and insurance for The Penny Hoarder. His work has been featured on Debt.com, The Ladders, Glassdoor, WDW Magazine, Angi and The News Wheel. Plumbers often work in tight, cramped, hot spaces and face grueling conditions every day. They regularly encounter hazardous materials and raw sewage and must adhere to safety standards to avoid work-related injuries, including electrical shock and contamination. Source: thepennyhoarder.com
While the BLS targets 5% job growth through 2030, the increase in home renovation projects due to the ongoing pandemic may create even more plumbing jobs in the years ahead.
People have always grumbled that a dollar doesn’t go as far as it used to. But these days, that complaint is truer than ever. No matter where you go — the gas station, the grocery store, the movies — prices are higher than they were just a month or two ago.
What we’re seeing is the return of a familiar economic foe: inflation. Many Americans alive today have never seen price increases like these before. For the past three decades, inflation has never been above 4% per year. But as of March 2022, it’s at 8.5%, a level not seen since 1981.
Modest inflation, like what we had up through 2020, is normal and even healthy for an economy. But the rate of inflation we’re seeing now is neither normal nor healthy. It does more than just raise the cost of living. It can have a serious impact on the economy as a whole.
Recent inflation-related news:
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In March 2022, the U.S. inflation rate hit a 40-year high of 8.5%.
Prices for gasoline have increased nearly 50% over the past year.
Retail giant Amazon has added a 5% fuel and inflation surcharge for sellers.
The Federal Reserve is planning a series of interest rate hikes to cool the overheated economy.
What Is Inflation?
Inflation is more than just rising prices. Prices of specific things we buy, from a gallon of milk to a year of college tuition, rise and fall all the time. These price increases affect individual consumers’ lives, but they don’t have a big impact on the entire economy.
Inflation is a general increase in the prices of goods and services across the board. It drives up prices for everything you buy, from a haircut to a gallon of gas. Or, to put it another way, the purchasing power of every dollar in your pocket declines.
Most of the time, inflation doesn’t disrupt people’s lives too much, because prices rise for labor as well. If your household spending increases by 5% but your paycheck increases by 5% at the same time, you’re no worse off than before.
But when prices rise sharply, wages can’t always keep up. That makes it harder for consumers to make ends meet. It also drives them to change their spending behaviors in ways that often make the problem worse.
Causes of Inflation
Inflation depends on the twin forces of supply and demand. Supply is the amount of a particular good or service that’s available. Demand is the amount of that particular good or service that people want to buy. More demand drives prices up, while more supply drives them down.
To see why, suppose you have 10 loaves of bread to sell. You have 10 buyers who want bread and are willing to pay $1 per loaf. So you can sell all 10 loaves at $1 each.
But if 10 more buyers suddenly enter the market, they will have to compete for your bread. To make sure they get some, they might be willing to pay as much as $2 per loaf. The higher demand has pushed the price up.
By contrast, if another seller shows up with 10 loaves of bread, the two of you will be competing for buyers. To sell your bread, you might have to lower the price to as little as $0.50 per loaf. The higher supply has pushed prices down.
Inflation results from demand outstripping supply. Economists often describe this as “too much money chasing too few goods.” There are several ways this kind of imbalance can happen.
Cost-push inflation happens when it costs more to produce goods. To go back to the bread example, cost-push inflation might happen because a wheat shortage makes flour more expensive. It costs you more to make each loaf of bread, so you can’t afford to bake as much.
As a result, you bring only five loaves to the market. But there are still 10 customers who want to buy bread, so they must pay more to get their share. The higher cost of production drives down the supply and thus drives up the price.
In the real world, cost-push inflation can result from higher costs for anything that goes into making a product. This includes:
Raw Materials. The wheat that went into your bread is an example. Higher-cost wheat means higher-cost flour, which means higher-cost bread.
Transportation. In today’s global economy, materials and finished goods move around a lot. Transporting products requires fuel, which usually comes from oil. So whenever oil prices go up, the price of other goods rises as well.
Labor. Another factor in production cost is labor. When schools closed during the COVID-19 pandemic, many parents had to stop working to care for their children. That created a worker shortage that drove prices up.
The opposite of cost-push inflation is demand-pull inflation. It occurs when consumers want to buy more than the market can supply, driving prices up.
Typically, demand-pull inflation results from economic growth. Rising wages and lower levels of unemployment put more money in people’s pockets, and people who have more money want to spend more. If the booming economy hasn’t produced enough goods and services to match this new demand, prices rise.
Other causes of demand-pull inflation include:
Increased Money Supply. Another way people can end up with more money in their pockets is because the government has put more money in circulation. Governments often do this to stimulate a weak economy or to pay off past debts. But as the money supply increases, the purchasing power of each dollar shrinks.
Rapid Population Growth. When the population grows rapidly, the demand for goods and services grows also. If the economy doesn’t produce more to compensate, prices rise. In Europe during the 1500s and 1600s, prices soared as the population grew so fast that agriculture couldn’t keep up with the new demand.
Panic Buying. Early in the COVID pandemic, consumers started buying extra groceries to fill their pantries in preparation for a lockdown. This led to shortages of many staple products, like milk and toilet paper. As a result, prices for those goods went up.
Pent-Up Demand. This occurs when people return to spending after a period of going without. This often happens in the wake of a recession. It also occurred as pandemic restrictions eased and people returned to enjoying movies, travel, and restaurant meals.
When consumers expect prices to be higher in the future, they often respond by spending more now. If the purchasing power of their savings is only going to fall, it makes more sense to take that money out of the bank and use it on a major purchase, like a new car or a large appliance.
In this way, expectations of high inflation can themselves lead to inflation. This type of inflation is called built-in inflation because it builds on itself.
When workers expect the cost of living to rise, they demand higher wages. But then they have more to spend, so they spend more, driving prices up. This, in turn, reinforces the belief that prices will keep rising, leading to still higher wage demands. This cycle of rising wages and prices is called a wage-price spiral.
Effects of Inflation
Inflation does more than just drive up the cost of living. It changes the economy in a variety of ways — some harmful, others helpful. The effects of inflation include:
Higher Wages. As prices rise with inflation, wages typically rise as well. This can create a wage-price spiral that drives inflation still higher.
Higher Interest Rates. When the dollar is declining in value, banks often respond by raising interest rates on loans. The Federal Reserve also typically raises interest rates to cool the economy and rein in inflation, as discussed below.
Cheaper Debt. Inflation is good for debtors because they can pay off their debts with cheaper dollars. This is most useful for loans with a fixed interest rate, such as fixed-rate mortgages and student loans.
More Consumption. Inflation encourages consumers to spend money because they know it will be worth less later. All this spending keeps the economy humming, but it can also drive prices even higher.
Lower Savings Rates. Just as inflation encourages spending, it discourages saving. Higher interest rates can counter this effect, but they often don’t rise enough to make a difference.
Less Valuable Benefits. High inflation is worse for people on a fixed income. They face higher prices without higher wages to make up for them. Benefits such as Social Security change each year to adjust for inflation, but higher benefits next year don’t help when prices are rising right now.
More Valuable Tangible Assets. Inflation reduces the purchasing power of the dollars you have in the bank. Tangible assets like real estate, however, gain in dollar value as prices rise.
The most common measure of inflation is the Consumer Price Index, or CPI. The Bureau of Labor Statistics (BLS) determines the CPI based on the cost of an imaginary basket of goods and services. BLS workers painstakingly check prices on all these items each month and record how each price changes.
To calculate the annual rate of inflation, the BLS looks at how much all prices in its basket have changed since a year earlier. Then it “weights” the value of each item based on how much of it people buy. The weighted average of all items becomes the CPI.
The BLS then uses the CPI to calculate the annual rate of inflation. It divides this month’s CPI by the CPI from a year ago, then multiplies the result by 100. This shows how the purchasing power of a dollar has changed over the last year. The result is reported monthly.
Other measures of inflation include:
Personal Consumption Expenditures Price Index (PCE). This inflation measure is published by the Bureau of Economic Analysis. Like the CPI, it’s a measure of consumer costs, but it’s adjusted to account for changes in the products people buy. The Federal Reserve uses the PCE to guide its monetary policy, as discussed below.
Producer Price Index (PPI). The PPI measures inflation from the seller’s perspective, not the buyer’s. It’s calculated by dividing the price sellers currently get for a basket of goods and services by its price in a base year, then multiplying the result by 100.
Historical Examples of Inflation
A little bit of inflation is normal. But sometimes inflation spirals out of control, with prices rising more than 50% per month. This is called hyperinflation, and it can be devastating for an economy.
Hyperinflation has occurred at various times and places throughout history. During the U.S. Civil War, both sides experienced soaring inflation. Other examples include Germany in the 1920s, Greece and Hungary after World War II, Yugoslavia and Peru in the 1990s, and Venezuela today. In most cases, the main cause was the government printing money to pay for debt.
The last time the U.S. had prolonged, high rates of inflation was in the 1970s and early 1980s. The inflation rate was nowhere near hyperinflation levels, but it spiked above 10% twice. Eventually, the Fed hiked interest rates to double-digit levels to get it under control.
Although high inflation can be destructive, zero inflation isn’t a good thing, either. At that point, an economy is at risk of the opposite problem, deflation.
When prices and wages fall across the board, consumers spend less. Sales of products and services fall, so companies cut back staff or go out of business. As a result, jobs are lost and spending drops still more, worsening the problem. The Great Depression was an example.
The Federal Reserve, or Fed, is the U.S. central bank — or more accurately, banks. It’s a group of 12 banks spread across the country under the control of a central board of governors. Its job is to keep the economy on track, reining in inflation while trying to avoid recessions.
The Fed maintains this balance through monetary policy, or controlling the availability of money.
Its main tool for doing this is interest rates. When the economy is weak, the Fed lowers the federal funds rate. This makes it easier for people to borrow and spend.
When the problem is inflation, it does the opposite, raising interest rates. This makes it more costly to borrow and more worthwhile to save. As a result, consumers spend less, slowing down the wage-price spiral.
The Fed has other tools for fighting inflation as well. One option is to change reserve requirements for banks, requiring them to hold more cash. That gives them less to lend out, which in turn reduces the amount consumers and businesses have to spend.
Finally, the Fed can reduce the money supply directly. The main way it does this is to increase the interest rate paid on government bonds. That encourages more people to buy bonds, which temporarily takes their money out of circulation and puts it in the hands of the government.
Inflation Frequently Asked Questions (FAQs)
If you keep seeing stories about inflation in the news, you may have some other questions about how it works. For instance, you may wonder:
What Is Hyperinflation?
Hyperinflation is more than just high inflation. It’s a wage-price spiral gone mad, sending prices soaring out of control. As noted above, the usual definition of hyperinflation is an inflation rate of at least 50% per month — more than 12,000% per year. However, some economists use the term to refer to an inflation rate of 1,000% or more per year.
What Is Disinflation?
Disinflation is a fall in the rate of inflation. This is what the Federal Reserve and other central banks try to achieve through their monetary policy, such as raising interest rates.
Disinflation is not the same as deflation, or falling prices. During a period of disinflation, prices are continuing to rise, but the rate at which they rise is slowing down.
What Is Transitory Inflation?
When the first signs of a post-COVID-19 inflation spike appeared, Federal Reserve chair Jerome Powell described it as “transitory.” By this, he meant that the rise in prices would be short-lived and would not do permanent damage to the economy.
However, in November 2021, Powell declared it was “time to retire that word.” Based on the growth in prices, he had concluded that inflation was more of a long-term trend. The Federal Reserve responded by planning to fight inflation harder, buying more bonds and plotting out a series of interest rate hikes.
What Is Core Inflation?
Measuring inflation can be tricky because prices for some products fluctuate more than others. Food and energy prices, in particular, can shift a lot from month to month. Including these products in the CPI can lead to sharp, but temporary, spikes or dips in the inflation rate.
To adjust for this, the CPI and PCE have a separate “core” version that doesn’t include food or energy prices. This core inflation measure is more useful for predicting long-term trends. The main versions of the CPI and PCE, known as the “headline” versions, give a more accurate picture of how prices are changing right now.
What Is the Consumer Price Index (CPI)?
As noted above, the Consumer Price Index, or CPI, is the main measure of inflation in the United States. The BLS calculates it based on how much prices have risen for an imaginary basket of goods and services that many Americans buy.
A little inflation in an economy is normal. It can even be a good thing, because it’s a sign that consumers are spending and businesses are earning. The Fed generally considers an annual inflation rate of 2% to be healthy.
However, higher inflation can cause serious problems for an economy. It’s bad for savers whose nest eggs, including retirement savings, shrink in value. It’s even worse for seniors and others on fixed incomes whose purchasing power has fallen. And it often requires strong measures from the central bank to correct it — measures that risk driving the economy into a recession.
If you’re concerned about the effects of inflation, there are several ways to protect yourself. You can adjust your household budget, putting more dollars into the categories where prices are rising fastest. You can stock up on household basics now, before the purchasing power of your dollars falls too much.
Finally, you can choose investments that do well during periods of inflation. Stock-based mutual funds and real estate investment trusts are both good choices. Just be careful with inflation hedges like gold and cryptocurrency, which carry risks of their own.
GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.
Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.
Here’s a slice of old Hollywood charm at its finest: a West Hollywood penthouse that was once home to Marilyn Monroe has just resurfaced on the market.
The actress, who rose to fame playing comedic “blonde bombshell” characters — which propelled her to become one of the most popular sex symbols of the 1950s and early 1960s — moved into the two-story penthouse in the mid-50s, at the height of her success.
Marilyn called many places home over the years. In fact, sources say that Monroe lived in over 43 separate residences over the years.
From high-end hotels to small apartments and sprawling Spanish-style mansions, to a brief stint living in Frank Sinatra’s guest house, or taking an extended (and somewhat controversial) stay at Bing Crosby’s Rancho Mirage estate, Marilyn Monroe moved around quite a few times before settling on a place of her own.
In 1954, the Monkey Business actress moved into a two-level penthouse at the Granville Towers, which sources say was her final apartment before she bought her Brentwood estate — which was the only property Marilyn ever owned.
After splitting from her second husband, New York Yankees star Joe DiMaggio, Monroe moved into her seventh (and last) apartment in West Hollywood. For about a year, the model-actress set up residence in the luxurious condo that has just been listed for $2.49 million.
And Monroe may have not been the only famous “blonde bombshell” to live in the two-story apartment. A Los Angeles Times story from three years ago also identified Portia de Rossi as a former resident.
A stylish residence set in a star-studded building
Oozing old Hollywood charm, the posh penthouse is located in one of the most spectacular buildings in West Hollywood.
Set on the top floor of Granville Towers, a 1930s French Normandy-style Hollywood classic, Monroe’s former abode boasts gorgeous architectural elements such as vaulted ceilings and floor-to-ceiling skylight windows.
Located at the corner of Sunset Boulevard and Crescent Heights, the 2,032-square-foot apartment offers sweeping views of the city and mountains.
Featuring two bedrooms and two bathrooms, a stunning circular staircase connects the two levels of luxurious living space.
The elegant interiors include glistening hardwood floors, spa-like bathrooms and built-in window seats.
The kitchen boasts Venetian plaster, steel cabinetry and Viking appliances, and the formal dining room includes a jaw-dropping chandelier.
While the location is prime, the amenities are just as impressive. With a 24-hour doorman always on duty, the old Hollywood building includes a beautiful courtyard and garden, a clubhouse, outdoor pool and spa.
Marilyn was by no means to only high-profile celebrity to call the West Hollywood building home.
A celebrity favorite, Granville Towers has attracted many A-listers in its almost century-long existence. In recent years, celebrities like Nicole Scherzinger, Ashley Greene, Mickey Rourke, Brendan Fraser, or David Bowie have all lived in the posh building.
Listed by Amanda Lynn, Gina Michelle and George Ouzounian of The Agency, Marilyn Monroe’s former home is almost a collectible for die-hard fans of old Hollywood.
More celebrity homes you might like
Frank Sinatra’s Famous Byrdview Estate Is Back on the Market Asking $21.5 MillionHistoric Old Hollywood Charm: See Inside Vanessa Hudgens’ Luxurious Los Feliz Estate The Story of Taylor Swift’s Holiday House — Home to “the Last Great American Dynasty” The Iconic Beverly House: where Jackie O & JFK Honeymooned, ‘The Bodyguard’ was Filmed, and where Beyonce Shot ‘Black is King’
Wall Street spent most of Friday applying some vibrant lipstick to what was otherwise a pig of a week for investors.
A broad market rally – one that saw each of the S&P 500’s 11 sectors finish higher – wasn’t a response to any new positive catalysts. Quarterly reports were light today, with most investors flipping the earnings calendar to next week’s retail-heavy slate.
And Friday’s most noteworthy datapoint was the University of Michigan’s latest consumer sentiment index reading, which dropped from 65.2 in April to 59.1 in May – a 10-year nadir that was well lower than the 64.1 reading expected.
Sometimes the market just enjoys a relief rally.
“Following a week of heavy selling, but with inflationary pressures easing just at the margin, and the Fed still seemingly wedded to 50-basis-point hikes for each of the next two FOMC meetings, the market was poised for the kind of strong rally endemic to bear market rallies,” says Quincy Krosby, chief equity strategist for LPL Financial.
He adds that given the Federal Reserve is only at the beginning of its rate-hike cycle and would like to see demand pull back further, “this rally will most likely weaken.”
Of course, even if this is just a pause before more market declines, investors don’t necessarily have to time the bottom to buy in at a decent valuation.
“This is still an attractive entry point, as we do not believe this is 1999/2000,” says Nancy Tengler, CEO and CIO of asset management firm Laffer Tengler Investments.
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The buying was strongest in consumer discretionary stocks (+3.9%) such as Amazon.com (AMZN, +5.7%) and Tesla (TSLA, +5.7%), along with technology plays (+3.3%) including Nvidia (NVDA, +9.5%) and Advanced Micro Devices (AMD, +9.3%).
Energy (+3.4%) was also bid higher amid a big pop in oil; U.S. crude futures finished 4.1% higher to $110.49 per barrel, helping to spark new highs in gasoline futures prices.
Notably absent from the rally was Twitter (TWTR, -9.7%), which sank after Elon Musk tweeted that the deal was “temporarily on hold.”
All the major indexes put up spectacular gains Friday, though for the week, it was still losses all around: The Nasdaq Composite (+3.8% to 11,805) still finished off 2.8% for the week, the S&P 500 (+2.4% to 4,023) was down 2.4% across the five days, and the Dow Jones Industrial Average (+1.5% to 32,196) closed the week 2.1% in the red.
Other news in the stock market today:
The small-cap Russell 2000 bounced 3.1% to 1,792.
Gold futures had no such luck. The yellow metal was off 0.9% to a 14-week low of $1,808.20 per ounce.
Bitcoin snapped back 5.1% to $30,034.99. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
Keep Your Guard Up Against Inflation
Inflation is prevalent virtually everywhere – including on corporate America’s earnings calls.
We’re most of the way through the first-quarter earnings season, and over the past few months, publicly traded companies keep repeating the “I” word as they discussed their most recent financial results.
FactSet used its Document Search technology to track mentions of the term “inflation” on corporate earnings calls, According to their senior earnings analyst, John Butters, of the 455 S&P 500 companies that have conducted earnings conference calls from March 15 through May 12, “377 have cited the term ‘inflation’ … which is well above the five-year average of 155.”
In fact, this is the highest overall number of S&P 500 companies citing inflation on their calls going back to at least 210. (The previous record? 356 … in the final quarter of 2021.)
It’s another signal that inflation continues to be a persistent problem – and with forecasts calling for still-high inflation to come, more active investors might do well to pack a little more protection. We’ve previously analyzed other ways to stay in front of inflation, such as stocks with pricing power and inflation-fighting funds.
Today, we look at another batch of investments that can help harness high inflation, with a focus on commodities, real estate and other areas of the market.
Kyle Woodley was long AMD, AMZN and NVDA as of this writing.
The mortgage industry is rife with jargon and acronyms, from LTV to DTI ratios. One term you’ll hear sooner or later is “conventional mortgage loan.”
It sounds boring, but it couldn’t be more important. Unless you’re a veteran, live in a rural area, or have poor credit, there’s a good chance you’ll need to apply for a conventional mortgage loan when buying your next house.
Which means you should know how conventional mortgages differ from other loan types.
What Is a Conventional Mortgage Loan?
A conventional loan is any mortgage loan not issued or guaranteed by the Federal Housing Administration (FHA), Department of Veterans’ Affairs (VA), or U.S. Department of Agriculture (USDA).
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Most conventional loans are backed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). These government-sponsored enterprises guarantee the loans against default, which lowers the cost for borrowers by lowering the risk for lenders.
As a general rule, stronger borrowers tend to use these private conventional loans rather than FHA loans. The exception concerns well-qualified borrowers who qualify for subsidized VA or USDA loans due to prior military service or rural location.
How a Conventional Mortgage Loan Works
In a typical conventional loan scenario, you call up your local bank or credit union to take out a mortgage. After asking you some basic questions, the loan officer proposes a few different loan programs that fit your credit history, income, loan amount, and other borrowing needs.
These loan programs come from Fannie Mae or Freddie Mac. Each has specific underwriting requirements.
After choosing a loan option, you provide the lender with a filing cabinet’s worth of documents. Your file gets passed from the loan officer to a loan processor and then on to an underwriter who reviews the file.
After many additional requests for information and documents, the underwriter signs off on the file and clears it to close. You then spend hours signing a mountain of paperwork at closing. When you’re finished, you own a new home and a massive hand cramp.
But just because the quasi-governmental entities Fannie Mae and Freddie Mac back the loans doesn’t mean they issue them. Private lenders issue conventional loans, and usually sell them on the secondary market right after the loan closes. So even though you borrowed your loan from Friendly Neighborhood Bank, it immediately transfers to a giant corporation like Wells Fargo or Chase. You pay them for the next 15 to 30 years, not your neighborhood bank.
Most banks aren’t in the business of holding loans long-term because they don’t have the money to do so. They just want to earn the points and fees they charge for originating loans — then sell them off, rinse, and repeat.
That’s why lenders all follow the same loan programs from Fannie and Freddie: so they can sell predictable, guaranteed loans on the secondary market.
Conventional Loan Requirements
Conventional loans come in many loan programs, and each has its own specific requirements.
Still, all loan programs measure those requirements with a handful of the same criteria. You should understand these concepts before shopping around for a mortgage loan.
Each loan program comes with a minimum credit score. Generally speaking, you need a credit score of at least 620 to qualify for a conventional loan. But even if your score exceeds the loan program minimum, weaker credit scores mean more scrutiny from underwriters and greater odds that they decline your loan.
Mortgage lenders use the middle of the scores from the three main credit bureaus. The higher your credit score, the more — and better — loan programs you qualify for. That means lower interest rates, fees, down payments, and loan requirements.
So as you save up a down payment and prepare to take out a mortgage, work on improving your credit rating too.
If you have excellent credit, you can qualify for a conventional loan with a down payment as low as 3% of the purchase price. If you have weaker credit, or you’re buying a second home or investment property, plan on putting down 20% or more when buying a home.
In lender lingo, bankers talk about loan-to-value ratios (LTV) when describing loans and down payments. That’s the percentage of the property’s value that the lender approves you to borrow.
Each loan program comes with its own maximum LTV. For example, Fannie Mae’s HomeReady program offers up to 97% LTV for qualified borrowers. The remaining 3% comes from your down payment.
Debt-to-Income Ratio (DTI)
Your income also determines how much you can borrow.
Lenders allow you to borrow up to a maximum debt-to-income ratio: the percentage of your income that goes toward your mortgage payment and other debts. Specifically, they calculate two different DTI ratios: a front-end ratio and a back-end ratio.
The front-end ratio only features your housing-related costs. These include the principal and interest payment for your mortgage, property taxes, homeowners insurance, and condo- or homeowners association fees if applicable. To calculate the ratio, you take the sum of those housing expenses and divide them over your gross income. Conventional loans typically allow a maximum front-end ratio of 28%.
Your back-end ratio includes not just your housing costs, but also all your other debt obligations. That includes car payments, student loans, credit card minimum payments, and any other debts you owe each month. Conventional loans typically allow a back-end ratio up to 36%.
For example, if you earn $5,000 per month before taxes, expect your lender to cap your monthly payment at $1,400, including all housing expenses. Your monthly payment plus all your other debt payments couldn’t exceed $1,800.
The lender then works backward from that value to determine the maximum loan amount you can borrow, based on the interest rate you qualify for.
In 2022, “conforming” loans allow up to $647,200 for single-family homes in most of the U.S. However, Fannie Mae and Freddie Mac allow up to $970,800 in areas with a high cost of living.
Properties with two to four units come with higher conforming loan limits:
Limit in High CoL Areas
You can still borrow conventional mortgages above those amounts, but they count as “jumbo” loans — more on the distinction between conforming and non-conforming loans shortly.
Private Mortgage Insurance (PMI)
If you borrow more than 80% LTV, you have to pay extra each month for private mortgage insurance (PMI).
Private mortgage insurance covers the lender, not you. It protects them against losses due to you defaulting on your loan. For example, if you default on your payments and the lender forecloses, leaving them with a loss of $50,000, they file a PMI claim and the insurance company pays them to cover most or all of that loss.
The good news is that you can apply to remove PMI from your monthly payment when you pay down your loan balance below 80% of the value of your home.
Types of Conventional Loans
While there are many conventional loan programs, there are several broad categories that conventional loans fall into.
Conforming loans fit into Fannie Mae or Freddie Mac loan programs, and also fall within their loan limits outlined above.
All conforming loans are conventional loans. But conventional loans also include jumbo loans, which exceed the conforming loan size limits.
Not all conventional loans “conform” to Fannie or Freddie loan programs. The most common type of non-conforming — but still conventional — loan is jumbo loans.
Jumbo loans typically come with stricter requirements, especially for credit scores. They sometimes also charge higher interest rates. But lenders still buy and sell them on the secondary market.
Some banks do issue other types of conventional loans that don’t conform to Fannie or Freddie programs. In most cases, they keep these loans on their own books as portfolio loans, rather than selling them.
That makes these loans unique to each bank, rather than conforming to a nationwide loan program. For example, the bank might offer its own “renovation-perm” loan for fixer-uppers. This type of loan allows for a draw schedule during an initial renovation period, then switches over to a longer-term “permanent” mortgage.
The name speaks for itself: loans with fixed interest rates are called fixed-rate mortgages.
Rather than fluctuating over time, the interest rate remains constant for the entire life of the loan. That leaves your monthly payments consistent for the whole loan term, not including any changes in property taxes or insurance premiums.
Adjustable-Rate Mortgages (ARMs)
As an alternative to fixed-interest loans, you can instead take out an adjustable-rate mortgage. After a tempting introductory period with a fixed low interest rate, the interest rate adjusts periodically based on some benchmark rate, such as the Fed funds rate.
When your adjustable rate goes up, you become an easy target for lenders to approach you later with offers to refinance your mortgage. When you refinance, you pay a second round of closing fees. Plus, because of the way mortgage loans are structured, you’ll pay a disproportionate amount of your loan’s total interest during the first few years after refinancing.
Pros & Cons of Conventional Home Loans
Like everything else in life, conventional loans have advantages and disadvantages. They offer lots of choice and relatively low interest, among other upsides, but can be less flexible in some important ways.
Pros of Conventional Home Loans
As you explore your options for taking out a mortgage loan, consider the following benefits to conventional loans.
Low Interest. Borrowers with strong credit can usually find the best deal among conventional loans.
Removable PMI. You can apply to remove PMI from your monthly mortgage payments as soon as you pay down your principal balance below 80% of your home’s value. In fact, it disappears automatically when you reach 78% of your original home valuation.
No Loan Limits. Higher-income borrowers can borrow money to buy expensive homes that exceed the limits on government-backed mortgages.
Second Homes & Investment Properties Allowed. You can borrow a conventional loan to buy a second home or an investment property. Those types of properties aren’t eligible for the FHA, VA, or USDA loan programs.
No Program-Specific Fees. Some government-backed loan programs charge fees, such as FHA’s up-front mortgage insurance premium fee.
More Loan Choices. Government-backed loan programs tend to be more restrictive. Conventional loans allow plenty of options among loan programs, at least for qualified borrowers with high credit scores.
Cons of Conventional Home Loans
Make sure you also understand the downsides of conventional loans however, before committing to one for the next few decades.
Less Flexibility on Credit. Conventional mortgages represent private markets at work, with no direct government subsidies. That makes them a great choice for people who qualify for loans on their own merits but infeasible for borrowers with bad credit.
Less Flexibility on DTI. Likewise, conventional loans come with lower DTI limits than government loan programs.
Less Flexibility on Bankruptcies & Foreclosures. Conventional lenders prohibit bankruptcies and foreclosures within a certain number of years. Government loan programs may allow them sooner.
Conventional Mortgage vs. Government Loans
Government agency loans include FHA loans, VA loans, and USDA loans. All of these loans are taxpayer-subsidized and serve specific groups of people.
If you fall into one of those groups, you should consider government-backed loans instead of conventional mortgages.
Conventional Loan vs. VA Loan
One of the perks of serving in the armed forces is that you qualify for a subsidized VA loan. If you qualify for a VA loan, it usually makes sense to take it.
In particular, VA loans offer a famous 0% down payment option. They also come with no PMI, no prepayment penalty, and relatively lenient underwriting. Read more about the pros and cons of VA loans if you qualify for one.
Conventional Loan vs. FHA Loan
The Federal Housing Administration created FHA loans to help lower-income, lower-credit Americans achieve homeownership.
Most notably, FHA loans come with a generous 96.5% LTV for borrowers with credit scores as low as 580. That’s a 3.5% down payment. Even borrowers with credit scores between 500 to 579 qualify for just 10% down.
However, even with taxpayer subsidies, FHA loans come with some downsides. The underwriting is stringent, and you can’t remove the mortgage insurance premium from your monthly payments, even after paying your loan balance below 80% of your home value.
Consider the pros and cons of FHA loans carefully before proceeding, but know that if you don’t qualify for conventional loans, you might not have any other borrowing options.
Conventional Loan vs. USDA Loan
As you might have guessed, USDA loans are designed for rural communities.
Like VA loans, USDA loans have a famous 0% down payment option. They also allow plenty of wiggle room for imperfect credit scores, and even borrowers with scores under 580 sometimes qualify.
But they also come with geographical restrictions. You can only take out USDA loans in specific areas, generally far from big cities. Read up on USDA loans for more details.
Conventional Mortgage Loan FAQs
Mortgage loans are complex, and carry the weight of hundreds of thousands of dollars in getting your decision right. The most common questions about conventional loans include the following topics.
What Are the Interest Rates for Conventional Loan?
Interest rates change day to day based on both benchmark interest rates like the LIBOR and Fed funds rate. They can also change based on market conditions.
Market fluctuations aside, your own qualifications also impact your quoted interest rate. If your credit score is 800, you pay far less in interest than an otherwise similar borrower with a credit score of 650. Your job stability and assets also impact your quoted rate.
Finally, you can often secure a lower interest rate by negotiating. Shop around, find the best offers, and play lenders against one another to lock in the best rate.
What Documents Do You Need for a Conventional Loan?
At a minimum, you’ll need the following documents for a conventional loan:
Identification. This includes government-issued photo ID and possibly your Social Security card.
Proof of Income. For W2 employees, this typically means two months’ pay stubs and two years’ tax returns. Self-employed borrowers must submit detailed documentation from their business to prove their income.
Proof of Assets. This includes your bank statements, brokerage account statements, retirement account statements, real estate ownership documents, and other documentation supporting your net worth.
Proof of Debt Balances. You may also need to provide statements from other creditors, such as credit cards or student loans.
This is just the start. Expect your underwriter to ask you for additional documentation before you close.
What Credit Score Do You Need for a Conventional Loan?
At a bare minimum, you should have a credit score over 620. But expect more scrutiny if your score falls under 700 or if you have a previous bankruptcy or foreclosure on your record.
Improve your credit score as much as possible before applying for a mortgage loan.
How Much Is a Conventional Loan Down Payment?
Your down payment depends on the loan program. In turn, your options for loan programs depend on your credit history, income, and other factors such as the desired loan balance.
Expect to put down a minimum of 3%. More likely, you’ll need to put down 10 to 20%, and perhaps more still.
What Types of Property Can You Buy With a Conventional Loan?
You can use conventional loans to finance properties with up to four units. That includes not just primary residences but also second homes and investment properties.
Do You Need an Appraisal for a Conventional Loan?
Yes, all conventional loans require an appraisal. The lender will order the appraisal report from an appraiser they know and trust, and the appraisal usually requires payment up front from you.
The higher your credit score, the more options you’ll have when you shop around for mortgages.
If you qualify for a VA loan or USDA loan, they may offer a lower interest rate or fees. But when the choice comes down to FHA loans or conventional loans, you’ll likely find a better deal among the latter — if you qualify for them.
Finally, price out both interest rates and closing costs when shopping around for the best mortgage. Don’t be afraid to negotiate on both.
GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.
G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.
Though both offer the convenience of buying something now and paying for it later, there’s definitely a difference between a charge card and a credit card when the monthly bill arrives. With a credit card, you can either pay the full amount owed or make a minimum payment and carry the balance forward. With a charge card, no matter how much you owe, you’re expected to pay the monthly bill in full.
That’s not the only thing that sets these cards apart. The two also vary in their accessibility, flexibility, spending limits, and costs. If you’re wondering if a charge card vs. a credit card is a better fit for you, read on for information that could help you understand and compare their key differences.
How Charge Cards Work
In some ways, a charge card is much like a regular credit card. When you use it to make a purchase, you’re borrowing money from the card issuer. And when you pay your bill, you’re paying the card issuer back.
But there are several things about the way charge cards work that make them very different from traditional credit cards. And because of the way they work, there are benefits and risks of charge cards to consider.
As mentioned above, a charge card holder’s obligation to pay the bill in full each month is probably the most important distinction. Because you don’t have the option of carrying forward a balance, you won’t pay any interest. But if you don’t pay the balance in full by the due date, you could be subject to a late fee and restrictions on your future card use.
Another thing that makes a charge card unique is that there’s no pre-set credit limit. This offers charge card holders some added flexibility, but it doesn’t mean you can go out and spend as much as you want any time you want — even if you’ve stayed current with your charge card payments.
A transaction still may be declined if it exceeds the amount the card issuer determines you can manage based on your spending habits, account history, credit record, and other financial factors. To avoid any confusion, card holders can contact their charge card issuer before making a major purchase to ask if the amount will be approved.
Recommended: When Are Credit Card Payments Due
How Credit Cards Work
Because they’re more common, you may be more familiar with how credit cards work than you are with charge cards. With a traditional credit card, card holders are given a pre-set credit limit that’s based on their income, debt-to-income ratio, credit history, and other factors. Once your account application is approved and you receive a card with a unique credit card number, you can use your card as much or as little as you like — as long as you stay within that limit.
Each month when you receive your billing statement, you can decide if you want to repay the full amount you owe or make a partial payment, but you must make at least the minimum payment that’s due. And if you carry forward a balance, you can be charged interest on that amount. (Similar to your spending limit, interest rates are typically based on a card holder’s creditworthiness.)
A credit card is classified as “revolving credit” because there’s no set date for when all the money you’ve borrowed must be repaid. As long as you make at least your minimum payments on time and stay within your credit limit, the account remains open, and you can use the available credit over and over again.
Differences Between a Charge Card and Credit Card
Here’s a side-by-side look at some key differences between charge cards and credit cards:
Charge Card vs. Credit Card
Full payment required every billing cycle
Can carry a balance, but must make minimum monthly payment
Can be difficult to find and qualify for
Many options available, even for those with not-so-great credit
Accepted by most U.S. vendors (but less so overseas)
Widely accepted in the U.S. and worldwide
No interest charged, but can expect a high annual fee
May avoid annual fee, but interest accrues on unpaid balance
Known for prestigious rewards programs
Many cards offer rewards, often without an annual fee
No hard spending limit
Hard pre-set spending limit
With a charge card, you’re required to pay what you owe in full when you receive your monthly billing statement. With a credit card, on the other hand, you can make a full or partial payment, but you’re only required to make a minimum monthly payment.
Even if you’re waiting for a refund that hasn’t yet shown up as a credit on your statement, you’ll be expected to pay the full amount of your charge card bill. With a credit card refund, you’ll just have to make sure you pay at least the minimum amount on your current bill.
If you’re looking for a new card, you’ll find there are far more credit cards available than true charge cards these days. Even American Express, the only major card issuer that still offers charge cards, has gone with a more hybrid approach.
American Express still offers cards that don’t have a pre-set spending limit. But those cards now come with a feature that — for a fixed fee — allows a card holder to split up eligible large purchases into monthly installments.
There also are some fuel cards, typically geared toward businesses, that are true charge cards.
Credit cards also are generally easier to qualify for than the charge cards that are available. Even if you have a poor or limited credit history, you may be able to find a secured or unsecured credit card that suits your needs.
Whether you shop local most of the time or hope to use your card as you travel the world, you may want to look at the acceptance rates of charge cards vs. credit cards.
Your card may not do you much good if you can’t use it where you like. American Express says its cards can now be accepted by 99% of the vendors in the U.S. that accept credit cards. If you aren’t sure your favorite local boutique or grocer will accept a particular card, you may want to ask or look for the card’s network logo in the store window.
If you plan to use your card overseas, you may want to check ahead on the acceptance rate in that country and also find out if you’ll have to pay a foreign transaction fee. Charge cards tend to have a lower rate of acceptance overseas.
If you’re trying to decide between a charge card vs. a credit card, how much a credit card costs compared to a charge card — both in interest charges and fees — could be an important consideration.
You can find a full explanation of how your card issuer calculates interest in your card’s terms and conditions. But as noted above, if you carry forward a balance on your credit card, you can expect to pay interest on the outstanding amount.
According to the Federal Reserve, the average credit card’s annual percentage rate (APR) is currently around 16%. Your rate may be higher or lower, depending on your creditworthiness.
You may not have just one interest rate associated with your account either. Your account may have a different APR for purchases, for example, than for credit card cash advances or balance transfers. Or you might have a lower, introductory APR for the first few months after you get a new card. If, over time, you miss payments or make late payments, the card issuer also could decide to raise your APR.
Because you don’t carry a balance with a charge card, you don’t pay interest. But if you pay off your credit card balance by the due date every month, you also won’t have to worry about accruing interest on a credit card account.
You won’t pay interest with a charge card, but you may end up paying a significant annual fee just to own the card. (The annual membership fee for an American Express Platinum Card, for example, is now $695.)
Some credit cards also charge annual fees, but you can find many that don’t.
Rewards and Perks
You may decide it’s worth paying a higher annual fee to enjoy the extra benefits some charge cards offer. American Express, for example, has a reputation for offering its card holders prestigious perks, including travel and retail purchase protections, early access to tickets for concerts and other entertainment events, and special offers from partner merchants.
However, plenty of credit cards also come with special benefits, such as cash-back rewards, travel rewards, retail discounts, or even cryptocurrency rewards. And many of those card issuers don’t charge an annual fee.
Both charge cards and credit card issuers also occasionally offer generous welcome or sign-up bonuses to new card holders, so that might be another benefit worth looking at when you’re searching for a new card.
Before you sign up for any card to get the perks it offers, though, it can be a good idea to step back and assess whether it’s worth paying a higher annual fee (or accruing interest on a balance you can’t pay off) to reap those rewards.
With a credit card vs. a charge card, you’ll know exactly how much you can spend, because your credit card will come with a pre-set limit. You can go online or use an app to check your credit card account at any time to see how much available credit you have.
Charge cards don’t have hard spending limits. But that doesn’t necessarily mean you can use your card to buy a car or take a trip around the world. Your card issuer may decline a charge if you’re spending more than it thinks you can afford.
How Card Choice Can Impact Your Credit Score
When it comes to what a charge vs. credit card can do for (or to) your credit score, there are few things you should know.
Whether you’re applying for a charge card or credit card, you can expect the card company to run a hard inquiry on your credit. This could temporarily lower your credit score, but only by a few points.
Whether you use a charge card or a credit card, paying your monthly bill on time is critical to building and maintaining a good credit record.
Payment history makes up 35% of your FICO credit score, so consistency is key. If your payment is 30 days or more past due and your card issuer reports it to the credit bureaus, that negative news could remain on your credit report for up to seven years. And it could come back to haunt you when you try to borrow money to buy a car or house.
Credit utilization (the percentage of your available credit that you’re currently using) makes up 30% of your FICO score, so it’s important to keep your credit card balances well under the assigned limit.
To maintain or boost your credit score, the general rule is that you should try not to exceed a 30% credit card utilization rate. If you’re using up a big chunk of the pre-set limit on your credit card, it could have a negative effect on your score.
Because charge cards don’t have a pre-set credit limit, it can be difficult to determine if a card holder is at risk of overspending — so neither FICO or VantageScore include charge card information when calculating a person’s utilization rate.
This can have both pros and cons for charge card holders. The advantage, of course, is that you don’t have to worry about negative consequences for your credit score if you spend a lot in one month using your charge card. On the flip side, though, if you have a large amount of available credit that you aren’t using, it won’t do anything to help your score.
Choosing Between Credit Cards and Charge Cards
Deciding whether to apply for a credit card vs. a charge card may come down to evaluating the benefits you’re hoping to get from the card and assessing your own spending behavior. Here are some questions you might want to ask:
• Does the card offer unique or prestigious perks you think you’ll use?
• If there’s a high annual fee for the card, does it fit your budget and are the card’s perks worth the cost?
• Do you have enough money, discipline, and organization to ensure your bill is paid in full every month? Or could there be times when you’ll want to make a partial or minimum payment and carry forward a balance?
• Is your credit score good or excellent? If not, you may have more options and a better chance of qualifying if you apply for a credit card instead of a charge card.
• If you think you’ll pay off your card’s balance every month, would a credit card still be a better fit because of the rewards, low or no fees, and wider acceptance from vendors?
Also keep in mind that you don’t necessarily have to choose. In fact, you could benefit from owning both a charge card and a credit card. You may find there are reasons to have both types of cards in your wallet.
Recommended: Charge Cards Advantages and Disadvantages
The terms charge card and credit card are often used interchangeably, but they are not the same thing. A charge card must be paid off every month, so there’s no interest to worry about —but there may be a high annual fee to pay. A credit card allows the user to make a minimum monthly payment and carry forward a balance, but the interest on that balance can add up quickly.
Each individual user must decide which is the better fit for their needs. And a card’s benefits vs. its costs may be a deciding factor. With a new SoFi credit card, you may be eligible to earn 2% unlimited cash back when you redeem it to save, invest, or pay down an eligible SoFi loan. And if you choose, you can redeem that cash back directly into crypto with your SoFi Active Invest account. Another perk: If you make 12 monthly on-time payments of at least the minimum payment due, SoFi will lower your APR by 1%.
Want to apply for a new card with rewards that work for you? Find out what a SoFi credit card has to offer.
Frequently Asked Questions
Is a credit card easier to get than a charge card?
Because these days there are more companies issuing credit cards, it may be easier to find one that suits your needs and has qualifications you can meet — even if you have a poor or limited credit history. There are very few charge cards available anymore.
Does a charge card build credit better than a credit card?
Both a credit card and a charge card can help or hurt your credit score, depending on how you use it.
When do credit cards charge interest?
Most credit cards come with a grace period, which means the credit card issuer won’t charge you interest on purchases if you pay your entire balance by the due date each month. If you fail to pay the entire amount on your statement balance, however, or if you make your payment after the due date, interest charges will likely appear on your next monthly statement.
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It was a choppy day for stocks as investors unpacked the latest consumer price index (CPI). Data released by the Labor Department this morning showed that prices consumers paid for goods and services in April rose at an annual rate of 8.3% – down from March’s 8.5% pace to mark the first drop in inflation in eight months. While encouraging at first glimpse, there were concerning signs deeper inside the report.
For instance, the decline in CPI last month reflected a drop in gas prices, which have since rebounded. Food prices remained elevated, while airfare and restaurant bills increased ahead of the key summer travel season. And core CPI, which excludes the volatile energy and food categories, rose 0.6% on a sequential basis – double what it was in March.
“While this report appears to mark the first that shows some moderation from the ever-rising pace of inflation since September of last year, one data point does not necessarily make a trend; and the rise in core CPI should lead to some consideration that the moderation in inflation will not be quick,” says Jason Pride, chief investment officer of private wealth at wealth management firm Glenmede.
With prices already high, Pride said, it should be harder for the CPI to continue to rise at the same pace, especially with the Federal Reserve also hiking interest rates to combat higher prices. “However, it will likely take multiple reports for such a trend [of moderating inflation] to clearly establish itself,” he says.
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This sentiment is echoed by Mike Loewengart, managing director of Investment Strategy at E*Trade. “Today’s read is a stark reminder that the journey to pre-pandemic levels of inflation will be a long one,” Loewengart says. “Although inflation slowed from March, the market’s reaction suggests that record high prices continue to weigh heavy on investors psyches. And with inflation persistently hot, the Fed has more fodder for increased rate hikes, which the market doesn’t often welcome with open arms.”
After bouncing between gains and losses in early trading, markets took a decisive turn lower this afternoon. At the close, the Nasdaq Composite was down 3.2% at 11,364, the S&P 500 Index was off 1.7% at 3,935 and the Dow Jones Industrial Average was 1.0% lower at 31,834.
Other news in the stock market today:
The small-cap Russell 2000 retreated 2.5% to 1,718.
U.S. crude futures surged 6% to end at $105.71 per barrel.
Gold futures gained 0.7% to settle at $1,853.70 an ounce.
Bitcoin slid below the $30,000 for the first time since July 2021, down 5.9% at $29,477.50. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
Roblox (RBLX) was down as much as 10% in after-hours trading Tuesday after the video game developer reported a first-quarter loss of 27 cents per share, wider than the 21 cents per share Wall Street was expecting. The company’s revenue of $631.2 million also fell short of the consensus estimate, as did bookings of 54.1 million. Still, the metaverse stock managed to finish today up 3.4% after Chief Financial Officer Michael Guthrie said on the company’s earnings call that year-over-year growth may have bottomed in March, sooner than anticipated.
Coinbase Global (COIN) shares plunged 26.4% on Wednesday after delivering a pretty disappointing quarterly report. Q1 revenues were off 27% year-over-year to $1.17 billion, widely missing analysts’ expectations for $1.50 billion. Meanwhile, the company swung to a $430 million loss after earning $388 million in the year-ago period. Monthly users were down 19% YoY, too. Also raising eyebrows in the cryptocurrency community was an update to the Risk Factors section in its Form 10-Q, warning that users could potentially lose access to their assets in the event Coinbase ever had to go through bankruptcy proceedings.
Inflation Remains a Top Concern for Investors
Inflation remains top of mind for investors. This is according to the latest Charles Schwab Trader Sentiment Survey, which reviews the outlooks, expectations and trading patterns of 845 Charles Schwab and TDAmeritrade clients. Inflation was the main concern for those surveyed in the report (20% of respondents), followed by geopolitics (15%) and recession/domestic politics (12% apiece). And nearly half of participants (45%) do not believe inflation will begin to ease until 2023.
“Overall, in the second quarter, market sentiment among traders is unquestionably skewing bearish,” says Barry Metzger, head of trading and education at Schwab. But market participants do see investing opportunities, the report notes.
Among the sectors survey respondents are most bullish on at the moment are energy (70%) and utilities (54%). The industries they are most upbeat toward include cybersecurity (71%) and agriculture (70%).
And 70% of those surveyed are interested in seeking out opportunities in defense stocks. While Russia’s invasion of Ukraine has unsettled many parts of the stock market, it has also sparked an increase in global military spending, which could create a potential boon for the industry. Here, we’ve compiled a quick list of defense stocks that are poised to benefit from this spending build. The names featured include familiar names as well as some under-the-radar picks – and they all sport top ratings from Wall Street’s pros.
There’s no way around it — college is expensive. This means that for many students, taking out a loan is the only way to realistically cover these expenses. And, like most other loans, student loans accrue interest.
In this article, we’ll explore the current interest rates across the most common student loan products, including federal and private student loans.
When we discuss federal interest rates on student loans in this article, we’re referring to what the rates wouldbe when the freeze is lifted.
Comparing Rates Between Federal, Private and Refinance Loans
Something you may notice is that, at the lowest end, private lenders seem to offer better interest rates than federal. It is important to note that these lowest interest rates are very difficult to get — your credit needs to be outstanding.
It’s also important to remember that, although fixed interest rates appear to have a higher range in the tables below, your interest rate by definition can change. So, while you may qualify for a lower interest rate on a variable-rate loan, it’s entirely possible that this rate will eventually go up and become higher than you would have gotten with the fixed-rate loan. This is simply the tradeoff (and risk) of variable interest rates.
Federal Loan Interest Rates at a Glance
Fixed Interest Rate
Direct Subsidized and Direct Unsubsidized Loans
Direct Unsubsidized Loans
Graduate or professional students
Direct PLUS Loans
Parents and graduate or professional students
Federal rates increased across the board for the 2021-2022 school year by nearly a whole percentage point. That’s unfortunate, but they are still lower than they have been for years, and generally much lower than an equivalent private student loan.
Federal loans come in two basic types: subsidized and unsubsidized. The primary difference is around when the interest starts accruing:
Subsidized student loan: Interest is paid by the Education Department as long as you’re enrolled at least half-time in college.
Unsubsidized student loan: Interest begins to accrue as soon as the loan is dispersed.
There are some other differences, but they’re relatively minor compared to this.
The last thing to cover with federal loans is the loan fee (also known as the origination fee). This fee is calculated as a percentage of the total loan amount and then deducted automatically from each disbursement. In practice, this means you’ll receive a smaller loan than the amount you actually borrowed.
Private Loan Interest Rates at a Glance
3.34% to 14.99%
1.04% to 11.99%
The wide variation in interest rate ranges is due to two factors: different lenders offering different rates, and the fact that the rate you’ll get is impacted by your credit and other factors.
As mentioned above, fixed interest rates tend to have higher rates on paper, but you don’t have to worry about that rate increasing on you, which is a very real possibility with variable-rate loans.
Loan Refinance Interest Rates at a Glance
2.59% to 9.15%
1.88% to 8.9%
If your credit is good, it’s possible to refinance your existing student loan to get a lower interest rate. This is not always possible, but it can be an option worth exploring. These refinanced interest rates can themselves be lower than “normal” private rates, so it can be an option worth exploring.
How Student Loan Interest Rates Are Determined
Although federal and private loans are technically different, they often follow similar trends. In other words, when federal student loan interest rates go up, private rates are likely to do the same. Likewise for when they go down. Let’s look at what actually goes into determining federal and private interest rates.
Federal Student Loan Interest Rates
These student loan interest rates are set each year by Congress, based on the high yield of the 10-year Treasury note auction in May. The new rate applies to loans disbursed from July 1 to June 30 of the following year.
Federal student loan rates are always fixed. This means that they won’t change during the life of the loan — whatever interest rate you get when you take out the loan is what you’ll keep until it’s paid off (it changes with student loan refinancing).
Private Student Loan Interest Rates
These loans are funded by banks, credit unions, and other private lenders. As such, interest rates vary between the different lenders, and it’s worth shopping around whenever possible.
Private lenders usually offer both fixed-rate and variable-rate loans. Fixed-rate means that your interest rate remains the same over the life of the loan. It can neither increase nor decrease.
A variable interest rate, on the other hand, means that your interest rate can fluctuate with the market. Sometimes you can get lucky and have it go down for a period of time. However, the risk with variable-rate loans is that the interest rate goes up significantly and you end up paying much more than anticipated.
It’s important to keep this in mind when selecting a loan. It may be worthwhile to take a slightly higher fixed interest rate rather than assume the risks of a variable rate.
The Impact of COVID-19 on Student Loans
The interest rate cuts in 2020 had a major ripple effect on student loan interest rates. Despite the slowly recovering economy, interest rates remain lower than they’ve been in years, for federal student loans and private fixed-rate and variable interest rate loans. This is excellent news for student loan borrowers, and we hope to see these rates remain low in the coming year.
Currently, all federal student loan debt is frozen until Sept. 1, 2022. This means that rates are set to zero and no payments are due until that date. This loan repayment freeze originally began in March 2020 at the outset of the pandemic and has been extended six times at this point.
The Pros and Cons of Federal Student Loans vs. Private Student Loans
Let’s explore the pros and cons of the two major classes of student loans — federal and private. Neither is perfect, as we’ll see. Rather, each is suited to particular situations and types of borrowers.
Federal Student Loans
Flexible repayment plans. Federal loans are eligible for income-based repayment plans and loan forgiveness. These can be a huge help if you find yourself in a tough financial spot.
Much lower requirements. It’s almost always much easier to qualify for a federal loan than it is a private student loan, particularly if you want a good interest rate.
More affordable overall. Most of the time you’ll end up paying less on federal student loans than on a private student loan.
Origination fees. Federal student loans are subject to small origination fees, which aren’t part of a private student loan. This means your loan disbursements are usually going to be smaller.
Borrowing limits for undergraduates. This means some students may actually need to take out a small private loan in addition to the federal loan to cover their full college costs.
Can’t choose your loan servicer. Federal student loans are turned over to a loan servicer to handle the payments and administration of that loan. Some of them have sketchy reputations
Private Student Loans
Larger loans. If you know that you’ll need a certain amount of money, and it’s more than federal loans can offer, it might make more sense to simply go private.
Potentially lower rates. A private loan may have lower rates, particularly with student loan refinancing. That said, you’ll need an excellent credit score to get these lowest rates.
No origination fees. Private student loans don’t have the origination fees that come with federal student loans.
More difficult to qualify for. Private loans have stricter requirements, particularly around credit histories. Federal student loans are almost always easier to qualify for.
Generally higher interest rates. Unless your credit is outstanding, you’ll almost always get a better interest rate with a federal student loan.
Less flexibility in repayment options. Some private lenders are willing to work with borrowers on this, but there’s no law or regulation forcing them to, and thus, no guarantee.
Frequently Asked Questions (FAQs) About Student Loan Interest Rates
If you still have questions about student loan interest rates, don’t worry — we’ve got answers. Here are some of the most common questions.
What is the Interest Rate on Student Loans Right Now?
Student loan interest rates range from a low of 1.04% to a high of almost 15%. The rates depend on whether you’re looking at federal or private, which type of loan, which private lender you go with, your credit history, and more.
That said, here’s the quick bullet list:
Federal direct for undergraduate students: 3.34%
Federal unsubsidized for grad students: 5.28%
Federal Direct PLUS for parents and graduate students: 6.28%
Private fixed-rate loans: 3.34% to 14.99%
Private variable-rate loans: 1.04% to 11.99%
Will Student Loan Interest Rates Go Up in 2022?
This is a hard question to answer. They are expected to remain fairly low for the foreseeable future, but this can always change. For the 2021-2022 school year, federal rates did increase, but they are still a good bit lower than they were prior to the pandemic.
Are Student Loan Rates Dropping?
Rates increased for the 2021-2022 school year, but remain lower than they were prior to the COVID-19 pandemic. So while they didn’t drop this year, they have dropped significantly compared to a few years ago.
What’s the Difference Between a Subsidized and Unsubsidized Federal Student Loan
A subsidized federal student loan is one in which interest is paid by the U.S. Department of Education Department while you’re enrolled at least half-time in college. An unsubsidized loan, on the other hand, begins accruing interest immediately on disbursement, even if you’re still enrolled in school.
Subsidized student loans have a six-month grace period after graduating. During this time, no payments are due, and the Education Department continues to pay the interest on the loan.
An unsubsidized loan, on the other hand, begins accruing interest immediately on disbursement, even if you’re still enrolled in school. The student is responsible for this interest. Unsubsidized loans still have a six-month grace period after graduation, but interest continues to accrue during this time. The interest then capitalizes, which means it gets added to the original loan amount.
When Do Student Loan Interest Rates Start?
Federal student loan rates are set each spring and go into effect July 1, running until June 30 of the following year. At that point, the new interest rate will take effect.
What is Student Loan Refinancing?
Student loan refinancing is a way to decrease the amount of interest paid on your loan. Essentially, when you refinance, the new lender pays off your existing loan and gives you a new one with new terms.
Not everyone can refinance — there are fairly strict rules to evaluate your credit and income to determine eligibility. Additionally, you generally reset the length of your loan term when you refinance, so it can sometimes end up costing you more money.
Finally, while you can refinance a federal loan, you lose the extra benefits they come with, including income-based repayment options.
What is Income-based Repayment?
This is a special repayment option available to federal borrowers that lets you tailor your monthly payments to your income. These plans are typically based on a percentage of your monthly disposable income. This can be quite a bit lower than you’d otherwise pay. The tradeoff is that it can take much longer to pay off the loan.
Additionally, loans on these repayment plans are automatically forgiven after 20-25 years of payments.
Penny Hoarder contributor Dave Schafer has been writing professionally for nearly a decade, covering topics ranging from personal finance to software and consumer tech.