Writing a check to yourself is one way to withdraw money from your bank account or transfer funds from one account to another. While there are other, more high-tech methods for making these transactions, writing a check to yourself is an easy option.
But it’s not the best choice for every situation. Sometimes, it’s more efficient to move funds electronically or visit an ATM to make a withdrawal. Here’s when writing a check to yourself makes sense, and how to do it.
Table of Contents
Key Points
• Writing a check to yourself is a way to transfer money between your own accounts.
• Start by writing your name as the payee and the amount you want to transfer.
• Sign the check on the signature line as the payer and write “For Deposit Only” on the back.
• Deposit the check into your other account through a mobile banking app or at a bank branch.
• Keep a record of the transaction for your own records and to reconcile your accounts.
How to Write a Check
If you don’t often use your checkbook, you may be wondering how to write a check. First, be sure to use a pen (that way, the information can’t be erased) and choose blue or black ink. Then, for every check you write, fill in each of the following details:
• The date
• Pay to the order of (the person or company the check is for)
• The amount the check is for in numbers
• The amount written out
• Memo (this is optional—you can use it to note what the check is for—or leave it blank)
• Your signature
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How to Write a Check to Yourself
The only difference when you write a check to yourself, versus a check to someone else, is that you put your own name on the “Pay to the order of” line. Then, just like you do for every other check you write, you’ll add the date, the dollar amount written in numbers, the dollar amount written in words, an optional memo, and finally, your signature.
Be sure to record the amount the check is for in the check register that comes with your checks when you order them (you should keep this in your checkbook along with the checks themselves). In the register, write down the date, the check number, the name of the person the check is for and/or what it’s for, and the amount. This will help you balance your checkbook so you know how much money is in your account.
Why Would You Write a Check to Yourself?
Writing a check to yourself is the low-tech way of transferring money from one bank account to another, or withdrawing money from your bank account. Here is when it can make sense to write a check to yourself.
• Making a transfer. If you’re closing one bank account and opening another, you can move funds by writing a check to yourself. You can also write yourself a check to deposit funds from one account into another at the same bank. Or, if you have accounts at different banks, you can transfer money by writing yourself a check from one bank and depositing it in the other.
• Getting cash from your bank account. If you want to withdraw money from the bank, you can simply write yourself a check, take it to the teller at the bank, and cash it. Just be sure to endorse the check by signing it on the back.
Examples of When You Would Write a Check to Yourself
If you have money in different bank accounts and need to consolidate your funds in order to make a large purchase, you could write a check to yourself. For example, if you’re remodeling and need to transfer $20,000 from your home equity line of credit (in one institution) to your bank account (in a different institution), you can write a check to yourself to transfer the money.
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When Writing a Check to Yourself Doesn’t Make Sense
Writing a check to yourself isn’t always the best, most efficient option for transferring funds or obtaining cash. Online banking, electronic transfers, and ATMs are typically faster and easier ways to get transactions done.
Transferring Money Within the Same Bank
If you have two accounts at the same bank and you want to move money from one account to the other, it’s much quicker and more convenient to transfer your money through online banking. Writing yourself a check to do this is a hassle.
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Getting cash out of your account
If you need to withdraw cash from your account, using an ATM can be faster and easier. If you write a check to yourself, you will need to visit the bank and go through a teller in order to cash the check and get your money. Just make sure to use an ATM within your bank’s network to help avoid ATM fees.
Risks and Concerns of Writing a Check to Yourself
When writing a check to yourself, never make the check out to “Cash.” Instead, always put your own name on the “Pay to the order of” line. This helps protect you. Otherwise, if a check is made out to “Cash,” and the check is lost or stolen, anyone can cash it.
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Other Ways to Move Your Money
There are several other ways to move money that are more convenient than writing a check to yourself. This includes wire transfers, ACH transfers, electronic funds transfers, and electronic banking.
Wire Transfer
Often, when people use the term “wire transfer,” they’re referring to any electronic transfer of funds, but the technical definition involves an electronic transfer from one bank or credit union to another. To make a wire transfer, you’ll pay a fee, usually between $5 and $50, and need to provide the recipient’s bank account information.
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ACH or Electronic Fund Transfer
An ACH is an electronic funds transfer across banks and credit unions. If you have direct deposit for your paychecks, for instance, that money is transferred to your bank account through ACH (which stands for Automated Clearing House). You can use ACH to transfer money from an account at one bank to an account at another. The transaction is often free, but check with your bank to make sure.
Electronic Banking
Online banking will allow you to move your money from one account to another within the same bank. All you need to do is log into your online account and use the “transfer” feature.
The Takeaway
Writing a check to yourself is one way to transfer money or obtain cash, but there are many methods for doing these things that are often more convenient, such as online banking or electronic transfers. Exploring all the options can help you decide what makes the most sense for you.
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FAQ
Can you legally write a check to yourself?
Yes, it is legal to write a check to yourself, as long as you’re not writing the check for more money than you have in the bank. It would be illegal to write a check for more funds than you have and then try to cash it.
Can I write a large check to myself?
Yes, you can write a large check to yourself if you have enough funds in your account to cover the amount. Never write checks for more money than you have in your bank account.
Can you write your own check and cash it?
Yes, you can write your own check and cash it at your bank or at any other location that offers this service.
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Whether you’re thinking about buying a home for the first time, buying a bigger or smaller home, or refinancing your mortgage on your existing home, you’re probably keeping a close eye on current mortgage rates. Here’s the most up-to-date data on a variety of types of fixed-rate mortgages in the United States, per mortgage technology and data company Optimal Blue.
Current average mortgage interest rates in the U.S. in 2024
Type of Mortgage
Current Rate
Rate Reported a Week Prior
Rate Reported a Month Prior
30-year conforming
6.756%
6.870%
6.834%
30-year jumbo
7.180%
7.149%
7.025%
30-year FHA
6.583%
6.695%
6.640%
30-year VA
6.352%
6.380%
6.334%
30-year USDA
6.697%
6.692%
6.589%
15-year conforming
6.068%
6.385%
6.039%
30-year conforming
6.756%
6.870%
6.834%
30-year jumbo
7.180%
7.149%
7.025%
30-year FHA
6.583%
6.695%
6.640%
30-year VA
6.352%
6.380%
6.334%
30-year USDA
6.697%
6.692%
6.589%
15-year conforming
6.068%
6.385%
6.039%
So how do mortgage rates work and why do they fluctuate so much? We’ll explain that too.
In this article:
Why are mortgage rates so high?
During 2020 and 2021, many homebuyers were able to get mortgage rates approaching or even below 3%. But with the federal government injecting money into the economy through COVID-19 pandemic aid to individuals and businesses—with the aim of preventing a recession—and consumers spending money at an unexpected clip, inflation hit record rates and prices soared.
In response, the Federal Reserve hiked its federal funds rate 11 times between March 2022 and July 2023. To put it simply, a higher federal funds rate means it costs more for banks when they need to borrow money. Lenders accordingly raise interest rates and it becomes more expensive for consumers and businesses to borrow. Debt gets more expensive in a variety of forms, including auto loans, carrying a credit card balance, and of course, mortgages.
But it’s an important piece of context that rates are not that different from where they were in the 1970s, 1980s, and 1990s. If anything, they’re a little lower today. They’re roughly on par with where they were in the early 2000s. The Federal Reserve dropped rates in 2007 and 2008 to near zero as part of the effort to revive an economy damaged by the Great Recession. While the Fed did hike rates slightly in 2015, it reversed course as the pandemic happened.
In short, the high mortgage rates of today are a shock to consumers after more than a decade of low rates—perhaps particularly to Americans in the Millennial and Generation Z demographics who came into adulthood when low rates were the norm—but are not historically unusual.
Will mortgage rates go down soon?
It’s possible the Fed could cut interest rates before the end of 2024. However, at the most recent meeting on this topic in June, the central bank decided to keep the federal funds target rate steady. Its analysis was that unemployment was low, hiring was strong, and that inflation was beginning to ease—but that the battle to get inflation back down to its target of 2% was not over.
A release issued after the decision put it this way: “The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”
While mortgage rates will still fluctuate day to day with the market, it’s unlikely home-shoppers will see the low rates they’re hoping for until the Fed decides it’s safe to lower the federal funds rate.
Why are home prices so high?
Put simply, low housing supply and high demand means home prices have shot up and stayed high. The Federal Housing Administration put the problem this way in a 2023 report to Congress:
“During the last two years, mortgage rates have quickly risen to a level not seen in more than two decades. Home prices have steadily increased over the last seven years, and while house price appreciation moderated this year, sales prices remained high as housing supply remained at some of the lowest levels ever recorded.”
Thus far in 2024, the trend does not seem to have abated. Dallas Tanner, CEO of Invitation Homes, described the problem in March as a “perfect storm”—created by the combination of cheap money before the Fed raised rates impacting borrowing, high demand for homes, and regulations at local and state levels making it difficult to build new supply.
In fact, home prices hit an all-time high in April 2024. The silver lining for prospective homebuyers, such as it is, is that price inflation seems to show signs of slowing. That means while prices are still going up, they’re not increasing quite so quickly or dramatically.
Historical home price data
If you’re curious how home prices in the 2020s compare to previous decades, take a look at this chart from the St. Louis Fed (commonly referred to as FRED):
Types of mortgages
As you begin your homebuying journey, here are some of the types of mortgages you should know about.
Conventional loan
This is simply a mortgage from a private lender not backed by a federal government program.
Government-backed loan
Working with certain lenders, the federal government insures these home loans, providing access to eligible applicants and reducing risk for the lenders in the event of the consumer defaulting on what they owe. These programs include FHA loans, VA loans, and USDA loans.
Conforming loan
These are conventional loans (see above) that do not exceed the Federal Housing Finance Agency’s maximum loan amount, and that meet criteria set by government-sponsored enterprises Fannie Mae and Freddie Mac. In 2024, in most of the U.S., the FHFA limit for one-unit properties is $766,550.
Jumbo loan
Contrast jumbo mortgages with the conforming loans just explained. A jumbo mortgage exceeds the FHFA’s maximum, and while you may need this type of loan if you’re planning to purchase a home with a large price tag, beware that you’ll likely pay more in interest over the life of the loan.
Fixed-rate mortgage
With a fixed-rate mortgage, your interest rate stays the same from the time you get the loan until you pay it off. That’s true whether you end up keeping the loan for its full duration, selling your home and using the proceeds to pay it off, or refinancing and taking out a new mortgage.
Beware that with a fixed-rate mortgage, your monthly payments can still change, for example if your property value increases (leading to higher property taxes) or if your homeowners insurance is bundled with your mortgage payment and your insurance premium increases. With severe weather events becoming more common, insurance rates in certain regions (like Florida) have seen double-digit increases in a single year.
Adjustable-rate mortgage
Unlike a fixed-rate mortgage, an adjustable-rate mortgage (ARM) has a rate tied to an index that tracks the market. As the index fluctuates, so too does your rate. Typically, these offer a low teaser rate for an initial window of time, then your rate may increase when the agreed-upon adjust periods kick in. See our analysis for whether ARMs are a good idea for more details.
What type of mortgage should you get?
There’s no silver bullet answer to this question. The best mortgage for you is going to depend on factors such as how large a loan you need, where you intend to buy, and what you can qualify for.
If you’re a U.S. military member or veteran, or the surviving spouse of a veteran—or the spouse of a veteran who is missing in action or being held as a prisoner of war—you are likely eligible for a VA home loan, which may allow you to buy a house with no money down.
Or, if you’re purchasing a home in an eligible rural area, you may qualify for a USDA loan. You can check USDA’s eligibility map as a starting point. As an example, at the time of writing, the map shows that someone looking to purchase a house in Charlotte, North Carolina would not be eligible. But someone looking to purchase a house in Gaffney, South Carolina roughly an hour’s drive away might be.
For consumers with a credit score of at least 580, who can afford a down payment ranging from 3.5% to 10%, an FHA loan is likely to be worth considering.
If none of these government-backed loans are available to you, however, you may have to go with a conventional mortgage and shop around for the best rate you can find. Applying at smaller institutions, such as local credit unions, may help you get a lower rate.
We will advise avoiding adjustable-rate mortgages unless you are comfortable with the risk of your rate (and accordingly, your monthly mortgage payment) going up after the teaser rate expires, and are willing to put in the work to refinance to a fixed-rate mortgage later on if market conditions justify it.
How to get the best mortgage rate you can
To some extent, you’re at the whims of the market when mortgage shopping, but there are tangible steps you can take to secure a lower rate. Here are a steps we recommend taking:
Check your credit score. While all is not lost if you have a credit score in the 500s or low 600s, mid-600s and above is ideal. If you’re not sure what your credit score is, there are numerous ways to check for free—make sure you’re looking at a FICO Score, as that’s the model lenders typically use. Signing up for an account with the credit bureau Experian is one easy way to get your score from a trustworthy source. If your score is low and you decide to hold off applying for a mortgage for a while, you can take steps to improve your credit such as opening a secured credit card and using it responsibly.
Shop around. Whether you work with a mortgage broker or comparison shop on your own, don’t assume the institution you bank with is necessarily the best option for your mortgage. You may get a lower rate with a local credit union, for example, even if you do most of your business with a larger bank that has a national presence.
Buy mortgage points. This is obviously only an option if you have the money available upfront. But if you do, and you intend to stay in your new home for several years, buying mortgage discount points can be well worth it in terms of a lower interest rate.
Use a rate lock. If you’re offered a favorable mortgage rate, consider initiating a lock-in that can hold it for 30 or more days. You won’t reap the benefits of rates dipping if they continue to go down, but you’ll have peace of mind that your rate shouldn’t skyrocket.
Refinance. Maybe you decided the best option was to forge ahead, even with a mortgage rate higher than you would have liked. In that case, keep an eye out for a chance to refinance your mortgage at a lower rate if the market changes.
Understanding interest rate vs. APR
While you may have heard interest rate and APR used interchangeably (for example that’s correct when referring to credit card rates) there’s an important difference in the context of mortgages. Your APR will be higher than your interest rate because it reflects the interest plus any fees and other charges.
What are mortgage points?
Want to lower your mortgage rate while you’re in the process of buying your soon-to-be home? Buying mortgage points, also known as discount points, offers a way to get a lower interest rate.
Essentially, you’re paying more toward interest at closing than you would otherwise have to in exchange for having a lower rate over the length of the mortgage.
Each point is worth 1% of the total amount of your loan. Thus, if your loan is $300,000, one point would cost you $3,000. Each discount point typically reduces your interest rate by 0.25% (though this varies by the specific lender). So, for example, using this value you’d have to buy four points to knock an 8% mortgage rate down to 7%.
You have the option to purchase points in non-round-number amounts as well, such as paying $1,375 for 1.375 points on a $100,000 mortgage—or even purchasing less than a point, such as $125 for 0.125 points.
If your mortgage meets the IRS requirements for interest payments to be tax deductible, you may be able to deduct the cost of purchasing the discount points when you file taxes—as long as you’re itemizing—for the year you buy them, or potentially over the life of the loan.
You pay for these points at closing, so keep in mind it’s a trade-off. Can you afford higher closing costs in exchange for a lower rate over the life of the loan? Do you intend to stay in the new home for at least a few years? Then buying discount points might be the right move.
But, if you have less saved up to go toward closing costs, you might decide to live with a higher rate instead and plan to refinance your mortgage if an opportunity presents.
If you’re in the latter situation, then a lender credit might help you achieve homeownership. We’ll explain more in a later section, but this works in essentially the reverse of mortgage points.
Don’t confuse mortgage discount points with “mortgage origination points,” which refers to origination fees paid to your lender—something else entirely vs. discount points.
Finally, know that a lender can cap the number of mortgage discount points you can buy.
Factors impacting your mortgage rate
There are a lot of things that go into determining your mortgage interest rate. Some of the big ones are:
Economic conditions. With inflation rising after 2020, it may be unsurprising if lenders raise rates to protect their profit margins, though that’s scant comfort for prospective homebuyers.
Lack of inventory. Add into that a well-documented housing shortage, and you’ve got a tough situation for those seeking to move from renting to homeownership or hoping to change to a larger or smaller house to fit with lifestyle changes. In fact, this is leading many baby boomers, who otherwise might have downsized and opened up inventory, staying in place due to their currently-low mortgage rates.
The Fed’s actions. As the Federal Reserve adjusts its federal funds rate, influencing the economy by making it more or less expensive to borrow money, banks tend to change their rates accordingly. If you’re keeping fingers crossed for mortgage rates to go down, you’re essentially hoping the Fed will cut rates soon.
Your credit. Not only does it make your mortgage application more likely to be approved if you have a good to excellent credit score, but a better score typically means you’ll be offered a lower rate, too.
How much you put down. We’ll touch on whether you actually have to save up a 20% down payment momentarily, but it’s undeniable that a larger down payment can mean more favorable terms on your mortgage.
Mortgage type and length. Government-backed mortgages such as FHA loans and VA loans may offer lower interest rates. Also, even if you don’t qualify for a government-backed loan and simply go with a conventional mortgage from a private lender, a 15-year mortgage may offer a lower rate than a 30-year mortgage (in exchange for a higher monthly payment).
Is it mandatory to put 20% down when buying a house?
In short, no. While you frequently hear that you need a 20% down payment, that’s more of a “nice to have” than an actual requirement. Typically, you will need at least a 5% down payment—and there are some special cases where it can be lower or nonexistent. Specifically, FHA loans require a minimum down payment of 3.5%, while VA home loans can help those who are eligible to buy a house with no money down.
This is good news for aspiring homebuyers who may have felt locked out by the 20% down payment rule of thumb. For example, if buying a $250,000 house, a 20% down payment would be $50,000. And that’s even before you consider the closing costs that will have to be paid out of pocket.
Learn more: How much should a house down payment be?
However, a larger down payment can help you get a lower interest rate on your mortgage, as well as a lower monthly payment. It can also help your offer be more competitive—the typical down payment is 8% for first-time homebuyers and 19% for repeat homebuyers, according to a 2023 report from the National Association of Realtors.
Also, know that if you take out a conventional loan with a down payment that’s less than 20%, you’ll be expected to purchase private mortgage insurance (PMI) which protects the lender. This will increase your monthly payments. However, you can request that your servicer removes the PMI once you’ve paid down your debt to a specified point—for example, when the principal balance hits 80% of the home’s original value.
Help for low income, bad credit, and first-time homebuyers
Many of the government-backed mortgage types outlined earlier in this article are worth considering if you have low income, bad credit, or are a first-time homebuyer. These include FHA loans, VA loans, and USDA loans.
With the federal government stepping in to mitigate risk for approved lenders, these loans may be more accessible to people with credit scores in the 500s or low 600s. Contrast that with a typical mortgage from a private lender without government backing, which will generally require applicants to have a mid-600s credit score or higher. They may also offer access to lower down payments and more affordable interest rates.
See our analysis of what type of mortgage might be best for you for more details on these types of home loans and who can qualify.
There are also programs specifically targeted at offering first-time homebuyers down payment assistance. These vary by location, but typically have income restrictions and length of residence requirements.
For example, first-time homebuyers in Austin, Texas may qualify for down payment loan assistance of up to $40,000. Requirements include the purchase of a single-family home or condominium in Austin’s full-purpose city limits and that applicants are at or below 80% median family income ($78,250 per year for two people as of this writing).
If this is all a little overwhelming, you might benefit from working with a HUD-approved counseling agency. HUD is the U.S. Department of Housing and Urban Development—and counselors with this training can help with topics such as understanding what documents you’ll need to provide to a mortgage lender and identifying local resources you may be able to use. You may be able to work with a HUD-approved counselor at no cost.
To find a housing counseling agency with HUD certification, you’ve got a few options:
Use the Find a Counselor tool provided by the Consumer Financial Protection Bureau.
Call the CFPB by phone at 855-411-2372 and they can connect you to a counselor.
Call the HOPE Hotline, open 24/7, by phone at 888-995-4673.
What are closing costs and how do they work?
If you thought the down payment was the only thing you had to save up for when planning to buy a house, brace yourself. You’ll also be responsible for closing costs out of pocket. Generally, buyers are responsible for the bulk of closing costs, though sometimes a seller may make concessions and agree to pay certain items in the interest of selling the house quickly.
Closing costs typically run about 3% to 5% of the amount of the loan, and can include expenses such as appraisals, title insurance, and more. We’ll dive into specifics momentarily, but first, let’s note that mortgage points and lender credits play an important role in determining how much you owe at closing.
Mortgage discount points, as explained earlier, lower your interest rate but require you to pay more upfront—lender credits do the reverse, letting you close for less in exchange for a higher rate. Here’s how.
How lender credits are calculated
It’s easy to understand lender credits as “negative points.” You should get a loan estimate and closing disclosure as part of the homebuying process, and lender credits should be reflected there—a $3,000 credit on a $300,000 mortgage might be shown as one negative point, for instance.
How much your interest rate increases for each negative point is going to vary by lender, as well as by factors such as the type of mortgage you’re taking out.
When discussing lender credits with the bank or credit union you’re working with for your mortgage, make sure everyone is using the same terminology. Some institutions may refer to “credits” that are not connected to your interest rate.
Now, on to some of the other elements making up your closing costs.
Loan origination fees
The saying goes that nothing in life is free, and that certainly applies to taking out a mortgage. The loan origination fees cover processing and underwriting, and generally cost up to 1% of the mortgage amount.
Appraisal and survey fees
This is fairly self-explanatory. The buyer is usually responsible for paying for the appraisal, which confirms the value of the house before the lender agrees to fund the mortgage. While the cost of an appraisal will depend on factors such as location, expect it to run $300 or more.
Title insurance
Title insurance makes sure the house can legally be transferred to the buyer, and that there aren’t any issues such as liens or unpaid taxes that would complicate things.
Homeowners insurance and HOA fees
You probably knew that you’d need to have homeowners insurance, with coverage generally including situations like fire and theft—as well as potentially covering medical expenses if someone gets hurt on your property. But did you know you likely have to pay the first year upfront?
And, if your new place is within a homeowners’ association, your first month of HOA dues will likely need to be paid at closing too. These dues often go toward things such as maintaining pools, clubhouses, and private roads.
Private mortgage insurance
PMI is standard when you make a down payment of less than 20%. While the cost for PMI varies based on numerous factors including your credit score and the insurer, a Freddie Mac estimate puts it at roughly $30 to $150 per month for every $100,000 you borrow.
If you have an FHA home loan, you’ll have something very similar but under a different name—a mortgage insurance premium (MIP).
Mortgage points
You can buy mortgage discount points worth 1% of the amount of your loan in exchange for a lower interest rate. However much you decide to put up for points will be due at closing. See our explanation of how mortgage points work for a more in-depth examination.
Property tax
Most of the closing costs we’ve addressed so far are not tax deductible. Property tax and mortgage points are two that likely are (but only if you’re itemizing). It’s usual to pay six months of advance property tax with your closing costs.
Attorney fees
This will depend on whether your state requires a real estate attorney to draft paperwork for the seller to be able to transfer the property title to you, the buyer.
Miscellaneous fees
Expect a variety of smaller fees, such as the cost of registering your home purchase with the appropriate local government body and a charge for your credit report.
When and how to refinance an existing mortgage
Maybe you’re already a homeowner, and once in a while you think to yourself, “Getting that first mortgage was so much fun. I really wish I could do it again, but darn it, I’m just not ready to buy a new house.” If so, you’re in luck—refinancing is a fancy term for taking out a new mortgage to replace your existing one on your current house.
Jokes aside, there are some pretty obvious cases where it’s worth the effort to refinance. Maybe the market has changed and rates have gone down, or perhaps your home value has gone up while you’ve been paying down debt and you want to turn the difference into cash.
Here’s when you may want to refinance and how it works to do so. Note, some mortgages allow you to refinance almost immediately while others might make you wait up to 24 months, so check with your lender about your specific loan offer before signing.
To get a better rate
If you bought your house after the Fed started raising rates in March 2022, you might be paying an interest rate in the vicinity of 6%, 7%, or 8% on your mortgage, judging by the national average. Should the Fed end up cutting rates in the future, you may have an opportunity to refinance at a lower rate. Even a difference of one percentage point can save you a lot of dough—potentially in the vicinity of a couple grand per year, depending on your loan specifics.
Or, perhaps you currently have an adjustable-rate mortgage and are tired of the rate fluctuating each time the adjustment period comes around. Even with caps on how much your rate can increase in certain cases or over the life of the loan, maybe you didn’t fully realize how much your monthly payment could fluctuate—or maybe your financial situation has changed, such as a reduction in income. Refinancing to a fixed-rate mortgage could give you peace of mind.
We should mention as a caveat to the above that your mortgage payment can still increase or decrease with a fixed-rate mortgage, for example if your property value goes up and property taxes increase accordingly.
When you need funds
Quite simply, a cash-out refinance lets you take out a new mortgage to pay off your old one and receive the difference between the new loan (your home’s current value) and what was left on the old loan by check or wire transfer.
Of course, the downside to this is that you’re taking on a new, bigger loan in exchange for immediate cash. And, depending on the term of your new mortgage, you could essentially be starting over on the repayment period with 30 years ahead of you to pay off your home.
But, if you’re OK accepting the above and you have equity in your home, a cash-out refinance can give you access to money that can be used for almost any purpose. Per an analysis of data spanning 2013 to 2023, the median amount homeowners pocket through cash-out refinances is $37,131, according to the Consumer Financial Protection Bureau.
How it works
Refinancing is more or less like what you went through the first time you took out a mortgage when you bought your home. It’s generally not free—closing costs on refinances average $5,000, according to Freddie Mac.
As with your first mortgage, you can choose to comparison shop on your own or use a mortgage broker when refinancing. You also have the chance to buy mortgage discount points to lower your interest rate.
Be skeptical of lenders advertising a “no-cost refinance” as this likely means they will roll closing costs into the loan amount and charge you a higher interest rate.
Historical mortgage rate trends
We spent time analyzing data from the Federal Reserve Bank of St. Louis (FRED) to satisfy your curiosity about how mortgage rates today compare with historical rates.
30-year fixed-rate mortgage highs by decade
Decade
Rate High
Specific Year
2020s
7.79%
2023
2010s
5.21%
2010
2000s
8.64%
2000
1990s
10.67%
1990
1980s
18.63%
1981
1970s
12.90%
1979
2020s
7.79%
2023
2010s
5.21%
2010
2000s
8.64%
2000
1990s
10.67%
1990
1980s
18.63%
1981
1970s
12.90%
1979
A note regarding mortgage rate data available for the 1970s: FRED data on 30-year fixed-rate mortgages starts in April 1971, so 1970 and part of 1971 are not factored into this analysis.
15-year fixed-rate mortgage highs by decade
Decade
Rate High
Specific Year
2020s
7.03%
2023
2010s
4.50%
2010
2000s
8.31%
2000
1990s
8.89%
1994
2020s
7.03%
2023
2010s
4.50%
2010
2000s
8.31%
2000
1990s
8.89%
1994
A note regarding mortgage rate data available for the 1990s: FRED data on 15-year fixed-rate mortgages starts in August 1991, so 1990 and part of 1991 are not factored into this analysis.
Chart of 30-year fixed-rate mortgage trends
Chart of 15-year fixed-rate mortgage trends
Chart of 30-year conforming mortgage trends
Chart of 30-year fixed-rate jumbo mortgage trends
Chart of 30-year VA mortgage trends
Chart of 30-year FHA mortgage trends
Chart of 30-year USDA mortgage trends
What is home equity and how do you leverage it?
Put simply, home equity is the difference between what your home is worth and what you owe on it. You can leverage this to borrow money for purposes like home improvement projects, paying off other debt, or even buying a vacation house or an investment property. Generally speaking, the funds are not restricted to any specific use.
There are two main ways of borrowing against the equity you’ve built up—a home equity loan or a home equity line of credit, with the latter commonly abbreviated as HELOC.
How home equity loans and HELOCs work
A home equity loan is also known as a second mortgage. It does not necessarily need to be from the same lender as your original mortgage is with. You take out a home equity loan for a set amount and with a set repayment period (often five to 20 years, but it can be as long as 30).
By contrast, a HELOC is a revolving line of credit, meaning you can borrow as needed and repay as you go. There’s an initial draw period, usually five to 10 years, where you can pay just the interest accrued. After that, you must make payments toward both principal and interest. As with a home equity loan, there’s no requirement to go to your original mortgage lender for your HELOC.
We’ll look at some pros and cons of both methods for leveraging your home equity and help you assess if either might be right for you.
Pros and cons of a home equity loan
Pros
Fixed interest rate
Set repayment timeline
Comparatively lower interest rate vs. unsecured loans
Might be partially tax deductible
Cons
Secured by your home
Requires good credit
May incur closing costs
Less flexibility
Pros and cons of a HELOC
Pros
Flexibility to borrow as you need funds
Comparatively lower interest rates vs. unsecured loans
Might be partially tax deductible
Cons
Secured by your home
Requires good credit
May incur closing costs
Variable interest rate
May charge a prepayment penalty
Is using home equity a good idea?
First, be very aware of the fact that both home equity loans and HELOCs are secured by your home as collateral. That means if you default, your home could be foreclosed upon. The chance of losing one’s home is never a matter to take lightly, even if your finances are in great shape.
If you understand and accept that risk, and have a budget in place for repaying your loan or line of credit reliably, you may decide it’s worth moving forward. After all, using home equity can likely get you a lower interest rate than you’d get with an unsecured personal loan. You may also have a longer window of time to repay what you owe, compared with a personal loan that might offer a three-to-five-year repayment schedule.
Depending on what you plan to use the funds for, even though the initial loan or HELOC will decrease your equity, you might end up better off in the long run—some home improvement projects, such as remodeling the kitchen, basement, or attic, may significantly increase the resale value.
Note that you might need to get an appraisal done before receiving approval for a home equity loan or HELOC. You’ll also need to have at least 15% to 20% equity in your home to be able to secure one of these products. And, while this might be stating the obvious, be aware you’ll need to provide proof of homeowners insurance.
If after reading all this you don’t feel like a home equity loan or HELOC is right for you, another option could be a cash-out refinance—where you take out a new mortgage to pay the old one off. Doing so essentially lets you pocket the difference between the new loan you took out (for your home’s current value) and what was left on the original mortgage. See our section on refinancing for more on when this might make sense.
Frequently asked questions
Who can get an FHA mortgage?
To be a good candidate for an FHA loan, you’ll generally need a credit score of 580 or higher, no history of bankruptcy in the past two years or foreclosure in the past three years, a debt-to-income ratio less than 43%, steady income and proof of employment, and purchasing a home that you will use as your main place of residence. You’ll also need to be able to make a down payment ranging from 3.5% to 10% (depending on your credit) and cover closing costs.
A quick note of explanation here—to calculate your debt-to-income ratio, you need to know your gross monthly income before taxes and any other deductions come out of your paycheck, plus the total amount of any debt payments you have to make each month. Divide your debt payment amount by your gross monthly income and there’s your DTI. For example, someone whose income is $5,000 and whose monthly debt payment is $1,500 has a DTI of 30%.
While FHA loans can be a strong option for first-time homebuyers, you can still apply for an FHA mortgage even if you’re a current homeowner or have owned a house in the past.
Is an adjustable-rate mortgage a good idea?
If you are uncomfortable with uncertainty, an adjustable-rate mortgage is probably not a good idea for you. ARMs offer an attractive low teaser rate for an initial period, then generally the rate goes up. Note that increases are based on an index, which tracks general market conditions, and a margin—the number of percentage points the lender can tack onto the index to turn a profit.
It’s also important to understand how often your rate can be adjusted. ARMs are referred to with a combination of numbers that spell out the length of your teaser rate and the frequency of subsequent adjustments. For example, if you have a 5/6m ARM, that means your intro rate should stay the same for five years, after which your lender can adjust your rate every six months.
The Consumer Financial Protection Bureau (CFPB) provides a Consumer Handbook on Adjustable Rate Mortgages, catchily nicknamed the CHARM booklet.
If you do proceed with an ARM, you may wish to keep an eye out when your intro rate expires for an opportunity to refinance to a fixed-rate mortgage. Just know that while you can refinance some mortgages almost immediately, others might make you wait for up to two years. Ask about the fine print before you sign.
What’s a mortgage rate lock?
A mortgage rate lock, or lock-in, allows you to temporarily freeze a rate you’ve been offered and protect it from the daily fluctuations that buffet mortgage rates. These typically last for 30, 45, or 60 days, so keep in mind you’ll need to move quickly once you initiate a rate lock. If your initial lock doesn’t provide enough time to seal the deal, you may be able to extend it—for a cost.
The downside to a rate lock is that if mortgage rates dip after you’ve locked in your rate, you won’t benefit from the decrease. Think carefully what level of uncertainty you can accept.
Lastly, know that your mortgage rate can still change in certain circumstances even if you’ve locked it in. Maybe the house appraises at a vastly different value than expected. Or perhaps you miss a payment on an existing credit account and your credit score goes down. A rate lock can provide some peace of mind in a turbulent market, but it is not an absolute guarantee.
Can I get a mortgage with bad credit?
The answer here is “maybe.” With a credit score in the mid-600s, you have a chance at getting approved for a conventional mortgage from a private lender or a USDA-backed loan. If your credit score is 500 or higher, you may be able to get an FHA loan, so long as you can put down a 10% down payment. With a credit score below 500, your application for any type of mortgage is likely to be rejected. Take a look at our tips on how to improve your credit in this case.
Can I get a mortgage on a mobile home?
You may be able to get a mortgage to purchase a mobile home (or more properly, a manufactured home, if built after June 15, 1976). But some lenders will consider such properties as greater risk than traditional houses and will avoid them accordingly, so you might have to shop around a bit. Also, know that a manufactured home should be atop a permanent base.
Can I get a mortgage to build a house?
If you already have the land where you’re planning to build your new home, what you need is a construction loan. And, if you haven’t purchased the land yet, what you need is a land loan.
These types of loans differ from home loans in a few ways. For example, both construction loans and land loans tend to have higher interest rates than home loans. They also have different durations, with a construction loan period generally only lasting a year, while a land loan repayment period may extend up to 20 years. Contrast these with a mortgage to buy a house, where a 30-year repayment period is standard.
Also, know that construction loans are likely to have variable interest rates which fluctuate based on an index, whereas fixed-rate home loans are more common.
You may be able to get a construction-to-permanent loan, which lets you convert the loan into a mortgage after your house is up.
Can I get a mortgage on a modular home?
If the modular home has already been constructed, then yes, a prospective homebuyer can get a mortgage for it just like for a stick-built home. But if the modular home has not yet been put together, a construction loan would be the appropriate type of funding.
Do I need a mortgage broker?
A mortgage broker essentially helps you comparison shop, getting quotes from multiple lenders based on your financial situation and needs. This can be helpful if you feel overwhelmed by the complexities of the homebuying process—and since lenders may have requirements such as a certain minimum credit score or debt-to-income ratio cutoff, the broker can connect you with a lender likely to work for you.
But, of course, it’s not free. It’s typical for the broker to be paid a commission by the lender based on a percentage of the mortgage amount (though there can sometimes be other arrangements, such as a flat fee). If you’re considering engaging a broker’s services, ask them to explain the payment structure before you commit to working with them.
Are mortgage payments tax deductible?
Yes, if your mortgage meets certain IRS requirements, the interest portion of your mortgage payments should be tax deductible. The loan must be secured by your home, and you need to have used the money from the loan to purchase or improve your main residence—with an allowance for a second home as long as that one too is used for personal purposes.
If you purchased mortgage discount points when you took out your mortgage, those are usually tax deductible for the year you bought the home, but not thereafter.
There are two important caveats to all this. First, there’s a cap on how much you can deduct. You’re limited to a principal amount of no more than $750,000 for loans originated in April 2018 or later (half that amount if you’re married but file separately). And second, you can only deduct mortgage interest and points if you itemize.
That last bit is key, because many homeowners may actually do better taking the standard deduction than trying to itemize and deduct mortgage interest on their taxes. The standard deduction as of 2024 is $29,200 for married couples filing jointly and $14,600 for singles and married folks filing separately. Those are big numbers to beat with itemized deductions.
Generative artificial intelligence holds a wealth of potential — and risk — for the mortgage industry, but despite the challenges, the developing technology is finding its place within company workflows.
Some of the greatest potential for adoption lies in marketing uses.
“Imagine if you Googled a topic, and then clicked through several links, and then summarized what you found in those links. Imagine if a machine could do that for you in 30 seconds,” said Adam O’Daniel, chief marketing officer at Guild Mortgage.
“It’s not delivering me any data that I couldn’t have probably found through Google search. It just saved me the time and in sorting through it and compiling the data.”
Across business segments, AI is demonstrating value as a tool that drives efficiency and even fuels inspiration among marketing professionals, even though widespread apprehension remains. Although mortgage and real estate companies have the same concerns around risks as others, their marketing teams and loan officers are testing the waters to varying degrees and learning to tailor AI for their specific needs.
“It’s a starting point for many, and it has been helpful if you’re, for instance, having a creative block,” said Whitney Blessington, chief marketing officer at Churchill Mortgage. “We call it like someone to brainstorm with, even though it’s not a person.”
Generative AI benefits also result from its ability to conduct quick research. “It can help you come up with good topics,” O’Daniel said.
A useful but still-developing technology opportunity Mortgage companies, more than other types of companies, appear open to exploring how artificial intelligence might help their marketing efforts.
While some forms of AI are already used in the underwriting context, especially for tasks related to data extraction and processing, concerns about enforcement of possible noncompliance leave some lenders wary about applying the technology in a customer-facing capacity. Marketing tasks, though, offer the opportunity to see how AI can improve efficiency within the appropriate guardrails.
In 2024 research released by Arizent, 64% of mortgage industry professionals said they would be open to utilizing artificial intelligence for a majority of their marketing and promotional tasks in a hypothetical scenario where regulations did not exist. Interest in the mortgage industry far exceeded the percentage of similar responses in six other financial sectors, none of which surpassed 50%.
At the same time, 55% within home lending said they would use it for most tasks associated with research and fact checking.
Its use in advertising, though, still presents some risk of bias in outreach, according to recent guidelines issued by the U.S. Department of Housing and Urban Development.
But despite the industry’s enthusiasm, the “A” in AI doesn’t stand for accuracy, and human marketing professionals will need to remain a fixture, mortgage leaders say. Even when used for research purposes, users have found themselves running into factually incorrect responses.
“You can’t count on it blindly,” Blessington said. “You still have to do your homework.”
“I think the biggest thing is, today, it really helps someone streamline their workflows,” she added, comparing it to an intern who might conduct low-level administrative work, such as writing metadata descriptions or alternative text for images.
“It helps you go from ideation to planning to actual content,” said O’Daniel. However, when generative AI “writes” any of its own content itself, it fails to perform to the standards the industry might want, he said.
“It may use terminology that is more appropriate for a bank and not an independent mortgage lender, and so you have to adjust the terminology. Some of the more finer nuances of the business — it doesn’t fully deliver.”
Current use scenarios and risks Use of artificial intelligence, particularly generative AI like ChatGPT or Microsoft Copilot, is still in its nascent stage within the mortgage industry; but with expectations of rapid expansion, it stands to change how future work can be done.
Entering AI waters may seem daunting, but the technology also offers customization that can facilitate ease of use, according to Ginger Bell, who regularly conducts seminars on artificial intelligence for real estate professionals. Bell is a co-host of the podcast AI Clubhouse and founder of housing industry video platform Edumarketing.com.
A loan officer or lender can customize their generative AI to home in on situations or guidelines it commonly addresses. “You can actually just type a scenario, and it reads the guidelines,” Bell said, while cautioning verification is still necessary.
“You can also ask it to cite exactly where it’s pulling that information from, and a lot of it is just training it to be able to ask the questions correctly, telling it what you want in terms of the response and then how you want that response to look.”
Bell commonly sees ChatGPT being used to assist in composing emails and social media posts, and some mortgage professionals also employ it to write video marketing scripts. Users can tailor a gen AI tool by feeding it their previously written transcripts, articles or other work, eventually training it to sound more like their own voice, she said.
But oversight and enhancements need to remain top of mind as well, said Jason Perkins, co-founder and president of Bonzo, a provider of communication engagement software and a mortgage customer-relationship management system.
“I look at AI-generated content as a frame of your business, not the be-all,” he said. “Personalization is what drives conversations.”
Generative AI can also quickly build marketing campaigns through a series of prompts — a set of instructions or steps to create messages with given parameters that might address a specific topic or target a borrowing segment. The prompts can also ensure that necessary disclosures and licensing information are included.
“A lot of companies need to realize this is a big compliance opportunity to make sure that your loan officers are providing their information in a compliant way,” Bell said.
However, while businesses have the capability to personalize their prompts and content via an open source generative AI platform, a number of companies are instead turning to enterprise versions that protect proprietary information and maintain compliance. Certain accounting firms go as far as requiring employees to use personalized generative AI under enterprise editions that remain closed sources, according to Bell.
“There’s a lot of folks who use what’s available to consumers on ChatGPT and other platforms like that, and certainly, it’s a great tool, but we’re trying to be very thoughtful about how to use those platforms,” O’Daniel said.
“You use a public platform — the data that I upload to the model stays with that model to fuel future learnings, which is amazing; but we might want to share information from a product guide or some other company program that we don’t want to be out of our control,” Guild’s marketing leader added.
When using a public platform “be aware as far as not putting any nonpublic information in there because it is open source,” Bell advised. In addition to potential noncompliance, it opens up businesses to cybersecurity risk.
Reliance on public artificial intelligence platforms without proper vetting of the content they produce also carries risk of potential copyright infringement, according to Perkins.
“They’re just aggregating data off of the internet,” he said. “Businesses and companies are going to put fences around their data,” meaning companies need to be aware of how loan officers and staff use AI-generated content in social posts or advertising.
Future potential and customer trust While marketing content crafted from AI has primarily appeared in written form, artificial intelligence is taking hold in other creative outlets. “Now there’s so many new technologies that are being built around this,” Bell said.
Advanced generative AI tools that alter photographs already exist, alongside emerging businesses that produce original imagery and videos based on an individual’s likeness and voice from a single recording.
However, while AI-generated imagery video represents one of the next growth phases for automation, it also brings with it a potential for misuse by fraudsters and a conundrum for businesses of all types who want to use technology to their advantage without eroding relationships with clients.
“I think there’s a number of questions around how that affects your brand,” O’Daniel said.
“It can go both ways. There are people who would appreciate more frequent informational updates from their lender and from their loan officer. So if the technology can help us deliver more frequent helpful information, that can build trust; but if the customer feels as if they’ve been misled and that this avatar is not really their loan officer, that can destroy trust. So I think we have to be very cautious.”
A standby letter of credit (also known as an SLOC or SBLC) is a legal document, typically used in international trade, that acts as a safety net for a deal. It communicates that a bank will guarantee payment if, for example, their customer fails to send funds to a seller for goods or services provided.
Generally, SOLCs are important when the buyer and seller haven’t been acquainted and haven’t yet established a sense of trust. These documents can help a seller secure a contract with a new client. This is especially helpful when they are competing with larger, more established sellers.
What Is a Standby Letter of Credit?
An SLOC (or SBLC; the terms are used interchangeably) is an irrevocable commitment by an issuing bank that it will make payment to a designated beneficiary if the bank’s client defaults on a deal. To phrase it a bit differently, these commitments ensure the payment of a specific amount if one party does not make good on a business agreement. For example, a seller might ship goods to a buyer, but the buyer fails to pay within a specified number of days. In such cases, the bank will intervene and compensate the seller if certain conditions are met.
However, the conditions can be very specific, and failure to meet them can result in the seller not being compensated. For example, issues with shipping or with the product itself could result in denial of payment.
These letters of credit are common in international trade when buyers and sellers aren’t familiar with one another. When entities from two different countries do a deal, the laws and regulations involved may differ. This can add a layer of uncertainty to whether the deal will go through smoothly. An SLOC can help the seller feel more confident they will be paid.
An SBLC acts as a safety net or insurance policy for the seller. If all goes well with the transaction, they won’t have to make use of it. Only if there are issues with the sale will the SBLC be needed, but that bank guarantee adds a level of confidence.
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How a Standby Letter of Credit Works
Now that you know the meaning of SBLC, here’s how it actually functions.
• When a buyer and seller are entering into a large contract, an SLOC might be created, especially if the buyer and seller don’t know one another. The buyer might create one to help secure a contract or the seller might ask the buyer to obtain a letter.
• In either case, the buyer goes to a bank and requests an SLOC.
• The bank will then perform underwriting to verify the buyer’s creditworthiness.
• The bank might also ask the buyer for collateral if they have bad credit (this is an example of why bad credit is a big deal). The amount of collateral will depend on a variety of factors, including the level of risk, the size of the deal, and the strength of the business.
• Once the process is complete, the buyer receives the SLOC.
• The bank will charge a fee, typically between 1% and 10% of value per year while the contract is in effect.
• Once the transaction project is complete, the SBLC is no longer valid, and the bank will no longer charge a fee.
However, if the buyer defaults on the agreement for any reason, the seller must provide all documentation listed in the SBLC to the buyer’s bank, informing them that the buyer has not held up their end of the arrangement. The bank will then reimburse the seller and later collect payment from the buyer, plus interest.
A deal can fail to be completed for many reasons, such as bankruptcy, lack of cash flow, or dishonesty on the part of the buyer. If the bank determines the buyer has violated the terms of the SLOC, it will then make payment to the seller.
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Types of Standby Letters of Credit
There are two types of standby letters of credit: financial SBLCs and performance SBLCs.
Financial SBLC
A financial SBLC guarantees payment for goods or services provided. The SBLC guarantees that the buyer’s bank will pay the seller if the buyer doesn’t pay within the timeframe outlined in the letter. If the bank does need to step in and make payment, it will later collect payment from the buyer, plus interest.
Performance SBLC
A performance SBLC is less common but usually guarantees the completion of a project. In this case, a person or company agrees to complete a project within a specified timeframe. Thus, a performance SBLC would reimburse the party paying for the project if it isn’t completed in time or if the client otherwise feels the project was not completed to satisfaction.
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Standby Letter of Credit Example
The most common use of SBLCs is to guarantee payment when a seller ships goods, typically internationally, to a buyer.
• For instance, a buyer might secure a contract to purchase a large shipment of corn from overseas. The seller, never having done business with the buyer before, might ask the purchaser to obtain an SBLC to ensure they are paid for the shipment. Even if the purchaser has taken steps to build credit, this is a new relationship between the two businesses, and trust hasn’t yet been established.
• The SBLC indicates that the buyer will remit payment within 30 days of receiving the shipment. Thanks to shipment tracking, the seller can see that the buyer has received the shipment of corn. However, 30 days have passed, and the buyer hasn’t paid.
• The seller can then go to the buyer’s bank, which issued to SBLC, and provide the necessary documentation about this deal and lack of payment.
• If the bank agrees that the buyer hasn’t held up their end of the agreement, the bank will then pay the seller for the corn. The bank would then collect payment and additional charges from the buyer.
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Advantages of a Standby Letter of Credit
SLOCs have a few advantages worth noting:
• Guarantee of payment The main benefit of SLOCs is they guarantee payment for the seller. Even if the buyer can’t pay, the seller can ask the buyer’s bank to reimburse them.
• Helps buyers land contracts A seller might hesitate to ship goods to a buyer they don’t know and trust, even if credit monitoring reveals they seem like a good bet. There’s still an element of risk. The SLOC can make a seller more confident about doing a deal since they will be more likely to get paid.
Disadvantages of a Standby Letter of Credit
There are disadvantages to SLOCs, too. These include:
• Increased costs The bank that guarantees the SLOC will charge the buyer a fee for every year the contract is in effect. And if the bank has to pay the seller, they will charge the buyer principal plus interest.
• Not always a guarantee Although SLOCs guarantee sellers will be paid, there can be many hurdles involved before payment is issued. For example, shipping delays or problems with the product itself can lead to denial of reimbursement.
How to Obtain a Standby Letter of Credit
Obtaining a standby letter of credit is generally the responsibility of the buyer. Their bank will reimburse the seller in the event they don’t pay promptly. The bank will also have to determine how creditworthy the client is and decide if collateral is required. (One of the benefits of good credit can be not having to put up collateral in situations like this one.)
To issue the letter, the buyer might work with either a domestic or international trade division of a bank, depending on the deal’s particulars. At this point, it’s also wise for the buyer to have an attorney on site to review the terms of the agreement.
A seller can ask that the buyer obtain an SLOC as part of the contract. All parties should have legal experts involved to ensure the accuracy and conditions of the agreement.
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The Takeaway
Standby letters of credit (SLOCs) are useful legal documents for both buyers and sellers doing business, especially if they are working on an international deal. These letters can act as a safety net, saying that if a buyer doesn’t complete a deal, their bank will step in and make payment. For sellers, these letters can help increase confidence that they will be paid for goods or services. For buyers, they can be helpful in securing new contracts.
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FAQ
What does standby mean in letter of credit?
A letter of credit is a legal document that provides a safety net for a financial deal. “Standby” in this context refers to the fact that these letters are only implemented (and funds then issued) by the bank if the buyer fails to pay. If the buyer pays within the expected timeframe, no action is taken. The letter of credit has stayed on standby status.
What is the difference between a letter of credit and a standby letter of credit?
The difference between a letter of credit and a standby letter of credit is what each of them promises. A letter of credit is a guarantee from a bank that the buyer will pay. On the other hand, a standby letter of credit is a guarantee from the bank that they will pay if the buyer fails to do so.
Can SBLC be used as collateral?
The SBLC itself is not usually considered collateral. However, a bank may require the buyer to provide collateral before issuing an SBLC if the bank feels the buyer’s creditworthiness is not up to par.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Safe deposit boxes are storage units located in banks that offer a secure way to store important items you may not want to keep at home, such as critical documents, collectibles, and family heirlooms.
Due to the growth of online banking and digital storage, safe deposit boxes aren’t as popular as they once were. However, there are some situations where these boxes can be useful. Here are key things to know about safe deposit boxes.
What Is a Safe Deposit Box?
A safe deposit box (also called a safety deposit box) is a secure locked box, usually made of metal, that stays in the safe or vault of a federally insured bank or credit union. They are typically used to keep valuables, important documents, and sentimental keepsakes protected from theft or damage.
Safe deposit boxes often come in two different sizes, usually 3” by 5” or 10” by 10,” and can be rented for an annual fee. In exchange for the fee, banks provide security measures to protect your valuables, such as alarms and surveillance cameras. In addition, the safe deposit boxes are stored in vaults that are designed to withstand natural disasters such as fires, floods, hurricanes, and tornadoes.
Unlike a bank account, however, the contents of a safe deposit box are not protected by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). As a result, there is still a small risk that you could lose the items in your container due to theft or damage.
Recommended: What Are the Differences Between FDIC and NCUA Insurance?
What You Should and Shouldn’t Keep in a Safe Deposit Box
Safe deposit boxes can be a good place to keep hard-to-replace documents and small valuables that you won’t need to access frequently. However, you generally don’t want to keep any items that you may need to grab in a hurry in the box, and certain items are prohibited.
Here’s a breakdown of things to keep — and not to keep — in a safe deposit box.
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Items Typically Kept in a Safe Deposit Box
• Important documents: Documents that are difficult to replace and often needed for legal purposes are commonly stored in safe deposit boxes. These include: birth certificates, marriage licenses, car titles, divorce records, citizenship papers, property deeds, and mortgage documents.
• Valuables: Jewelry, rare coins, stamps, and other valuable collectibles can be safely stored away from potential theft.
• Financial Instruments: Stock certificates, bonds, and other financial instruments that require safekeeping can be securely stored in a safe deposit box.
• Backup data: You might store external hard drives or USB drives containing sensitive personal or business information here to protect against data loss.
• Personal keepsakes: Irreplaceable items like family heirlooms, photos, and memorabilia can be stored to ensure they don’t get lost or damaged.
Items to Avoid Putting in a Safe Deposit Box
• Cash: While you may be tempted to store some cash in your safe deposit box, you’re likely better off putting the money in a high-yield savings account at a bank or credit union, which will allow your money to grow. The cash will also be insured (up to certain limits) by the FDIC or NCUA.
• Original copies of wills: Original wills should not be stored in a safe deposit box because they may be difficult to access immediately after the owner’s death, delaying probate. You might instead store a copy of a will.
• Durable power of attorney: Similar to wills, these documents might be needed quickly in emergencies, and delays could cause significant issues. Consider storing a copy.
• Passport: If you need to travel urgently, accessing your passport from a bank vault could be problematic due to limited bank hours.
• Frequently used items: Any items you need regular access to should not be kept in a safe deposit box due to limited accessibility.
• Prohibited items: Banks and credit unions generally prohibit the storage of firearms, explosives, weapons, hazardous materials, illegal substances (such as drugs), alcohol, perishable items, and cremated remains.
How Much Does a Safe Deposit Box Cost?
Rental fees vary by the box’s size and financial institution. The average cost to rent a box at a commercial U.S. bank runs between $15 and $350 per year. Additional costs may include fees for lost keys or late payments.
Some banks and credit unions will offer discounts on a safe deposit box cost if you have a relationship with the bank. In some cases, an institution may offer free access to a safe deposit box as a perk to their customers.
How to Get a Safe Deposit Box
To rent a safe deposit box, you’ll generally need to follow these steps:
1. Research your options. Not all banks and credit unions offer safe deposit boxes. You’ll want to find an institution that both provides this service and is conveniently located.
2. Meet the requirements. Many banks require you to be an existing customer with a checking or savings account. However, some banks may allow noncustomers to rent boxes for an additional fee.
3. Provide identification. You’ll need to bring valid identification, such as a driver’s license or passport, to verify your identity. If you plan to allow another person access to your safe deposit box, they will need to be present and show ID as well.
4. Sign a rental agreement. You (and, if applicable, your corenter) will need to sign a rental agreement outlining the terms and conditions of the box rental.
5. Make a payment. You generally need to pay the initial rental fee upfront. Some banks may offer discounts for long-term rentals or automatic payments.
6. Get your key. Upon completing the paperwork, you will receive a key to your safe deposit box. The bank retains a second key. Both keys are required to access the box. If the bank offers keyless access, they will likely scan your finger or hand.
Keep in mind that every time you wish to access your safe deposit box, you’ll need to present your photo ID, as well as your key (if it’s not keyless). The bank may also require your signature before allowing you to open your box.
Recommended: How Long Does It Take to Open a Bank Account?
How Safe Is a Safe Deposit Box?
Safe deposit boxes are generally very secure. They are housed in a bank vault, which offers robust protection against theft, fire, flood, and other disasters. Banks employ multiple layers of security, including surveillance cameras, alarms, and restricted access to the vault area.
When you rent a safe deposit box, the bank typically gives you a key to use. The bank also retains a second “guard key” which must be used by a bank employee in tandem with your key. Some banks now use a keyless biometric entry system, where you scan your finger or hand instead.
However, it’s important to note that the contents of a safe deposit box are not insured by the bank or the FDIC. As a result, you may need to obtain separate insurance or add a rider to your homeowners or renters insurance for coverage.
Recommended: Are Online Savings Accounts Safe?
Pros and Cons of Safe Deposit Boxes
Safe deposit boxes can be a good way to protect your valuables. Here are some of the upsides of renting one:
• Security: Safe deposit boxes offer a high level of security, since they are stored in areas with limited access and stepped-up surveillance.
• Environmental protection: They can protect your valuables from environmental damage, such as a flood or fire.
• Privacy: The contents of a safe deposit box are known only to the renter, offering a high degree of privacy.
• Organization: Safe deposit boxes help keep important documents and valuables in one secure location, making it less likely you will misplace them.
But safe deposit boxes also come with downsides. Here are some to consider:
• Limited access: Access is restricted to bank hours, which can be inconvenient, especially in an emergency.
• Cost: There is an ongoing rental fee, which varies based on the size of the box.
• Not insured: Contents are not insured by the bank or FDIC. Separate insurance may be needed for valuable items.
• Delayed access for loved ones: In the event of the renter’s death, accessing the box may require legal processes that could delay access to important documents.
Recommended: Different Types of Savings Accounts You Can Have
The Takeaway
If you’re looking for a safe place to stash vital papers or valuable possessions, you might consider renting a safe deposit back at a brick-and-mortar bank or credit union. Items stored in these containers are protected against theft, loss, or damage due to a flood, fire, or other disaster.
But the protection has limits: Unlike regular bank accounts, safe deposit boxes are not insured by the FDIC. Also keep in mind that safe deposit boxes aren’t ideal for items you may need to grab in a hurry, since access is limited to banking hours.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.
FAQ
What can I use instead of a safe deposit box?
Alternatives to a safe deposit box include:
• A fire-rated personal home safe: This can offer protection from environmental damage (such as fire or flood). However, a thief could potentially steal the whole safe.
• Digital storage solutions: Cloud services can securely store important documents and data backups.
• An attorney’s office: For legal documents, a trusted lawyer’s office may offer secure storage.
• Private vault facility: These are a viable alternative to a safe deposit box but tend to cost more.
Can safe deposit boxes be jointly shared?
Yes. When you open a safe deposit box, you can designate one or more corenters who will have equal access to the box. This is useful for couples, business partners, or family members who need shared access to important documents and valuables. Each renter typically receives a key, and all corenters’ signatures are required on the rental agreement.
Is it safe to keep money in a safe deposit box?
While it is physically safe to keep money in a safe deposit box, it is not recommended. Cash stored in a safe deposit box does not earn interest and is not insured by the Federal Deposit Insurance Corporation (FDIC). You’re generally better off keeping cash in a high-yield savings account or other insured financial instrument that offers safety, liquidity, and interest earnings.
Do banks know what you put in a safety deposit box?
No. The contents of a safe deposit box are private, and bank employees do not have access to the items stored inside. When you rent a safe deposit box, you receive a key, and the bank retains a second key. Both keys are required to open the box, but only you can open it and see its contents. This ensures privacy and confidentiality.
Photo credit: iStock/AlexSecret
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
Although you may have never heard the term before, core deposits are a basic concept in retail banking. When customers (probably just like you) deposit funds in a checking, savings, or money market account, financial institutions consider this money to be core deposits. Financial institutions then use core deposits to loan money to other consumers and generate profits through interest-bearing investments. So, generally speaking, growing core deposits helps institutions better leverage these funds and earn profits.
Though this may sound like technical knowledge, the truth is that understanding how core deposits work and why they are important can help you better navigate your banking life.
What Is a Core Deposit?
Simply put, core deposits are a stable source of capital for financial institutions like banks and credit unions. It’s money that consumers deposit and that the bank then turns around and uses elsewhere. For instance, those funds could be part of a loan. Core deposits usually include individual savings accounts, business savings accounts, and money market accounts.
In addition, financial institutions may offer incentives to encourage consumers to deposit money in a specific account to increase their core deposits. Building their capital with core deposits can have an array of advantages for a financial institution, including boosting revenue.
💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.60% APY, with no minimum balance required.
How To Calculate Core Deposits
Given that core deposits can reflect a bank’s health, it may be valuable at times to figure out how much a financial institution has. This may be a bit technical for a typical layperson, but here is the technique.
• To calculate core deposits, one can look at the balance sheet or deposit footnotes that consist of checking, savings, and money market deposits. Ideally, it’s best to leave out particular broker or certificate deposits since both deposit accounts tend to follow rates and involve higher costs for the financial institution. Banks that are oversaturated with deposits like this may have liquidity issues and struggle to fund their loan portfolio.
• The next step: Compare the number of core deposits to overall deposits to find the ratio of core deposits.
◦ Banks with 85% to 90% core deposit ratios are considered to be solid financial institutions.
◦ Additionally, banks should generally have a substantial percentage of non-interest-bearing deposits, consisting of about 30% of total deposits. That ratio of 30% or higher also indicates that a financial institution is in good health.
Recommended: When Will Direct Deposit Hit My Account?
Methods for Increasing Core Deposits
The success of a financial institution relies on the growth of its core deposits. For this reason, financial institutions continually look for ways to attract and retain their customer base and increase those deposits. It’s critical to success.
Here are some strategies financial institutions implement to grow their core deposits.
Cultivating Relationships
Banks can boost core deposits by cultivating relationships with their current customers. After a consumer puts their money in the institution (whether by setting up the direct deposit process, electronically, or with a teller or ATM), they are now a client. The bank or credit union can focus on nurturing that relationship, so the consumer uses the bank for all of their banking needs. Perhaps they will move a savings or business account that they keep elsewhere to this bank.
What’s more, if the customer feels valued, they will likely share their experience with friends and family (you may have done this in your own banking life, for instance). This good word of mouth can lead to the growth of core deposits and strengthen the financial organization.
There are a variety of ways to cultivate better customer relationships. With account holders who bank at brick-and-mortar institutions, one technique is to enhance interactions with the staff. For example, a teller or bank representative might suggest personalized products to meet a client’s needs, such as one of the different kinds of deposit accounts. Online banks can also glean their customers’ needs and create tailored offers with incentives, like a cash bonus or additional services (say, budgeting help).
Another initiative might be to reach out to high net worth clients to personalize the relationship, knowing that these individuals are likely to have cash to deposit. Banks that pay attention to their customer’s needs and make an effort to add special touches can improve customer satisfaction, increasing core deposits.
Recommended: How to Deposit Cash at an ATM
Bolstered Online Services
In today’s world of digital financial management, enhancing online services can encourage more customers to deposit funds at a financial institution and potentially do so in larger amounts. Having the latest bells and whistles, such as seamless spending and saving tracking and the most advanced biometric security measures, can be a big plus.
This can be an especially good tactic for smaller financial institutions. Community banks may struggle with growing core deposits. If an institution like this has limited capital, enhancing online services can be an important avenue to pump up those core deposits. Improved online banking services may well cost a fraction of what it does to bolster a physical bank branch. Creating digital services can also help the bank reach more consumers. While a bank branch may generate between 75 and 100 new accounts per month, a digital branch could help increase this number by hundreds.
When opening a new account, many consumers choose to compare options online first. Even if a bank has competitive rates and has conveniently located branches, prospective account holders may choose competing banks if they rank higher on search engines. For this reason, creating an online presence and digital services that are as strong as possible can grow the number of deposits.
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Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!
Offer Tailored Services
Financial institutions that offer tailored services to particular industries or specialized banking products can attract consumers who value these services. For example, banks can identify niches or target audiences in their community that provide the most deposit advantages. If they are doing business in an area known for an abundance of hospitals, a niche bank might develop more banking products and services that meet the needs of healthcare professionals (say, ways to pay off student loans faster). They can mold an incentive strategy around the industry to attract more customers and core deposits.
A financial institution must strike a balance between core deposits being available for consumers to withdraw funds and their cash being used to make loans and otherwise generate revenue. (After all, one of the ways a bank makes money is based on charging a higher interest rate on loans than is paid on deposits.)
There are governmental guidelines for this: All financial institutions must have bank reserves, a percentage of deposits they must hold and have available as cash. In the past, this figure has ranged between 3% and 10%. But as of 2020 and the COVID-19 crisis, this requirement was lowered to 0% to stimulate the economy. So, since banks are not required to set aside any deposits, if all of the depositors requested total withdrawals from their accounts, the bank wouldn’t have enough money to fulfill this request.
That’s where the Federal Deposit Insurance Corporation (FDIC) comes in and can insure core deposits. Here’s how much does the FDIC insure: up to $250,000 per depositor, per account ownership category, per insured institution. So even in the very unlikely event that a bank were to fail, consumers will have this amount covered.
The Takeaway
Core deposits — the funds put in checking, savings, and money market accounts — help banks make money and offer loans to consumers. Growing core deposits is vital to an institution’s success, and this goal can be achieved in a variety of ways, including offering more personalized services and more online banking capabilities.
If you are interested in accessing state-of-the-art benefits of digital banking, see what SoFi offers.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.
FAQ
What is the difference between core deposits and purchased deposits?
Core deposits are typically stable bank deposits, such as those in checking accounts and time deposits. Purchased deposits are rate-sensitive funding sources that banks use. These purchased deposits are more volatile and, as rates change, more likely to be withdrawn or swapped out.
What is a non-core deposit?
Non-core deposits are certificates of deposit or money market accounts that have a specified rate of interest over their term.
How much does FDIC cover?
The FDIC covers up to $250,000 per depositor, per account ownership category, per insured institution in the very unlikely event of a bank failure.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Deciding between an online and a traditional bank? First, let it be known that no two people’s banking styles are exactly the same. For every person who loves popping into their local branch and chatting with their favorite teller, there’s someone else who avoids bank branches at all costs, preferring to seamlessly swipe their way through financial transactions on their mobile phone.
Traditional vs. online banks also have other important distinctions, including the dollars-and-cents bottom line. Their typical fees charged and interest rates paid differ as well.
So how can you decide which kind of financial institution best suits your needs? Read on to get the intel you need, including:
• The differences between traditional and online banking
• How online banking vs. traditional banking works
• The advantages of online banking
• How to open an online bank account
Differences Between Online and Traditional Banking
Online and traditional banking both typically offer reliable ways to manage your money, but they do differ considerably in several ways. First, a little lesson in what they are:
• Traditional banks are ones that have branches you can visit, have ATMs, and often have a website and app for conducting some business digitally. They tend to charge account fees and offer interest rates that may be lower than online banks.
• Online banks offer many (most, even) of the same services as traditional banks, but they don’t have a footprint in the physical world. You won’t be able to visit a branch or use their branded ATMs (though they may partner with an ATM network or refund your fees). The lack of branches usually allows them to charge lower or no fees and pay depositors a higher interest rate.
Now, here’s a closer look at some key points of differentiation:
Security
If you keep your money at a traditional bank and visit a branch, you likely feel reassured by the presence of security guards and perhaps a glimpse of a massive vault inside. You might wonder if online banking is as secure as a bricks-and-mortar bank. If you use a strong password and avoid conducting online banking with a public WiFi connection or on a public computer, you are following good advice for keeping your account safe. While there are no 100% guarantees, your money should be well protected.
What’s more, both online and traditional banks abide by the same federal regulations. This means that if your financial institution is insured by the Federal Deposit Insurance Corporation, you are covered in the event of a bank failure up to $250,000 per depositor, per account type. Want to be sure of that safety net? You can use the FDIC BankFind to make sure your online bank is FDIC-insured.
Bank Fees and Interest Rates
As briefly noted above, online banks typically save big on real estate and staffing costs and pass that along to their customers. Many charge no or low fees. Which may be a very big deal: According to the Consumer Financial Protection Bureau, Americans pay more than $15 billion a year on bank overdraft fees, which are usually $30 to $35 a pop.
Online banks also likely offer higher interest rates on saving accounts and may offer interest on checking, too. For instance, at press time, SoFi was offering 1.80% APY on savings, while Chase offered 0.01%. That’s quite a noticeable gap. So if you don’t use traditional banking services, you can probably save money and earn more interest with online banking.
24/7 Banking
A few years ago, online banks tended to have the advantage here, providing services around the clock. Traditional banks, which may only be open from 9 a.m. to 5 p.m. Monday through Friday, have been working hard to close the gap and offer services (from check deposits to money transfers) via their website or app at all hours.
Still, online banks may have the edge in terms of 24/7 support, since they have offered this kind of service from the get-go. Making mobile deposits or switching up your password at 2 a.m. is no problem for them, and if you hit a speed-bump, you can likely chat or phone your way to help.
ATMs
If you’re an account holder at a large traditional bank, you’ll probably have a good number of conveniently located ATMs that you can access without a fee. However, those who bank at a smaller, local or regional institution may have fewer options. They may have to make a special trip to get to their bank’s ATM or otherwise pay an out-of-network fee.
How about online banking and ATMs? Digital banks don’t have branches, so how can they have cash machines, you might wonder. The answer is: They don’t. Instead, they usually have work-arounds in this situation. Most online banks partner with a large cash-machine network that you can use for free for withdrawals or for depositing cash at an ATM. Or they may have an arrangement that refunds you for any bank fees you incur using an ATM. Online banks tend to work hard to level the playing field on this front.
Get up to $300 when you bank with SoFi.
Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!
How Online Banking Works
If you’ve been used to traditional banking, online banking may seem like a brave new world, and a somewhat intimidating one at that. In truth, however, online banking closely mirrors what happens at a bricks-and-mortar bank, minus the bricks-and-mortar and those free lollipops.
For example, you can open checking and savings accounts, get a debit card, sign up for automatic bill pay, transfer funds, and more. The one challenge can be withdrawing or depositing cash; there’s no teller service, but you may be able to manage cash at a linked ATM (as mentioned above). You may find that the pros of mobile banking and online transactions make up for this inconvenience.
If you typically go into a branch for certain services, such as wire transfers, you’ll likely find you can do them online with a digital bank. And the fact that you can do them on a website or app means the bank isn’t paying the overhead of having a bricks-and-mortar location. So you are probably earning more interest and avoid account management fees than if you kept your money at a traditional bank.
Recommended: How Many Bank Accounts Should I Have?
Advantages of Online Banking Over Traditional Banking
Here’s a side-by-side comparison of how online vs. traditional banking compares.
Feature
Online Banking
Traditional Banking
Interest rates
Typically have considerably higher interest rates since they can pass along their savings on overhead to the customer
Tend to have lower APYs (annual percentage yields) as they need to cover the costs of their branches and staffing
Bank fees
Usually offer no fees or lower fees than traditional banks
Often assess monthly account fees, minimum balance fees, overdraft charges, and more
ATMs
Probably lack branded ATMs but likely partner with a network for fee-free transactions
Typically have a network of their own ATMs, which may or may not be conveniently located
Customer Service
Usually offered 24/7 via chat or phone
Usually offered in person during business hours and by chat or phone 24/7
Security
High-level online security and fraud protection
High-level online security and fraud protection at large chains
How to Know if Online Banking Is Right for You
Whether you choose to bank online or with a traditional financial institution is a very personal decision. Here are a few of the most important signs that online banks will be a good fit:
• You prioritize high interest rates and low fees to help your money grow faster.
• You are comfortable accessing a partner network of ATMs vs. a bank’s own branded machines.
• You are satisfied with seeking customer service via chat or phone.
• You are confident managing your money without having a personal banker at your local branch.
• You are digitally savvy enough to conduct transactions online; you also know not to use public WiFi or computers for banking business or else you’ll risk bank account fraud.
Opening an Online Bank Account
With online banking, you don’t have to wait until Monday morning to open a new account. You can just log on from your couch on a Sunday afternoon to start a new account and otherwise manage your money.
Technology is allowing financial companies to change the entire banking experience and improve it for customers. One of these new ways is by opening an online bank account with SoFi. With our Checking and Savings, you’ll earn an amazing APY and pay no account fees.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.
FAQ
How does online banking work?
Online banking allows you to manage your money without going into a bricks-and-mortar branch. Using the bank’s website and/or app, you can spend, save, transfer funds, and conduct other business.
What are the advantages of online banking over traditional banking?
Online banking can offer several advantages: Some people prefer using a website or app vs. going into a bank branch as often happens with traditional banking. What’s more, online banking usually offers lower fees (or none whatsoever) and higher interest rates than bricks-and-mortar banks.
What is a disadvantage of online banking?
Online banking doesn’t offer the opportunity to build a personal relationship with your banking team. Also, depositing cash can be a challenge.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Income verification documents, which are typically requested when you’re applying to rent a home or apartment, are documents that prove you have a job and are earning an income.
A landlord requests these documents to ensure that you’re earning enough to cover your rent payments each month. The income verification paperwork requested may vary from landlord to landlord, and the documents may also differ, depending on your specific career situation. The landlord is simply doing their due diligence to make sure you can afford the rental.
Table of Contents
Key Points
• Income verification documents are required by landlords to confirm a potential tenant’s ability to pay rent.
• Common documents include pay stubs, tax returns or W2 forms, and bank statements.
• For self-employed individuals, 1099 forms or personal tax returns may be necessary.
• Additional proof like a letter from an employer can also be used to verify income.
• These documents help ensure that the rent does not exceed a reasonable portion of the tenant’s income.
How to Show Proof of Income to Rent an Apartment
There are a number of ways that prospective renters can show proof of income to a prospective landlord or property management company. The types of documents you need to produce will likely depend on the specific request from the landlord.
Generally, there are a few standard income verification documents that landlords and property managers are looking for:
• Pay stubs
• Tax returns or W2 forms
• Bank statements
• A letter from your employer
Typically, a landlord will request two forms of income verification. Often, your pay stubs and tax forms will suffice as proof of income. But in some cases, you may need to submit several months’ worth of bank statements. You might even need to ask your employer to write you a letter to assure the landlord that you have a job and do have income.
How to Show Proof of Income if You’re Self-Employed
If you’re self-employed, the process can be more complicated. You may need to submit 1099 tax forms or your personal tax returns showing regular and steady income going back a couple of years. Depending on the nature of your self-employment, you may have business tax returns, such as a Schedule C if you own and run a small business, that you can use to verify your income.
You can also use bank statements from your business bank account to show a landlord that you have income. The documents required will likely be similar to those you need when applying for self-employed personal loans. Ask the landlord what will work best for them so you will know exactly what documents you should present.
How to Show Proof of Income for Side Hustles
You may have a side hustle — perhaps you make and sell crafts online, for instance — and that’s similar to owning a small business. And you should be reporting the income you make from your side hustle to the IRS on your tax return. By presenting your tax return to a landlord, you can prove that you’re making side hustle income.
If you’re working for a ridesharing app or food delivery service, the company should be sending you a tax statement with your annual earnings so that you can report them on your tax return. You can always show a copy of that tax statement to a prospective landlord.
Why Proof of Income is Important
Proving your income is important when you rent an apartment — or apply for credit, for that matter — because it shows that you have money coming in every month, and are able to fulfill your financial obligations. In other words, it shows the property owner that you can make your rent payments.
Recommended: What Is The Difference Between Transunion and Equifax?
Understanding Rent-to-Income Ratio
Along with proving your income, you need to make sure that your rent is not eating up too much of your paycheck. That’s where the “rent-to-income ratio” comes into play. It calculates the percentage of your total income that you’re spending on rent.
The general rule of thumb is that you shouldn’t spend more than 30% of your gross monthly income on housing costs. Depending on where you live, those costs may be a higher or lower percentage of your income, but try to aim for around 30%. An online money tracker can help you keep tabs on your spending.
To figure out your rent-to-income ratio, divide your total annual earnings by 12, which gives you your monthly earnings, and multiply that number by 0.3 (or 30%). The result is how much you can afford to spend on rent per month.
Annual earnings ÷ 12 x 0.3 = How much you can afford to pay for rent
For example, let’s say you earn $50,000 a year. Divide that number by 12 and multiply it by 0.3 and you get $1,250. That’s what you should aim to spend on rent each month. Depending on where you live, you may need to spend more, but that figure gives you a ballpark of where you should be in order to have enough money to pay for your other expenses and hopefully, contribute to your savings as well.
How to Best Prepare to Pay Rent
When you are approved by a landlord to rent an apartment, you’ll need to plan and prepare to pay your rent on time and in full every month.
That means having your finances in order. First, you should have a checking account set up. Typically, you’ll pay your landlord by check or through an online portal and either way, you’ll need a bank account in order to do this. You may be surprised to learn that more than 6% of U.S. households (or more than 14 million people) don’t have a bank account. Fortunately, it’s easy to open a bank account if you don’t have one.
Next, make sure that you’re properly budgeting for your rental expenses. You want to make sure that you have enough money in your account to cover the rent when your landlord cashes your check. A budget planner app can help.
There are other expenses that can go along with renting an apartment or home that you may need to pay. Here are a few you should be aware of:
• Utility bills
• Renters insurance
• Parking, maintenance, and fees for amenities such as a gym or pool
Finally, know the terms of your lease. It’s common for rent to go up once a lease expires, which you may discover when you go to re-sign or renegotiate the rent. Unfortunately, renting is not like a fixed-rate mortgage when you have a monthly rate locked in. So don’t be surprised if the costs of staying in your apartment go up after your lease expires.
The Takeaway
Income verification documents offer proof to a landlord or property management company that you have enough money coming in every month to pay the cost of an apartment or home rental. Typically, pay stubs, tax returns, and bank statements are the only forms of documentation you need. However, if you are a small business owner, you may be required to produce additional documents. The good news: Once you are approved to rent, you can start the process of moving in.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
SoFi helps you stay on top of your finances.
FAQ
Can you rent an apartment with no income?
It is possible to rent an apartment with no income, though it likely will be quite difficult. In this instance, having a high credit score can help, because it shows you have a track record of paying your expenses. A healthy savings account can also be useful to prove you have money in the bank.
Can proof of income for an apartment be faked?
It is possible to fake proof of income for an apartment by using online tools to create fake pay stubs and other documents. This constitutes fraud and is illegal, but it does happen.
Is proof of income different for a student?
Yes, it can be, yes. If a student has no income because they are studying full-time, they may need to get a co-signer like a parent or guarantor in order to secure a lease.
Photo credit: iStock/Anna Kim
SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Inside: The exact habits you need to learn how to be financially stable. Financial stability is when you are in control of your finances. Make sure you have these money habits!
Are you ready to move from financially sound to financially stable?
Well, the good news is this is something you can easily accomplish and we are going to show you exactly how to do it in this post. Learn over thirty simple traits to prove to yourself that you are financially stable.
One of the great things about being money financially stable is it means that you are less worried about money. You are established with your finances and you are consistent on how you spend and save your money.
It is a great feeling to be financially stable because you know that your bills are taken care of and everything that you want to spend money on that you actually can!
The Money Bliss Steps for Financial Freedom is a guide to help you become financially independent. Along your path, you will go through many different journeys and many different seasons, but it is a great feeling to know that you are in a good place financially.
Becoming financially stable is something that anybody is capable of doing.
It just takes determination, a growth mindset, and a desire to be wise with your money.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
What does Financial Stability Mean?
Financial stability is when you are confident in your personal financial situation. You have money to pay monthly bills, set aside for big purchases, invest in your future, and be able to sleep at night.
When you can do these above things, that is when we can say that a person is financially stable.
When you define financial stability, the definition should motivate you to improve your money situation because the more you work towards becoming financially stable, the better the opportunities present themselves.
It is one step up from being financially sound and moving closer to financial security.
Another way of saying financially stable is of good financial standing.
Overall, the financially stable meaning is you have made wise decisions that will ultimately let you live the life you want. One step closer to financial freedom.
How to Be Financially Stable
The good news is you only need to do three steps to become financially stable plus they are not complicated.
This is exactly how do you become financially stable…
It is just a habit that you need to start doing.
If you have bad habits with money, then you are not going to have the success with money that you need. If you have good habits with money, then you will end up becoming financially stable.
Just a side note, If you need a good book on changing bad habits into good habits. I highly recommend Atomic Habits by James Clear. It is a great book to help you change the habits that need to change, and start to live the life that you want.
Now, back to the three steps to becoming financially stable.
If you want to learn how to become financially stable, then this is what you need to do.
1. Pay Yourself First
This is the most important habit that you can do to become financially stable.
Many times, I feel like I sound like a broken record about the importance of how you need to pay yourself first. It doesn’t matter if it is your very first job in high school, starting out at 21, or quickly approaching your 50s, you need to pay yourself first today.
Take your paycheck and automatically save a certain percentage.
If you have never saved before start with 10%.
If you know that your spending is out of control plus you have the income to save a higher percentage, then plan to save 20-25% ot your income.
When you first begin to save, the goal is not the amount you save; it is about the first time that you begin to save.
It is about proving to yourself that you are capable of saving and seeing that account, increase over time will continue to motivate you.
So, if you want to be financially stable, then you must pay yourself first. Set up a separate savings account or an investment account where you will put that money.
2. No Debt
Second, no debt. Period.
If you cannot buy something in cash, then wait until you have the cash available to make the purchase. Do not use debt just because you have access to credit.
If you want to be financially stable over the long term, that means you must eliminate consumer debts.
Now, before you freak out and say, “I can’t be financially stable because I have so much debt that is dragging behind me and holding me back.” Don’t freak out. You can make a plan to get out of debt.
By getting out of debt, you are proving that you are on the path to becoming financially stable.
In the meantime, you just don’t go into any more debt.
If you are in your 20s, steer clear from debt and do not get into the debt trap.
The Trickly Mortgage Debt Conversation….
Because owning a house comes with a price and it comes with a premium since there is a cost to upgrade it, pay property taxes, and so much more. Plus this varies greatly in an HCOL vs LCOL area.
Do your research and figure out is it more cost-effective for you to purchase a home and pay the mortgage payment or is it better to rent and not have the responsibilities of being a homeowner. This is a personal situation that you must determine what works best for you and it is very location and market driven.
For example, we bought in a high cost of living area before the prices skyrocketed. Thus, our mortgage is way less than the cost of rent. So for us, we are still financially stable because we have a mortgage because it is cheaper than rent (and by a lot).
On the flip side, if you are just starting out and trying to purchase a home, it may be more cost-effective for you to keep renting to stay out of debt and become financially stable quicker. Then you will be able to reach financial independence faster.
3. Invest Your Money
The last piece to becoming financially stable is you must invest your money.
This is not the time or place just to be stuffing money under the couch or in a savings account that is earning .02%. You need to invest your money in the stock market.
The best way to invest is on a consistent basis. Every paycheck you invest a certain amount consistently. It does not matter if the market is up or the market is down.
The returns from investing will be greater than doing nothing with your money.
Doing nothing with your money means that you are actually losing money when you account for the cost of inflation.
So, you must invest your money.
One of the types of income is passive income, and you can earn passive income through investing.
A huge step to becoming financially stable is to diversify your income. This may not be as important to you today, but if you are in that category of “I don’t want to work anymore” or retirement is on the horizon.
Your financial future can be secured through investing in your portfolio.
Recap – How to be Financially Stable at any Age
You can become financially stable at any age – 20, 25, 30s, without college, or even in your teens at 17 or 19. You can even be financially stable with a low income.
The formula is still the same for everyone.
These are the three things you must do for financial stability:
Pay Yourself First
No Debt
Invest
If you are serious about wanting to be financially stable, these are the three steps that you need to take. It is not rocket science.
It is very simple, clear steps to make sure that you are successful in the long term with money.
Now, let’s dig into the habits and traits of someone who is financially stable.
Learn:
Traits of someone who is financially stable
This is when we can say that a person is financially stable.
In this section, we are going to dive into the qualities, traits, and habits of people that are financially secure.
These are things that you can start working on today. Over time you will begin to make better solid money choices going forward.
These are solid money habits that will transform your financial future.
These are simple and easy ways for you to become financially secure.
1. Emergency Fund
An emergency fund is the backbone of financial security – there is absolutely no way around it.
The goal is for you to never use your emergency fund. But let’s be real, there will be a time or a place that you will have to dig into your emergency fund because an actual true emergency exists.
A financially stable person has an emergency fund to fall back on when times get tough.
Here is more information on how to build an emergency fund and the steps that you need to build one fast:
2. Plan to Be Debt Free
Like we said earlier, one of the basic steps of how to become financially free is to have no debt.
However, for too many people that would automatically say that is not in the cards for me. Paying off my debt is way too difficult. But, not for the financially stable person!
I am here to tell you that you can become financially stable by creating a plan to becoming debt free and actually stick to it.
That means your debt balance is going down each and every month. Plus you know your debt payoff date because that paying off debt is one of the best decisions that we ever personally made.
Also, it does not matter if good debt and bad debt – the concept promoted by many financial gurus. Debt is debt.
Debt means that you owe somebody else and you are going to have to pay it back at some point for a premium. So, the sooner you pay off your debt, the better of you will be.
3. Save 20% of Income
Do you save at least 20% of your paycheck? If so, then you know what financial stability means.
When you are financially stable, you are not living paycheck to paycheck and you automatically save money at the beginning of the month when your paycheck comes in.
The best place to start is to start saving at least 20% of your income.
If you are not quite there (yet), then look at one of our main money saving challenges. They are plenty of savings numbers to start small and then work on the bigger challenges. Prove to yourself that you save money.
Since saving money is easy for them, they work on increasing their savings percentage each year. Personally, I find it a better challenge to increase that savings percentage more than anything else.
4. Spend Less Than You Make
In order to make progress, your expenses are less than the money that is coming in.
That does not mean the amount of money coming in is the same amount that you can be spending. The reason why is you have to account for the money saved adn invested.
You learn how to live below your means.
This may mean giving up a coffee, a trip to the salon, happy hour, or something you do out of habit in order to start saving money.
Remember, the goal for this type of person who is financially stable is they spend less than they make. They may spend on the little luxuries here and there because they are able to do since they have set money aside and they are not overspending.
5. Mastering Money management Skills
The best trait of somebody that is financially stable is they understand the basics of money management.
This does not necessary mean the person is in love with spreadsheets, budgets, numbers, and reads money management books every single second. This means they understand the basics.
You earn, you save, you spend.
You save more, spend less, and you prioritize your money goals to make sure you are making the progress on your financial journey that you want to do.
Many times financially stable people start to enjoy learning about money management and tend to dive into their finances even further. Once they get started, they want to learn more about their money situation, and how they can improve their finances quicker by making a few more changes.
6. Their Finances are Exciting
You don’t have to be an Excel spreadsheet nerd to find that your finances are exciting.
This type of person enjoys waking up checking their balances and seeing a positive increase in their net worth.
They find it exciting, they find it motivating. It makes them realize all of their sacrifices is making a difference in the long term. They look at the greater picture and saying I’m not going to work till I am 65; I may look at retiring when I am 50.
They are working hard today and enjoy finding ways to improve their money situation; which they find exciting and fun. You love quoting these money mantras daily.
7. Month or More Ahead on Bills
A financially stable person uses their income from this month to pay for the next month. They are not living behind where the income coming in is going is paying for the current expenses.
They are actually a full month, maybe even two, maybe even three months ahead of their bills.
For example, their paycheck from July will be their August spending. For some that want an even bigger cushion, their money earned in July is actually going to be for their September spending.
That is a sign that somebody is financially stable and has the ability to avoid temptation and not to spend the extra money.
8. Sinking Funds are a Priority
A financially stable person sets aside money regularly for expenses in the future. These are called sinking funds.
These buckets of money is money allocated for a certain purpose.
One of the most popular sinking funds that most people have is for vacations, kids activities, home repair, or car repair. Those are probably the most common.
You can have as many sinking funds as you want as a financially stable person. Another option is just to have one big sinking fund that will cover whatever is needed in case something be happens. A wise person knows how much money they need to cover these expenses.
A financially stable person utilizes sinking funds to make sure they are able to meet unexpected expenses when they happen.
9. Invest in Stock Market Consistently
In the last two years, the stock market on average typically earns 13.9% each year (source).
The reason that this is important is your money can make you money without you doing anything.
Once you have your investment account set up and automatically contribute a slice of your paycheck, then you select a fund or a few stocks of companies you believe in. Starting your investing system is not as bad as you would think.
By investing in the stock market consistently, you are more likely to have higher returns than somebody who invest once a year, twice a year, or three times a year.
By investing either every week or every month, the likelihood that your account size will increase is greater than when you try and time the market.
I’ll be very honest…the average person has no idea how the stock market is going to react and even most experts. However, you can take an investing course, like Trade and Travel with Teri Ijeoma, and learn about buyers zones and seller zones. This is the best financial knowledge someone can have and you probably will not lose money by attempting to figure it out yourself.
This investing course is a great resource and something I highly recommend all of my readers to take. Read my Trade and Travel review.
Because the amount of the course is eye-opening, I can pretty much guarantee it will be less than the amount that you can lose in the stock market by yourself.
That is what a savvy person would do – invest in the course and then invest in the stock market.
10. Focused on Next Money Goal
A financially stable person knows exactly what they have done to get where they are today. Plus they know exactly where they are headed to in the future.
They don’t waver on their next money goal.
They have short term financial goals that they are determined to make happen. That is their number one or two priority in their life because they know that by reaching their money goals, they will have more time freedom in life.
At the end of the day, having money equates to freedom.
This is not the same as having money does not equate to success. There will always be the age-old debt on whether is money everything.
The answer may surprise you, but at the end of the day… money does equal freedom.
11. Saving for Retirement
If I don’t save for my retirement, then who else will help me in my older golden years? That is exactly what a financially stable person would ask.
They know that social security and all the government programs might run out of funding, so they are focused on saving for their retirement and most financial state. They are in control of what they are able to control. You cannot control future government programs or tax rates.
In addition, they are using a Roth IRA to get the maximum contributions that they can have each year for retirement. They are savvy enough to get the maximum contribution from their employer’s 401K match.
This type of person won’t be wondering… What Happens If you Don’t Save for Retirement?
12. Able to Vacation When They want
These are the people that you probably envy the most because they paid cash for the vacation that you financed.
A financially stable person is not worried about having to pay for the trip on the way home. They are savvy and use a vacation fund that they contribute to on a regular basis.
That right there helps them to go on vacation each and every year.
Don’t be jealous! Join the bandwagon and start traveling the world today.
13. Money Set Aside for a Rainy Day
As much as we like to think we can predict the future, in reality, we do not know what the next day, week, month, or even year can bring. And in many circumstances, you may be caught off guard when difficulties come.
If you have a loss of income and still have bills to pay today, that is where having a rainy day fund set aside will help you be prepared.
This is a step to becoming financially secure and a long-term habit to embrace.
A person who has a rainy day fund that will cover at least six months of living expenses is somebody that is financially secure.
They know that hopefully, they will not have to use that money, but in case they do, the money is available to them.
14. Don’t Cry When Something Breaks
When you’re financially secure, you know things that are going to break.
And as much as it sucks, you are not going to be in tears, trying to figure out how to pay to replace that item. You understand the concept of… It is what it is you move on.
Replace the item and you go on with your day.
Since you know you have money set aside for various purposes, there is no reason to cry. It may not be how you feel like spending money, but that is just part of life.
When you are financially insecure and a light comes on in your car, that is a red flag that something is wrong. Many people freak out because they don’t have the money set aside for a $500 or $1,000 repair.
So you know when you are financially secure when you can laugh it off, shake it off and move on with your day.
15. Fun Spending Can Happen
This is one of the best reasons for being financially secure…you can spend money!
When you decrease your other expenses, you can increase the amount of fun spending. There are great benefits to becoming aware of your financial situation.
Too many times, people give up to their money situation. Instead of saying, no, no, no all the time, you will get to a position where you can say yes yes yes! I want to do this and this!
You do not feel guilty about spending extra money!
At this point, you know you have earned whatever it is you want to spend money on.
16. You Can Sleep at Night
This is one of the best traits of a financially secure person! Their finances are NOT waking them up in the middle of the night wondering “oh my gosh, how am I gonna pay my bills, how am I going to pay my rent, how am I going to pay my car payment, I am sick of my job, etc.”
You quit worrying about do I have enough money to make it to the end of the month. That is financially security right there.
When you can sleep at night knowing all of your bills, expenses, and saving are taken care of. You know deep down that you are on track of your financial future.
That is financial security at its best.
If you are in a situation right now where you can’t sleep at night, then you need to learn how to drastically cut expenses. You must get a hold of your situation before it spirals any further out of control.
17. No Frivolous Spending
Financially, even though a financially secure person can spend money when they want. They have the money to be able to spend, right?
Most choose not to be frivolous with their money.
(Hint: that is why they stay financially stable.)
They tend to be a thrifty person knowing a good price to purchase an item. They know when something is overrated or overpriced.
Even if they can afford it, they are just not willing to spend money on it. That is okay because they are in the situation of being financially secure because of the solid money decisions they have made.
Spending frivolous money here and there can up quickly. Even something as low as $10 or $20 here or there may not impact your financial picture in one day. If you add it up over the course of a year, it can become $3,650 or $7,300. Just by frivolously spending a small amount each day.
18. Know Your FI Number
Your FI number will help you to make the jump to financial freedom.
You know what it will take for you to become financially independent – specifically, the dollar amount needed.
In the FIRE community, it is typically known as your FI number, which is your financial independence number. The number is the amount of your net worth and the amount saved up, so you can start living off of your investment income.
This number will vary from person to person.
It is based on your personal situation. The variables that impact your FI number include:
Your income today
How much you plan to spend today
The amount you save today
How much you plan to spend in the future
Your age now
Age you want to quit working (aka retire)
Typically, most couples with kids can start looking at FI number in the $1.5 million range. The first reaction is that the number is either WAY LOWER than they thought it would be. Yes, because we have been taught by “financial professionals” that you need so much more in assets in your retirement accounts than you actually do.
The time is now to become a financially secure person and learn your fi number today. Here’s a great resource to help you.
19. Diversify Your Income
Just as with as above and knowing your FI number, financial independence becomes more likely to happen once you start diversifying your income.
A financially stable person earns all three types of income.
Most people rely on earned income only. If you only rely on earned income, then you reach a max threshold of what you are able to earn.
So a financially secure person has multiple buckets of income; they are diversified in investments, real estate, or side hustle. The key to long term success is finding ways to make passive income.
20. Budget isn’t AS Important
A trait of a financially secure person is they know how much they are able to spend, how much they need to save, and the amount of money that they come in every single month.
They do not need to budget down to the very last line item. (thank goodness for many of you reading this!)
A financially secure person has an overall sense that income exceeds their spending and saving goals.
That is financial security.
While a budget may help them stay focused and a more detailed budget may help them reach their longer term goals.
It does not mean that a budget is necessary. You can still have a loose budget and know that you are still making ends meet because they have a system set up and a system set in place.
Budgeting is not as important as it was previously.
21. Splurging is Okay
This is one of the best feelings as a financially secure person is knowing that it is okay to splurge. It is okay to spend extra money. It is okay to stop cutting corners at every single turn.
You remember back to the days when each month was a struggle to make ends meet. That is not the life that you live anymore; you live a completely different life. And now, it is okay to splurge.
And to be very honest, for most people, once they become financially secure, it is actually really, really hard for them to loosen that tight fist on their money and start spending it.
22. Same Page with Finances with Spouse or Significant Other
They share the same money vision and together they set smart financial goals. All of their decisions are made together.
Did you get that keyword??? Together. Meaning with the other person.
While they may not agree on every single line item of their budget or how they spend money individually, they still set aside money for each of them to spend as they please. Around here at Money Bliss, we call this money a slush fund.
Because at the end of the day, as a couple, they know they are still making progress in the right direction for the long term. So, these couples do not worry about the short term of how you spend your $100 each month if you are reaching your goals and that happens once financial security sets in.
23. Net Worth Grows Significantly Each Year
If your net worth does not grow significantly each year, then you got a problem.
A financially secure person knows their net worth and has systems in place to keep it growing significantly each and every year.
It’s not just one or two percentage points typically, you can expect a much higher rate of growth of 8-10%. Once your net worth increases, the bigger the bucket for the percentage of growth.
24. Credit Cards are Paid in Full
Financial security means you were able to pay your credit card bill in full each and every month without blinking. This is a mantra of a financially secure person.
They chose to use their credit cards wisely so they can get points, cash back, and travel benefits.
But, they are also cognizant that each and every month that credit card is paid off in full; this type of person will not carry a credit card balance for any reason. Period.
25. Prepared for Large Purchases
Nothing states financial security more than being able to go out and replace $5000- $10,000 worth of appliances or home repairs or something similar.
A financially secure person realizes that they have to be prepared for large purchases since they are going to happen.
It is only a matter of when a big purchase will happen.
This person is consistently setting money aside in a sinking fund for those large purposes. In our house, we like to call it the big murph fund.
We know that it may be a small remodel project, an appliance that needs to get fixed or looking at replacing a car. Many items can fall under this big murph fund umbrella. For us, we do not set aside money for each of those purposes in their own sinking funds because then we would not able to maximize our investments.
Instead, we estimate how much money is likely needed and set aside for large purchases that are likely to happen in the next one to two years.
Ways to Save $5000:
26. Your Health Matters
Financial stability means that you are able to spend money on your health and it is a priority for you and your household.
You start realizing the benefits of taking care of your body, eating properly, and managing your health in better ways.
The light bulb starts going off and says slaving at my work for 60 to 80 hours a week may not be worth it. While the income may be great, a financially stable person may feel like they are killing themselves inside for the benefit of others.
A financially secure person knows that their health matters more than money does.
You are more likely to spend money on organic produce because you know it is better for your body. You consistently review to see if you are spending your time in ways that benefit your overall health.
27. Bad Money Habits Are a Thing of the Past
We have all had them.
We have all made stupid money mistakes.
And the best part is a financially secure person has learned from their bad money habits and made changes so they never happen again.
All of the things that they used to do, they don’t do anymore. Bad habits are something that happened in the past. While they may regret it, which is absolutely okay and part of working through the process to make further progress.
Their past mistakes are not going to hold them back from their future self and build solid money habits.
28. Giving Money is Generous
When you are able to give 10% of your income and not be panicked about making ends meet, that is when you know that you have reached a higher level of financial security.
Giving money is generous.
It is something that helps society come together and as a community making the world a better place.
By you being able to give money will help somebody else become a better version of themselves. We have all had others that have helped us.
By giving money, you can pay it forward. It can be something as simple as paying for the people behind you. It could be something grand like having a building named after you because you made a massive donation.
The size of the giving does not matter. It is the fact that you decided and made the conscious decision to start giving your money.
29. People Ask You about Money Questions
When others start looking towards what you have accomplished in your financial journey, that is when you know you have created an environment of solid money management skills.
People will start coming to you asking questions on how they can improve their money situation. And that is fabulous!
That means that others view you as being financially secure and stable in your personal finances. You deserve a pat on the back and motivation to keep up the hard work.
30. Happy With Your Financial Path
Remember that saying, “If you are happy and you know it, clap your hands.” Well, as a financially secure person, it is when you wake up and look at your overall financial picture and say, “You know what, I’ve got this, I’m on the right path,” and you put a big grin on your face. And you pat yourself on the back.
As a financially stable person, you are proud of what you have overcome, the difficult challenges you faced, and now you are excited about where the next step is going to take you and your future.
It is not roses and happiness the entire way; there are ups and downs along your path that got you to a financially stable place.
But deep down you know that you are on a stable future with a solid path.
31. You Know You are In Control of Your Money
This type of person knows exactly where their money goes.
They are in control of their money; their money doesn’t control them.
They make the decisions on how, when, why, and where they spend money.
They are not told by outsiders how to manage their money. A financially stable person has control over their money and in the long run, it opens up the doors of opportunity.
This is a sign of financial independence.
How Much Money is Financially Stable?
How much money do you need to be financially stable?
This will depend on everybody’s personal situation.
If you are single and only providing for your one household, the amount of money that you need is much less than a family of six to eight people. In view of that fact, the more people that you’re responsible for, the more money that you need to become financially secure.
Let’s put some number on the question of how much money is financially stable.
3-6 months of expenses
Positive net worth
No debt (or a solid plan to get out of debt)
Able to give 5% of your income
Saving at least 20% of your income
$100k of F-you money (read JL Collins book for terminology)
Increasing saving percentage each year
At a bare minimum, you could estimate to need at least $25,000 for a single person or $100,000 for a family of four.
These assumptions include you continuing to live below your means and not regressing from the progress you made.
However, most people feel more financially secure when their net worth hits $250,000 or $500,000. Once you hit millionaire status, you are financially secure.
Are you Ready to Move from Not Financially Stable to Financial Stability?
You are in charge of your destiny.
You are able to go from one place to another, but you have to be willing to take the jump, take the risks, and seize opportunities.
So if you are not sure that you are ready to move on to financially stable, you need to be financially sound first. For now, save this post and come back once you are ready to move to the next step of becoming financially stable.
If you are ready to move to financial stability, then you need to start today and make all of these habits of somebody who is financially stable a part of your life.
There is no “Oh, I’m gonna wait till tomorrow.” Because then you are just going to keep putting it off. Tomorrow needs to become today.
The sooner that you can become financially stable, the better off that you will be.
Procrastination is just like having a plan, but not setting it into motion. You actually need to take action and start today. Enough planning, enough procrastination.
Start slow with easy habits. A good habit here and there. Keep building on those habits and you will slowly step-by-step learn how to become a financially stable person.
It does not take a huge monumental stream of income to achieve financial stability. All it takes is perseverance to make better yourself.
You can become the next millionaire with no money!
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
A banker’s acceptance (or BA) is a financial instrument used to guarantee large future transactions, often in the import/export markets. As a debt instrument, it can function as an investment, commonly traded between large banks and institutional investors on the secondary market. It can trade at a discount to par like U.S. Treasury bills in money markets.
BAs play a key role in facilitating international trade and in broader fixed-income markets. While you may not own an individual banker’s acceptance in your checking account, these instruments help promote sound and liquid markets.
What Is Banker’s Acceptance?
A banker’s acceptance (which you may see written as bankers acceptance) is a short-term form of payment guaranteed by a bank; it is often used for international trade transactions.
Banks often make money on the spread between the buy and sell price on a fixed-income asset or through fees and commissions. BAs commonly have a maturity of between 30 and 180 days and trade at a discount to par. Functioning like a post-dated check, they are seen as a relatively safe method of payment for large transactions. BAs are considered short-term debt instruments.
Here are some more details about banker’s acceptance and how these instruments work.
• The BA is issued and priced based on the creditworthiness of the issuing bank. An investment banker earns a commission for making the transaction.
• Only customers with a strong credit history can access the BA market. These entities are often corporations involved in international trading (import/export) markets.
• A banker’s acceptance can also be highly marketable and liquid, allowing money to transfer from one bank to another.
💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.
How Banker’s Acceptance Works
A banker’s acceptance is considered a time draft. A business can request one from a bank as a way of gaining enhanced security while conducting a deal. The bank essentially promises to pay the firm that is exporting goods a particular amount of money on a certain date. When it does this, it takes funds out of the importer’s bank account.
Typically, the term of a banker’s acceptance is between 30 and 180 days.
Who Issues Banker’s Acceptance?
Not all banks offer BAs. Businesses with a good relationship with a large bank can obtain a banker’s acceptance. It can be an appealing product for an institution entering a large-value transaction. Like signing a check over to someone, the account holder must have enough cash to execute the transaction.
More than a simple checking account transaction, though, obtaining a BA typically requires an amount of credit to be detailed. There are usually fees involved in obtaining a BA, too.
Who Buys Banker’s Acceptances?
Banker’s acceptances are traded by banks and securities dealers on a secondary market, similar to how debt instruments are traded. They are available for a discount on its face value. The exact value may vary with the rating of the bank that has promised payment on the banker’s acceptance.
How Banker’s Acceptance Is Used
Here’s more detail on how banker’s acceptances can be used.
Checks
Think of a banker’s acceptance as a certified check. It’s a relatively safe way to do a transaction. The money owed is guaranteed on a specific date listed on the BA bill. Credit analysis is usually done to verify the creditworthiness of the issuer, so it’s a bit different than how a bank will verify a check before you deposit it.
BAs are frequently used to facilitate the international trading of goods. A buyer of imported products can issue a BA with a payment date after a shipment is scheduled to be delivered. The seller exporting can then take payment before finalizing the shipment. The exporter in this case can hold the BA to maturity or sell it on the secondary market. Unlike a check, the BA is backed by the guarantee of the bank, not an individual.
Investments
Aside from the import/export market, bankers’ acceptances are used commonly in the investment world. Buyers might purchase a BA and hold it to maturity to effectively earn a rate of return on short-term money. Since BAs are seen as very low-risk products, they are used as a cash-like security.
Still, retail consumers usually won’t be able to purchase a BA in an online or traditional retail bank. The purchase is, as noted above, only available to certain financial entities.
Recommended: What Are Some Safe Types of Investments?
Pros and Cons of Banker’s Acceptance
There are a number of positive aspects of bankers’ acceptances to consider.
Pros
First, the upsides of BAs:
Provides Seller Assurances Against Default
Backed by the guarantee of a bank, a banker’s acceptance is regarded as a high-quality fixed-income security that is often liquid and highly marketable. For importers and exporters, financial transactions can be made to facilitate international trading of goods without the risk that one party goes bust.
Buyer Does Not Have to Prepay for Goods
A banker’s acceptance works like a promissory note so the buyer does not have to prepay. Liability can immediately transfer from the issuer of the banker’s acceptance to the bank. The payment is likely debited only on the due date.
Enhances Confidence in the Deal
Part of the process of issuing a banker’s acceptance is usually having a good credit standing and a relationship with a major bank. Since high-risk customers might not be considered, there is strong confidence in BAs traded. There would be no need for the exporting company to worry about default risk; that lies with the banker. While individual investors often do not engage in BA trading, there are important traditional banking alternatives that feature financial solutions to help facilitate transactions.
Cons
While there are many positive aspects of bankers’ acceptances, there are still some risks for those involved in the transaction and trading of BAs. Consider the following:
Bank May Require Buyer to Post Collateral to Hedge Risk
Collateral is sometimes required for a deal to happen. Collateral provides a backstop should the importer be unable to pay. It can reduce risks to the bank and expedite the deal. Think of it like seller concessions to get a deal done, though collateral is generally not used when buying and selling a home.
Buyer May Default
With a banker’s acceptance, the bank accepts default risk, which can be a downside. The issuing bank typically must honor the payment terms even if the account holder, perhaps an importing/exporting corporation, does not have the cash on the payment date. Not all banks choose to be in this market due to the risk that the buyer could default.
Potential Liquidity Risk
Liquidity risk means an individual or financial institution cannot meet its debt obligations in the short term. Investors may not encounter liquidity risk with a banker’s acceptance instrument, but the issuing bank could have liquidity risk from the importer who must pay. This may be a key consideration for a bank issuing a BA. The secondary market for banker’s acceptance products remains highly liquid.
Pros of BAs
Cons of BAs
Provides assurance vs. default
Bank may require collateral
Buyer doesn’t need to prepay for goods
Buyer may default
Enhances confidence that deal will work
Potential liquidity risk
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The Takeaway
A banker’s acceptance is a debt instrument that plays a key role in well-functioning capital markets. BAs help facilitate international trade through bank guarantees. Knowing about this important fixed-income product type can help individuals understand financial markets and institutions.
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FAQ
What is the difference between a letter of credit and a banker’s acceptance?
A letter of credit is a financial instrument that a bank issues for a buyer (the bank client) guaranteeing that a seller will be paid. A banker’s acceptance, on the other hand, guarantees that the bank will pay for a future transaction, rather than the individual account holder.
What is a banker’s acceptance in a real-life example?
An example of a banker’s acceptance would be that, on April 1st, the Acme Bank sends a BA to Back-to-School Supplies, saying it will make funds available on June 1st for a shipment of goods for their client. On June 1st, the school supply company will be able to withdraw those funds.
How safe are banker’s acceptances?
Banker’s acceptances are a relatively safe transaction for all involved, but the exact degree will vary with the creditworthiness of the bank guaranteeing the funds.
Is a banker’s acceptance a short-term investment?
Banker’s acceptances are considered a short-term investment or debt instrument. They are usually traded at a discount, and they are seen as similar to Treasury bills.
Is a banker’s acceptance a loan?
A banker’s acceptance isn’t a loan. It’s a short-term debt instrument, typically with a maturity date of 30 to 180 days.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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