Special margin requirements refer to higher-than-normal requirements for margin traders. That typically means requirements that are above 25%.
According to the Securities and Exchange Commission (SEC), many brokers keep even higher maintenance margin requirements, typically between 30% and 40% — and sometimes higher depending on the type of securities purchased. These special margin requirements may vary.
What Are Special Margin Requirements?
Special margin requirements are higher than standard margin requirements — above a maintenance margin rate of 25%. Higher margin rate requirements mean you must maintain a higher equity amount in your account when trading on margin.
Margin trading refers to using cash and securities in your account as collateral to purchase more assets. In doing so, you can use leverage to amplify returns — but you must also pay interest on borrowed funds. For anyone interested in trading on margin, it’s important to know the rules of margin accounts and also which stocks feature special margin requirements.
When it comes to trading stocks on margin, there are plenty of blanket rules and regulations in place. For instance, the Federal Reserve requires a 50% initial margin and a 25% maintenance margin.
The Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE) also require at least $2,000 of cash or securities to be deposited before someone can trade in a margin account.
Special margin requirements are often found on highly volatile stocks, so just a small drop in the price of these stocks can trigger a margin call. Brokers might also issue special margin requirements on concentrated positions in your account. Leveraged positions and other factors might also trigger special margin requirements.
Leverage and margin are related — but not the same.
Brokers do not just haphazardly issue special margin requirements. An analysis of historical volatility is used along with the use of SPAN margin. SPAN margin is calculated by standardized portfolio analysis of risk — a system used by exchanges around the world to control risk. SPAN margin determines margin requirements based on an assessment of one-day risk for a trader’s account. It is used primarily in options and futures markets. The SPAN system allows an exchange to know what a “worst-case” one-day move could be for any open futures position.
Special vs Standard Margin Requirements
Special Margin Requirement
Standard Margin Requirements
Brokers can determine special margin rates
Initial margin set at 50%
A special margin requirement might exist for a concentrated position
Some securities cannot be purchased on margin
💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
Increase your buying power with a margin loan from SoFi.
Borrow against your current investments at just 10%* and start margin trading.
How Do Special Margin Requirements Work?
Special margin requirements work by enforcing stricter equity deposits in your account when trading volatile stocks. The broker wants to protect itself in the event the securities in your account rapidly drop in value. Another way a broker protects itself is by issuing margin calls when special margin requirement percentages are breached.
With a margin call, you must deposit more cash or securities into your account to meet the call. You can also liquidate your holdings to generate cash and increase your equity percentage. If you fail to meet the call on time, the broker might liquidate your positions for you.
For a broker, it’s important to have safeguards like special margin requirements in place in case financial markets turn volatile. If many investors face margin calls all at once, the broker could face credit risk if those investors are unable to repay loans used in margin trading. 💡 Quick Tip: When you trade using a margin account, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.
Pros and Cons of Special Margin Requirements
In terms of benefits and drawbacks, the upside is that special margin requirements help to control risk when investors engage in day trading — and the downside is more restrictions on your margin trading account.
Here’s a deeper dive into positives and negatives for the broker and for the investor.
Pros and Cons for Brokers
Pros
Cons
Reduces risk when markets turn volatile
More restrictive trading could turn away customers
Allows for tighter margin calls on risky positions
Individuals might seek looser requirements from other brokers
Historical data provides a guide as to which stocks are most volatile
Uncertainty exists when trying to predict what the most volatile securities will be going forward
Pros and Cons for Investors
Pros
Cons
Highly volatile stocks are easier to identify
Higher equity is required to trade certain stocks
Provides a guardrail when trading stocks
Margin calls can trigger more quickly
Can be a tool to identify highly volatile stocks for options trading
Margin percentages can change without notice
The Takeaway
While many stocks and ETFs have initial margin amounts of 50% and maintenance margin levels at 25%, some volatile stocks have higher special margin requirements. These requirements help protect both brokers and investors in the event that the stock tanks.
Margin trading is typically riskier than trading with a cash account. Investing with borrowed funds amplifies returns — positive and negative. It is important to be aware of the risks involved with this strategy.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
Get one of the most competitive margin loan rates with SoFi, 10%*
FAQ
What is a special margin account?
A margin account is a type of brokerage account in which your broker lends you cash, using the account’s equity as collateral, to purchase securities. These securities are known as marginable securities. Margin increases your purchasing power but also exposes you to the potential for larger losses.
What are margin requirements?
Margin requirements are percentages of equity you must maintain in your margin trading account. According to Regulation T of the Federal Reserve Board, the initial margin for equities is 50% and maintenance margin is 25%. There are higher special margin requirements for highly volatile stocks. In addition, if you have a concentrated position, you might face a special higher margin requirement.
How much money do you need to open a margin account?
The NYSE and FINRA require a deposit of $2,000 or cash or securities with your broker before trading on margin. Some firms may require larger deposits.
Photo credit: iStock/akinbostanci
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information. Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
When you hear of a company “going public,” one route is via an initial public offering, or IPO — but a company can also go public through a direct listing, where no new shares are created and underwriters are not required.
Direct listings, also known as the direct listing process (DLP), direct placement, or direct public offering (DPO), are a way for companies to raise capital by selling existing shares without the complexity of engaging investment banks and other intermediaries.
While a direct listing is typically less expensive than an IPO, and typically there’s no lock-up period, there is a risk in direct listing shares without the support of underwriters.
Table of Contents
What Is the Difference Between Direct Listings and IPOs?
A direct listing is one method by which a company can list shares of stock on a public exchange such as the New York Stock Exchange (NYSE) or Nasdaq directly, without using underwriters to create new shares, as you might with an IPO.
While some listing choices involve selling shares of stock to investors, IPOs and direct listings have many differences. The main difference between the two is that with an IPO a company issues and sells new shares of stock, while with a direct listing shareholders sell existing shares.
Comparing the Direct Listing and IPO Process
The differences between using a direct listing vs. an IPO to take a company public are pretty straightforward.
How a Direct Listing Works
If a private company is interested in going public, but doesn’t want the hassle of working with underwriters, they may choose to do a direct listing. With a direct listing, anyone who owns shares in the company can sell them directly to the public once the new company is listed on a public exchange. Shareholders may include investors, promoters, and employees.
By choosing a direct listing over an IPO, a company can avoid using an underwriter, which potentially saves money and time. Underwriters fulfill multiple roles in the IPO process, including working with the fledgling company to meet regulatory standards and set the initial price per share. These are important steps, but not necessary if a new company is only selling existing shares.
Further, because no new shares are created with a direct listing, existing shares won’t get diluted. 💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.
How an Initial Public Offering Works
When a company offers shares of stock to the general public for the first time, it’s known as an initial public offering (IPO).
Before an IPO, a company is considered private, which means that shares of stock are not available for sale to the general public. Also, a private company is not generally required to disclose financial information to the public.
To have an IPO, a company must file a prospectus with the Securities and Exchange Commission (SEC). The company will use the prospectus to solicit investors, and it includes key information like the terms of the securities offered and the business’s overall financials.
Initial public offerings are a popular choice for companies looking to raise capital. The company works with an underwriter (typically part of an investment bank), who helps navigate regulations and figure out the initial price of the shares. They may also purchase shares from the company and sell them to investors (such as mutual funds, insurance companies, investment banks, and broker-dealers) who will in turn sell them to the public.
One benefit of working with an underwriter is the greenshoe option. This is an agreement that a company can enter into with the underwriter in which the underwriter has the right to sell a greater number of shares during the sale than they originally intended to, if there is a lot of market demand. This can help the company gain additional investment.
Working with an underwriter creates some security for the company, which is one reason so many companies go the route of the IPO.
Pros and Cons of Direct Listings
There are advantages and disadvantages for companies and investors when it comes to direct listings vs. IPOs.
Pros of a Direct Listing
Less expensive than an IPO for the company
Unlike IPOs, direct listings do not require underwriters, since no new shares are being created. Typically, an underwriter charges a fee between 3% and 7% per share. Depending on the scope of the IPO, these fees can add up to hundreds of millions of dollars.
In addition, underwriters often purchase shares below their agreed-upon market value, so companies don’t receive as much investment as they may have had they sold those shares directly to retail investors.
No lock-up periods for shares
If a company goes through an IPO, existing shareholders are generally not allowed to sell their shares to the public during the sale and for a period of time following the sale. These lock-up periods are required in order to prevent stock prices from decreasing due to an oversupply.
The direct listing model is essentially the opposite, in which existing shareholders sell their stock to the public and no new shares are sold.
Provides liquidity for existing shareholders
Anyone who owns stock in the company can sell their shares during a direct listing. 💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
Cons of a Direct Listing
There are also some potential drawbacks when it comes to direct listings.
Risk that shares won’t sell
With a direct listing, the amount of shares sold is based solely on market demand. Because of this, it’s important for a company to evaluate the market demand for its stock before deciding to go the route of a direct listing.
Companies best suited to direct listings are those that sell directly to consumers and have both a strong, recognizable brand and a business model that the public can easily understand and evaluate.
No help from underwriters with marketing and sales
Underwriters provide guarantees, promotion, and support during the listing process. Without an underwriter involved, the company may find that shares are difficult to sell, there may be legal issues during the sale, and the share price may see extreme swings.
No guarantee of stock price
Just as there is no guarantee that shares will sell, there is also no guarantee of stock price. In contrast, having an underwriter can help manage potentially extreme price swings.
This chart outlines the main points covered above.
Pros of Direct Listings
Cons of Direct Listings
Less expensive than an IPO
Potential for initial volatility
No lock-up periods
Risk that shares won’t sell
Liquidity for existing shareholders
No help from underwriters
No stock price guarantee
The Takeaway
Direct listings are an appealing alternative to IPOs for private companies who want to go public, thanks in part to lower costs and reduced regulations. A direct listing may also be appealing to retail investors who want to purchase shares from companies that are going public.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
Why would a company do a direct listing?
A direct listing offers a more direct path to going public on a stock exchange. The company doesn’t have to issue new shares, as only existing shares get sold in a direct listing. This eliminates the need for intermediaries like underwriters.
Can anyone buy a direct listing stock?
Yes, investors can buy a direct stock listing as they would any other stock listed on an exchange.
Is a direct offering good for a stock?
Since direct listings bypass the middleman and eliminate the need for underwriters, they can be less expensive for a company vs. IPOs, but the lack of marketing support could hurt the stock price and initial sales.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Consumers may not know it, but financial institutions often rely on “bundled” credit reports to make more fully informed decisions before lending an individual money.
That process is known as a tri-merge credit report (also known as a three-in-one credit report.) The merged report can give the lender a more complete picture of an applicant’s financial situation, since each credit report may contain slightly different information.
You can’t request a merged credit report on your own but you can ask a lender to share their tri-merged report with you. Read on to learn more about what tri-merged credit reports are and how they can impact your chances of getting a loan.
What Is a Tri-Merge Credit Report?
A tri-merge credit report simply combines three credit reports from the three largest credit reporting bureaus — Experian, Equifax, and Transunion — and consolidates them into one credit report for creditors and lenders. They are most commonly used in the mortgage lending sector where more information is required to properly assess larger loans.
Creditors often rely on three-in-one credit reports because they want a thorough review of an applicant’s credit history, an outcome a lender may not get with input from just one credit reporting agency. 💡 Quick Tip: Need help covering the cost of a wedding, honeymoon, or new baby? A SoFi personal loan can help you fund major life events — without the high interest rates of credit cards.
How Do Merged Credit Scores Work?
A tri-merge credit report gives those lenders what they need – a comprehensive overview of a credit applicant using information from three credit reports, instead of one or two credit reports.
By combining all three credit scoring formulas and outcomes into a single credit report, creditors can get an expanded and more complete look at a credit applicant’s financial history (including payments and credit usage), based on the information included in the tri-merge credit report.
Recommended: Common Credit Report Errors and How to Dispute Them
Why Do You Have More Than One Credit Score?
Each credit scoring company has its own formula for calculating credit scores and one model may place more importance on one factor, such as payment history, while another may not. Also, different types of loans have different scoring methods.
The most commonly used credit scoring model is the FICO® Score, a base score that has a range of 300 (lowest score) to 850 (highest score). But within the FICO models, there are industry-specific ranges.
• FICO® Auto Score Range is 250 to 900
• FICO® Bankcard Score Range is 250 to 900
• FICO® Mortgage Score Range is 300 to 850
VantageScore is another credit scoring model used by all three major credit reporting bureaus.
FICO Score and VantageScore base their calculations on different aspects of a person’s financial history.
• FICO uses factors that are in a credit report, such as payment history of credit accounts, how much debt a person has, how long credit accounts have been open, how often new credit inquiries happen and how often new credit accounts are opened, and the mix of credit account types.
• Vantage uses the same criteria as FICO, but places different levels of importance on each. Vantage also looks at additional factors that might not appear on a person’s credit report, such as rent and utility payments. Using factors such as these makes it possible for people who don’t have much of a credit history to have a credit score and be able to access consumer credit.
Lenders use credit scores and other information in the loan approval process.
What Does a Tri-Merge Credit Report Look Like?
Tri-merge credit reports offer creditors the same look and feel as a standard consumer credit report, with a few differences.
For starters, the third-party provider creating the three-in-one credit report culls the credit reports from each of the three primary credit-reporting firms (Experian, Equifax, and TransUnion) and pulls the most pertinent information for use in the tri-merge credit report.
In its final form, the tri-merge credit report includes the following sections.
• An upfront summary that provides information on the credit applicant in capsule form.
• A full section on the credit applicant’s financial accounts, focusing on larger accounts like mortgages, credit cards, auto loans, and any types of personal loans.
• Data on the applicant’s credit payments history, any open accounts, any history of late or no credit payments, any tax liens or bankruptcies, and the applicant’s credit utilization ratio (i.e., the applicant’s outstanding credit balance divided by the total amount of revolving credit the applicant has available).
A tri-merge credit report may also include a specific credit report from any of the three major credit reporting agencies, based on the specific credit analysis needs of the mortgage lender who uses the three-in-one report.
Why Do Personal Loan Lenders Look at Your Tri-Merge Credit Report?
Tri-merge credit reports are more commonly used in mortgage lending than personal loan lending. But if you’re applying for a large personal loan — some lenders offer personal loans up to $100,000 — the lender may look at a tri-merge credit report to get a comprehensive picture of your creditworthiness. The tri-merge credit report will include any current or past personal loans and your payment history on those. The lender will use that information to determine approval for the loan you’re applying for. 💡 Quick Tip: Choosing a personal loan with a fixed interest rate makes payments easy to track and gives you a target payoff date to work toward.
How Does a Tri-Merge Credit Report Affect Your Loan Application?
Different lenders approach the risk of lending money with different tolerance levels, just as they each have different credit score requirements. A loan applicant whose credit reports don’t include late payments and unmanageable debt loads will likely be approved for a loan with favorable terms and lower interest rates.
Alternatively, a loan applicant whose credit report shows a large amount of existing debt and a history of late or missed payments may be offered a high interest rate and less favorable terms.
Because lenders that use a tri-merge credit report to assess an applicant’s creditworthiness are looking at a comprehensive picture, it’s in the best interest of the applicant to clean up their credit reports from each of the three major credit bureaus before they begin applying for a loan.
Recommended: Typical Personal Loan Requirements Needed for Approval
Is a Tri-Merge Credit Report a Hard Inquiry?
Any official lender review of a tri-merge credit report will be a hard inquiry and will temporarily impact your credit score. In general, each hard credit inquiry can decrease a credit score by five points.
The severity of any credit score decline due to a hard pull largely depends on the applicant.
A consumer with a strong credit report may see less of a credit scoring decline than one with a weak credit report. Multiple credit report hard inquiries can be a reason why a consumer with a weak credit history may see their credit scores decline moderately.
Recommended: Soft vs Hard Credit Inquiry: What You Need to Know
Can I Order My Own Tri-Merge Credit Report?
Tri-merge credit reports are available to lenders, but not generally to individuals. A lender may be willing to share with you the tri-merge credit report they pulled in your application process. A credit counselor who offers first-time homebuyer programs may also be able to pull a tri-merge credit report for you in a credit review process, but there may be a fee for that service.
However, you can — and it’s a good idea to do this — request a free copy of your credit report from AnnualCreditReport.com.
You can request a free copy of your credit report once a week from each of the three major credit bureaus. Reviewing all three of your credit reports will give you much of the same information as is included in a tri-merge credit report.
The Takeaway
Tri-merge credit reports can prove highly useful to mortgage and other lenders looking for a comprehensive review of an applicant’s credit history.
By merging the credit report analysis of the three major credit reporting agencies, creditors and lenders are getting a fully-formed outlook they likely wouldn’t get by relying on a single credit reporting agency.
For consumers, the key takeaway on three-in-one credit reports is simple – take a disciplined and diligent stance on your credit, review your credit reports on a regular basis, and ensure key issues like on-time payments and credit utilization rates are in good standing.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
What is a tri-merge credit report?
A tri-merge credit report is a credit report combining information from the three major credit bureaus, Equifax, Experian, and TransUnion.
Is a tri-merge credit report a hard inquiry?
When a tri-merge credit report is pulled during the formal loan application process, it will be a hard inquiry on the applicant’s credit report.
Can I pull my own tri-merge credit report?
No. Tri-merge credit reports are available to lenders, not individuals, and they’re mainly used in the mortgage loan process. If you’re working with a credit counselor, you may be able to have a tri-merge credit report pulled during a credit review process.
Photo credit: iStock/Irina Ivanova
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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.
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.
Along with the thrill of home shopping comes the daunting task of finding a mortgage to help pay for it. Before you become disheartened, keep this in mind: With several types of loans available, you may have more ways to qualify than you think. Each has its own down payment, credit score, and borrowing requirements.
Understanding your options can help you shop with confidence and secure the best type of financing for your needs.
These are the key categories of home loans you should be familiar with when you’re looking for a mortgage:
Conventional: A conventional loan is the most common type of mortgage. It may be right for you if your credit score is at least 620 and you wouldn’t benefit from a government loan. The Federal Housing Finance Agency sets limits for how much you can borrow with a conventional conforming loan. In 2024, the limits for a single-family or one-unit home are $766,550 in most counties.
Jumbo: If you want to borrow more than the conventional conforming limit, you can get a conventional conforming jumbo loan for up to $1,149,825 for a single-family home in high-cost counties. For even larger purchases, lenders offer nonconforming jumbo loans.
Government: This category includes FHA loans for borrowers with credit scores below 620, USDA loans for borrowers in rural areas, and VA loans for military service members, veterans, and surviving spouses. The U.S. government guarantees a portion of the borrower’s principal to encourage lenders to offer mortgages to people who might otherwise have trouble qualifying.
Fixed-rate loans: Any of the above categories of loans will typically have a fixed interest rate for the life of the loan. A fixed-rate loan provides financial predictability: Your monthly principal and interest payment will be the same each month.
Adjustable-rate loans: Conventional, government, and jumbo loans can also have an adjustable interest rate that stays the same for the first few years, then periodically changes based on market conditions.
Learn More: VA loan vs. conventional loan: How to choose
Here’s a quick overview to help you understand the differences between conforming and nonconforming mortgages.
While less common, these mortgage types can be a good fit for certain borrowers:
Piggyback loans: These loans allow you to finance 10% of the purchase price with a second mortgage to supplement your down payment. If you only have 10% saved for your down payment, you can use a piggyback loan to help you make a 20% down payment and avoid private mortgage insurance. Low-down-payment loans typically require mortgage insurance.
Physician loans: These loans are for doctors, dentists, optometrists, and certain other medical professionals who are actively or about to start practicing, completing a residency, or completing a fellowship. Physician loans account for characteristics common to these borrowers, such as high student debt, limited down payments, and high earning potential.
Balloon mortgages: With a balloon mortgage, you pay interest but no principal or less than the fully amortized amount of principal with each monthly payment. After a certain number of years, the remaining principal balance is due as a lump sum called a balloon payment.
Nonqualified mortgages: Specialty lenders offer these home loans to borrowers with less common situations that require more creative financing. Physician loans and balloon mortgages fall into this category. So do bank statement loans, large jumbo loans, investment property loans based on a property’s cash flow, and loans for borrowers with a recent bankruptcy or foreclosure.
There isn’t a single best type of mortgage, which is why lenders offer different types for different borrowers. Here’s how to choose a home loan that will meet your needs:
Know your credit score: If your score is below 620, you’ll be limited to FHA loans and nonqualified mortgages (also called non-QM loans). If you have time to work on your score before getting a mortgage, focus on getting above 620 to increase your options. If not, plan to focus on FHA and non-QM loans, but be prepared to pay mortgage insurance premiums for the life of the loan with an FHA loan or pay a higher mortgage rate and fees with a non-QM loan.
Find out what special programs you may be eligible for: If you have qualifying military service, you may be eligible for a VA loan. If you’re far from the ideal loan candidate and want to buy in a rural area, you may be eligible for a USDA loan. If your income is less than 80% of the area median for your household size, you may be eligible for down payment assistance. These programs offer significant advantages, so you’ll want to consider them if you qualify.
Take stock of your cash reserves: Estimate what your total monthly living expenses will be after you get your mortgage and multiply the result by three. Next, calculate how much money you can afford to take out of your savings for a down payment and closing costs — or factor in what you may qualify for through one of the programs mentioned above.
Know your target price range: If you want to borrow more than the conforming loan limit in your area, plan to apply for a jumbo loan, which may also mean saving at least 10% of the purchase price for your down payment. Otherwise, you’ll want to consider conventional and government loans first because they’re widely available.
Understand the risks and additional costs: Low-down-payment conventional loans and all FHA loans require borrowers to pay for mortgage insurance that protects the lender in case the borrower defaults. Making a small down payment also puts you at risk of owing more than your home is worth if home prices fall, which could be a problem if you need to move or want to refinance. Adjustable-rate loans have future payment uncertainty. Mortgages with higher interest rates can be expensive in the long run. There’s no guarantee you’ll be able to refinance into a stable fixed-rate mortgage or get a lower rate.
Find out: How to buy a house in 2024
Your mortgage lender will be able to tell you the specific reasons why you were denied a mortgage. It could be as simple as accurate information on your application or due to more complicated factors, like your credit history or income. Another possibility is that your financial profile doesn’t match the lender’s risk tolerance.
Whatever the reason, work on fixing the problems so a lender will approve you at a reasonable interest rate.
Down payment requirements depend on the type of home loan you’re seeking.
Certain loans — like VA or USDA mortgage loans — can be extended to you without a down payment. Conventional mortgages require 3% down, and FHA loans require 3.5% down.
If making a substantial down payment is difficult due to income constraints, you may qualify for a down payment assistance program through your state or lender.
If your income is low to moderate for the area where you want to buy, you may qualify for down payment assistance through a state or lender program.
The main difference between a first and second mortgage is who has first rights to the proceeds if a home is foreclosed.
If a borrower ends up in foreclosure, the proceeds from the forced sale of the home go to the first mortgage lender before the second mortgage lender gets anything. First mortgages are, therefore, less risky for lenders and have lower rates than second mortgages. For example, a home equity loan would be a second mortgage if you took it out while still paying off your first mortgage — the one you bought your home with.
A Roth IRA can be used to pay for college expenses, and it is possible to do so without incurring taxes or penalties. However, there are disadvantages of using a Roth IRA for college, and it’s important to weigh the pros and cons.
A Roth IRA is designed to help individuals save for retirement. While you can also use a Roth IRA for college expenses, you’ll want to understand the potential ramifications.
Here’s what you need to know about using a Roth IRA for college, plus other college savings options, to help make the best decision for your situation.
Can You Use a Roth IRA for College?
You can use a Roth IRA to help pay for college. However, as mentioned, a Roth IRA is primarily a vehicle for saving for retirement. You contribute after-tax dollars to the account (meaning you pay taxes on the contributions in the year you make them), and the money in the Roth IRA grows tax-free. You can generally withdraw the funds tax-free starting at age 59 ½. However, if you withdraw the money early, you may be subject to a 10% penalty.
But there are some ways to make early withdrawals from your Roth IRA to help pay for college without being penalized. Because you contribute to a Roth IRA with after-tax dollars, you can withdraw the contributions (but not the earnings) you’ve made to a Roth at any time without paying a penalty. You could then use those contributions to help pay for college.
Just be aware that there are annual contribution limits to a Roth IRA. In tax year 2023, you can contribute up to $6,500 (or $7,500 if you’re 50 or older), and in 2024 you can contribute up to $7,000 ($8,000 for those 50 or older). How much you’ve contributed will affect how much you have in contributions to withdraw, of course.
Another way to use a Roth IRA to pay for college without being penalized is by taking advantage of one of the Roth IRA exceptions that allow you to withdraw money from your account early. One of the exceptions is for qualified higher education expenses.
💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.
Do You Have To Pay Penalties if You Use a Roth IRA for College?
Typically, if you take out money from your Roth IRA before age 59 ½ , you will be subject to taxes and penalties. However, IRA withdrawal rules grant a few exceptions to this rule, and one of the exceptions is for qualified higher education expenses.
If you pay qualifying higher education expenses to a qualified higher education institution for your child, yourself, your spouse, or your grandchildren, you won’t have to pay the 10% penalty for withdrawing funds from a Roth IRA. Qualified higher education expenses include things like tuition, fees, books and supplies. However, you will still have to pay taxes on any earnings you withdraw from your Roth IRA.
Get a 2% IRA match. Tax season is now match season.
Get a 2% match on all your SoFi IRA contributions* through Tax Day (up to the annual contribution limits). Plus, you can still contribute to your 2023 IRAs until April 15th.
*Offer lasts through Tax Day, 4/15/24. Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.
Pros and Cons of Using a Roth IRA for College
Whether using a Roth IRA for college is right for you depends on your particular situation. Here are the pros and cons you’ll want to consider.
Pros of Tapping Into a Roth IRA for College
Advantages of using a Roth IRA for college expenses include:
• You might not have to borrow as much money to pay for college. Using a Roth IRA for college expenses may reduce the need for student loans. And for some students, using money from a Roth IRA might make the difference between being able to afford to attend college or not.
• You won’t be penalized for withdrawing the money. Because of the exception for qualified higher education expenses, you can take out the money to pay for those expenses without having to pay the 10% penalty.
• If you withdraw just your contributions, you won’t owe taxes on that money.
Cons of Tapping Into a Roth IRA for College
These are the drawbacks of using a Roth IRA to pay for college:
• Your retirement savings will take a hit. This is the biggest disadvantage of using the money in a Roth IRA for college. While there are other ways to help cover the cost of college, there are generally fewer options to help you save for retirement if you spend your Roth IRA funds on college expenses.
• Because of possible compounding returns, even a few thousand dollars withdrawn from your Roth IRA today might mean missing out on tens of thousands of dollars of potential growth by the time you’re ready to retire years from now.
• Eligibility for financial aid could be affected. Another possible downside of using a Roth IRA for college is that the money you withdraw generally counts as income on the FAFSA (Federal Application for Federal Student Aid). That may limit financial aid you could receive, including grants and loans.
Roth IRA vs 529 for College
Before you decide to use a Roth IRA for college savings, you might want to consider a 529 plan. With a 529, you can save money for your child to go to college and withdraw the funds tax-free as long as they’re used for qualified higher education expenses.
A 529 plan has more generous contribution limits than a Roth IRA does, and other extended family members may also contribute to the plan. In addition, while 529 contributions aren’t deductible at the federal level, many states provide tax benefits for 529s.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
Which College Expenses Can a Roth IRA Be Used For?
According to the IRS, a Roth IRA can be used to pay for qualified higher education expenses. These qualified expenses include tuition, fees, books and supplies, and equipment required for enrollment or attendance.
The Takeaway
It’s possible to use a Roth IRA to help pay for qualified higher education expenses, and you typically won’t be subject to a penalty for doing so. However, taking funds out of your Roth IRA means you won’t have that money available for retirement. You’ll also lose out on any gains that may have compounded throughout the years. That could impact your retirement savings or even delay your retirement date.
Instead of using a Roth IRA for college, you may want to consider other ways to save for college that might better fit your financial needs, such as a 529 plan. That way you can save for both college and retirement.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Help grow your nest egg with a SoFi IRA.
FAQ
Can you use a Roth IRA for college?
Yes, it is possible to use a Roth IRA for college expenses. If you withdraw money from a Roth IRA for qualified higher education expenses, you generally will not be subject to the 10% early withdrawal penalty. Tuition, fees, books, supplies, and equipment needed for enrollment or attendance are usually considered qualified expenses.
Is a Roth IRA better than a 529 for college?
Deciding whether to use a 529 plan or a Roth IRA for college will depend on your specific financial situation. In many cases, a 529 plan may make more sense than a Roth IRA for college savings. You can generally contribute more to a 529 plan each year than you can to a Roth IRA, there are tax advantages to the plan, and other relatives can also contribute to it. Plus, by using a 529, you won’t be taking money from your retirement savings.
Can I withdraw from my IRA for college tuition without penalty?
Yes, you can use a Roth IRA to pay for college tuition without penalty in most cases because tuition is generally considered a qualified higher education expense. However, to avoid taking money from your retirement savings, you may want to consider other college saving options instead, such as a 529 plan.
Photo credit: iStock/Tempura
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Real estate investing can be an effective way to hedge against the effects of inflation in a portfolio while generating a steady stream of income. When it comes to how to invest in real estate, there’s no single path to entry.
Where you decide to get started can ultimately depend on how much money you have to invest, your risk tolerance, and how hands-on you want to be when managing real estate investments.
Why Invest in Real Estate?
Real estate investing can yield numerous benefits, for new and seasoned investors alike. Here are some of the main advantages to consider with property investments.
• Real estate can diversify your portfolio, allowing you to better balance risk and rewards.
• Provides the opportunity to generate investment returns outside of owning securities such as stocks, ETFs, or bonds.
• Historically, real estate is often seen as a hedge against inflation, since property prices tend to increase in tandem with price increases for other consumer goods and services.
• Owning real estate investments can allow you to generate a steady stream of passive income in the form of rents or dividends.
• Rental property ownership can include some tax breaks since the IRS allows you to deduct ordinary and necessary expenses related to operating the property.
• Real estate may appreciate significantly over time, which could result in a sizable gain should you decide to sell it. However, real estate can also depreciate in value, leading to a possible loss or negative return. Investors should know that the real estate market is different than the stock market, and adjust their expectations accordingly.
There’s one more thing that makes real estate investing for beginners particularly attractive: There are many ways to do it, which means you can choose investments that are best suited to your needs and goals.
💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.
Alternative investments, now for the rest of us.
Start trading funds that include commodities, private credit, real estate, venture capital, and more.
7 Ways to Invest in Real Estate
Real estate investments can take different forms, some of which require direct property ownership and others that don’t. As you compare different real estate investments, here are some important things to weigh:
• Minimum investment requirements
• Any fees you might pay to own the investment
• Holding periods
• Past performance and expected returns
• Investment-specific risk factors
With those things in mind, here are seven ways to get started with real estate investing for beginners.
1. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a company that owns and operates income-producing properties. The types of properties you might find in a REIT include warehouses, storage facilities, shopping centers, and office space. A REIT may also own mortgages or mortgage-backed securities.
REITs allow investors to enjoy the benefits of property ownership without having to buy a building or land. Specifically, that means steady income as REITs are required to pay out 90% of taxable income annually to shareholders in the form of dividends. Most REIT dividends are considered to be ordinary income for tax purposes.
Many REITs are publicly traded on an exchange just like a stock. That means you can buy shares through your brokerage account if you have one, making it relatively easy to add REITs to your portfolio. Remember to consider any commission fees you might pay to trade REIT shares in your brokerage account.
2. Real Estate Funds
Real estate funds are mutual funds that own a basket of securities. Depending on the fund’s investment strategy, that may include:
• Individual commercial properties
• REITs
• Mortgages and mortgage-backed securities
Mutual funds also trade on stock exchanges, just like REITs. One of the key differences is that mutual funds are not required to pay out dividends to investors, though they can do so.
Instead, real estate funds aim to provide value to investors in the form of capital appreciation. A real estate fund may buy and hold property investments for the long term, in anticipation of those investments increasing in value over time.
Investing in a real estate fund vs. REIT could offer broader exposure to a wider range of property types or investments. A REIT, for instance, may invest only in hotels and resorts whereas a real estate mutual fund may diversify with hotels, office space, retail centers, and other property types.
3. REIT ETFs
A REIT ETF or exchange-traded fund is similar to a mutual fund, but the difference is that it trades on an exchange just like a stock. There’s also a difference between REIT ETFs and real estate mutual funds regarding what they invest in. With a REIT ETF, holdings are primarily concentrated on real estate investment trusts only.
That means you could buy a single REIT ETF and gain exposure to 10, 20 or more REITs in one investment vehicle.
Some of the main advantages of choosing a REIT ETF vs. real estate funds or individual REITs include:
• Increased tax efficiency
• Lower expense ratios
• Potential for higher returns
A REIT ETF may also offer a lower minimum investment than a REIT or real estate fund, which could make it suitable for beginning investors who are working with a smaller amount of capital.
But along with those advantages, investors should know about some of the potential drawbacks:
• ETF values may be sensitive to interest rate changes
• REIT ETFs may experience volatility related to property trends
• REIT ETFs may be subject to several other types of risk, such as management and liquidity risk more so than other types of ETFs.
As always, investors should consider the risks along with the potential advantages of any investment.
4. Real Estate Crowdfunding
Real estate crowdfunding platforms allow multiple investors to come together and pool funds to fund property investments. The minimum investment may be as low as $500, depending on which platform you’re using, and if you have enough cash to invest you could fund multiple projects.
Compared to REITs, REIT ETFs, or real estate funds, crowdfunding is less liquid since there’s usually a required minimum holding period you’re expected to commit to. That’s important to know if you’re not looking to tie up substantial amounts of money for several years.
You’ll also need to meet a platform’s requirements before you can invest. Some crowdfunding platforms only accept accredited investors. To be accredited, you must:
• Have a net worth over $1 million, excluding your primary residence, OR
• Have an income of $200,000 ($300,000 if married) for each of the prior two years, with the expectation of future income at the same level
You can also qualify as accredited if you hold a Series 7, Series 65, or Series 82 securities license.
5. Rental Properties
Buying a rental property can help you create a long-term stream of income if you’re able to keep tenants in the home. Some of the ways you could generate rental income with real estate include:
• Buying a second home and renting it out to long-term tenants
• Buying a vacation home and renting it to short-term or seasonal tenants
• Purchasing a multi-unit property, such as a duplex or triplex, and renting to multiple tenants
• Renting a room in your home
But recognize the risks or downsides associated with rental properties, too:
• Negative cash flow resulting from tenancy problems
• Problem tenants
• Lack of liquidity
• Maintenance costs and property taxes
Further, the biggest consideration with rental properties usually revolves around how you’re going to finance a property purchase. You might try for a conventional mortgage, an FHA loan if you’re buying a multifamily home and plan to live in one of the units, a home equity loan or HELOC if you own a primary residence, or seller financing.
Each one has different credit, income, and down payment requirements. Weighing the pros and cons of each one can help you decide which financing option might be best.
6. Fix and Flip Properties
With fix-and-flip investments, you buy a property to renovate and then resell it for (ideally) a large profit. Becoming a house flipper could be lucrative if you’re able to buy properties low, then sell high, but it does take some knowledge of the local market you plan to sell in.
You’ll also have to think about who’s going to handle the renovations. Doing them yourself means you don’t have to spend any money hiring contractors, but if you’re not experienced with home improvements you could end up making more work for yourself in the long run.
If you’re looking for a financing option, hard money loans are one possibility. These loans let you borrow enough to cover the purchase price of the home and your estimated improvements, and make interest-only payments. However, these loans typically have terms ranging from 9 to 18 months so you’ll need to be fairly certain you can sell the property within that time frame.
7. Invest in Your Own Home
If you own a home, you could treat it as an investment on its own. Making improvements to your property that raise its value, for example, could pay off later should you decide to sell it. You may also be able to claim a tax break for the interest you pay on your mortgage.
Don’t own a home yet? Understanding what you need to qualify for a mortgage is a good place to start. Once you’re financially ready to buy, you can take the next step and shop around for the best mortgage lenders.
How to Know If Investing in Real Estate Is a Good Idea for You
Is real estate investing right for everyone? Not necessarily, as every investor’s goals are different. Asking yourself these questions can help you determine where real estate might fit into your portfolio:
• How much money are you able and willing to invest in real estate?
• What is your main goal or reason for considering property investments?
• If you’re interested in rental properties, will you oversee their management yourself or hire a property management company? How much income would you need them to generate?
• If you’re considering a fix-and-flip, can you make the necessary commitment of time and sweat equity to get the property ready to list?
• How will you finance a rental or fix-and-flip if you’re thinking of pursuing either one?
• If you’re thinking of choosing REITs, real estate crowdfunding, or REIT ETFs, how long do you anticipate holding them in your portfolio?
• How much risk do you feel comfortable with, and what do you perceive as the biggest risks of real estate investing?
Talking to a financial advisor may be helpful if you’re wondering how real estate investments might affect your tax situation, or have a bigger goal in mind, like generating enough passive income from investments to retire early.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
The Takeaway
Real estate investing is one of the most attractive alternative investments for portfolio diversification. While you might assume that property investing is only for the super-rich, it’s not as difficult to get started as you might think. Keep in mind that, depending on how much money you have to invest initially and the degree of risk you’re comfortable taking, you’re not just limited to one option when building out your portfolio with real estate.
Ready to expand your portfolio’s growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi’s easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it’s important to consider your portfolio goals and risk tolerance to determine if they’re right for you.
Invest in alts to take your portfolio beyond stocks and bonds.
FAQ
How Can I Invest in Property With Little Money?
If you don’t have a lot of money to invest in property, you might consider real estate investment trusts or real estate ETFs for your first investments. REITs and ETFs can offer lower barriers to entry versus something like purchasing a rental property or a fix-and-flip property.
Is Real Estate Investing Worth It?
Real estate investing can be worth it if you’re able to generate steady cash flow and income, hedge against inflation, enjoy tax breaks, and/or earn above-average returns. Whether investing in real estate is worth it for you can depend on what your goals are, how much money you have to invest, and how much time you’re willing to commit to managing those investments.
Is Investing in Real Estate Better Than Stocks?
Real estate tends to have a low correlation with stocks, meaning that what happens in the stock market doesn’t necessarily affect what happens in the property markets. Investing in real estate can also be attractive for investors who are looking for a way to hedge against the effects of inflation over the long term.
Is Investing in Real Estate Safer Than Stocks?
Just like stocks, real estate investments carry risk meaning one isn’t necessarily safer than the other. Investing in both real estate and stocks can help you create a well-rounded portfolio, as the risk/reward profile for each one isn’t the same.
Photo credit: iStock/Pheelings Media SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
[cd_fund-fees] Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing. Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor’s risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds. Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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.
The concept of new vs. old wealth did not exist until fairly recently in human history; before that, most people could not have even imagined that they were one or the other kind of person simply because there was no such thing as cash!
Typically, old money is people with a lot of resources who are looking to pass on what they have in order to secure their future. New money, on the other hand, comprising mostly or exclusively by entrepreneurs starting from scratch.
The concept of old money vs new money has been around since the 1920s -yet many people have not given much thought to the concept.
Since most people feel like they will never belong in either group of people – old money or new money.
Are you interested in the concept of old money, but need to make it happen with new money? There are many reasons why you should give both styles of money a chance.
Over time, old money becomes new money.
A lot of people are fascinated with the idea of becoming independently wealthy quickly, right! But, what about those who want to become wealthy gradually? It takes time for old money to become new money.
There is a lot of discussions these days about the old and new money.
When you’re trying to make a big change in your life and start to build your own wealth, it can be difficult.
In order for the change to stick and grow into something more permanent, there are many steps that must take place. Lessons learned from old money.
If you are looking to improve your finances, then this post will help spark some inspiration!
What is Old Money?
The definition of “old money” is describing a social class of people we consider members of the upper class in society. This type of old money has been around for centuries and can be traced back to previous generations.
Old money is a wealth passed down from one family generation to another.
It is not “new,” and old money is a result of work that has made their first generations wealthy.
However, many people do not know about the qualities of old money because they may have been brought up as “old” money is only for a select few.
In today’s society, it is easy to identify someone as having old money because they are typically wealthy and have descended from many generations. You may look down on those who have old money for being “old-fashioned” or not “progressive” enough or just “trust fund” babies. This is a misconception.
Many of those with old money carry the wealth that has been given to them by their ancestors with dignity, insightfulness, and grace. Even when others lost everything due to greediness, they were able to withstand time periods of economic hardship.
Old Money tends to be more generous and kind than new money, which is often seen as selfish.
You can look at families such as the Vanderbilts or even the Rockefellers as old money passed down from generation to generation.
Even in Europe, the term “old money” associates with wealthy families. These families have been able to keep the wealth and power that they have passed down from generation to generation, as well as the pride of their heritage.
What is New Money?
New money is the self-made wealthy people in the world who have made it big.
New money is the recent abundance of money that has created their wealth.
It is new to them, and it took a lot of time for them to get where they are.
New money refers to self-made millionaires of the world, such as Jeff Bezos, Steve Jobs, and Mark Zuckerberg. They are rich because they were able to create a product or service that would go on to be one of the most popular products in their respective markets and quickly become successful.
Most of the new money is mainly found in occupations like technology, sports, and entertainment. These self-made millionaires of the world are entrepreneurs and innovators who have helped shape our society as we know it today.
Many of these people may have grown up poor or broke without extra money for anything. They did not have the support of old money to help them find success.
However, today, they can show that they have a lot of money.
What is the difference between old money and new money?
New money is made recently, whereas old money is made by previous generations in years prior.
Beyond that, there are some notable differences of old money vs new money behavior.
Chance to Make New Money
The biggest difference between new and old money is that new money has a lot of competition, which means there are many more opportunities to earn it.
You can make new money today.
You cannot change your heritage and family’s ability to pass down old money and wealth to you.
This is great for those with an entrepreneurial spirit. They can start to build wealth today.
Wealth Source
New money is self-made and old money is inherited.
Old and new money can be differentiated by who created the wealth.
You have old money if you inherited something from your parents or grandparents. Inheritance is when one person or business transfers part of its assets to another person at the time of death.
Earned wealth is the result of an individual’s effort and hard work, which is seen in the person’s bank account. Creating new money happens in your lifetime.
You are able to pass down that wealth and then, it becomes old money.
Tolerance for Risk
Old-money investors typically do not take on risks. So, they would not invest in something that has a 50-50 chance of working out. That’s why old money is safer than new money because it has a much lower risk factor.
Old-money investors typically invest in things they know will work out such as real estate, long-term investing, or other businesses.
New money takes on a lot of risks because you cannot rely on it as much as you would with old-money investments.
New money investors are starting from zero with nothing. They have much less to risk and the reward is much higher.
Social Perception
New money is not as elitist as old money.
People’s perception of old money is different from new money.
Old money has an attached stigma to the lifestyle they must maintain. In the United States, old wealth is more respected than recent wealth. This idea comes from the social perception of those who are wealthy for a long time and are able to maintain their status with ease.
People who come from lower-class societies often will have a hard time being accepted into high society. Thus, why old money and new money collide on many hot topics.
New money entrepreneurs may grow up poor and end up in a higher class than their parents. However, they may still be looked down on by those of Old Money because they grew through grit and ingenuity.
Differences in Spending Habits
The difference in spending habits between each group is not just limited to the amount of money they spend. Not only do different people have different tastes and needs, but there are also differences in how much people are willing to spend on certain items.
For example, there is a difference between people who buy luxury goods and those who don’t, but both groups could have the same amount of income.
There are many differences in spending habits between old money families and new money.
However, it is important to understand that they do not have a direct correlation with success or financial status.
For old money, they tend to be willing to spend money to uphold an appearance and a certain lifestyle. Yet, they are careful to make sure the family money can be passed on for generations.
Whereas, new money has wildly different spending habits. Some are frivolous with their money because they have waited so long for the opportunity and know they can always make it back again. Others are more hesitant to spend because they worked too hard to get where they are at today.
When does New Money become Old Money?
There is no clear line between old and new money, but the comparison still has value because there is still enough generational wealth to draw from.
The transition from new money to old money happens when the generational wealth is passed down.
The perception of old money was made in the early 1900s. In fact, old money is just wealth passed down and lasts another generation.
The hardest part for new money to become old money is teaching the younger generations how to manage their newfound wealth.
In addition, the common “new money” folks with net worth of over $2 million may not have the right advisors like the billionaires to properly transfer their wealth to future generations and start to build the old money way of life.
Do you know what 10 figures in money is?
Old Money vs New Money Examples
The easiest way to differentiate between old and new money is that old money is inherited from the older generation while new money is created by the current generation.
Old Money has the privilege of being passed down for generations, giving it a sense of stability and security.
New Money comes with its own set of challenges in terms of debt, lack of legacy, and lack of time-tested investment strategies for saving or spending.
New-Age millionaires are self-made wealthy families with new money, making up a large percentage of the wealthiest Americans. These people tend to be more frugal than old-money families who may have been successful for generations and acquired their wealth in the past without much effort. The current generation is acquiring its own lavish lifestyles rather than relying on inheritance. New money families are considered “new entrants” into an exclusive club for old money family members and can feel like they’re being left out due to their lack of legacy.
There are many reasons to give old money a chance, including the fact that it is more likely to be passed down than new money.
Old money is inherited while new money is created by the current generation. Old families are seen to be more educated and refined. In addition, they tend to spend less on luxuries because they know the next generation will have their hands full with managing their possessions.
Old Money is seen to be more classy than New Money.
Accordingly, Old Money families are considered a higher class, with roots going back centuries and attributed to industrialists from a previous era of wealth creation.
Why Take on an Old Money Mentality with New Money
There are many reasons why you should give “old money” a chance. Even if you were not born into inherited wealth, there are plenty of lessons to learn and pass along to your family.
Reason #1 – Financially Stable
First, the people who have old money are usually more financially stable and will be able to help out when times get tough.
They are taught how to be wise with money.
Learn if you embody one of the 32 habits of financially stable people.
Reason #2 – Life Experiences
Second, old money people are more knowledgeable and worldly than new money. They have a wealth of knowledge about the world and will be able to share it with you when hanging out with someone who is new money.
With old money, they have the resources to provide a higher level of education as well as travel to many countries.
However, you do not need money to do experience life to the fullest. One of the best ways to find immeasurable life experiences is to volunteer either locally or globally.
Reason #3 – Financial Safeguards
Third, old money people are more financial safeguards in place than new ones. So, they never worry about being broke or homeless due to the fact that they were born into wealth and their parents passed it down to them.
You can accomplish this with new money as well.
You must create financial safeguards to make sure a sizable chunk of your wealth is making a passive income. Thus, providing for your needs as well as your heirs for many years to come.
This is where a strong financial plan of how to transfer assets to the next generation is needed.
Reason #4 – Giving Back
Fourth, old money people usually give back more frequently than new money. As such, you can find many places with old money names on the building.
Here are some examples of what old money and new money can do:
– Give opportunities for young entrepreneurs
– Help create jobs and is an important part of the economy
– Give people a voice who don’t have many opportunities.
-Create funding for social projects that are beneficial to society
Reason #5 – Transfer Inherited Wealth
Lastly, there is something special about being able to pass down generational wealth.
This is something that comes with a lot of responsibility as you must teach your heirs how to manage money wisely.
However, you can build a lasting legacy beyond your own life.
Ready to Build New Money Wealth?
Money in the 1920s is much different than today.
Old money is usually inherited wealth or obtained through family connections. As technology increases, new money is replaced old money. However, when you look at industries like real estate where there’s not a lot of room for new money, it may be a good idea to give old money habits a chance.
When you give old money a chance in life, you will learn how much time-tested wisdom there really is behind these worldly possessions and riches.
Just because you want old money or new money, it does not greedy or extravagant. It means you know the value of a dollar and want the best for your family.
Embrace one of the many important habits of those with a background of wealth.
But the truth is, nobody likes the idea of talking about money, especially when it involves inherited wealth. So, have discussions today about long-term money decisions.
At the end of the day, it is more important to appreciate family ties over material possessions since they will last longer than any other form of wealth.
Old money offers wisdom to help new money avoid making the same mistakes.
The old money vs new money style is here to stay.
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.
Options trading offers a complex yet potentially rewarding approach to the stock market, allowing investors to buy or sell assets at predetermined prices within specific time frames. Unlike direct stock purchases, these contracts grant the right without obligating the transaction, providing a strategic tool for managing investment risks and capitalizing on market predictions.
This guide will explore the fundamentals of options trading, including the differences between call and put options, the process of getting approved for trading, and strategies for minimizing risks while maximizing returns.
What is an option?
An option is a contract that grants you the option buyer, the right, but not the obligation, to buy or sell a particular asset at a set price on a particular date or within a select window of time.
It’s also classified as a derivative, with the associated value directly linked to the underlying asset. This price point is also known as the strike or exercise price, and the expiration date specifies when the contract terminates.
But how does this benefit investors? Well, it’s a cost-efficient way to manage risk because you’re only investing in the opportunity to purchase shares at another date, and not the stock itself. Options also allow you to sell your existing shares at a set price if the market tanks to limit your losses.
How does options trading work?
However, it’s a bit more complex than simply buying and selling shares. In essence, options traders are taking a gamble on the direction they think the stock price will go in. That way, they won’t have to buy or short the actual stock when they think the market is going to skyrocket or dip.
Furthermore, there’s a relatively extensive process to get approved as an options trader. You’ll also need to open a brokerage account and maintain a set amount of reserves to remain in good standing as an investor.
And should you decide not to exercise the option, you’re free to walk away with no strings attached. You can also rake in a little more cash by selling the option, or options contract, to an investor who’s interested.
Benefits of Trading Options
There are several benefits to trading options, including:
Flexibility: Options can be used to hedge against potential losses in other investments, or to generate income through the writing of options.
Leverage: Because options allow traders to control a large amount of underlying assets for a relatively small investment, they offer significant leverage.
Limited risk: The potential loss on an options trade is limited to the premium paid for the option.
Customization: Options can be customized to meet the specific needs and objectives of the trader.
Liquidity: Options are traded on organized exchanges, making it easy to buy and sell them.
Versatility: Options can be used in a variety of market conditions, including bearish, bullish, and neutral markets.
Types of Options
Still sold on the idea of trading options? There are two types to choose from:
Call Options: these are deposit rights to purchase the stock at a later date. If the call option is not exercised before the expiration date, you lose your investment in the option and the right to purchase the underlying stock at the strike price.
Put Options: these are premiums paid to hedge against the risk of a market downturn. They are similar to an insurance policy that protects your investment. If the price of the underlying stock plummets, you will still have your right to sell a set number of shares at the exercise price. But if the market stays intact or swings upward and you decide not to sell, your premium is lost.
You should also know that call and put holders are owners of options contracts. They absorb minimal risk as there’s no obligation to buy or sell, regardless of market performance. Instead, they are free to exercise the option when they see fit.
By contrast, call and put writers are sellers of options contracts. Unfortunately, they’re exposed to more risk because they must follow through on their promise to buy or sell if the holder exercises their option.
Options Pricing
Options pricing refers to the process of determining the value of an options contract. There are several factors that can impact the price of an options contract. These include the underlying asset’s price, the option’s strike price, the time remaining until the option’s expiration date, the option’s implied volatility, and the risk-free interest rate.
One of the most widely used methods for calculating the price of an option is the Black-Scholes model. This model takes into account the aforementioned factors to determine the theoretical value of an options contract. Other methods for pricing options include the binomial model and the Monte Carlo simulation.
Keep in mind that the price of an options contract can fluctuate significantly over time, and may be affected by a variety of market conditions. Therefore, options traders should carefully consider the potential risks and rewards of their trades and use appropriate risk management strategies.
Risks and Rewards of Options Trading
Options trading can be a complex and risky endeavor, but it can also provide the opportunity for significant profits. It’s essential for investors to understand the potential risks and rewards involved to make informed decisions and manage risk effectively.
One way to minimize risk when trading options is to use investment strategies like spreading. This involves buying and selling options at different strike prices and expiration dates to offset potential losses.
Another investment strategy is to use stop-loss orders. They allow you to set a certain price at which your trade will be automatically closed to prevent further losses.
Additionally, you should diversify your portfolio and not rely too heavily on options trading. That way, if one trade doesn’t work out, you won’t be left with all your eggs in one basket.
Investors can maximize their profits and minimize risks by understanding options trading and implementing risk management strategies.
Getting Started with Options Trading
Getting started with options trading requires more than a simple phone call to a broker or an online purchase. It demands a proactive approach and thoughtful preparation to set the stage for your trading activities.
Step 1: Select a Brokerage Firm
Like it or not, you’ll have to work with a brokerage firm to get screened and cleared to trade options. But don’t just settle for the first broker you find. Shop around and carefully analyze your options before making a decision. Remember, they’ll be evaluating your experience, so you should do the same.
Do a little research to determine if they’ll be a good fit. Pay attention to consumer reviews, services they offer, costs or commissions structure, account minimums, and educational resources they offer, just to name a few.
Furthermore, inquire about educational resources, including self-guided online courses and webinars, along with telephone, virtual, and live support designed to help you identify and understand the most strategic routes when trading options.
Finally, feel free to ask questions as they arise to ensure you have all the information you need to make a well-informed decision. The more access you have to support staff, the better.
Remember, it’s your hard-earned money that will be used to buy options, so you want to make sure you derive the greatest benefit in exchange for your investment.
Step 2: Get Screened
Once you’ve selected a brokerage firm, the next step is to get screened. This is a prerequisite to being assigned a trading level. Before screening can begin, the broker will want to get an understanding of your investment goals and which types of options you’re most interested in. They will also inquire about your trading experience and will request additional information about your finances.
Your information will be compiled by the broker and analyzed to determine the optimal trading level. Levels range from 1 to 5 and will dictate the types of transactions you’re able to engage in.
Furthermore, you’ll need to maintain a minimum balance of $2,000 in your account at all times, per industry requirements. Additionally, purchasing a call option may mandate a margin account or line of credit to serve as security. Check with the brokerage firm to confirm minimum reserves and additional details regarding margin accounts.
Step 3: Start Trading Options
Now that you’re in the clear, you have to use your knowledge and judgment to make some critical choices that can boost or dent your wallet. Some important considerations:
How you think the stock will perform – Anticipating an increase in price? A call option is best as it allows you to turn a profit if the price surpasses the strike price within the window of time allotted by the option, and. In this case, you will be in the money. But if the market price drops below the strike price, you’ll be out of the money.
By contrast, if you already own shares and are expecting a dip in the price, you would purchase a put option. You’ll be in the money if the market price drops below the strike price, and out of the money if the market price ends up exceeding the strike price.
The length of the option – Stock options are only valid for a set period of time. Some options last for several days or months, while others span several years.
Optimal strike price – It’s difficult to determine where the stock price will end up, so you’ll have to make an educated guess regarding the strike price before purchasing an option.
Thinking the price of a share currently trading for $50 will increase to $75? Let’s assume you purchase a call option with a strike price below $75. (You want a call option that leaves a little wiggle room to account for the cost of the option). If the share price exceeds the strike price, you will be in the money or turn a profit.
Now assume you owned these shares and expected the share price to drop to $25? By purchasing a put option with a strike price that is above $25 and accounts for the cost of the option, you’ll be in the money if the price does drop below this point.
Bottom Line
Options trading is a sophisticated tool for seasoned investors, offering strategic depth to portfolio management. However, it’s not the sole method to mitigate risk or seek returns. Stock trading presents a more accessible alternative, with its direct approach and fewer entry barriers.
While options can leverage market movements and offer protection, they demand a solid grasp of market intricacies. In contrast, stock trading provides a straightforward path to investment growth. Choosing between them depends on your risk tolerance, investment goals, and willingness to explore market complexities.
Editor’s Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
What Is a Put Option?
In options trading, a put option is the purchase of a contract that gives an investor the right, but not the obligation, to sell a specific security at a certain price by a certain date. Put options are different from call options, the purchase of which gives buyers the right, but not the obligation, to buy a particular security at a certain price by a certain date.
Investors can use put options to trade a variety of securities, including stocks, bonds, futures and commodities. Trading options can potentially lead to greater returns, but it can also amplify losses, making it a potentially riskier strategy.
Understanding certain options terminology — including what a put option is and how it works — can be helpful if you’re thinking about incorporating options trading strategies into your portfolio.
[embedded content]
Options Basics
Before digging into the details of put options, it’s helpful to understand a little about how options trading works in general. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying security at a certain price — this is called the strike price. Options must also be exercised by a specific expiration date.
An investor who buys an options contract pays a premium to do so, which can be determined by the volatility of the underlying asset and the option’s expiration date. If the option holder does not exercise the option by the expiration date, they lose their right to buy or sell the underlying security and the option has no value.
Options are derivative investments, since they derive their value from the underlying assets. They can be bought and sold on an exchange, just like the underlying assets they’re associated with.
Finally, user-friendly options trading is here.*
Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.
How Does a Put Option Work?
A put option is a specific type of options contract. Here’s an example: The buyer of the put option has the right, but not the obligation, to sell shares of an underlying asset at the agreed-upon strike price up until the option’s expiration date. Meanwhile, the seller of the put option has an obligation to buy those shares from the buyer if the buyer chooses to exercise the put option.
Put options increase in value as the price of the underlying security decreases. Likewise, put options lose value as the price of the underlying stock increases. Depending on where the underlying asset’s price is in relation to a put option’s strike price, the option can be one of the following:
• In the money: An in-the-money put option has a strike price that’s higher than the underlying asset’s price.
• At the money: An at-the-money (or on-the-money) put option has a strike price that’s equal to the underlying asset’s price.
• Out of the money: An out-of-the-money put option has a strike price that’s below the underlying asset’s price.
Of the three, the in-the-money put option is more desirable because it means a put option has intrinsic value. If you’re the buyer of a put option and that option is in the money, it means you can sell the underlying asset for more than what it’s valued at by the market.
Recommended: In the Money (ITM) vs Out of the Money (OTM) Options
Put Option Example
An example might make things even more clear.
Assume you own shares of XYZ stock. The stock is currently trading at $50 a share but you believe its price will dip to $40 per share in the near future. You purchase a put option which would allow you to sell the stock at its current price of $50 per share. The options contract conveys the right to sell 100 shares of the stock, with a premium of $1 per share.
If your hunch about the stock’s price pays off and the price drops to $40 per share, you could exercise the option. This would allow you to sell each of the 100 shares in the contract for $10 more than what it’s worth, resulting in a gross profit of $1,000. When you factor in the $1 per share premium, your net profit ends up being $900, less any commission fees paid to your brokerage.
Difference Between Put and Call Option
It’s important to understand the difference between put and call options in trading. A call option is an options contract that gives the buyer the right, but not the obligation, to purchase shares of an underlying asset at the strike price by the expiration date. The seller of the call option is obligated to sell those shares to the call option buyer, should they decide to exercise the option.
Like put options, call options can also be in the money, at the money, or out of the money. An in-the-money call option has a strike price that’s below the underlying asset’s actual price. An out-of-the-money call option has a strike price that’s above the underlying asset’s actual price.
Here’s a simple way to think of the differences between put options and call options: With buying put options, the goal is to sell an underlying asset for more than its market value. With buying call options, the goal is to buy an underlying asset for less than what it’s worth.
Pros and Cons of Trading Put Options
Options trading may appeal to a certain type of investor who’s comfortable moving beyond stock and bond trading. Like any other investment, put options can have both advantages and disadvantages. Weighing them both in the balance can help you decide if options trading is something you should consider pursuing.
Pros
Cons
• Low initial investment required compared to trading stocks.
• The option buyer has the right but no obligation to sell the underlying asset.
• Higher return potential, on a percentage basis.
• Losses may be amplified.
• The option seller has the obligation to buy the underlying asset at the strike price if the buyer decides to execute the contract, which could result in greater downside for the seller.
• Unforeseen volatility may drastically affect price movements.
Pros of Trading Put Options
• Lower investment. When you purchase a put option, you’re paying a premium and your brokerage’s commission fees. When you purchase shares of stock, you may be investing hundreds or even thousands of dollars at a time. Between the two, put options may be more attractive if you don’t want to tie up a lot of cash in the markets.
Also, buying a put option gives you the right to sell a particular asset at a set strike price but you’re not required to do so. You can always choose to let the option expire; you’d just be out the premium and commission fees you paid.
• Return potential. Trading put options can be lucrative if you’re able to sell assets at a strike price that’s well above their actual price. That might result in a higher profit margin than if you were trading the underlying asset itself.
Cons of Trading Put Options
• Loss amplification. While trading put options can potentially lead to better returns, it can also potentially amplify your losses. If you’re selling put options, you’re obligated to sell the underlying asset at the strike price, even if that strike price is not in your favor.
• Volatility. Volatility can threaten returns with put options if an asset’s price doesn’t move the way you were expecting it to. So it’s possible you might walk away with lower gains than anticipated if you choose to exercise a put option during a period of heightened volatility.
How Do You Trade Put Options?
It’s possible to trade put options inside an online brokerage account that allows for options trading (not all of them do). When deciding which put options contracts to buy, it’s important to consider:
• Where the underlying asset is trading currently
• Which way you think the asset’s price is most likely to move
• How much of a premium you’re willing to pay to purchase an options contract
It’s also important to consider the expiration date for a put option. Keep in mind that options with a longer expiration period may come with a higher premium.
Different Put Option Styles
There’s a difference between European-style and American-style put options.
With European-style options, you can only exercise the option on its expiration date.
With American-style put options you can exercise the option at any time between the date you purchased it and its expiration date, offering more flexibility for the investor.
Put Option Trading Strategies
Different options trading strategies can be used with put options. These strategies vary in terms of reward potential and risk exposure. As you get more familiar with how to trade stock puts, you might begin exploring more advantaged techniques. Here are some of the most common put option plays.
Long Put
A long put strategy involves purchasing a put option with the expectation that the underlying asset’s price will fall. For example, you might want to buy 100 shares of XYZ stock which is trading at $100 per share, which you believe will drop to $90 per share. If the stock’s price drops to $90 or below, you could exercise your contract at the higher $100 per share price point.
Short Put
A short put is the opposite of a long put. In a short put strategy, you’re writing or selling the put option with the expectation that the underlying security’s price will rise or remain above the strike price until it expires. The payoff comes from being able to collect the premium on the option even if the buyer doesn’t exercise it.
Recommended: How to Sell Options for Premium
Married Put
A married put strategy involves holding a long position in an underlying security while also purchasing an at-the-money option for the same security. The idea here is to minimize downside risk by holding both the asset itself and an at-the-money put option.
Long Straddle
A long straddle strategy involves buying both a call option and a put option for the same security, with the same strike price and expiration date. By straddling both sides, you can still end up turning a profit regardless of which the underlying asset’s price moves.
The Takeaway
Options trading may be right for retail investors who are comfortable taking more risk in exchange for a chance to potentially earn higher returns. Getting familiar with put options and how a stock put works is the first step.
Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.
Trade options with low fees through SoFi.
Photo credit: iStock/Drazen_
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Fund Fees If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Average mortgage rates edged higher yesterday. Unfortunately, it was the sixth consecutive business day on which they’ve risen.
Earlier this morning, markets were signaling that mortgage rates today might barely move. However, these early mini-trends frequently alter speed or direction as the hours pass.
Current mortgage and refinance rates
Find your lowest rate. Start here
Program
Mortgage Rate
APR*
Change
Conventional 30-year fixed
7.15%
7.17%
Unchanged
Conventional 15-year fixed
6.57%
6.61%
-0.04
Conventional 20-year fixed
7.16%
7.19%
+0.02
Conventional 10-year fixed
6.63%
6.66%
-0.05
30-year fixed FHA
6.51%
7.19%
Unchanged
30-year fixed VA
6.61%
6.72%
-0.03
5/1 ARM Conventional
6.3%
7.39%
Unchanged
Rates are provided by our partner network, and may not reflect the market. Your rate might be different. Click here for a personalized rate quote. See our rate assumptions See our rate assumptions here.
Should you lock your mortgage rate today?
Tomorrow’s Federal Reserve events (see below) could make a big difference to mortgage rates in the near and medium terms. But, right now, I’m pessimistic about our seeing a sustained downward trend until the summer. And some wonder if the fall might be a more realistic timeframe.
So, for now, my personal rate lock recommendations remain:
LOCK if closing in 7 days
LOCK if closing in 15 days
LOCK if closing in 30 days
LOCK if closing in 45 days
LOCKif closing in 60days
However, with so much uncertainty at the moment, your instincts could easily turn out to be as good as mine — or better. So, let your gut and your own tolerance for risk help guide you.
>Related: 7 Tips to get the best refinance rate
Market data affecting today’s mortgage rates
Here’s a snapshot of the state of play this morning at about 9:50 a.m. (ET). The data are mostly compared with roughly the same time the business day before, so much of the movement will often have happened in the previous session. The numbers are:
The yield on 10-year Treasury notes held steady again at 4.32%. (Neutral for mortgage rates. However, yields were rising this morning.) More than any other market, mortgage rates typically tend to follow these particular Treasury bond yields
Major stock indexes were mixed this morning. (Neutral for mortgage rates.) When investors buy shares, they’re often selling bonds, which pushes those prices down and increases yields and mortgage rates. The opposite may happen when indexes are lower. But this is an imperfect relationship
Oil prices increased to $83.18 from $81.35 a barrel. (Bad for mortgage rates*.) Energy prices play a prominent role in creating inflation and also point to future economic activity
Goldprices inched down to $2,156 from $2,159 an ounce. (Neutral for mortgage rates*.) It is generally better for rates when gold prices rise and worse when they fall. Because gold tends to rise when investors worry about the economy.
CNN Business Fear & Greed index — dropped to 69 from 75 out of 100. (Good for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So, lower readings are often better than higher ones
*A movement of less than $20 on gold prices or 40 cents on oil ones is a change of 1% or less. So we only count meaningful differences as good or bad for mortgage rates.
Caveats about markets and rates
Before the pandemic, post-pandemic upheavals, and war in Ukraine, you could look at the above figures and make a pretty good guess about what would happen to mortgage rates that day. But that’s no longer the case. We still make daily calls. And are usually right. But our record for accuracy won’t achieve its former high levels until things settle down.
So, use markets only as a rough guide. Because they have to be exceptionally strong or weak to rely on them. But, with that caveat, mortgage rates today look likely to hold close to steady. However, be aware that “intraday swings” (when rates change speed or direction during the day) are a common feature right now.
Find your lowest rate. Start here
What’s driving mortgage rates today?
Tomorrow
I covered yesterday the three Federal Reserve events due early tomorrow afternoon:
2 p.m. Eastern — Rate announcement and report publications
2 p.m. Eastern — Summary of Economic Projects publication. This occurs only quarterly and includes a dot plot
I’ll brief you more fully on those tomorrow morning. That way you’ll know what to look out for before it’s too late to act.
Personally, I’m not very hopeful about the impact of the Fed’s events on mortgage rates. Of course, I can’t be sure what they’ll bring. But recent economic data has likely reinforced the central bank’s natural caution. And I suspect that it may signal later and fewer cuts in general interest rates this year than markets have been expecting.
If I’m right, that could be seriously bad for mortgage rates. So, let’s hope I’m wrong.
Today and later in the week
I’ll be surprised if today’s economic reports move mortgage rates much. They cover February’s housing starts and building permits. It’s not that those data are unimportant. However, they rarely attract the attention of the investors who largely determine mortgage rates.
We have to wait until Thursday for a couple of reports that sometimes affect mortgage rates. They’re two March purchasing managers’ indexes (PMIs) from S&P. One is for the services sector and the other covers manufacturing. I’ll brief you on those tomorrow morning.
Don’t forget you can always learn more about what’s driving mortgage rates in the most recent weekend edition of this daily report. These provide a more detailed analysis of what’s happening. They are published each Saturday morning soon after 10 a.m. (ET) and include a preview of the following week.
Recent trends
According to Freddie Mac’s archives, the weekly all-time lowest rate for 30-year, fixed-rate mortgages was set on Jan. 7, 2021, when it stood at 2.65%. The weekly all-time high was 18.63% on Sep. 10, 1981.
Freddie’s Mar. 14 report put that same weekly average at 6.74% down from the previous week’s 6.88%. But note that Freddie’s data are almost always out of date by the time it announces its weekly figures.
Expert forecasts for mortgage rates
Looking further ahead, Fannie Mae and the Mortgage Bankers Association (MBA) each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.
And here are their rate forecasts for the four quarters of 2024 (Q1/24, Q2/24 Q3/24 and Q4/24).
The numbers in the table below are for 30-year, fixed-rate mortgages. Fannie’s were updated on Feb. 12 and the MBA’s on Feb. 20.
Forecaster
Q1/24
Q2/24
Q3/24
Q4/24
Fannie Mae
6.5%
6.3%
6.1%
5.9%
MBA
6.9%
6.6%
6.3%
6.1%
Of course, given so many unknowables, both these forecasts might be even more speculative than usual. And their past record for accuracy hasn’t been wildly impressive.
Important notes on today’s mortgage rates
Here are some things you need to know:
Typically, mortgage rates go up when the economy’s doing well and down when it’s in trouble. But there are exceptions. Read ‘How mortgage rates are determined and why you should care’
Only “top-tier” borrowers (with stellar credit scores, big down payments, and very healthy finances) get the ultralow mortgage rates you’ll see advertised
Lenders vary. Yours may or may not follow the crowd when it comes to daily rate movements — though they all usually follow the broader trend over time
When daily rate changes are small, some lenders will adjust closing costs and leave their rate cards the same
Refinance rates are typically close to those for purchases.
A lot is going on at the moment. And nobody can claim to know with certainty what will happen to mortgage rates in the coming hours, days, weeks or months.
Find your lowest mortgage rate today
You should comparison shop widely, no matter what sort of mortgage you want. Federal regulator the Consumer Financial Protection Bureau found in May 2023:
“Mortgage borrowers are paying around $100 a month more depending on which lender they choose, for the same type of loan and the same consumer characteristics (such as credit score and down payment).”
In other words, over the lifetime of a 30-year loan, homebuyers who don’t bother to get quotes from multiple lenders risk losing an average of $36,000. What could you do with that sort of money?
Verify your new rate
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.
How your mortgage interest rate is determined
Mortgage and refinance rates vary a lot depending on each borrower’s unique situation.
Factors that determine your mortgage interest rate include:
Overall strength of the economy — A strong economy usually means higher rates, while a weaker one can push current mortgage rates down to promote borrowing
Lender capacity — When a lender is very busy, it will increase rates to deter new business and give its loan officers some breathing room
Property type (condo, single-family, town house, etc.) — A primary residence, meaning a home you plan to live in full time, will have a lower interest rate. Investment properties, second homes, and vacation homes have higher mortgage rates
Loan-to-value ratio (determined by your down payment) — Your loan-to-value ratio (LTV) compares your loan amount to the value of the home. A lower LTV, meaning a bigger down payment, gets you a lower mortgage rate
Debt-To-Income ratio — This number compares your total monthly debts to your pretax income. The more debt you currently have, the less room you’ll have in your budget for a mortgage payment
Loan term — Loans with a shorter term (like a 15-year mortgage) typically have lower rates than a 30-year loan term
Borrower’s credit score — Typically the higher your credit score is, the lower your mortgage rate, and vice versa
Mortgage discount points — Borrowers have the option to buy discount points or ‘mortgage points’ at closing. These let you pay money upfront to lower your interest rate
Remember, every mortgage lender weighs these factors a little differently.
To find the best rate for your situation, you’ll want to get personalized estimates from a few different lenders.
Verify your new rate. Start here
Are refinance rates the same as mortgage rates?
Rates for a home purchase and mortgage refinance are often similar.
However, some lenders will charge more for a refinance under certain circumstances.
Typically when rates fall, homeowners rush to refinance. They see an opportunity to lock in a lower rate and payment for the rest of their loan.
This creates a tidal wave of new work for mortgage lenders.
Unfortunately, some lenders don’t have the capacity or crew to process a large number of refinance loan applications.
In this case, a lender might raise its rates to deter new business and give loan officers time to process loans currently in the pipeline.
Also, cashing out equity can result in a higher rate when refinancing.
Cash-out refinances pose a greater risk for mortgage lenders, so they’re often priced higher than new home purchases and rate-term refinances.
Check your refinance rates today. Start here
How to get the lowest mortgage or refinance rate
Since rates can vary, always shop around when buying a house or refinancing a mortgage.
Comparison shopping can potentially save thousands, even tens of thousands of dollars over the life of your loan.
Here are a few tips to keep in mind:
1. Get multiple quotes
Many borrowers make the mistake of accepting the first mortgage or refinance offer they receive.
Some simply go with the bank they use for checking and savings since that can seem easiest.
However, your bank might not offer the best mortgage deal for you. And if you’re refinancing, your financial situation may have changed enough that your current lender is no longer your best bet.
So get multiple quotes from at least three different lenders to find the right one for you.
2. Compare Loan Estimates
When shopping for a mortgage or refinance, lenders will provide a Loan Estimate that breaks down important costs associated with the loan.
You’ll want to read these Loan Estimates carefully and compare costs and fees line-by-line, including:
Interest rate
Annual percentage rate (APR)
Monthly mortgage payment
Loan origination fees
Rate lock fees
Closing costs
Remember, the lowest interest rate isn’t always the best deal.
Annual percentage rate (APR) can help you compare the ‘real’ cost of two loans. It estimates your total yearly cost including interest and fees.
Also, pay close attention to your closing costs.
Some lenders may bring their rates down by charging more upfront via discount points. These can add thousands to your out-of-pocket costs.
3. Negotiate your mortgage rate
You can also negotiate your mortgage rate to get a better deal.
Let’s say you get loan estimates from two lenders. Lender A offers the better rate, but you prefer your loan terms from Lender B. Talk to Lender B and see if they can beat the former’s pricing.
You might be surprised to find that a lender is willing to give you a lower interest rate in order to keep your business.
And if they’re not, keep shopping — there’s a good chance someone will.
Fixed-rate mortgage vs. adjustable-rate mortgage: Which is right for you?
Mortgage borrowers can choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM).
Fixed-rate mortgages (FRMs) have interest rates that never change unless you decide to refinance. This results in predictable monthly payments and stability over the life of your loan.
Adjustable-rate loans have a low interest rate that’s fixed for a set number of years (typically five or seven). After the initial fixed-rate period, the interest rate adjusts every year based on market conditions.
With each rate adjustment, a borrower’s mortgage rate can either increase, decrease, or stay the same. These loans are unpredictable since monthly payments can change each year.
Adjustable-rate mortgages are fitting for borrowers who expect to move before their first rate adjustment, or who can afford a higher future payment.
In most other cases, a fixed-rate mortgage is typically the safer and better choice.
Remember, if rates drop sharply, you are free to refinance and lock in a lower rate and payment later on.
How your credit score affects your mortgage rate
You don’t need a high credit score to qualify for a home purchase or refinance, but your credit score will affect your rate.
This is because credit history determines risk level.
Historically speaking, borrowers with higher credit scores are less likely to default on their mortgages, so they qualify for lower rates.
So, for the best rate, aim for a credit score of 720 or higher.
Mortgage programs that don’t require a high score include:
Conventional home loans — minimum 620 credit score
FHA loans — minimum 500 credit score (with a 10% down payment) or 580 (with a 3.5% down payment)
VA loans — no minimum credit score, but 620 is common
USDA loans — minimum 640 credit score
Ideally, you want to check your credit report and score at least 6 months before applying for a mortgage. This gives you time to sort out any errors and make sure your score is as high as possible.
If you’re ready to apply now, it’s still worth checking so you have a good idea of what loan programs you might qualify for and how your score will affect your rate.
You can get your credit report from AnnualCreditReport.com and your score from MyFico.com.
How big of a down payment do I need?
Nowadays, mortgage programs don’t require the conventional 20 percent down.
Indeed, first-time home buyers put only 6 percent down on average.
Down payment minimums vary depending on the loan program. For example:
Conventional home loans require a down payment between 3% and 5%
FHA loans require 3.5% down
VA and USDA loans allow zero down payment
Jumbo loans typically require at least 5% to 10% down
Keep in mind, a higher down payment reduces your risk as a borrower and helps you negotiate a better mortgage rate.
If you are able to make a 20 percent down payment, you can avoid paying for mortgage insurance.
This is an added cost paid by the borrower, which protects their lender in case of default or foreclosure.
But a big down payment is not required.
For many people, it makes sense to make a smaller down payment in order to buy a house sooner and start building home equity.
Verify your new rate. Start here
Choosing the right type of home loan
No two mortgage loans are alike, so it’s important to know your options and choose the right type of mortgage.
The five main types of mortgages include:
Fixed-rate mortgage (FRM)
Your interest rate remains the same over the life of the loan. This is a good option for borrowers who expect to live in their homes long-term.
The most popular loan option is the 30-year mortgage, but 15- and 20-year terms are also commonly available.
Adjustable-rate mortgage (ARM)
Adjustable-rate loans have a fixed interest rate for the first few years. Then, your mortgage rate resets every year.
Your rate and payment can rise or fall annually depending on how the broader interest rate trends.
ARMs are ideal for borrowers who expect to move prior to their first rate adjustment (usually in 5 or 7 years).
For those who plan to stay in their home long-term, a fixed-rate mortgage is typically recommended.
Jumbo mortgage
A jumbo loan is a mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac.
In 2023, the conforming loan limit is $726,200 in most areas.
Jumbo loans are perfect for borrowers who need a larger loan to purchase a high-priced property, especially in big cities with high real estate values.
FHA mortgage
A government loan backed by the Federal Housing Administration for low- to moderate-income borrowers. FHA loans feature low credit score and down payment requirements.
VA mortgage
A government loan backed by the Department of Veterans Affairs. To be eligible, you must be active-duty military, a veteran, a Reservist or National Guard service member, or an eligible spouse.
VA loans allow no down payment and have exceptionally low mortgage rates.
USDA mortgage
USDA loans are a government program backed by the U.S. Department of Agriculture. They offer a no-down-payment solution for borrowers who purchase real estate in an eligible rural area. To qualify, your income must be at or below the local median.
Bank statement loan
Borrowers can qualify for a mortgage without tax returns, using their personal or business bank account as evidence of their financial circumstances. This is an option for self-employed or seasonally-employed borrowers.
Portfolio/Non-QM loan
These are mortgages that lenders don’t sell on the secondary mortgage market. And this gives lenders the flexibility to set their own guidelines.
Non-QM loans may have lower credit score requirements or offer low-down-payment options without mortgage insurance.
Choosing the right mortgage lender
The lender or loan program that’s right for one person might not be right for another.
Explore your options and then pick a loan based on your credit score, down payment, and financial goals, as well as local home prices.
Whether you’re getting a mortgage for a home purchase or a refinance, always shop around and compare rates and terms.
Typically, it only takes a few hours to get quotes from multiple lenders. And it could save you thousands in the long run.
Time to make a move? Let us find the right mortgage for you
Current mortgage rates methodology
We receive current mortgage rates each day from a network of mortgage lenders that offer home purchase and refinance loans. Those mortgage rates shown here are based on sample borrower profiles that vary by loan type. See our full loan assumptions here.