When it comes to borrowing money, building up your emergency fund, and performing financial transactions, you have more options than ever before. You can open an account with a traditional bank, set up an online bank account, or choose a neighborhood credit union. Best of all, you can have accounts with multiple institutions, maximizing convenience.
As you’re reviewing your options, you may see some claims that credit unions are better than banks. There’s no one-size-fits-all financial institution that works for every consumer on the planet, but there are some reasons you might want to choose a credit union over a brick-and-mortar or online bank.
Why is a credit union better than a bank for some people? Get the answer to this question, plus an overview of how credit unions work.
What Is a Credit Union?
A credit union is a nonprofit organization that provides a variety of financial services. Like banks, credit unions are heavily regulated financial institutions. They typically offer the following products and services:
Checking accounts. A checking account is a type of deposit account. Once you deposit money, you can spend it by writing checks, using your debit card, or making online transfers.
Savings accounts. Savings accounts make it easier to put away money for a rainy day. If you have an active account, you can deposit money and earn interest on it.
Certificates of deposit. A certificate of deposit, commonly known as a CD, is a special type of savings account. When you open a CD, you agree to keep your money in it for a certain period of time. In exchange, the bank pays a higher interest rate than you can get with a standard savings account.
Retirement accounts. Many credit unions offer IRAs and other retirement accounts, making it easier to save for the future.
Auto loans. If you don’t have enough cash on hand to buy a car, you can take out an auto loan from your credit union. An auto loan is a type of installment loan, which means you borrow the money and pay it back in equal monthly installments. The lender earns money by charging interest on the loan.
Mortgages. Most people don’t have hundreds of thousands of dollars in cash to buy a home. If you belong to a credit union, you may be able to take out a home loan. Some loans have fixed interest rates, while others have adjustable rates, giving you more flexibility.
Personal loans. If you need a loan to consolidate your debts, do expensive home repairs, pay for a wedding, or cover other major expenses, you may be able to take out a personal loan from a credit union. With a personal loan, you borrow a certain amount of money and pay it back in monthly installments.
Credit cards. Many credit unions also offer credit cards, which give you access to revolving credit. You use each card to make purchases and then pay back what you borrowed over time. If you don’t pay your full balance each month, you must make a minimum payment to keep your account in good standing.
Banks vs. Credit Unions: Major Differences
One of the biggest differences between banks and credit unions is that credit unions are nonprofit organizations owned by their members. In contrast, a bank is a for-profit institution owned by a group of shareholders.
Nonprofit and for-profit organizations have different purposes. Due to their nonprofit status, credit unions have cooperative structures. Board members and employees are concerned with the financial well-being of all members. Credit unions also have strong community roots.
The main purpose of a for-profit bank is to make money for shareholders. When there’s a profit motive in place, employees and board members tend to make decisions based on what’s best for shareholders instead of what’s best for customers or communities. For example, employees at Wells Fargo opened thousands of fraudulent accounts to boost the bank’s bottom line, hurting customers in the process.
Membership Requirements
Another major difference between banks and credit unions is that credit unions have strict membership requirements. Banks want to make as much money as possible, so they tend to offer accounts to anyone who meets some basic criteria. For example, a bank may open a checking account for any adult who doesn’t have a history of writing bad checks.
Credit unions are member-owned, so they have additional requirements. For example, some credit unions require their members to work for the federal government. Others are designed for members of the military or people who live in a specific geographic area. If you don’t meet the membership requirements, you won’t be able to open an account.
Banks and credit unions are both subject to federal regulation, but they’re not regulated by the same agencies. In the United States, the Office of the Comptroller of the Currency charters all banks and monitors their activities. The National Credit Union Administration oversees credit unions.
Both agencies work to ensure consumers receive fair treatment. Federal regulations also protect bank and credit union customers against deceptive business practices, giving you extra peace of mind.
Why Is a Credit Union Better Than a Bank for Some Consumers?
So, why is a credit union better than a bank in some cases? One of the main benefits is that credit unions operate for the good of their members. If you’re invested in the success of your community, joining a credit union can help you contribute to local development.
Credit unions also tend to offer slightly higher interest rates on certain savings and investment products. As of December 2023, credit unions were paying 2.93% on a five-year CD with a $10,000 deposit. In contrast, traditional banks were only paying 2.02%.
In some cases, a credit union also charges lower interest rates on credit cards and loans. The lower your rate, the less you pay in interest over time. At the end of 2023, credit unions charged an average of 12.72% on credit cards, while banks averaged 15%.
If you join a credit union, you may even save money on fees. Traditional banks need to maximize their profits, so they often charge monthly maintenance fees and fees for accessing certain services. You may also have to meet minimum daily balance requirements to avoid additional service charges.
Many credit unions charge no monthly service fees and have no minimum balance requirements. If you have to make a deposit to open your account, the minimum deposit may be just a few dollars. Credit unions may also offer free checks, free mobile banking, and other free services to their members.
Credit Unions vs. Banks: The Bottom Line
Banks and credit unions both have their place in the financial world. If you’re looking for personalized service, lower fees, and better interest rates, consider joining a credit union. You can always set up a traditional bank account if you want to access additional services.
To learn more about financial matters, check out Credit.com’s ultimate guide to personal finance.
Not too long ago, getting a mortgage meant a lot of paperwork, visits to the bank, and waiting weeks or more for underwriter approval. But the way we apply for mortgages is changing fast, thanks to the digital world we live in.
You can apply for a mortgage online quickly and easily, adding layers of convenience to what used to be a tedious and harrowing experience. Applying for a mortgage online is becoming more popular because it’s convenient, quick, and easy.
As with so many other facets of life, the internet has made the mortgage process simpler and friendlier. With a few clicks, you can start the journey to owning your dream home.
In this article, we’re going to look at the pros and cons of applying for a mortgage online. Whether you’re buying your first home or thinking about refinancing, it’s important to know how the online mortgage process works. By the end, you’ll have a better idea of whether an online mortgage is right for you and how to handle the process.
The Rise of Online Mortgage Applications
The mortgage industry has shifted dramatically from traditional, in-person processes to digital applications. Here’s a brief look at this evolution and the current trends in the United States.
Traditional vs. Online Processes
Traditionally, getting a mortgage meant visiting a bank, dealing with lots of paperwork, and waiting weeks for approval. It was a process filled with face-to-face meetings and manual document handling. In contrast, the online mortgage process is faster and simpler. You can apply from anywhere, upload documents electronically, and get quicker responses.
Why the Shift Happened
This move towards digital applications has been driven by a demand for convenience and speed. The rise of technology in finance and changes in consumer behavior have played significant roles. The COVID-19 pandemic accelerated this trend, as remote and digital services became essential.
Current U.S. Trends
In the U.S., online mortgage applications are now a popular choice, especially among younger homebuyers who prefer digital interactions. Many mortgage lenders offer online options, and some operate exclusively online. This trend is driven by the ease of comparing rates, quicker application processes, and the overall convenience of handling things digitally.
Pros of Applying for a Mortgage Online
The shift towards online mortgage applications brings several advantages. Here’s a look at the key benefits:
Convenience and Accessibility
Applying from anywhere: One of the biggest advantages of online mortgages is the ability to apply from home or on-the-go. This flexibility is a game-changer for many, especially for those with busy schedules or limited access to traditional banks.
Available 24/7: Unlike visiting a traditional bank or mortgage broker, businesses that keep daytime hours, you can apply for a mortgage online at any time, day or night. You can even pause the application process and pick it up again later. If you prefer to handle your financial matters outside of standard banking hours, an online mortgage app makes it possible.
Speed of the Process
Faster applications and approvals: Online systems are designed for speed. From submitting an application to getting approval, the process is significantly quicker compared to traditional methods. This efficiency can be crucial in competitive housing markets.
Real-time updates: Online platforms often provide instant updates and digital communication channels. Stay in the loop with automated notifications, so you know exactly where your application stands. Prospective homebuyers no longer have to deal with the anxiety of waiting for responses.
Easier Comparison Shopping
Rate and term comparisons: Online platforms make it easy to compare mortgage rates and terms from various lenders. This ability to quickly view and compare options can lead to better financial decisions.
Informed decision-making: With online resources, you can research different mortgage products, understand the nuances of each option, and make an informed choice without feeling rushed.
Automation and Efficiency
Automated document handling: Online applications often come with automated systems for document submission and verification, reducing the chance of human error and accelerating the review process.
Streamlined processes: The overall application process is streamlined online, with clear instructions and fewer steps. This saves time and makes the entire experience less daunting for applicants.
Cons of Applying for a Mortgage Online
While there are many benefits to applying for a mortgage online, there are also some drawbacks to consider. Here are the main cons:
Less Personalized Service
Limited face-to-face interaction: Online applications lack the personal touch of meeting with a loan officer. This can be a downside for those who value direct, personal advice.
Challenges in customized advice: Getting tailored advice for unique financial situations can be harder online. This could be a concern for applicants with complex financial backgrounds or specific needs.
Security and Privacy Concerns
Potential data breaches: Applying online involves sharing personal and financial information digitally, which could be vulnerable to cyber threats like data breaches and identity theft.
Verifying lender legitimacy: It can be challenging to ensure the legitimacy of online lenders. You’ll need to be extra diligent researching lenders to avoid scams and fraudulent entities.
Complexity in Handling Unique Cases
Addressing complex financial situations: Online systems may not handle complex financial scenarios as effectively as a human loan officer might. This could be a problem for applicants with non-standard income sources or credit issues.
Automated systems limitations: While efficient, automated processes might not fully understand or accommodate nuanced financial situations, potentially leading to misinterpretation or oversimplification of an applicant’s financial state.
Reliance on Technology
Technical issues: The entire process depends on having a stable internet connection and functioning technology. Any disruptions in these can hinder the application process.
Comfort with technology required: You’ll need to be relatively tech savvy to complete an online mortgage application. This could be a barrier for those less familiar with digital platforms.
What to Consider Before Applying Online
Before diving into the online mortgage application process, there are several factors you should consider:
Assessing your financial situation: Take a close look at your finances, including your income, expenses, debts, and credit score. Understanding where you stand financially will help you determine what you can afford in monthly payments, including loan principal, interest, taxes, and insurance, and what kind of loan terms might be best for you.
Comfort level with technology: Consider how comfortable you are using digital tools and platforms. You’ll need to know how to use websites, upload documents securely, and communicate digitally in a timely manner.
Researching online lenders: It’s crucial to research and verify the credibility of online lenders. Look for reviews, check their credentials, and ensure they are legitimate and trustworthy to avoid scams and security risks.
Tips for Applying for a Mortgage Online
When you’re ready to apply for a mortgage online, keep these tips in mind for a smooth and secure experience:
Ensure a Secure and Informed Process
Use a secure internet connection: Always apply from a secure, private Wi-Fi network. Avoid public Wi-Fi to protect your sensitive personal and financial information.
Understand the application steps: Familiarize yourself with the online application process. Know the stages involved, from initial application to final approval.
Prepare necessary documents: Gather all required documents in advance. This typically includes proof of income, tax returns, bank statements, and credit reports. Having these ready will speed up your application.
Safeguard Your Personal Information
Choose secure platforms: Apply through reputable lenders with secure websites. Look for HTTPS in the web address as a sign of security.
Be cautious with your info: Share your personal and financial details only on the application. Avoid providing sensitive information via email or over the phone, especially if it’s an unsolicited request.
Regularly update your security software: Ensure that your computer or device has the latest security updates and antivirus software. This helps protect against malware and cyber threats.
Effectively Utilize Online Tools
Use online calculators: Leverage online mortgage calculators to estimate your monthly payments, understand interest rates, and determine affordability.
Comparison tools: Take advantage of comparison platforms to compare different mortgage rates and terms from various lenders. This can help you find the best deal suited to your needs.
Educational resources: Many online mortgage platforms offer educational resources. Use these to understand the types of mortgages available, the application process, and other important aspects of home buying.
By following these tips, you can apply for a mortgage online more confidently and securely. Remember, being prepared and informed is key to a successful and stress-free mortgage application experience.
Conclusion
Applying for a mortgage online comes with a unique set of pros and cons. It offers convenience, speed, and the ability to easily compare options, but it also requires a comfort level with technology and lacks the personalized service of traditional methods.
Before deciding, consider your own financial situation, your comfort with technology, and the credibility of the online lenders you select. By weighing these factors carefully, you can make a choice that best suits your individual needs and circumstances in your journey towards homeownership. If you decide to use an online lender, heed the tips above to get through the process securely and effectively.
Credit unions offer unique benefits — such as potentially higher interest rates than at traditional banks. While many credit unions offer membership only to certain groups, some credit unions are open to everyone. Becoming a member of a credit union requires applying for membership and meeting a credit union’s requirements. Here’s what you need to know about how to join one.
How to join a credit union in 5 steps
1. Consider what you want from a credit union.
Credit unions are as varied as banks. Before joining one, consider what you want out of your experience and choose the institution that’s right for you. Here are a few questions to ask yourself:
Do you prefer an online-only option or one that offers branches?
Do you need access to ATMs?
Are you looking for high interest rates on deposits, low interest rates on loans, or specialized options such as accounts for kids or teens?
Will you be able to avoid any fees the credit union charges?
Is there a credit union that supports a cause or community you also want to support or are a part of?
⏰ Limited-time offer
SoFi Checking and Savings
NerdWallet rating
Bonus
$400
Limited-time offer
Don’t miss out on a bigger bonus
Get a NerdWallet-exclusive bonus of up to $400 when you open an account and hit $5,000 in direct deposits within 25 days after your first one. That’s $100 more than SoFi’s normal $300 bonus! Select “Learn More” to get started. Expires 4/22/24. Terms apply.
2. Confirm you meet membership requirements.
Some credit unions require that you live, work or worship in a certain area, or that you be part of certain associations or organizations. A local teachers credit union, for example, may be available only to educators of a particular school district or state. Other credit unions have open membership requirements — meaning anyone can join as long as they meet a requirement such as opening a savings account or making a donation to an affiliated cause or organization.
3. Collect your required information and documents.
Once you’ve verified you’re eligible to join the credit union you’ve selected, gather the required things to apply for membership. You’ll need to provide personal information such as:
Your name.
Date of birth.
Contact information (email address, mailing address and phone number).
Drivers license or government-issued ID.
Social Security number.
If you’re joining a credit union that’s exclusive to certain people, you may also need to provide proof that you are eligible for membership: a pay stub or a school transcript, for example, or other documentation.
4. Apply for membership.
Follow the application process. Depending on the credit union, you can do this online or in person at a branch if the credit union has them. Applying for membership can take as little as a few minutes.
5. Make a deposit to your new account.
Once your application is approved and your membership begins, make a deposit into your new account. Note that some accounts require a certain minimum deposit to open or a certain minimum balance to avoid fees.
What to know about joining a credit union
Credit unions are different from banks.Credit unions are not-for-profit financial institutions, and when you join a credit union, you become a shareholder, or owner. In contrast, banks are for-profit businesses that allow customers to have accounts.
Deposit accounts are called share accounts. At a credit union, deposit accounts are called “share accounts” (and “share certificates” for certificates of deposit) — because as a member, you own a share of the credit union. Thus, your account earnings at a credit union are referred to as “dividends” (the equivalent of interest at a bank).
Credit union membership requirements vary. Many credit unions offer membership only to certain groups (for example, firefighters, teachers or residents of particular regions). Some credit unions are open to anyone who meets an open-to-anyone requirement, such as depositing a few dollars into a new account or joining a particular organization.
Some credit unions offer shared branches and/or a shared network of ATMs. If your credit union participates in shared branching, that means you can complete some of your banking tasks at other credit unions that belong to the same network. If your credit union belongs to a shared network of ATMs, you’ll have access to more ATMs than just your credit union’s branded ones.
In need of cash? Some apps can help — but they want to be your bank account, too.
Apps at banking fintech firms Dave and MoneyLion offer small, short-term cash advances to eligible consumers. If you open a bank account or set up direct deposit, the apps sweeten the deal with lower fees or larger borrowing amounts. Apps at other firms, such as Chime, Current and Albert, offer a similar perk for those with accounts: No-fee overdraft services that cover an expense when your account has nonsufficient funds.
But a single feature like extra cash between paychecks is likely not a good reason to wed yourself to a new bank account, says Adam Rust, director of financial services with the Consumer Federation of America, a nonprofit that represents consumer advocacy organizations.
Between banks and credit unions, consumers can choose from more than 8,000 federally insured banking institutions, he says. The flexibility to overspend may be one of many qualities you look for in a new bank.
Here’s how to think through these two separate financial decisions: Getting extra cash and choosing a bank account.
Extra cash: An enticing offer, but with strings
When you urgently need extra money, a hurdle like setting up a bank account — and potentially adding direct deposit — may seem easy to clear if it means getting the cash you need.
Dave’s fee for immediate funding is 5% of the advance amount for users with an external bank account, but just 3% for users with a Dave checking account. MoneyLion offers cash advances of up to $500 to users with external bank accounts, but increases the eligible advance amount to $1,000 if they set up direct deposit to a MoneyLion checking account.
The fee-free overdraft feature from Chime, Current and Albert will pay for certain customers’ transactions when they don’t have enough funds in their account, but only if they have a bank account that receives direct deposits. Chime requires at least $200 a month in direct deposits, and Current requires at least $500 a month. Albert requires direct deposits plus a subscription.
Apps with cash advances or overdraft coverage seem like helpful tools to bridge an income gap. They don’t check credit or charge late fees, and you can usually get a small amount of money — up to $250 covered for overdrafts and up to $500 from a cash advance app — on short notice. Your next paycheck or bank account deposit typically repays what you borrowed. And none of these apps have overdraft fees, which can be around $35 at banks.
But opening a new bank account just for a cash advance or overdraft feature might lead to unexpected inconveniences or worse. Switching banks is hard for a reason: You set up a relationship with a bank or firm, including using your bank account to pay your ongoing bills and subscriptions.
“That’s such a significant part of your financial life — it’s the foundation of your financial life — and to pick that because of a once-every-direct-deposit transaction seems, to me, like a risk of making a mistake,” Rust says.
Compare bank accounts based on low fees and available features
Choosing where to bank involves assessing available features and their associated costs. A good checking account typically has low or no monthly fees, low or no minimum balance requirements, a free ATM network and cheap ways to move money around.
Banking fintech firms — or neobanks — tend to check many of the boxes for a desirable checking account: low costs and some perks not often available at traditional banks. Dave and MoneyLion have $1 monthly fees, either as part of membership or for bank account usage. Chime and Current have no monthly fees. These four offer free ATM withdrawals nationwide through third-party networks, direct deposits up to two days early and cash-back rewards. Albert has all of these features but charges a nearly $15 monthly fee.
Consider features they lack, too
Banking fintech firms often focus on a narrow set of accounts and features. None of the five mentioned offer joint accounts or business bank accounts, in case you manage money with a partner or run a small business. These firms don’t have branch networks for in-person services as an alternative to online or phone support. They’re also not part of the Zelle network, which enables nearly instant transfers across different banks. Other features, such as paper checkbooks, foreign currency and cashier’s checks, aren’t available either.
Most banking fintech firms have federally insured accounts through partner banks instead of being banks themselves. If the firms fail, there can be risks that bank failures don’t have. The Federal Deposit Insurance Corp. (FDIC) sweeps in to protect customers at failed banks to prevent any loss or delay to money access, but that doesn’t happen for bankrupt companies that partner with banks. Neobank failures can result in delays to accessing your money or bank accounts.
Even credit-related perks have limits. Dave and MoneyLion set caps on the amount users can borrow between paychecks. Overdraft features at Chime, Current and Albert have maximum coverage amounts — starting as low as $20 — and some transactions, like online bill payments or transfers, aren’t covered.
Bear in mind, too, that setting up direct deposit with a cash advance app’s bank account just to meet the criteria for a larger advance could disrupt your finances. Funneling your paycheck to two different banks may mean you’ll need another set of login credentials to access your account online, you may need another debit card — and things get even more complex if transfers take days to move from your new account to your primary one.
“It can obviously be a loss of convenience for the consumer to have multiple accounts or to have to only use their MoneyLion account because it could get them greater advances,” says Andrew Kushner, senior policy counsel with the Center for Responsible Lending.
Find alternatives for extra cash
Cash advances and overdraft coverage can be helpful if they’re used occasionally, but if you’re struggling to cover everyday expenses like gas and groceries, consider alternatives that require less commitment to an app and low or no fees.
Some national banks offer small, affordable loans to existing customers, and federal credit unions may provide low-cost payday alternative loans. Financial assistance programs from local nonprofits can help with necessities like food and clothing. Or consider taking out a low- or no-interest loan from a family member.
Contrary to popular belief, starting an investment portfolio doesn’t require a large sum of money. In fact, with just $500 or less, you can easily kickstart your investment journey in the stock market.
12 Best Ways to Invest $500
If you’re looking for other ways to invest, but don’t have much cash, here are twelve of the best ways to invest $500 or less.
1. Micro-Investing
With micro-investing, even those with limited disposable income can join the game, starting with as little as $5. Ideal for college students or novice investors, there are a multitude of micro-investing apps available, many requiring an initial investment of $500 or less.
These user-friendly platforms offer a simple way to dip your toes into the investment world. Check out these five top micro-investing apps to start your journey today.
Robinhood
If you’re a beginner investor, Robinhood is an excellent choice. Unlike many other platforms, Robinhood has no minimum balance requirement and doesn’t charge any fees for trading.
It is also very easy to use the app. Additionally, Robinhood stands out among micro-investing platforms, offering the ability to trade in a wide range of assets, including full stocks, mutual funds, options, and cryptocurrencies.
To find out more, read our comprehensive review of Robinhood.
Stash
Stash accommodates the needs of a diverse range of investors. Upon signing up, you’ll take a quick survey to assess your risk tolerance, allowing you to determine the amount and frequency of your investments.
With Stash, you also have the power to select the industries and companies you want to invest in. For example, if you’re passionate about sustainability, you can easily choose to invest only in eco-friendly organizations.
Acorns
Investing made simple and affordable – that’s what Acorns offers. Signing up is a breeze, with no minimum balance required, and the low monthly fee of just $1
Once you’ve joined, simply connect your Acorns account to your credit or debit card. Every time you make a purchase, the app will round up the amount to the nearest dollar and automatically invest that change once it reaches $5.
Betterment
For those who want to be hands-on with their micro-investing, Betterment may be the answer. The platform takes care of the investing for you, while also giving you the option to work with a financial advisor and have a say in your investment portfolio.
Signing up is easy, with no minimum balance required for its basic plan. However, it’s important to note that Betterment charges a 0.25% monthly fee on your investments.
2. Exchange-Traded Funds (ETFs), Mutual Funds, or Index Funds
For those looking to invest $500, exchange-traded funds (ETFs), mutual funds, and index funds are all great options. ETFs offer a basket of securities that can be exchanged on the market, just like a stock. You can find plenty of online brokers that offer a wide selection of commission-free ETFs.
Mutual funds are managed by a professional broker and aim to beat a given stock market index, while index funds are designed to match the index and grow from there.
All three types of investments have low expense ratios, low fees and commissions, and offer broad, diversified exposure to the stock market.
See also: ETFs vs. Mutual Funds: What’s the Difference?
3. Buy Bitcoin
For some, investing in cryptocurrency may be too risky and volatile for their taste. However, Bitcoin has had an average growth of over 100% per year for the past 12 years! In fact, if you had invested $500 in Bitcoin five years ago, you’d have approximately $90,000 today.
If you’re interested in getting into crypto, Coinbase is a great place to start. They’ll give you $10 in free Bitcoin when you buy or sell $100 or more in crypto. Coinbase also offers ways for you to earn up to $32 worth of crypto for free.
See also: 5 Best Ways to Buy Bitcoin With a Bank Account
4. Open a Roth IRA
It’s never too late to start planning for retirement, and a Roth IRA might be the way to go. With this retirement savings plan, you contribute after-tax money to an investment account, which you can then withdraw tax-free when you reach retirement age.
However, there are a few things to keep in mind before opening a Roth IRA. An individual retirement account (IRA) is meant for long-term savings and withdrawing the money before you turn 59 and a half may result in penalties. If you anticipate needing to access the funds sooner, consider exploring alternative options.
5. Start an Online Business
If you’re looking for an unconventional way to invest your money, why not try starting an online business? Traditional brick-and-mortar businesses require a lot of capital to get up and running, but the same cannot be said for an online business.
You won’t need office space, a warehouse, or expensive equipment. In all likelihood, you won’t need to invest $500. It will cost much less than that. Here are some popular online business ideas:
Starting and monetizing a blog
Selling things on eBay or Craig’s List
Selling services like freelancing writing, editing, or graphic design
Opening an e-commerce store
Buying items and flipping them for profit
6. Use Robo-Advisors
Investing your money with a robo-advisor might be a smart choice. A robo-advisor is a user-friendly online investment platform that creates a tailored and diversified portfolio for you based on your answers to a questionnaire.
Although robo-advisors have limited services compared to working with a financial advisor and do not offer personalized advice, they have low fees and make investing with as little as $500 in the stock market accessible. Additionally, robo-advisors offer multiple investment options, including:
Roth IRAs
Traditional IRAs
Solo 401(k)s
Taxable accounts
7. Open a High-Interest Savings Account
If you’re still exploring your options and not ready to invest yet, consider opening a high-yield savings account. The best high-interest savings accounts currently pay about 3% to 5% in interest.
While the returns may not match the potential gains of the stock market, having a savings account serves as a solid backup plan and provides peace of mind for the future. Don’t let your funds go to waste – take advantage of this secure and profitable opportunity.
8. Open a High-Yield CD
A high-yield certificate of deposit (CD) is a low-risk investment option that offers a higher rate of return compared to traditional savings accounts. CDs work by allowing you to deposit a fixed amount of money for a set period of time, typically ranging from a few months to several years. In exchange for this commitment, the financial institution offering the CD agrees to pay you a higher rate of interest compared to traditional savings accounts.
Opening a high-yield CD with $500 or less is a straightforward process that can be done through a bank or credit union. You simply choose the term length and deposit amount that works best for you, and the institution takes care of the rest. As your money grows over time, you’ll earn a higher return on your investment compared to traditional savings accounts.
Just remember that CDs typically have early withdrawal penalties. So, make sure you’re comfortable with the term length and the amount you’re depositing before opening an account.
9. Invest in Real Estate Crowdfunding
Investing in real estate is not limited to traditional methods, even with just $500. A prime example is real estate crowdfunding via platforms like Fundrise.
Fundrise provides investment opportunities in both commercial and residential properties with a minimum investment of just $10. This eliminates the requirement for a large capital investment, making real estate investment accessible to a wider range of individuals.
Check out our in-depth Fundrise review.
10. Pay Down Your Debt
Reducing debt is a sound investment for securing your future, particularly concerning high-interest credit card debt. The Federal Reserve reveals that the average credit card interest rate can be as much as 15% or higher, with a low credit score only driving the APR to even more astronomical heights.
Think about it, if your APR is at its highest, you may be shelling out hundreds of dollars each month just in interest charges. But by focusing your efforts on paying down your debt, you stand to save yourself not just money, but countless headaches in the coming year. With the possibility of freeing up thousands of dollars, it’s an investment worth making.
11. Try Peer-to-Peer (P2P) Lending
Peer-to-peer lending offers a unique twist on conventional lending methods. Rather than seeking loans from traditional banks, borrowers turn to platforms such as Prosper, connecting with investors like yourself.
By participating in P2P lending, you have the opportunity to generate a steady monthly income by lending funds to individuals or businesses. The added bonus? The money you earn is deposited directly into your account, providing a convenient and hands-off approach to investing.
12. Invest in Your Financial Education
Investing in your financial literacy may be the most valuable investment you’ll ever make. For a nominal fee of just $5 to $15, you can access top-notch personal finance books or audiobooks that can transform your financial future.
Take “Rich Dad Poor Dad” for example, available on Amazon for as low as $6.82 for the Kindle edition or $11.36 for the paperback. And if audiobooks are more your style, a month of Audible membership costs only $14.95.
You can expand your knowledge on real estate investing, stock investment strategies, and fundamental money management skills to help you get out of debt and attain financial independence.
And if reading isn’t your preferred method of learning, there are plenty of affordable online courses available. With so many options, it’s remarkable how much financial education you can gain for less than $500.
Frequently Asked Questions
What is the best way to invest $500?
The best way to invest $500 depends entirely on your personal financial status and objectives. If you’re just starting out investing, consider investing in a low-cost and diversified mutual fund or ETF. These investment vehicles offer the advantage of spreading your funds across a range of stocks and bonds, mitigating the risk associated with any single investment.
Other options to ponder include setting up a Roth IRA or investing in a high-yield savings account. The choice that works best for you ultimately hinges on your risk appetite, investment timeline, and financial aspirations.
Is it possible to invest $500 in stocks?
Absolutely! With just $500, you can venture into the world of stock investing. Micro-investing apps provide the opportunity for you to invest in individual stocks or opt for an ETF that follows a particular index.
It’s crucial to conduct thorough research and seek the guidance of a financial advisor to determine the best investment strategy that aligns with your unique circumstances.
Is it worth investing $500 in a robo-advisor?
Investing your $500 via a robo-advisor can be a wise decision. These digital platforms leverage algorithms to manage your investments, offering a more passive investment strategy.
Furthermore, robo-advisors tend to be more economical than human financial advisors, making them a fantastic choice for individuals seeking to initiate their investment journey.
What are the risks of investing $500?
Starting your investment journey with just $500 can be a smart move. However, it’s important to keep in mind the inherent dangers that come with investing.
Remember, no investment is entirely risk-free and there’s always a chance of losing your funds. To ensure you make an informed decision, conduct thorough research and consult a financial expert who can guide you towards the best option suited for you.
Bottom Line
We hope that this article has demonstrated to you that investing can be simple and accessible, even with a limited budget. You can start investing immediately with a modest amount of funds. If you’re not quite ready to invest, consider paying off high-interest credit card debt, increasing your income, and establishing an emergency fund.
The peer-to-peer payment network Zelle offers free and almost instant transfers between bank accounts at different U.S. banking institutions. Launched in 2017, Zelle’s network has grown to include more than 2,000 participating banks and credit unions. Many, but not all, bank customers can find Zelle featured in their bank’s mobile app.
Using a bank that offers Zelle in its app has perks: There’s no extra app to download, and your bank may have higher transfer amount limits than what Zelle’s app allows.
Skip down to our lists to see if your bank uses Zelle.
Quick facts about Zelle
Zelle is primarily used to send, request or receive funds with friends and others you trust.
Zelle transfers can be delivered within minutes and generally are free.
Customers at banks, credit unions or neobanks that don’t offer Zelle can access Zelle’s standalone app, though transfer amount limits may differ.
SoFi Checking and Savings
Min. balance for APY
$0
CIT Bank Platinum Savings
Min. balance for APY
$5,000
BMO Alto Online Savings Account
Min. balance for APY
$0
Frequently asked questions
Are Zelle transfers free to send and receive?
Typically, yes. More than 99% of checking accounts linked to Zelle don’t charge a fee, according to a 2023 Zelle survey of financial institutions that offer Zelle.
How much can I send or receive through Zelle at a non-participating bank?
If your bank doesn’t offer Zelle, you can send up to $500 weekly and receive up to $5,000 in Zelle’s app. There’s no ability to request different limits. You can have higher limits at a bank in Zelle’s network, though it’s up to the bank.
What are some notable banks and credit unions that don’t use Zelle directly?
Some notable financial institutions that NerdWallet has reviewed and that don’t participate directly in the Zelle network include Alliant Credit Union, American Express, Barclays, Connexus Credit Union, LendingClub Bank, Marcus by Goldman Sachs, Pentagon Federal Credit Union, SoFi and Synchrony Bank. In addition, nonbank fintech apps (or neobanks) such as Chime, Current and Greenwood aren’t in Zelle’s network.
Can the sender and recipient be at banks where neither offers Zelle?
No. Unfortunately, either the sender or recipient must belong to a bank or credit union that offers Zelle for a transfer to work. The person who doesn’t have Zelle directly can download the Zelle app and enroll with a Visa or Mastercard debit card.
What are transfer services like Zelle?
Peer-to-peer transfer apps such as Venmo and Cash App have the same ability as Zelle to transfer money fast to friends and family for free. However, unlike Zelle, they put any money you receive into an in-app balance. The process to withdraw money to a linked bank account is free but usually takes several days, or you can withdraw within minutes for a fee. Learn more about peer-to-peer payment services.
In addition, banks and credit unions are gradually adopting FedNow, a new real-time transfer service run by the Federal Reserve.
Who owns Zelle?
Zelle is owned by Early Warning Services, a financial tech firm and consumer reporting agency that is co-owned by seven of the largest U.S. banks: Bank of America, Capital One, Chase, PNC, Truist, U.S. Bank and Wells Fargo.
Is Zelle safe?
Zelle’s parent company has said that more than 99.9% of payments sent don’t have reports of fraud or scam, according to a 2022 press release. However, there is still a chance you can be contacted by fraudsters who ask you to send money via Zelle.
Unlike credit card and debit card purchases, a Zelle transfer can’t be canceled or reversed once someone receives it, which is also the standard practice for wire transfers and transfers on a real-time network such as FedNow and RTP. Zelle provides customer support and potential reimbursement in cases when people get scammed.
🤓Nerdy Tip
Nearly instant transfers between your accounts: When you enroll two accounts at two different banks with Zelle, you can transfer money between banks faster than typical ACH transfers. Standard bank-to-bank transfers can still take multiple days.
12 online banks that use Zelle
We considered online banks with strong account offerings that participate in Zelle’s network. Click each bank name to read our review:
17 traditional banks that use Zelle
We considered the largest U.S. banks as well as various regional banks that we’ve reviewed. Click each bank name to read our review.
12 credit unions that use Zelle
We considered credit unions we’ve reviewed and that stand out due to their size or services. Some credit unions have geographic or other membership restrictions. Click each credit union name to read our review:
Don’t see your bank or credit union? See the full list of financial institutions in Zelle’s network on Zelle’s website.
Did you know…
Zelle transfers are not wire transfers, which use a separate network. Both can provide funds delivery within minutes, but wires tend to have high fees and are intended for large amounts, such as a home purchase. Zelle transfers are typically free and can be for various reasons and amounts (up to a limit).
Many people send and receive funds via their checking account, the hub of their financial life. But not everyone has an account. In fact, an estimated 4.5% of U.S. households (approximately 5.9 million) were “unbanked” in the most recent year studied, according to the FDIC. This means that, in their household, no one held a checking or savings account at a financial institution such as a bank or credit union.
Not having a bank account can make it more challenging to send and receive money, but it’s not impossible. Here, you’ll learn how you can move funds around without a bank. Read on to learn:
• Key considerations before choosing a money transfer method
• What options are available for sending and receiving funds without a bank account.
What to Consider Before Choosing a Transfer Method
As with all financial services, you don’t want to rush and just go with the first method available. Each option you review will probably have its pluses and minuses. If you are trying to send or receive money without a bank account, do your research. Consider these important factors as you move toward making your decision.
Reliability
Reputation matters, always — and especially with something as important as money. You want to use services that have been around long enough to have a track record. You can start by asking your inner circle of friends and family to hear what they use. You can read online reviews as well at trusted sites. Key things to consider are whether money transfers were completed successfully, on time, and without excessive charges.
Transfer Cost
Without a bank account, you may not have the ease of, say, having your paycheck direct-deposited via Automated Clearing House (or ACH) or using a debit card. In fact, you may have to spend time and money to send or receive some cash. So read the fine print on the options you are considering to make sure you’re clear on the fee structure.
When it comes to how to transfer money from one account to another, what will you be charged for and what’s free? Will there be certain criteria to meet in order for a transaction to be done without fees? You don’t want any surprises.
Security
Security is critical. When it comes to cash changing hands, you want to feel confident about safety. You don’t want to risk your hard-earned dough getting stuck in the ether somewhere or vanishing entirely. Look into what layers of protection are in place, such as two-step authentication, data encryption, and an adequate privacy policy. Fraud and identity theft are rampant these days, so safeguarding financial information is a must.
💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.
Options for Sending and Receiving Money Without a Bank Account
With all those factors in mind, here are specific options you may have to send or receive funds without a bank account involved.
Mobile Wallets
Here’s one idea for how to send money to someone without a bank account: mobile wallets, or digital wallets. These are smartphone apps where you can store your debit and credit cards. Apple Pay, Google Pay, and Samsung Pay are a couple of examples you may have heard of. These services offer a way to pay a friend without cash exchanging hands. Or you might receive funds. Some points to note:
• There are often no fees involved, and you may enjoy cash back and other rewards for completing a transaction with your linked card.
• Both the sender and receiver must have the same digital wallet for the transaction to be free. If you have PayPal or Venmo, your recipient needs to have them too in order to do a peer-to-peer or P2P transaction.
• Fees may apply when using extras like expedited transfers or paying by credit card, and mobile wallets in the US are often restricted to transfers within our country.
• Mobile wallets can get all sorts of information as you use them — your name, mailing and email addresses, mobile number, records of your calls and texts, your contacts and calendar, the unique ID number of your mobile device, account information, what you buy and where and for how much. Not everyone is comfortable with sharing all of that personal data.
Money Orders
Money orders may seem like they’ve gone the way of the dinosaur, but they still serve a purpose, including offering a way to send money without a bank account (or to someone who is unbanked). Some details:
• You get one from the post office or stores like CVS and Western Union, among others.
• They may not be the fastest way to send money without a bank account.
• The recipient will need to show identification to cash it.
• Prices vary depending on the service you use and how much money is sent, but they can be reasonably priced. For instance, at the post office, you may pay $2.10 for a money order up to $500 and $3.00 for one that’s more than $500, up to $1,000. By the way, money orders are typically capped at $1,000. You could buy multiple ones if you need to transfer more than that amount.
Credit Cards
If you don’t have a bank account to fund the transfer, know that some money transfer services allow you to pay by credit card. Then, your recipient will be able to pick up cash pretty much instantly. It’s easy and convenient, but it’s likely to be more expensive than other methods.
For example, Cash App allows you to use a credit card to send funds, but will charge you 3% of the transaction value, and then the credit card you’ve linked may also charge you interest or fees. This might not be your first choice if you have less pricey options available.
Prepaid Debit Cards
A prepaid debit card is another way to move money when a person doesn’t have a bank account. It shares some features of a credit card, debit card, and gift card.
• It is a debit card that’s been pre-loaded with money, and you can generally use it at any retailer (online or in person) that accepts credit cards.
• Prepaid debit cards may be associated with credit card networks; think MasterCard or Visa, for example. This means they can be used anywhere that accepts that kind of plastic.
• These cards may be riddled with fees. For instance, you might get hit with a fee for card activation, making a purchase, adding money to the card, and/or withdrawing money at an ATM. You’ll want to read the fine print because these fees may make prepaid cards a less attractive option.
Recommended: Alternatives to Traditional Banks
Cash or a Check
Cash is king and can be a super-simple way to send or receive funds, even if you don’t have a bank account, provided you can safely hand over the bills. If the two parties involved are in different locations, this becomes a lot riskier. Mailing cash is probably never a wise move.
Checks are also a time-honored way to transfer money; the person who receives it can then cash the check, perhaps paying a fee since they don’t have a bank account. But if you use mail to send the payment, a lost check situation can occur or a check might be stolen. So, there could be some risk involved.
Money Transfer Services
Money transfer services can be a godsend. No bank account is required for either the sender or recipient. It’s easy. In addition to in person retail outlets, you can now access money transfer services like Western Union and MoneyGram online.
• It’s a quick transaction; money can arrive as early as the same day.
• You have some flexibility, such as sending money transfers to a debit card or a mobile wallet.
• Pay attention to fees, though, as they vary and depend on the amount you’re sending and more. For example, if you use Western Union to send money to someone in Mexico, the fee could be anywhere from $4.99 to $26.49 or more, depending on the specifics.
The Takeaway
Having a bank account can be a cornerstone of good money management, but there are a number of Americans who don’t have one. If, for whatever reason you are without one or you want to transfer money with someone who doesn’t have an account, there are still ways to send and receive money. These include digital wallets, money orders, money transfer services, and other options. Some will have fees and security risks, among other downsides. Take your time to explore the safest, most convenient, and affordable choice for your situation.
If you are an account holder in this situation, you might also see what options your financial institution offers to simplify transfers.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with up to 4.60% APY on SoFi Checking and Savings.
FAQ
Can I transfer money to someone without a bank account?
Yes, there are a number of options to transfer money if someone doesn’t have a bank account. These include using a money transfer service, prepaid debit card, mobile wallet, or money order.
What is the best way to transfer money to someone without a bank account?
What’s best depends on the two people involved. What are any time constraints, what is cost-effective, and what method is most convenient? Once these and other factors are considered, you can determine the best method, which might be a money transfer service, a mobile wallet app, a money order, or a prepaid debit card.
How much does it cost to send money without a bank account?
Costs vary depending on the method you use, the amount of money you’re sending, and whether it is being transferred domestically or internationally. While a domestic money order from the U.S. Postal Service will cost up to $3.00 for an amount between $500 and $1,000, you might wind up paying considerably more for other transactions.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket.
Home improvement loans let you finance the cost of upgrades and repairs to your home.
Some — like the FHA 203(k) mortgage — are specialized for home renovation projects, while second mortgage options — like home equity loans and HELOCs — can provide cash for a remodel or any other purpose. Your best financing option for home improvements depends on your needs. Here’s what you should know.
Check home improvement loan options and rates. Start here
In this article (Skip to…)
What is a home improvement loan?
A home improvement loan is a financial tool that allows you to borrow money for various home projects, such as repairs, renovations, or upgrades.
Unlike a secured loan like a second mortgage, home improvement loans are often unsecured personal loans, meaning you don’t have to put up your home as collateral. You get the money in a lump sum and pay it back over a predetermined period, which can range from one to seven years.
Now, you might be wondering how this is different from a home renovation loan. While the terms are often used interchangeably, there can be subtle differences.
Home improvement loans are generally more flexible and can be used for any type of home project, from installing a new roof to landscaping. Home renovation loans, on the other hand, are often more specific and may require you to use the funds for particular types of renovations, like kitchen or bathroom remodels.
How does a home improvement loan work?
So, you’ve decided to spruce up your home, and you’re considering a home improvement loan. But how does it work? Once you’re approved, the lender will give you the money in a lump sum. You start repaying the loan almost immediately, usually in fixed monthly installments. The interest rate you’ll pay depends on various factors, including your credit score and the lender’s terms.
Be mindful of additional costs like origination fees, which can range from 1% to 8% of the loan amount. Unlike a credit card, where you can keep using the available credit as you pay it off, the loan amount is fixed. If you find that you need more money for your project, you’ll have to apply for another loan, which could affect your credit score.
Home improvement loan rates
Interest rates for home improvement loans can vary widely, generally ranging from 5% to 36%. Your credit score plays a significant role in determining your rate—the better your credit, the more favorable your rate. Some lenders even offer an autopay discount if you link a bank account for automatic payments.
You can also prequalify to check your likely interest rate without affecting your credit score, making it easier to plan for the loan purpose, whether it’s a new kitchen or fixing a leaky roof.
So, whether you’re dreaming of solar panels or finally fixing up your master bedroom, a home improvement loan can be a practical way to finance your projects. Just make sure to read the fine print and understand all the terms, including any potential autopay discounts and bank account requirements, before you apply.
Types of home improvement loans
1. Home equity loan
A home equity loan (HEL) is a financial instrument that lets you borrow money using the equity you’ve built up in your home as collateral. The equity is determined by subtracting your existing mortgage loan balance from your current home value. Unlike a cash-out refinance, a home equity loan “issues loan funding as a single payment upfront. It’s similar to a second mortgage,” says Bruce Ailion, Realtor and real estate attorney. “You would continue making payments on your original mortgage while repaying the home equity loan.”
Check home equity loan options and rates. Start here
This kind of loan is particularly useful for big, one-time expenditures like home remodeling. It offers a fixed interest rate, and the loan terms can range from five to 30 years. You could potentially borrow up to 100% of your home’s equity.
However, there are some cons to consider. Since you’re essentially taking on a second loan, you’ll have an additional monthly payment if you still have a balance on your original mortgage. Also, the lender will usually charge closing costs ranging from 2% to 5% of the loan balance, as well as potential origination fees. Because the loan provides a lump-sum payment, careful budgeting is necessary to ensure the funds are used effectively.
As a bonus, “a home equity loan, or HELOC, may also be tax-deductible,” says Doug Leever with Tropical Financial Credit Union, member FDIC. “Check with your CPA or tax advisor to be sure.”
2. HELOC (home equity line of credit)
A Home Equity Line of Credit (HELOC) is another option for tapping into your home’s equity without going through the process of a full refinance. Unlike a standard home equity loan that provides a lump sum upfront, a HELOC functions more like a credit card. You’re given a pre-approved limit and can borrow against that limit as you need, paying interest only on the amount you’ve actually borrowed.
Check your HELOC options. Start here
While there’s more flexibility because you don’t have to borrow the entire amount at once, be aware that by the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender can be permitted to change the terms over the loan’s life. This can reduce the amount you can borrow if, for instance, your credit goes down.”
The pros of a HELOC include minimal or potentially no closing costs, and loan payments that vary according to how much you’ve borrowed. It offers a revolving balance, which means you can re-use the funds after repayment. This kind of financial instrument may be ideal for ongoing or long-term projects that don’t require a large sum upfront.
“HELOCs offer flexibility, and you only pull money out when needed, within the maximum loan amount. And the credit line is available for up to 10 years, which is your repayment period.” Leever says.
3. Cash-out refinance
A cash-out refinance is a viable option if you’re considering home improvements or other significant financial needs. When opting for a cash-out refinance, you essentially take on a new, larger mortgage than your existing one and then pocket the difference in cash.
This cash comes from your home’s value and can be used for various purposes, including home improvement projects like finishing a basement or remodeling a kitchen. However, the money can also be used for other things, like paying off high-interest debt, covering education expenses, or even buying a second home. Importantly, a cash-out refinance is most beneficial when current market rates are lower than your existing mortgage rate.
Check your eligibility for a cash-out refinance. Start here
The advantages of going for a cash-out refinance include the opportunity to reduce your mortgage rate or loan term, which could potentially result in paying off your home earlier. For instance, if you initially had a 30-year mortgage with 20 years remaining, you could refinance to a 15-year loan, effectively paying off your home five years ahead of schedule. Plus, you only have to worry about one mortgage payment.
However, there are downsides. Cash-out refinances tend to have higher closing costs that apply to the entire loan amount, not just the cash you’re taking out. The new loan will also have a larger balance than your current mortgage, and refinancing effectively restarts your loan term length.
4. FHA 203(k) rehab loan
The FHA 203(k) rehab loan is backed by the Federal Housing Administration that consolidates the cost of a home mortgage and home improvements into a single loan, which makes it particularly useful for those buying fixer-uppers.
Check your eligibility for an FHA 203(k) loan. Start here
With this program, you don’t need to apply for two different loans or pay closing costs twice; you finance both the house purchase and the necessary renovations at the same time. The loan comes with several benefits like a low down payment requirement of just 3.5% and a minimum credit score requirement of 620, making it accessible even if you don’t have perfect credit. Additionally, first-time home buyer status is not a requirement for this loan.
However, there are some limitations and downsides to be aware of. The FHA 203(k) loan is specifically designed for older homes in need of repairs, rather than new properties. The loan also includes both upfront and ongoing monthly mortgage insurance premiums. Renovation costs have to be at least $5,000, and the loan restricts the use of funds to certain approved home improvement projects.
According to Jon Meyer, a loan expert at The Mortgage Reports, “FHA 203(k) loans can be drawn out and difficult to get approved. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.”
5. Unsecured personal loan
If you’re looking to finance home improvements but don’t have sufficient home equity, a personal loan could be a viable option. Unlike home equity lines of credit (HELOCs), personal loans are unsecured, meaning your home is not used as collateral. This feature often allows for a speedy approval process, sometimes getting you funds on the next business day or even the same day.
Check home improvement loan options and rates. Start here
The repayment terms for personal loans are less flexible, usually ranging between two and five years. Although you’ll most likely face closing costs, personal loans can be easier to access for those who don’t have much home equity to borrow against. They can also be a good choice for emergency repairs, such as a broken water heater or HVAC system that needs immediate replacement.
However, there are notable downsides to consider. Unsecured personal loans generally have higher interest rates compared to HELOCs and lower borrowing limits. The short repayment terms could put financial strain on your budget. Additionally, you may encounter prepayment penalties and expensive late fees. Financial expert Meyer describes personal loans as the “least advisable” option for homeowners, suggesting that they should be considered carefully and perhaps as a last resort.
6. Credit cards
Using a credit card can be the fastest and most straightforward way to finance your home improvement projects, eliminating the need for a lengthy loan application. However, you’ll need to be cautious about credit limits, especially if your renovation costs are high.
You might need a card with a higher limit or even multiple cards to cover the costs. The interest rates are generally higher compared to home improvement loans, but some cards offer an introductory 0% annual percentage rate (APR) for up to 18 months, which can be a good deal if you’re sure you can repay the balance within that time frame.
Check home improvement loan options and rates. Start here
Credit cards might make sense in emergency situations where you need immediate funding. For longer-term financing, though, they’re not recommended. If you do opt for credit card financing initially, you can still get a secured loan later on to clear the credit card debt, thus potentially saving on high-interest payments.
How do you choose the best home improvement loan for you?
The best home improvement loan will match your specific lifestyle needs and unique financial situation. So let’s narrow down your options with a few questions.
Check your home improvement loan options. Start here
Do you have home equity available?
If so, you can access the lowest rates by borrowing against the equity in your home with a cash-out refinance, a home equity loan, or a home equity line of credit.
Here are a few tips for choosing between a HELOC, home equity loan, or cash-out refi:
Can you get a lower interest rate? If so, a cash-out refinance could save money on your current mortgage and your home improvement loan simultaneously
Are you doing a big, single project like a home remodel? Consider a simple home equity loan to tap into your equity at a fixed rate
Do you have a series of remodeling projects coming up? When you plan to remodel your home room by room or project by project, a home equity line of credit (HELOC) is convenient and worth the higher loan rate compared to a simple home equity loan
Are you buying a fixer-upper?
If so, check out the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with your home purchase loan. Just review the guidelines with your loan officer to ensure you understand the disbursement of funds rules.
Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a more straightforward process.
“The only time I’d recommend the FHA203(k) program is when buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options as well.”
Do you need funds immediately?
When you need an emergency home repair and don’t have time for a loan application, you may have to consider a personal loan or even a credit card.
Which is better?
Can you get a credit card with an introductory 0% APR? If your credit history is strong enough to qualify you for this type of card, you can use it to finance emergency repairs. But keep in mind that if you’re applying for a new credit card, it can take up to 10 business days to arrive in the mail. Later, before the 0% APR promotion expires, you can get a home equity loan or a personal loan to avoid paying the card’s variable-rate APR
Would you prefer an installment loan with a fixed rate? If so, apply for a personal loan, especially if you have excellent credit
Just remember that these options have significantly higher rates than secured loans. So you’ll want to reign in the amount you’re borrowing as much as possible and stay on top of your payments.
How to get a home improvement loan
Getting a home improvement loan is similar to getting a mortgage. You’ll want to compare rates and monthly payments, prepare your financial documentation, and then apply for the loan.
Check home improvement loan options and rates. Start here
1. Check your financial situation
Check your credit score and debt-to-income ratio. Lenders use your credit report to establish your creditworthiness. Generally speaking, lower rates go to those with higher credit scores. You’ll also want to understand your debt-to-income ratio (DTI). It tells lenders how much money you can comfortably borrow.
2. Compare lenders and loan types
Gather loan offers from multiple lenders and compare costs and terms with other types of financing. Look for any benefits, such as rate discounts, a lender might provide for enrolling in autopay. Also, keep an eye out for disadvantages, including minimum loan amounts or expensive late payment fees.
3. Gather your loan documents
Be prepared to verify your income and financial information with documentation. This includes pay stubs, W-2s (or 1099s if you’re self-employed), and bank statements, to name a few.
4. Complete the loan application process
Depending on the lender you choose, you may have a fully online loan application, one that is conducted via phone and email, or even one that is conducted in person at a local branch. In some cases, your mortgage application could be a mix of these options. Your lender will review your application and likely order a home appraisal, depending on the type of loan. You’ll get approved and receive funding if your finances are in good shape.
Get started on your home improvement loan. Start here
Home improvement loan lenders
When considering a home improvement loan, it’s necessary to explore various lending options to find the one that best suits your needs. The lending landscape for home improvement is diverse, featuring traditional banks, credit unions, and online lenders. Each type of lender offers different interest rates, loan terms, and eligibility criteria.
It’s advisable to prequalify with multiple lenders to get an estimate of your loan rates, which generally doesn’t affect your credit score. This way, you can compare offers and choose the most favorable terms for your renovation project.
Among the popular choices in the market, Sofi and LightStream stand out for their competitive rates, easy online application, and customer-friendly terms. Both are equal housing lenders, ensuring they adhere to federal anti-discrimination laws. In addition to these, other lenders like Wells Fargo and LendingClub also offer home improvement loans with varying terms and conditions.
How can I use the money from a home improvement loan?
When you do a cash-out refinance, a home equity line of credit, or a home equity loan, you can use the proceeds on anything — even putting the cash into your checking account. You could pay off credit card debt, buy a new car, pay off student loans, or even fund a two-week vacation. But should you?
It’s your money, and you get to decide. But spending home equity on improving your home is often the best idea because you can increase the value of your home. Spending $40,000 on a new kitchen remodel or $20,000 on finishing your basement could add significant value to your home. And that investment would be appreciated along with your home.
That said, if you’re paying tons of interest on credit card debt, using your home equity to pay that off would make sense, too.
Average costs of home renovations
Home renovations can vary widely in cost depending on the scope of the project, the quality of the materials used, and the region where you live. However, here’s a general idea of what you might expect to pay for various types of home renovations.
Renovation Type
Average Cost Range
Kitchen Remodel
$10,000 – $50,000
Bathroom Remodel
$5,000 – $25,000
Master Bedroom Remodel
$1,500 – $10,000
New Roof
$5,000 – $11,000
Exterior Paint
$6,000 – $20,000
Interior Paint
$1,500 – $10,000
New Deck
$15,000 – $40,000
Solar Panel Installation
$15,000 – $25,000
Window Replacement
$5,000 – $15,000
The information is based on data from HomeGuide.com and is current as of August 2023.
Please note that these are just average figures, and the actual costs can vary. For instance, a high-end kitchen remodel could cost significantly more, especially if you’re planning to use custom cabinetry and high-end appliances. Similarly, the cost of a new deck can vary depending on the size and type of materials used.
Home improvement loans FAQ
Check home improvement loan options and rates. Start here
What type of loan is best for home improvements?
The best loan for home improvements depends on your finances. If you have accumulated a lot of equity in your home, a HELOC, or home equity loan, might be suitable. Or, you might use a cash-out refinance for home improvements if you can also lower your interest rate or shorten the current loan term. Those without equity or refinance options might use a personal loan or credit cards to fund home improvements instead.
Should I get a personal loan for home improvements?
That depends. We’d recommend looking at your options for a refinance or home equity-based loan before using a personal loan for home improvements. That’s because interest rates on personal loans are often much higher. But if you don’t have a lot of equity to borrow from, using a personal loan for home improvements might be the right move.
What credit score is needed for a home improvement loan?
The credit score requirements for a home improvement loan depend on the loan type. With an FHA 203(k) rehab loan, you likely need a good credit score of 620 or higher. Cash-out refinancing typically requires at least 620. If you use a HELOC, or home equity loan, for home improvements, you’ll need a FICO score of 680–700 or higher. For a personal loan or credit card, aim for a score in the low-to-mid 700s. These have higher interest rates than home improvement loans, but a stronger credit profile will help lower your rate.
What is the best renovation loan
If you’re buying a fixer-upper or renovating an older home, the best renovation loan might be the FHA 203(k) mortgage. The 203(k) rehab loan lets you finance (or refinance) the home and renovation costs into a single loan, so you avoid paying double closing costs and interest rates. If your home is newer or of higher value, the best renovation loan is often a cash-out refinance. This lets you tap the equity in your current home and refinance into a lower mortgage rate at the same time.
Is a home improvement loan tax deductible?
Home improvement loans are generally not tax-deductible. However, if you finance your home improvement using a refinance or home equity loan, some of the costs might be tax-deductible.
Disclaimer: The Mortgage Reports do not provide tax advice. Be sure to consult a tax professional if you have any questions about your taxes.
Shop around for your best home improvement loan
As with anything in life, it pays to compare all your options. So don’t just settle on the first loan offer you find.
Compare lenders, mortgage types, rates, and terms carefully to find the best loan for home improvements.
Time to make a move? Let us find the right mortgage for you
Many people mistakenly believe they can’t afford to buy a home because they don’t really know what their options are. Fortunately, home loans are not one-size-fits-all. There are various mortgages available to suit your budget and preferences.
So, before you start visiting open houses, take some time to familiarize yourself with the different home loans that are available. Going into the home buying process informed could help you save a lot of money on your down payment, interest, and fees.
The 8 Types of Mortgage Loans Available
Understanding the different types of mortgage loans will help you choose the option that’s best suited for you. Let’s look at a brief overview of the eight types of mortgages available in 2024.
1. Conventional Loans
A conventional loan is a mortgage that’s not issued by the federal government. There are two different types of conventional mortgages you can choose from: conforming and non-conforming loans.
A conforming loan falls within the guidelines laid out by Fannie Mae and Freddie Mac. You’ll take out a conforming loan through a private lender like a bank, credit union, or mortgage company. Since the government doesn’t guarantee the loan, conventional mortgages typically come with more stringent lending requirements.
According to the CFPB, the maximum loan amount for a conventional loan is $484,350. However, it may be as high as $726,525 in counties with a high cost of living. You’ll have to take out private mortgage insurance (PMI) if you don’t have a 20% down payment.
Conventional loans are fixed-rate mortgages, which means your monthly mortgage payment remains the same throughout the entire life of the mortgage loan. The terms typically range from 10 to 30 years:
30-year fixed-rate mortgage
20-year fixed-rate mortgage
15-year fixed-rate mortgage
10-year fixed rate mortgage
Pros:
It can be used to purchase a primary home or an investment property
Tends to cost less than other types of loans
You can cancel your private mortgage insurance (PMI) once you reach 20% equity in your home
Cons:
Must have a minimum FICO score of 620 or higher
Harder to qualify for than government-backed loans
You’ll need to have a low debt-to-income ratio to qualify
2. Conventional 97 Mortgage
A conventional 97 mortgage is similar to a conventional loan in that it’s widely available to various borrowers. The main difference is that with this type of home loan, you only have to pay a 3% down payment.
The program is available for first-time and repeat home buyers. However, it must be your primary place of residence, and the maximum loan amount is $510,400.
Pros:
Widely available to most borrowers
Only requires a 3% down payment
Available for first-time and repeat homebuyers
Cons:
Cannot be used to purchase investment properties
The maximum loan amount is $510,400
Requires a minimum FICO score of 660 or higher
3. FHA Loans
FHA loans are backed by the Federal Housing Administration and are a popular option for first-time home buyers. To qualify, you need to have a 3.5% down payment and a minimum credit score of 580.
If you have a credit score of 500 or higher, you can qualify for an FHA loan with a 10% down payment. These flexible requirements make FHA loans a suitable option for borrowers with bad credit.
To qualify for an FHA home loan, you must have a debt-to-income ratio of 43% or less. These loans can’t be used to purchase investment properties, and your home must meet the FHA’s lending limits.
These limits vary by state, so you’ll need to check the FHA’s website to see what the guidelines are for your area.
Pros:
Loans come with low down payment options
A viable option for borrowers with bad credit
Available for first-time and repeat homeowners
Cons:
Loans can’t be taken out for investment properties
If your credit score is below 580, a 10% down payment is required
You must have a debt-to-income ratio below 43%
Mandatory mortgage insurance premiums
4. FHA 203(k) Rehab Loans
An FHA 203(k) rehab loan is sometimes referred to as a renovation loan. It allows home buyers to finance the purchase of their home and any necessary renovations with a single loan.
Many people purchase older homes to fix them up. Instead of taking out a mortgage and then applying for a home renovation loan, you can accomplish both within a single mortgage.
A rehab loan is similar to an FHA loan in that you’ll need a 3.5% down payment. However, the credit requirements are stricter, and you’ll need a minimum credit score of 640 to qualify.
Pros:
Allows you to buy a home and finance the remodel within one mortgage
Requires a minimum 3.5% down payment
Easier to qualify since the FHA backs your loan
Cons:
Credit requirements are more stringent than typical FHA loans
You must hire approved contractors and cannot DIY the renovations
The closing process takes longer than other types of mortgages
5. VA Loans
The Department of Veteran Affairs guarantees VA loans. These loans are designed to make it easier for veterans and service members to qualify for affordable mortgages.
One of the biggest advantages of taking out a VA loan is that it doesn’t require a down payment or mortgage insurance premium (MIP). And there are no listed credit requirements, though the lender can set their own minimum credit requirements. VA loans typically come with a lower interest rate than FHA and conventional loans.
To qualify for a VA loan, you must either be active duty military, a veteran or honorably discharged. You’ll need to apply for your mortgage through an approved VA lender.
Pros:
No down payment required
No PMI required
Flexible credit requirements
Cons:
Must be a veteran to qualify
Some sellers will not want to deal with a VA loan
6. USDA Loans
A USDA loan is a type of mortgage that’s available for rural and suburban home buyers. It’s a viable option for borrowers with lower credit scores that are having a hard time qualifying for a traditional mortgage.
USDA loans are backed by the U.S. Department of Agriculture, and they help low-income borrowers find housing in rural areas. USDA loans do not require a down payment, but you will need a minimum credit score of 640 to qualify.
You will need to meet the USDA’s eligibility requirements to qualify for the loan. But according to the department’s property eligibility map, over 95% of the U.S. is eligible.
Pros:
No down payment required
A practical option for low-income borrowers
Available to first-time and repeat home buyers
Cons:
A minimum credit score of 640 is required
Housing is limited to rural and suburban areas
7. Jumbo Loans
A jumbo loan is a mortgage that exceeds the financing guidelines laid out by the Federal Housing Finance Agency. These loans are unable to be purchased or guaranteed by Fannie Mae or Freddie Mac.
A jumbo mortgage is financing for luxury homes in competitive real estate markets, and the limits vary by state. In 2024, the FHFA raised the limits for a one-unit property to $766,550, increasing from $726,200 in 2023. In certain high-cost areas, the limits for jumbo loans vary, reaching up to $1,149,825. These jumbo loans are for mortgages that exceed the set limits in their respective counties.
If you’re hoping to buy a home that costs more than $1 million, you’ll need to take out a super jumbo loan. These loans provide up to $3 million to purchase your home. Both jumbo and super jumbo mortgages can be difficult to qualify for and require excellent credit.
Pros:
These loans make it possible to purchase large homes in expensive areas
Typically comes with flexible loan terms
Cons:
Jumbo loans and super jumbo loans come with higher interest rates
You’ll need a good credit history to qualify
8. Adjustable Rate Mortgages (ARMs)
Unlike a fixed-rate mortgage, where the interest rate is set for the life of the loan, an adjustable-rate mortgage (ARM) comes with interest rates that fluctuate. Your interest rate depends on the current market conditions.
When you first take out an ARM, you will typically start with a fixed rate for a set period of time. Once that introductory period is up, your interest rate will adjust on a monthly or annual basis.
An ARM can be a suitable option for some borrowers because your interest rate will likely be low for the first couple of years you own the home. But you need to be comfortable with a certain level of risk.
And if you choose to go this route, you should look for an ARM that caps the amount of interest you pay. That way, you won’t find yourself unable to afford your monthly payments when the interest rates reset.
4 Types of ARMs
There are 4 different types of adjustable-rate mortgages typically offered:
One Year ARM – The one-year adjustable-rate mortgage interest rate changes every year on the anniversary of the loan.
10/1 ARM – The 10/1 ARM has an initial fixed interest rate for the first ten years of the mortgage. After 10 years is up, the rate then adjusts each year for the remainder of the mortgage.
5/5 and 5/1 ARMs – ARMs that have an initial fixed rate for the first five years of the mortgage. After 5 years is up, for the 5/5 ARM, the interest rate changes every 5 years. For the 5/1 ARM, the interest changes every year.
3/3 and 3/1 ARMs – Similar to the 5/5 and 5/1 ARMs, except the initial fixed-rate changes after 3 years. For the 3/3 ARM, the interest rate changes every 3 years and for the 3/1 ARM, it changes every year.
Pros:
Interest rates will likely be low in the beginning.
If you pay the loan off quickly, you could pay a lot less money in interest.
Cons:
Your monthly mortgage payments will fluctuate.
Many borrowers have gotten into financial trouble after taking out an ARM.
Choosing the Right Home Loan
When it comes to choosing a home loan, you need to consider a few key factors. First, you’ll want to think about the type of loan that is best suited to your needs.
Fixed-rate mortgages offer stability and predictability, while adjustable-rate mortgages (ARMs) can be a viable option for those who expect their income to increase significantly over time. You’ll also want to consider your budget and how much you can afford to borrow, as well as the size of your down payment and the length of the loan term.
It’s also crucial to shop around and compare offers from multiple mortgage lenders. While it’s tempting to go with the first lender you find, it pays to do your homework and see what other options are available.
This can help you get a better rate and more favorable terms on your loan. It’s a good idea to get quotes from at least three different lenders, and to consider both traditional banks and online lenders.
Tips for Getting the Best Rates and Terms
One of the most effective strategies is to improve your credit score. Lenders look closely at credit scores when deciding whether to approve a loan. Those with higher scores are typically offered better terms. You can improve your credit score by paying your bills on time, reducing your debt, and correcting any errors on your credit report.
Another tip is to make a larger down payment, which can help you secure a lower interest rate and reduce the size of your monthly payments. Finally, consider working with a mortgage broker, who can help you shop around and find the best deal.
Bottom Line
As you can see, there are many home loans for you to choose from. The type of mortgage that’s best for you will depend on your current income and financial situation.
If you’re not sure where to start, consider working with a qualified loan officer. They can assess your situation and recommend the option that will be best for you.
You’ve got some cash in a savings account earning a paltry 0.01%. You plan to spend it to buy a home or a car or something else in a few years. How can you invest the money until then to earn some extra interest?
It’s called short-term investing, and it’s tricky. Put your money in the stock market, and it could be gone when you need it. Put it in a traditional savings account, and it earns practically nothing. So, what should you do?
Recently, a listener to our podcast, Michael, emailed me with just this dilemma:
Let’s answer Michael’s question.
What is a Short Term Investment?
What exactly is a short-term investment? Well, there is no official definition. There is no governing body that defines what short-term or long-term investing is. It’s arbitrary.
For me, short-term investing is investing money you’re going to need to spend in fewer than five years.
Why five years? Because most of the time, the stock market doesn’t lose money over a 5-year period. It can, of course. Go back to the 1930s and 40s and you’ll find 5-year periods where the market was crushed, as this Bankrate slideshow demonstrates… 1932 was the worst. The 5-year period ending that year saw a drop of 60.9%.
But that’s rare.
When we have a pretty significant stock market correction or a bear market, it usually takes us at least five years to pull out of it. Of course, that’s not a guarantee. We could hit a bear market, and it could take us 10 years to pull out of it.
Either way, five years is where I draw the line. You may want to draw your own line more conservatively… or even less conservatively, for that matter. What I hope to do today is give you some information that will enable you to make a sound decision.
So, let’s begin.
The 10 Best Short Term Investments
1. Lending Club
Lending Club offers a great option with the potential for better returns. This P2P lending platform makes it easy to invest in loans to individuals and companies.
It’s also perfect for short-term lending. Loans on the platform are for either three or five years. If you know you won’t need the money until then, Lending Club is a reasonable alternative.
I’ve invested in Lending Club loans since the platform was first launched. My current annualized return, including loans that defaulted, is over 8%.
With higher returns, however, comes higher risks. Loans do go into collections and eventually default from time to time. Over the years, I’ve invested in 17 loans that defaulted.
The key is diversity. You can invest in a loan with as little as $25. By diversifying across many loans, you minimize the effect a single default will have on your portfolio.
LendingClub Pros and Cons
Very easy to invest in a diversified loan portfolio
Potential for high returns on a short-term basis
Not FDIC-insured
Cannot liquidate the loans early
Potential for losses
Expected Annual Return: 5.00 to 7.00+%
Read more: Lending Club Review
Lending Club Disclaimer:
2. Certificate of Deposit
The second option for short-term money is a certificate of deposit. CDs give us a lot more options than a savings account. The term of a CD can range from a few months to more than five years, and the longer the term, the higher the rates.
These higher rates, however, come with added risk. Here’s why.
A CD can be cashed in before it matures. For example, you could invest in a 5-year CD, but decide to withdraw your money after the first year. If this happens, however, most CDs charge a penalty. The amount of the penalty varies by bank and CD product.
As a result, it’s best to keep money in a CD until it matures. For this reason, picking the length of the CD is a critical decision.
So, you end up having this delicate dance- you want a long CD term so that you can make the most interest. But you don’t want to pay a penalty if you take the money out early.
CD Pros and Cons
FDIC insured
CD terms ranging from 6 months to 5 years or longer
Higher interest rates on longer term CDs
Can create a CD ladder
Still relatively low interest rates
Penalty for early withdrawal
Expected Annual Return: 1.00 to 2.50%
Here is a list of banks that offer high-yield CD options:
3. Investing With Betterment
Betterment presents an interesting opportunity for short-term investors. It’s not an investment. Rather, it’s an online company that makes investing in stock and bond ETFs easy.
The service can be used for all types of investing, including long-term retirement investing. To use Betterment in the shorter term, you must get the asset allocation right.
Learn More: The Perfect Asset Allocation Plan
Betterment lets investors decide how much to put in stock ETFs and how much to put in bond ETFs. For short-term investing, a 50/50 allocation protects against the downside while allowing for potentially higher returns.
Here’s the 50/50 asset allocation with Betterment:
The 50% in stocks gives us a chance to earn greater returns. The 50% in bonds helps protect short-term investors from a market crash.
There are no guarantees, of course. But looking at a 50/50 portfolio during the 2008-2009 market crash gives us some comfort.
Using PortfolioAnalyzer, I assumed we invested $10,000 at the start of 2008. Assuming we needed the money three years later, how would our 50/50 portfolio perform over a 3-year period. Remember that in 2008, a total U.S. stock index fund lost more than 37%.
Here are the backtested results of our 50/50 portfolio:
The portfolio still lost money in 2008, although far less than the 37% that the market dropped. And what was our final portfolio value at the end of 2010? It grew to $11,014, for an annual return of 3.27%.
While 3.27% is not a great return, remember that 2008 was a very bad year for stocks. Shift our time period one year forward (2009-2011) and our annual return jumps nearly 11%.
As a result, a 50/50 portfolio with Betterment is a reasonable choice for those needing the money in three to five years.
Betterment Pros and Cons
Very easy to implement
Money can be withdrawn at any time
Potential for much higher returns
Fees are very low
Not FDIC-insured
Potential for capital losses
Expected Annual Return: 0 to 10+%
Learn More: Betterment Review
4. Online Savings Account
Traditional banks pay as little as 0.01% on a savings account. That’s as close to zero percent as you can get.
One option for short-term savings that pay more is to go with an online bank. While the rates are still nothing to brag about, the top online savings accounts today pay about 0.50%. Chime®is now paying an APY of 2.00%, which is right in line with the best online savings accounts available. Chime offers a terrific online savings and checking account geared toward savers. You can see the top current rates here.
Online Saving Account Pros and Cons
FDIC insured
Funds can be withdrawn at any time
Rates better than a brick and mortar bank
No monthly fees
Interest rates are still low
Inflation exceeds the rates
Expected Annual Return: 1.30%
Here are some high-yield savings account options:
5. Municipal Bonds
There is a significant downside to bonds: taxes. Interest earned on bonds is taxed, as are any capital gains.
One option to reduce the tax burden is municipal bonds (known as “munis”). These bonds are typically free of federal income tax and may be free from state income tax, too. Munis are an excellent option for those in the higher federal tax brackets.
I’ve invested in Vanguard’s Intermediate-Term Tax-Exempt Fund (VWIUX) in the past. SEC yields on these funds are lower than similar taxable bonds. The comparison must be made on an after-tax basis. This fund currently sports an SEC yield of almost 2%.
Municipal Bonds Pros and Cons
Potential for higher returns
Tax advantages
Easy access to funds without penalty
Potential for losses
Not ideal for those in lower tax brackets
Expected Annual Return: 2 to 5% (after tax)
6. Short Term Bonds
Our third option is short or intermediate-term bond funds. More specifically, we want to look at low-cost index mutual funds and ETFs. Both Vanguard and Fidelity offer several options.
Here, you have some important choices to make. Do you want a fund that invests just in U.S. government bonds or one that also invests in corporate bonds? Do you want a short-term bond fund or an intermediate-term bond fund?
Like everything else in life, these choices involve trade-offs.
U.S. Government bonds are more secure than corporate bonds, but they pay less. Short-term bonds are less sensitive to interest rate fluctuations than intermediate-term bonds, but they pay less. Today, short-term government bonds do not pay much more than an online savings account. For example, the SEC yield on Vanguard’s short-term Treasury fund is just 1.25%.
For my money, I want to do better than that in a bond fund. While intermediate-term funds can lose money in a given year, they are reasonably stable. Vanguard’s Intermediate-Term Bond Index Fund (VBILX), for instance, costs just 0.07% and sports an SEC yield of over 2.50%.
A review of the performance of VBILX shows that it lost money in only one of the past ten years:
Short Term Bonds Pros and Cons
While not FDIC-insured, still reasonably secure
Intermediate-term bonds can yield significantly higher rates than a savings account
Money can be withdrawn from the fund when needed
Not FDIC-insured
Can lose money
Rates are historically low
Expected Annual Return: 1.00 to 6.00%
7. Bulletshares
There is a downside to traditional bond funds. They can experience capital losses as funds sell some bonds to buy new ones. If interest rates have risen, the fund incurs a loss on the sale of bonds.
Enter Guggenheim’s Bulletshares. These ETFs combine the potential returns of a bond fund with the fixed maturity of a CD. I first learned about Bulletshares from Jeanne J. Fisher, MBA, CFP, CPFA of ARGI Financial Group.
Traditional bond funds continue in perpetuity. The fund management regularly sells bonds as maturities age and replaces them with new bonds with longer maturities. In contrast, Bulletshares have a defined term of one to ten years.
At the end of the term, assets are returned to existing shareholders. And unlike CDs, a shareholder can sell his or her ETF shares at any time without penalty.
Related: What Are ETFs (and Are They a Strong Investment Option)?
Bulletshares come in two flavors: (1) corporate bonds and (2) high-yield corporate bonds. The first invests in investment-grade corporate bonds. The second buys bonds issued by corporations with a credit rating below investment grade. It involves more risk but offers higher returns.
As an example, the Guggenheim BulletShares 2020 High Yield Corporate Bond ETF has a current yield to maturity of over 5%.
Bulletshares Pro and Cons
Potential for higher returns
ETF shares can be sold at any time
Fixed maturity dates
Not FDIC-insured
Funds can lose money
Expected Annual Return: 1.50 to 5.50%
8. Wealthfront
Like Betterment, Wealthfront is a robo-advisor that makes investing easy. I list it here in addition to Betterment for one reason: It’s free.
Well, it’s free for your first $5,000 if you sign up using a DoughRoller link. After that, the cost is similar to Betterment. For both, you pay the very low fees charged by the ETFs. You also pay a Betterment or Wealthfront fee of about 25 basis points.
With Wealthfront, however, the 25 basis point fee is waived for the first $5,000.
Wealthfront Pros and Cons
Very easy to implement
Money can be withdrawn at any time
Potential for much higher returns
Fees are very low
Not FDIC-insured
Potential for capital losses
Expected Annual Return: 0 to 10%
Read more: Wealthfront Review
9. Worthy Bonds
Worthy Bonds offers you an opportunity to earn 5% on your money, with an investment of as little as $10. It’s a peer-to-peer investment site, where you can invest money in bonds issued by small businesses. The bonds aren’t guaranteed by a government agency, like FDIC, but many of them are collateralized by business inventory.
When you use the Worthy Bonds mobile app, you can automatically add funds to your investment account. Similar to many micro-savings apps, Worthy Bonds uses spending round-ups to move small amounts of money into your investment account as you spend. For example, if you pay $4.10 for a cup of coffee, the app will charge your account an even $5. $4.10 will go to pay the merchant, and $0.90 will go into your investment account. Once you accumulate an even $10 in round-ups, the funds can be used to purchase a bond.
Worthy Bonds Pros and Cons
Invest with as little as $10
An investment of $1,000 can be diversified across 100 different bonds
Interest is credited weekly
There are no fees charged on your account
Earn interest at more than twice the rate of inflation
Pays simple interest only, and does not compound for higher returns
The maximum investment is not more than 10% of your net worth or annual income, or $100,000
Expected Annual Return: 5%
Read more: Worthy Bonds Review – A Worthy Investment for Everyone
10. SmartyPig
The final investment option on our list offers an interesting twist to online savings accounts. SmartyPig combines a high yield with savings goals. As of August 2018, SmartyPig currently offers a high yield savings APY of 1.55%.
Now, the savings goals. With SmartyPig, you set specific savings goals. You can set multiple goals, or just one. You then add to the account until you reach your goal. In this way, SmartyPig is ideal for short-term savers.
Related: 6 Keys to Setting Financial Priorities
SmartyPig Pros and Cons
FDIC-insured
Potential for returns higher than most online banks
Makes saving for a specific goal very easy
Low rate compared to other options
Expected Annual Return: 1.00+% (depending on account balance)
Is the Stock Market a Good Place for Short-Term Investing?
We could stop here. After all, the above short-term investing options should cover most situations. Yet many will ask one remaining question: Why not just put all our money in the stock market?
It’s an understandable question. Particularly when the market is rising, missing out on money can be painful. It’s funny, though. Nobody asks me this question in a bear market.
And that’s the point. With the stock market, you can lose money over a short period of time.
Thinking Long Term: Sweat In Up Markets So You Don’t Bleed In Down Markets
Let’s return to 2007 and run a test. We’ll use the Vanguard S&P 500 index fund as a proxy for the market. And we’ll assume we have $10,000 at the start of 2007, that we’ll need to use in three to five years.
How would a $10,000 investment have performed? At the end of three years, we would have $8,395, for an annual return of -5.66%. At the end of five years, we would have $9,837, for an annual return of -0.33%
Yes, 2008 was a bad year. But again, that’s the point. Investing 100% of short-term money in the stock market presents a significant risk of loss of capital. Fortunately, we have better ways to invest for the short term.
Public is an app that helps you invest in individual stocks, even if you don’t have much money to commit. What makes it good for short-term investments is its lack of fees. There is no commission to buy or sell a stock so you can move your money in and out of the market at will without worrying about minimum investment terms. Read our Public app review
How to Manage Your Short Term Investments
Track and Analyze your Short-Term Investments for Free: Managing investments can be a hassle. You may have multiple IRAs, multiple 401ks, as well as taxable accounts. And then there are bank accounts. The easiest way to track and analyze all your investments, regardless of where they are located, is with Empower’s free financial dashboard.
Empower enables you to connect all of your 401(k), 403(b), IRAs, and other investment accounts in one place. Once connected, you can see the performance of all of your investments and evaluate your asset allocation.
With Empower’s Retirement Fee Analyzer you can see just how much your 401k and other investments are costing you. I was shocked to learn that the fees in my 401(k) could cost me over $200,000!
Empower also offers a free Retirement Planner. This tool will show you if you are on track to retire on your terms.
If all of this is overwhelming and not something you want to handle on your own, you may want to think about working with a financial advisor or investment advisor. We suggest visiting Paladin Registry, where you can fill out a form online to tell them what you are looking for. It’s free to use and Paladin Registry will email you a list of three highly-rated professionals that match your needs. From there you can interview each one and choose the best fit.
Happy investing!
Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.