Jul
15
2024

Are High-Yield Checking Accounts Worth It?

By | Budgeting & Goals, money, Money & Life | Comments Off on Are High-Yield Checking Accounts Worth It?

Checking accounts generally aren’t known for their high interest rates. But the days of earning nothing (or practically nothing) on the money sitting in checking may be coming to an end. While the average annual percentage yield (APY) on checking is still a measly 0.08%, many banks and credit unions now offer significantly higher rates for their checking accounts. So-called “high-yield checking accounts,” these accounts often pay more than many savings accounts. Some even rival high-yield savings accounts.

But there is a catch: You generally need to follow certain strict rules to earn the high rate. If you don’t, you may learn little or no interest for the month. Are high-yield checking accounts worth it? Maybe. Here’s what you need to know.

What Are High-Yield Checking Accounts?

High-yield checking accounts (also known as high-interest checking accounts) are checking accounts that offer higher interest rates than standard checking accounts. Like any other checking account, you can use a high-yield checking account for everyday transactions, like paying bills online, receiving your paycheck, writing checks, and making purchases using a debit card.

The key difference between a traditional checking account and a high-yield checking account is that the latter offers a higher interest rate. Although rates vary, you can currently find high-yield checking accounts with a 3.00% APY, and sometimes higher.

Some high-yield checking accounts offer the same APY on all balances, while others offer a tiered rate with higher APYs for higher balances. You may also have to meet certain requirements to access the advertised rate, such as making a certain number of transactions each month, signing up for direct deposit of your paycheck, and enrolling in electronic statements.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


How High-Yield Checking Accounts Work

You can use a high-yield checking account as you would a standard checking account. That means you can deposit and withdraw funds, pay bills, transfer money to and from linked bank accounts, use a debit card for purchases and cash withdrawals at ATMs, and more.

At the same time, your checking account balance earns interest each statement period. To earn the highest APY or waive a monthly account maintenance fee, however, you may need to meet certain requirements. For example, you may have to:

•   Use your debit card for a certain number of transactions each month

•   Maintain a minimum balance for the statement period

•   Have a minimum amount in direct deposits each month

•   Use bill pay a minimum number of times each month

•   Enroll in online banking and electronic statements

•   Have other accounts at the same financial institution, such as a savings account or investment account

If you can’t meet your financial institution’s requirements, you likely won’t be able to earn a competitive interest rate or you might get hit with a fee that can outweigh the benefits of a high interest rate.

Pros of High-Yield Checking Accounts

Deciding whether high-yield checking accounts are worth it means considering both the benefits and drawbacks of these accounts. Here’s a look at two key advantages.

Extra Interest

A high-yield checking account allows you to earn significantly more interest than you could in a regular checking account. The best high-yield checking accounts pay rates that may be competitive with high-yield savings accounts or certificate of deposit (CD) rates.

While you likely have money moving and out of your checking account, it may be worth earning as much as you can on the money that sits in the account. This is especially true if you tend to keep a large balance in checking and can easily meet the bank’s requirements to earn the high rate.

Liquidity

High-yield checking accounts offer the interest often associated with savings accounts combined with accessibility of a checking account. Though the Federal Reserve no longer requires banks to limit savings account transactions to six per month, many banks have continued to impose the rule and will charge you a fee if you exceed the limit. Checking accounts don’t impose these limitations, however. You can write checks, use a debit card, and make withdrawals as needed.

Recommended: Checking vs Savings Accounts: A Detailed Comparison

Cons of High-Yield Checking Accounts

Although you have the potential to earn a competitive interest rate with a high-yield checking account, these accounts also come with a few drawbacks. Here are some cons to consider.

Transactional Requirements

To earn the high interest rate, high-yield checking accounts typically require you to meet specific transactional requirements. These may include making a certain number of debit card purchases per month, having direct deposits, or logging into online banking regularly. The requirements may be complex, and if you’re unable to meet them at any time, you may risk not earning any interest or earning a much lower rate than you anticipated.

Rate Caps

Many high-yield checking accounts cap the balance eligible for the high interest rate. For example, the high rate might only apply to balances up to $10,000, with any amount above that earning a significantly lower rate or no interest at all. This can limit the overall interest you can earn in the account, especially if you maintain a higher balance.

Who Benefits Most From These Accounts?

Those who benefit most from a high-yield checking account are individuals who can meet the requirements to earn the highest interest rate without difficulty.

For example, if you frequently make debit card purchases or get your paycheck from your employer through direct deposit, you may already be meeting the requirements for top rate and don’t have to put in any extra effort. In this case, a high-yield checking account earns interest on money that would otherwise sit earning little to nothing.

However, a high-yield checking account probably doesn’t make sense if you’ll struggle to meet the bank’s criteria to earn a high rate or avoid fees. In that case, you might be better off with a regular checking account and a high-yield savings account, which can pay as much as many high-yield checking accounts but with less hassle.

Comparing High-Yield vs Regular Checking

High-yield checking accounts serve the same basic purpose as regular checking accounts but have different benefits and requirements. Here’s a look at how they compare.

Interest Earnings Examples

High-yield checking: If you have a $10,000 balance earning the 3.00% APY in a high-yield checking account, you could earn $300 in one year.

Regular checking: If you have a $10,000 balance earning the national average rate for checking accounts, which is 0.08% APY, you could earn $80 in one year.

Total difference: The high-yield checking account would provide $220 more in interest over the course of a year.

Other Considerations

Fees: Regular checking accounts may have fewer or lower bank fees compared to high-yield accounts.

Accessibility: Both types of accounts offer similar access to funds through checks, debit cards, and ATMs.

Requirements: High-yield checking accounts often have stricter usage requirements to qualify for the higher interest rate.

Alternatives To Consider

High-yield checking accounts are a useful financial tool, but they aren’t the answer for everyone. If you’re interested in a bank account that pays a higher-than average APY, here are some alternatives to consider.

•   High-yield savings accounts: The interest rate you can earn in a high-yield savings account can be the same or higher than a high-yield checking account, but without the stringent requirements. While you generally can’t pay bills and make purchases directly from a savings account, you can easily transfer the funds to your checking account when you need to make payments.

•   Money market accounts: Money market accounts (MMAs) typically offer higher APYs than traditional savings accounts, while providing some of the conveniences of a checking account, like a debit card and checks. These hybrid accounts may have certain requirements, however. For example, some institutions require high minimum balances to open an account or avoid fees. Also MMAs can be subject to transaction limits, so they aren’t a perfect substitute for a checking account.

•   Certificates of deposit (CD): CDs offer a fixed APY that’s usually higher than regular savings accounts. In exchange, you agree to leave the money untouched for a set term, which can range from a few months to several years. If you have a large chunk of cash you won’t need for several months or more but want a guaranteed rate of return, a CD may be worth considering.

The Takeaway

If you want the features of a checking account, such as a debit card and frequent access, while growing your money, a high-yield checking account may be worth looking into. However, you’ll want to make sure that you can meet the requirements of the account. If you can’t, you could end up earning little or no interest and/or getting hit with fees. In that case, you may be better off with a regular checking account and a savings account that pays a competitive APY.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What is a good high-yield checking rate?

A good high-yield checking account rate typically is 3.00% APY or higher. This is significantly higher than the current average APY for checking accounts, which is 0.08% APY.

Keep in mind, though, that in order to earn the advertised rate on a high-yield checking account you may need to meet certain conditions, such as a minimum number of debit card transactions, a minimum amount in monthly direct deposits, or maintaining a certain balance.

Do these types of checking accounts have debit cards?

Yes, high-yield checking accounts typically come with debit cards, just like regular checking accounts. The debit card allows you to make purchases, withdraw cash from ATMs, and manage your daily transactions.

In fact, using the debit card is often a requirement to qualify for the high interest rates offered by these accounts. A bank or credit union may specify a minimum number of debit card transactions per month as part of the account’s conditions to earn the advertised high yield.

What are the disadvantages of using a high-yield checking account?

High-yield checking accounts have some disadvantages, including stringent requirements to earn the high interest rates. For example, you may need to maintain a high balance or make a minimum number of debit card transactions and direct deposits per month to earn the advertised rate. If you don’t meet the requirements, you may earn very low (or no) interest for that month or get charged a fee.

In addition, some of these accounts have rate caps, which means that the high interest rate only applies to a specific balance limit, with amounts above that earning lower or no interest.

Photo credit: iStock/Dilok Klaisataporn

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

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 4.00% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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Jul
15
2024

How to Calculate Annual Percentage Yield (APY)

By | Debt Payoff, Financial Independence, money | Comments Off on How to Calculate Annual Percentage Yield (APY)

Annual percentage rate, or APY, is the rate of interest earned on a savings or investment account in one year, including compound interest (the interest you earn on interest). Unlike the nominal interest rate, which does not consider the impact of interest compounding, APY provides a more accurate picture of how much you’ll earn in an account over the course of one year. This allows you to compare different financial products and make informed decisions about where to put your money for the best returns.

Read on to learn the basic APY meaning, how to calculate annual percentage yield, and some of the limitations of APY.

Understanding Annual Percentage Yield (APY)

An abbreviation for annual percentage yield, APY indicates how much interest a bank account, such as a high-yield savings account or certificate of deposit (CD), earns in one year, expressed as a percentage.

An APY includes the effect of compounding interest, which is when you earn interest on both the money you’ve saved (principal) and the interest you earn. Depending on the bank and type of account, interest on an account can compound (i.e., get calculated and added) yearly, monthly, quarterly, or daily. The more frequently an account compounds, generally, the more the account will earn.

That’s why it’s important to consider APY — and not just the interest rate — when looking for a bank account. Comparing APYs helps you compare financial products as apples to apples by letting you know the real return on the account. Almost all savings accounts, and some checking accounts, have an APY.

Simple Interest vs Compound Interest

Understanding APY involves knowing the difference between simple and compound interest. With simple interest, an account holder earns interest only on the principal, or the initial amount of money they deposited. With compound interest, on the other hand, an account holder earns interest on the principal along with the accrued interest.

Compound interest helps your money grow faster, as you’ll earn interest on your interest. The frequency of compounding is important; the more often your interest compounds, the more money you’ll generally earn. An account may compound interest daily, monthly, quarterly or annually.

When it comes to savings and investment accounts, simple interest is less common than compound interest.

Recommended: Difference Between APY vs Interest Rate

Earn up to 4.00% APY with a high-yield savings account from SoFi.

No account or monthly fees. No minimum balance.

9x the national average savings account rate.

Up to $2M of additional FDIC insurance.

Sort savings into Vaults, auto save with Roundups.


Calculating APY

There is a specific formula for calculating APY. To use it, you’ll need to know your interest rate and how frequently the interest compounds.

APY = (1 + r/n)^n – 1

Where:

•   ^ = to the power of

•   r = the nominal interest rate

•   n = the number of compounding periods per year

APY Calculation Examples

To see how much compounding frequency can affect your APY, let’s look at four examples with the same interest rate but four different compounding periods (annually, quarterly, monthly, and daily).

•   Annual compounding interest: n = 1

•   Quarterly compounding interest: n = 4

•   Monthly compounding interest: n = 12

•   Daily compounding interest: n = 365

Assume a nominal interest rate (r) of 5.00%.

Annual compounding interest:

APY = (1 + .05/1)^1 – 1

APY = 5.00%

Quarterly compounding interest:

APY = (1 + .05/4)^4 – 1

APY = 5.09%

Monthly compounding interest:

APY = (1 + .05/12)^12 – 1

APY = 5.12%

Daily compounding interest:

APY = (1 + .05/365)^365 – 1

APY = 5.13%

As you can see, the more often interest is compounded, the higher the APY is. Choosing an account or investment that compounds daily will yield a higher amount earned from interest at the end of the year.

Fortunately, you don’t have to do any fancy calculations to learn the APY of a bank account. To help people compare accounts and accurately estimate possible earnings, banks are required to display account APYs.

Recommended: Use this APY calculator to start comparing APY.

Fixed vs Variable APY

Another factor to consider with APY is whether it is fixed or variable. Savings accounts, checking accounts, and money market accounts are typically variable rate accounts. This means the APY can change over time depending on market conditions.

Fixed rate accounts, on the other hand, have an APY that does not change during the term of the account. For example, a certificate of deposit (CD) account usually has a fixed APY for the term of the CD. No matter what happens to market rates, the APY will stay the same.

Both types of APYs have pros and cons. Locking in a fixed APY can be beneficial if market rates go down after you open the account. However, it could be a negative should market rates go up, since you won’t benefit from the increase.

Recommended: What Is a High-Yield Checking Account?

Limitations and Considerations of APY

Knowing the APY for an account or investment can tell you a lot, but there are other factors to consider when choosing where to put your money. Here are a few other things to keep in mind.

•   Fees and penalties: Some financial products come with monthly and incidental fees or penalties that can impact the effective return. APY calculations typically do not account for these additional costs, so it’s a good idea to consider them when evaluating the overall profitability of a deposit account or investment.

•   Liquidity: While CDs often have higher, fixed APYs compared to traditional savings accounts, your money is tied up until the maturity date. That means you can’t access that money in the event of an emergency if you want to earn the interest you were promised upon investing.

•   Fixed vs. variable: A high-yield savings account may advertise a high APY right now, but it is likely variable. This means that as the market changes, the interest rate could go down. It’s a good idea to routinely check how much interest your savings account (or checking account or money market account) is earning. If the APY has significantly dropped, you may want to consider opening a bank account with a higher APY elsewhere.

•   Inflation: Inflation erodes the purchasing power of money over time. While APY provides a return rate, it does not account for inflation. To understand the real rate of return on any type of account or investment, it’s important to adjust an APY for inflation.

•   Taxes: Interest earned on savings accounts is typically subject to taxes. The APY does not consider the impact of taxes on the effective return. So it’s important to factor in tax obligations when evaluating the net return on an investment.

The Takeaway

Understanding and calculating APY is essential for making informed financial decisions. Whether you’re evaluating savings accounts or investment products, APY provides a clear picture of the true return, accounting for the effects of compounding interest. By comparing APYs, you can see how different savings vehicles stack up against each other. This can help you choose the most profitable options and optimize your financial growth.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What is the difference between APY and APR?

APY stands for annual percentage yield and tells you how much interest you’ll earn on a deposit or investment account over the course of one year, including compounding interest (which is when your interest also earns interest). APR stands for annual percentage rate and represents the annual cost of borrowing money. It includes the interest rate plus any fees and costs associated with the loan or line of credit to reflect the real cost of borrowing.

How do you calculate the APY for a savings account or investment?

To calculate the annual percentage yield (APY) for a savings account or investment, you can use this formula:

APY = (1 + r/n)^n – 1

Where:

•   ^ = to the power of

•   r = the nominal interest rate

•   n = the number of compounding periods per year

Banks and credit unions are required to display the APY of their financial products, so you generally don’t need to do any calculations. If you know the APY and how much you’ll be depositing, you can use an online APY calculator to determine how much interest you’ll earn by the end of the year.

What factors can affect the APY of a financial product?

The main factors that affect the annual percentage yield (APY) of a financial product are the nominal interest rate and how often the interest compounds (meaning gets calculated and added to the account). Generally, the higher the interest rate and the more often it compounds, the higher the APY.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

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 4.00% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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Jul
15
2024

Guide to Overdraft Lines of Credit

By | Credit, money, Money & Life | Comments Off on Guide to Overdraft Lines of Credit

An overdraft line of credit is a pre-approved loan attached to your checking account. If you don’t have enough money in your account to cover a transaction (such as a debit card transaction or automatic bill payment), the line of credit kicks in and covers the overdraft. This prevents denied and failed transactions, overdraft fees, non-sufficient fund fees, and potentially other fees and headaches. However, these credit lines come with costs of their own. Are they worth it? Here are key things to know about overdraft protection lines of credit.

🛈 Currently, SoFi does not provide members an overdraft line of credit.

What Is an Overdraft Line of Credit?

An overdraft line of credit is a feature offered by banks and credit unions that links your checking account to an established line of credit. If you sign up for this type of overdraft protection, you can borrow against that line of credit to cover shortfalls when (or if) you overdraw your checking account.

For example, let’s say your checking account is low on cash due to some unexpected expenses, then an automated payment goes through or a check you wrote a while ago (and forgot about) gets cashed. With an overdraft line of credit, the bank or credit union will cover that overage by drawing from your credit line. The payments will go through and you won’t get hit with a non-sufficient funds (NSF) or bounced check fee.

However, there are still costs involved. Credit unions and banks that offer an overdraft line of credit will typically charge a transfer fee each time you draw from the credit line. On top of that, you’ll pay interest on the borrowed balance until you pay it off.

How Overdraft Lines of Credit Work

Typically, if your checking account doesn’t have enough money to cover a debit card purchase, check, or online bill payment, the bank will either cover the pending transaction and charge you overdraft fee, or they will reject the transaction and charge you a fee for insufficient funds (you may also get hit with a fee from the party that was expecting payment).

If you have a checking account with an overdraft line of credit, on the other hand, any overdraft is automatically withdrawn from your line of credit and deposited into your account. You will typically be charged a small fee for each overdraft that is covered. You’ll also pay interest on the money you borrow from your credit line.

An overdraft protection line of credit has a preset amount it can cover on your behalf, which can range from $500 to $7500 or more. As with other lines of credit, you only pay a transfer fee or interest if you actually borrow money from the credit line.

Banks and credit unions often have requirements for customers to qualify for an overdraft line of credit, such as maintaining a specific account balance for a certain period of time, depositing money regularly into the account, having a positive credit history, and having minimal overdrafts in your recent banking history.

What Happens if You Use Your Overdraft Line of Credit?

If you use your overdraft line of credit, the bank or credit union will typically charge a transfer fee and interest on the balance provided for your purchase. For example, say you spend $100 at the grocery store using your debit card but only have $60 in your account. The transaction will go through and your overdraft line of protection kicks in, putting $40 in your account.

You’ll pay a small fee for the cash transfer (usually around $12) and the $40 balance will start accruing interest until it’s paid back in full. You’ll need to repay the amount you borrowed according to the terms set by your bank. Typically, you need to make monthly payments, either manually or by having them automatically deducted from your checking account.

Keep in mind that once you use an overdraft line of credit, it can have an impact on your credit, since it qualifies as a loan. Paying off the balance in a timely fashion can have a positive impact on your credit, while carrying a high balance and/or making late payments can have a negative impact on your credit.

Recommended: Can You Overdraft a Credit Card?

Pros and Cons of Overdraft Lines of Credit

An overdraft line of credit can save you in a pinch but can also cause unwanted financial consequences. Here are some benefits and potential pitfalls to consider.

Pros of Overdraft Lines of Credit

•   Provides a safety net. Overdraft credit lines (which often come with high limits) can help you afford necessary expenses and handle emergencies without taking out a loan.

•   Transactions won’t fail. With an overdraft line of credit, debit card purchases, online bill payments, and checks will go through successfully, even if you don’t have the funds in your account to cover them.

•   May be cheaper than other options. The transfer fee plus the interest charges can end up costing less than overdraft fees and the penalties for returned payments and checks.

•   Can help you build credit. Drawing from your credit line and then paying off your balance responsibly can have a positive impact on your credit.

Cons of Overdraft Lines of Credit

•   Not everyone qualifies. Approval for the line of credit may involve passing lender requirements, such as keeping a certain average account balance, signing up for direct deposit, and having a strong credit history.

•   Fees can add up. Typically, you incur a transfer fee for every advance. Some lenders also charge annual fees and account fees for overdraft lines of credit.

•   Interest rates tend to be high. Overdraft lines of credit tend to have high interest rates because there’s no collateral from the borrower, which increases risk to the lender.

•   Could negatively impact your credit. If you carry a high balance and/or don’t make your payments on time, an overdraft credit line could have a negative impact on your credit.

Alternatives to Overdraft Lines of Credit

While overdraft lines of credit offer convenience and might help you save money, other options might be more beneficial depending on your situation. Here’s a breakdown of the alternatives to overdraft lines of credit.

Effective Account Management

Effectively managing your checking account and finances can help you avoid overdrafts altogether. This entails regularly monitoring your account balance, signing up for “low balance” alerts, and always keeping a cushion of cash in your checking account.

Link Another Account to Your Checking Account

Linking your checking account to another financial account, such as a savings account, can provide a safety net in case of insufficient funds. If a transaction will overdraft your checking account, funds will automatically transfer from the linked account to cover the shortfall.

This option avoids overdraft fees and ensures that your transactions are not declined due to insufficient funds. However, you may pay a transfer fee when the protection is triggered, and you’ll need sufficient funds in your linked deposit account to cover the overdrawn amount to use this service.

Opt Out of Overdraft Coverage

If all of your bank’s overdraft protection options involve costs, you might consider going without overdraft coverage. If you go this route, your bank will decline any transactions that would bring your account into the negative. This could put you in a difficult situation if you can’t make a needed purchase, but you’ll avoid overdraft fees and/or running up interest.

Consider Switching Banks

You may be able to find a bank with generous overdraft protections for checking accounts. For example, some banks offer grace periods after overdrafts, such as one business day to cover the overage without incurring any penalties. In addition, many financial institutions have reduced or eliminated their overdraft fees.

Recommended: Switching Bank Accounts When in Overdraft

The Takeaway

Overdraft lines of credit give bank and credit union customers immediate access to funds to cover transactions and avoid costly overdraft and non-sufficient fund fees.

While they can cover emergency expenses and prevent transactions from failing when your account balance is low, high interest rates and credit implications can lead to other challenges. Alternatives to using an overdraft line of credit include: effective account management, linking accounts, and/or finding a bank with favorable overdraft policies.

FAQ

Does tapping into your overdraft line of credit affect your credit score?

Tapping into your overdraft line of credit means taking on debt, which can impact your credit. If you consistently make timely payments and manage that debt responsibly, it can have a positive impact on your credit history. Conversely, if you fail to repay the borrowed amount on time, it could lead to negative marks on your credit report.

How does an overdraft protection line of credit work?

An overdraft line of credit is a safety net for checking accounts, providing funds to cover transactions that exceed available balances. When faced with insufficient funds, the bank or credit union extends a predetermined line of credit, allowing the transaction to proceed without incurring overdraft fees. The customer then repays the borrowed amount, along with any applicable fees and interest.

Can you overdraw your credit limit?

No, you cannot overdraw beyond the credit limit set for your overdraft line of credit. Your bank establishes a maximum limit based on your creditworthiness and financial history. If a transaction exceeds this limit, it will typically be declined, and you may still face fees for insufficient funds. It’s important to be aware of your credit limit and monitor your account to avoid transactions that might exceed it.

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

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 4.00% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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What Is a Gold IRA? How Do You Invest in One?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Gold IRA? How Do You Invest in One?

While it’s common for people to use their IRA to invest in stocks, bonds, and other securities, it’s also possible to set up a self-directed IRA to invest in physical gold bars, coins, or bullion.

Although the assets within a self-directed IRA are considered alternative investments, these accounts still follow the standard IRS rules regarding tax advantages, annual contribution limits, and so forth.

That said, not all brokers offer self-directed IRAs. And investing in gold within an IRA may be more expensive owing to the cost of storing a physical commodity like gold.

Establishing a Gold IRA Account

It’s important to understand that there isn’t a dedicated “gold IRA” that’s geared toward investing in gold alone (or any other type of precious metal). Rather, investors interested in investing in gold or other types of alternative investments can set up what’s known as a self-directed IRA (or SIDRA) in order to choose investments that aren’t normally available through a traditional IRA account.

While alternative investments can be illiquid, volatile, or subject to other risk factors, investors interested in alts may be curious about the potential for greater diversification since these assets typically don’t move in tandem with conventional markets. In the case of precious metals, they can be an inflation hedge.

Understanding Self-Directed IRAs

Typically, most IRA providers only allow you to invest in securities like stocks, bonds, ETFs or mutual funds. If you want to invest in gold by buying shares in an ETF focusing on gold, or by purchasing stock in a gold mining company, then a traditional IRA custodian is fine.

But if you want to hold physical gold in your IRA, you’ll need to find a broker that will allow you to set up a self-directed IRA.

Self-directed IRAs and self-directed Roth IRAs allow account holders to buy and sell a wider variety of investments than regular traditional IRAs and Roth IRAs.

While a custodian or a trustee administers the SDIRA, the account holder typically manages the portfolio of assets themselves. These accounts may also come with higher fees than regular IRAs owing to the higher cost of storing physical assets like gold.

That said, a self-directed IRA follows the same general rules as ordinary IRAs in terms of tax rules, withdrawal restrictions, income caps, and annual contribution limits (see details below). A self-directed IRA can be set up as a traditional, tax-deferred account, or a self-directed Roth IRA.

Setting Up a Gold IRA Account

Once you’ve found an IRA custodian or brokerage that allows you to open a self-directed IRA and purchase physical gold, you can fund your account. Be sure you’re working with a reputable, experienced precious metals IRA custodian, and that the company is registered with the SEC (Securities and Exchange Commission) and with FINRA (Financial Industry Regulatory Authority).

The two most common ways to fund a gold IRA are by contributing cash or transferring money from an existing IRA or 401(k) account.

After you’ve funded your account, your broker will purchase the physical gold and store it for you. These same steps will hold true if you want to invest in other precious metals, including silver or platinum.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Gold Standards for IRAs

Just as with a silver IRA, there are restrictions on the physical gold you are allowed to hold in an IRA. Any gold that is held in an IRA must be at least 99.5% pure.

Some common types of gold coins that are allowed to be held in a gold IRA include American Eagle bullion or coins, Canadian Maple Leaf coins and Australian Koala bullion coins.

Managing a Gold IRA Portfolio

The process for managing an IRA invested in gold is similar to managing an IRA that holds any commodity or security.

When you open a gold IRA, you will issue instructions to your broker to buy and sell physical gold, just as you would if you were buying stocks in a more traditional IRA. The value of your gold IRA portfolio fluctuates with the value of the physical gold that you hold.

You are not allowed to hold the gold yourself while it is part of your IRA. If you want to take possession of the physical gold bullion in your gold IRA, you will need to make a withdrawal from your IRA — which is subject to standard IRS rules governing IRA withdrawals.

An early withdrawal before age 59 ½ may result in taxes and/or penalties, so make sure you understand the terms before you take a withdrawal from a self-directed IRA.

Recommended: Portfolio Diversification: What It Is and Why It’s Important

Tax Advantages and Drawbacks of Gold IRAs

Remember that an IRA invested in gold still follows the basic structure and tax rules of traditional and Roth IRAs. The annual contribution limit for a regular, Roth, or self-directed IRA is $7,000 for tax year 2024, or $8,000 for those 50 and older.

•   With a self-directed traditional IRA, you save money that’s considered pre-tax (just as in a traditional IRA account). The value of the assets within the account may grow over time, but taxes are deferred. This means you will owe tax on the money when you withdraw it, which you can do without penalty starting at age 59 ½.

•   With a self-directed Roth IRA you make after-tax contributions, just as you would with a regular Roth IRA. Here the money grows tax free over time. In the case of a Roth account, qualified withdrawals are tax free starting at age 59 ½, as long as you have had the account for at least five years, according to the five-year rule.

In addition, investors who want to set up a Roth SIDRA must meet certain income requirements (the same income caps as for a regular Roth IRA). For single and joint tax filers: in order to contribute the full amount to a Roth IRA you must earn less than $146,000 (for single filers) or $230,000 (if you’re married, filing jointly), respectively. See IRS.gov for additional details, or consider consulting a tax professional.

One of the biggest drawbacks of a gold IRA is that the money in your IRA is generally intended for retirement. That means that if you withdraw the money in any IRA before you reach 59 ½, you may have to pay additional taxes and/or a 10% penalty. Another drawback is that you are limited by how much you can contribute to a gold IRA each year.

The Takeaway

There isn’t a specific type of IRA called a gold IRA — this is just a common way to refer to a self-directed IRA that is used to invest in physical gold. A gold IRA might be a traditional or a Roth IRA, which each come with certain tax advantages. Any gold that you hold in a self-directed IRA must be at least 99.5% pure. Additionally, not all brokers allow you to self-direct your investments and hold gold in your IRA.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What types of gold investments can be held in a gold IRA?

Like other commodities including silver or platinum, there are specific rules about what kinds of gold investments can be held in a gold IRA. Gold must be at least 99.5% pure to be eligible to be held in an IRA. This includes coins like the Australian Koala, Canadian Maple Leaf, or American Eagle.

How do you set up and fund a gold IRA account?

The most important step to setting up and funding a gold IRA is to find a custodian that will allow you to open a self-directed IRA and invest in precious metals. Once you have found a custodian that will, simply follow their account setup instructions. Then you can fund your gold IRA, by either making a new contribution, or transferring money from a 401(k) account or an existing IRA.

What are the tax benefits and restrictions associated with a gold IRA?

The tax benefits and restrictions of a self-directed gold IRA are the same as any other IRA. With a traditional gold IRA, you may be eligible for a tax deduction in the year that you make a contribution, but you’ll owe taxes on withdrawals. With a Roth gold IRA, you don’t get a tax deduction when you make your contribution — instead, your withdrawals are tax free. In most circumstances, you will have to pay taxes and/or penalties if you make a withdrawal before age 59 ½.

Photo credit: iStock/JohnnyGreig

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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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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houses with percent symbol mobile

How Much Equity Do You Have in Your Home?

By | Budgeting & Goals, Home Ownership, personal_loan | Comments Off on How Much Equity Do You Have in Your Home?

Making monthly mortgage payments can feel like chipping away at an iceberg, especially in the beginning. Savvy homeowners take heart that each payment earns them a little more ownership in their property. But do you know exactly how much ownership, commonly called “equity,” you currently have? Knowing how to calculate home equity can help you feel a growing sense of satisfaction as you make those mortgage payments.

Simply put, home equity is the difference between the value of a property and the outstanding balance of all mortgages, liens, and other debt on the property. Read on to determine how much of your home you really own, what you can do to increase your equity, and how you can leverage that equity to make it work harder for you.

Key Points

•   Home equity represents the difference between a property’s current market value and the outstanding mortgage balance, calculated using the formula: Home Equity = Home Value – Home Debt.

•   To accurately determine home value, homeowners can use online property tools or request a professional appraisal from their mortgage lender.

•   The loan-to-value ratio (LTV) helps represent home equity, indicating the percentage of a home’s value that is borrowed, with lenders typically allowing a maximum LTV of 80%.

•   Increasing home equity can be achieved through larger down payments, making extra mortgage payments, or refinancing to shorter-term loans, alongside strategic home improvements.

•   Homeowners can usually borrow 80%-85% of their home equity, and options like Home Equity Lines of Credit (HELOCs) allow for flexible borrowing against property value over time.

How to Calculate Your Home Equity

As noted above, home equity is the difference between your home’s current value and the outstanding balance of your mortgage and other debt on the property. It’s a simple equation:

Home Equity = Home Value – Home Debt

How to Find Your Home’s Value

To estimate your home value, you can use the purchase price of your home, but that doesn’t account for any appreciation in value. For a precise calculation of your home equity, you’ll need to know your home’s current value with appreciation. You can get an estimate of your home’s value with an online property tracking tool. These calculators approximate the appreciation of your home by comparing it with similar properties in the area. While helpful, these tools can’t provide an exact measure.

To determine your real-time home value, you’ll need to contact your mortgage lender and request an official appraisal. Your lender will conduct an inspection and evaluation of what your home is worth in the current market. The appraiser may ask you for documentation of any work you’ve done on your home to come to a more exact figure.

How Much Is Left on Your Mortgage?

Calculating home equity also involves knowing what you owe on your current home mortgage loan. You can find your mortgage payoff amount (which is different from your balance) on your lender’s online portal. Add to that the outstanding amount you owe on any second mortgages, liens (for unpaid taxes or child support, for example), home equity lines of credit, and any other loans that use your home for collateral. The sum of these items is your home debt, the last figure in the equity equation.

Using the Loan-to-Value Ratio to Represent Home Equity

The loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed — it’s like the opposite of equity. Lenders set maximum LTVs, typically 80%, for home equity loans. This means homeowners cannot borrow more than 80% of their home’s value.

You can calculate your LTV by dividing your outstanding home debt, discussed above, by your home’s appraised value:

LTV = Home Debt ÷ Home Value

For example, if your home is worth $375,000, and you still owe $200,000, your LTV is 53%. (200,000 ÷ 375,000 = .53) This means you still owe 53% of the equity in your home. Subtract 53 from 100 to see how much equity you have built in your home: Your available equity is 47%.

Examples of Home Equity Calculations After 1, 3, 5, 10 Years

The table below shows how much equity a fictional homeowner accumulates over the first 10 years of their mortgage. This assumes an initial home value of $300,000, with annual appreciation of 10%, a mortgage APR of 7.5%, and a monthly payment of $1678.11. The LTV is rounded to the nearest whole percentage. (The actual annual appreciation for American homes over the last 10 years on average was 7.4%.)

Year Home Value Loan Balance Home Equity LTV
0 $300,000 $240,000 $60,000 80%
1 $330,000 $237,596 $92,404 72%
2 $363,000 $235,196 $127,803 65%
3 $399,300 $232,611 $166,689 58%
4 $439,230 $229,825 $209,405 52%
5 $483,150 $226,822 $256,327 47%
6 $531,470 $223,587 $307,882 42%
7 $584,620 $220,101 $364,519 38%
8 $643,080 $216,343 $426,736 34%
9 $707,380 $212,294 $494,085 30%
10 $778,120 $207,931 $570,188 27%

Recommended: How Much Will a $300,000 Mortgage Cost You?

What Is a Good Amount of Home Equity?

Common wisdom says that it’s smart to keep at least 20% equity in your home. This is why many lenders limit your LTV to 80%. To borrow against your home, then, you’ll typically need more than 20% equity.

Fortunately, that’s not a problem for most homeowners. Research firm Black Knight recently estimated that Americans have $193,000 of “accessible” home equity on average, over and above the recommended 20%. This is mostly due to rising home values.

Recommended: How Home Ownership Can Help Build Generational Wealth

How Much Home Equity Can You Take Out?

The amount of equity you can take out depends on the lender and the type of loan. However, most lenders will allow you to borrow 80%-85% of your home’s appraised value. The other 15%-20% remains as a kind of financial cushion.

A homeowner who doesn’t want to take out a home equity loan but needs cash might consider a Home Equity Line of Credit (HELOC). A HELOC allows owners to pull from their property’s equity continually over time. Borrowers can take only what they need at the moment. HELOCs use the home as collateral, which might not appeal to all borrowers.

Tips on Increasing Home Equity

Your initial home equity is determined by your down payment. The larger the down payment, the more equity a homeowner has right off the bat. The average down payment among American homebuyers is currently 13%. But a down payment of 20% or more can qualify borrowers for more favorable mortgage rates and also helps you avoid paying for private mortgage insurance.

After the down payment, home equity typically accumulates in three ways: monthly mortgage payments, appreciation, and home improvements. Beyond waiting for their home to appreciate, homeowners can increase their equity in several ways:
Pay more than your minimum mortgage payment each month. The extra money will go toward your principal, increasing your equity more quickly. Learn how to pay off a 30-year mortgage in 15 years.

Make biweekly payments instead of monthly. Your mid-month payment will incrementally lower your interest due. And by the end of the year, you’ll have made an extra mortgage payment.

Make strategic home improvements. Certain updates increase your home’s value more than others.

Refinance to a shorter-term loan. By refinancing to a 10- or 15-year mortgage instead of a standard 30-year, each mortgage payment will increase your equity at a faster rate.

The Takeaway

Calculating home equity involves subtracting your mortgage payoff balance (found on your lender’s website) from your home’s current value. To get the most accurate idea of your home’s market value, you’ll need an appraisal by your mortgage lender, which can cost $300-$450. Homeowners typically can’t borrow more than 80%-85% of their home equity. Knowing how to calculate equity in your home can be a first step in determining how to use that equity to fund renovations or another important expense.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

How do you determine your home equity?

To quickly estimate your home equity, subtract the amount you owe on your current mortgage from your home’s current value.

What is the formula to calculate home equity?

To figure out home equity, simply subtract the amount you owe on your home mortgage loan (and any other loan you may have that is secured by your home) from your home’s current value.

How much equity can you borrow from your home?

A lender will generally let you borrow 80%-85% of your home’s value, minus the amount you owe on your mortgage. Some lenders allow you to borrow more.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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