Jan
08
2025
How Do Interest Rates Impact Stocks?

How Do Interest Rates Affect the US Stock Market?

By | Growing Wealth, invest, Investing | Comments Off on How Do Interest Rates Affect the US Stock Market?

The impact of interest rates and their fluctuations are a fact of life for investors, and there are several ways interest rates can affect the stock market. For example, higher interest rates raise the cost of borrowing for consumers and corporations, which can ultimately affect public companies’ earnings, and potentially, stock prices. The reality for stock market investors is that even minor adjustments to interest rates can significantly impact their portfolios.

But the effects interest rates may have on stock prices goes much deeper than that. Here’s how rising or falling interest rates could affect stocks, stock prices, and the stock markets.

Key Points

•   Interest rates affect stock markets by influencing borrowing costs for consumers and corporations, which can impact public companies’ earnings and stock prices.

•   Higher interest rates increase borrowing costs, potentially slowing the economy and reducing stock prices.

•   Lower interest rates can boost stock markets by making borrowing cheaper, encouraging spending, and increasing company revenues.

•   Changes in interest rates can shift investor preferences between stocks and bonds, depending on the yield environment.

•   Diversifying portfolios and monitoring Federal Reserve policies can help investors manage the impact of interest rate fluctuations.

What’s the Fed Fund Rate?

While many market factors come into play to determine interest rates, the Federal Reserve, or the U.S. central bank, influences rates and sets the fed funds rate. The fed funds rate is the rate that financial institutions trade federal funds, which has a downstream effect on interest rates of all types, from mortgage rates to the effective interest rate you’ll pay on your credit card balance.

Zooming out even more to try and get more context, the Fed has a “dual mandate”:

•  Create the best environment for maximum employment.

•  Stabilize prices, or keep inflation in check.

One of the tools the Fed has in its toolkit to try to achieve these twin goals is controlling short-term interest rates — or, the Fed Funds rate. This is done by the Federal Open Market Committee (FOMC) — made up of 12 Fed officials — which meets eight times a year to set the federal funds rate, or the target interest rate.

The federal funds rate is the rate banks charge each other to lend funds overnight.

Other factors influence general interest rates, like consumers’ demand for Treasuries, mortgages, and other loans. But when the Fed adjusts the federal funds rate, it has sweeping ripple effects on the economy by broadly changing the cost of borrowing.

When Rates Go Up, What Happens to the Stock Market?

The Fed may increase interest rates in response to some macroeconomic trend, such as rising prices (or inflation). That was the case in 2022 and 2023, when the Fed increased interest rates in response to rising inflation. That’s generally a sign that the economy is a bit too hot, or growing too fast.

If the U.S. economy is growing too fast, the Fed can hike interest rates to get a grip on rising inflation – again, which is exactly what happened in 2022 and 2023 – which effectively makes goods and services more expensive. This is to make borrowing and getting credit more expensive, which curbs consumer and business spending, reduces widespread prices, and hopefully gets the economy back on an even keel.

Another example: In the early 1980s, Fed Chair Paul Volcker jacked up interest rates to above 20% in order to tame runaway inflation; prices were rising by more than 10% annually during the period. Volcker’s interest rate moves were a big reason why the average 30-year mortgage rate was above 18% in 1981.

As for how that affects the stock market? Generally, it leads to a decline, though not always. Since costs go up after a rate hike, earnings can fall, and investor sentiment can take a hit, too.

When Rates Go Down, What Happens to the Stock Market?

Conversely, when rates go down, the market may rally, as the Fed is signaling that it wants to give the economy a shot in the arm. That means borrowing costs could decline, more people could potentially be spending money, and businesses could drive more revenue and profits. Those are all things investors want to see and hear, so they may increase demand for stocks, lifting the market overall.

Again, the Fed might do this if it thinks the economy is too slow or contracting, and wants to boost activity. This move, known as loose monetary policy, is one way the Fed attempts to hit the mandate of creating the best environment for maximum employment.

In short: Lower interest rates make it easier for consumers, businesses, and other economic participants to borrow money and get easier access to credit. When credit flows, Americans are more likely to spend money, create more jobs, and more money enters the financial markets.

Recent history bears this strategy out. In 2008, when the global economy cratered, and both employment and spending were in free fall, the Fed slashed rates to near zero percent to make credit easier to get and restore confidence among consumers and businesses that the economy would stabilize. The Fed again cut interest rates in March 2020 to near zero percent to stimulate the economy during the initial waves of shutdowns due to the coronavirus pandemic.

Do Rate Changes Impact the Bond Market?

Generally, higher interest rates tend to be a headwind for stocks, partly because investors will prefer to invest in lower-risk assets like bonds that may offer an attractive yield in a high-interest rate environment.

But lower rates may make the stock market more attractive to investors looking to maximize growth. Because investors cannot get an attractive yield from lower-risk bonds in a low rate environment, they will put money into higher-risk assets like growth stocks to seek an ideal return. So, there tends to be an inverse relationship between stocks and bonds depending on the prevailing interest rate environment.

Recommended: Bonds vs. Stocks: Understanding the Difference

Other Areas Affected by Rate Changes

While the stock market may be affected by rate changes, so are consumers and businesses.

Consumers

In a period of high interest rates, publicly traded companies face a potential indirect threat to revenues, which could hurt stock prices.

That’s due to the reduced levels of disposable income in a high-rate environment. Higher rates make it more expensive for consumers to borrow money with credit cards, mortgages, or personal or small-business loans.

Consumers’ tighter grip on their pocketbooks may negatively affect companies, who find it more challenging to sell their products and services. With lower revenues, companies can’t reinvest in the company and may experience reduced earnings.

Companies

Businesses that are publicly traded can experience significant volatility depending on interest rate fluctuations. For instance, changes in interest rates can impact companies through bank loan availability.

When rates rise, companies may find it more difficult to borrow money, as higher interest rates make bank loans more expensive. As companies require capital to keep the lights on and products rolling, higher rates may slow capital borrowing, which can negatively impact productivity, cut revenues, and curb stock growth.

Correspondingly, companies can borrow money more freely in a lower interest rate environment, which puts them in a better position to raise capital, improve company profitability, and attract investors to buy their stock.

Protecting Your Investments From Higher Rates

There are strategies you can use to protect your portfolio when interest rates change.

•   Monitor the Federal Reserve and its rates policy. The FOMC meets eight times a year to discuss economic policy strategy. Even if they don’t result in an interest rate change, announcements from the meetings can significantly impact the stock market.

•   Diversify your portfolio. Investors can try to diversify their portfolio up front. A portfolio with a mix of investments like stocks, bonds, real estate, commodities, and cash, for example, may be less sensitive to interest rate moves, thus minimizing the impact of any volatile interest rate fluctuations.

•   Look into TIPS. Investing in Treasury Inflation Protected Securities (TIPS) may help fortify a portfolio against interest rate swings. TIPS are a form of Treasury bonds that are indexed to inflation. As inflation rises, TIPS tend to rise. When deflation is in play, TIPS are more likely to decrease.

The Takeaway

Changes in interest rates can have far-reaching effects on the stock market. In general, higher interest rates tend to have a dampening impact on stocks, while lower interest rates tend to boost market prices. Higher interest rates effectively mean higher borrowing costs that can slow down the economy and companies’ balance sheets and drag down stock prices. Additionally, higher interest rates can boost the appeal of bonds relative to equities, which also acts as a drag on stocks.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How do rate changes affect stock prices?

Rate changes can and do affect stock prices. Typically, when rates rise, the market falls, and conversely, when rates fall, the market rises.

What sectors are impacted the most when rates change?

The financial services industry is one of the most heavily impacted industries when it comes to rate changes, but so are several others, including retail and manufacturing.

How do interest rates affect inflation?

Higher interest rates may serve to lower inflation by reducing overall demand in the economy. Higher rates means higher prices, and fewer people will make purchases accordingly, which should have a downstream effect of lowering prices in response to lower demand.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jan
07
2025
How to Open Your First IRA

How to Open an IRA in 5 Steps

By | Budgeting & Goals, Building Your Career, Growing Wealth, invest, Investing | No Comments

Saving for retirement may be the biggest financial goal many of us will ever set. So it makes sense to explore all retirement savings options, including an IRA, or individual retirement account. Individual retirement accounts are tax-advantaged tools that can be opened by virtually anyone with earned income, unlike employer-sponsored 401(k) plans. The sooner you open your first IRA, the more opportunity your savings have to grow over time, potentially leading to a nice nest egg upon retirement.

There are other benefits to opening an IRA. For one, it can deliver attractive tax perks — either up front or in retirement — and it can be especially attractive to individuals who don’t have an employer-sponsored 401(k) plan, or have maxed it out already.

This article will walk you through the steps of opening an IRA — whether a traditional, Roth, or SEP IRA.

Key Points

•   Opening an IRA provides a tax-advantaged way to save for retirement, allowing individuals with earned income to benefit regardless of employer-sponsored plans.

•   Selecting the right investing style, either through a robo-advisor for automation or an online broker for hands-on management, is crucial when setting up an IRA.

•   Different types of IRAs, including Traditional, Roth, and SEP IRAs, offer various tax benefits and contribution limits based on income and employment status.

•   The process of opening an IRA involves providing personal information, identification, and selecting beneficiaries, followed by funding the account through transfers or rollovers.

•   Choosing the right investments within an IRA, such as stocks, bonds, or target date funds, should align with individual risk tolerance and retirement goals for optimal growth.

How to Open an IRA

1. Choose Your Investing Style

When setting up an IRA, you have the option to select the investing style that aligns with your preferences and goals. You can choose between two primary methods: using an online broker for self-directed investing or opting for a robo-advisor for automated investing.

•   Consider a robo-advisor for a hands-off approach: If you find the array of investment choices daunting or you’re unsure where to begin, a robo-advisor might be the ideal solution. This option allows you to take a more hands-off approach and automate your investments. Simply share your retirement and investment objectives, and the robo-advisor will create and maintain a tailored portfolio specifically designed to meet your needs.

•   Choose an online broker to take control of your investments: For those who prefer to be more involved and make their own investment decisions, using an online broker for self-directed investing is the way to go. This method allows you to directly manage your investments and typically comes with the benefit of commission-free trades. This is a great choice for individuals who want to actively participate in the management of their IRA investments.

2. Decide Where to Open Your IRA

You can open an IRA online, a bank, mutual fund company, or other financial services provider. Typically, the more personal care and advice you get, the higher the account fees will be. A robo-advisor, for instance, might charge lower fees than a brokerage.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

3. Determine the Type of IRA You Want to Open

Traditional IRA

If you have earned income, you can open a traditional IRA regardless of how much you make per year. An IRA can be a good next step if you’ve maxed out your 401(k), for instance.

One notable difference between traditional and Roth IRA accounts is that traditional IRAs allow you to deduct your contributions on your tax returns now, meaning you pay taxes on distributions when you retire. You’ll pay a 10% penalty tax (in addition to regular income tax) on any money you withdraw from a traditional IRA before age 59 ½, with a few exceptions.

It may be better to go with a traditional IRA if you think you’ll be in a lower tax bracket after retirement. This is because you’ll be saving on a higher tax rate now (vs. the lower rate you’d be paying later, since you’d be in a lower tax bracket in retirement).

Roth IRA

Unlike traditional IRAs, Roth IRAs have income limits for contributions. For 2024 and 2025, single filers can contribute the maximum amount to a Roth IRA if their income meets a certain threshold. If their income exceeds this threshold but falls below another, they can contribute a reduced amount. Similarly, married couples filing jointly can contribute the maximum if their income meets a specific level, with a reduced contribution amount available for those who don’t meet the full threshold.

Roth IRA contributions are made with after-tax income. While that doesn’t offer any tax advantages now, it does mean that when you withdraw money upon retirement, you won’t have to pay taxes on it. As such, a Roth IRA may make sense for eligible individuals who typically get a tax refund and expect to be in a similar or higher tax bracket when they retire (for example, if they plan to have substantial income from a business, investments, or work).

SEP IRA

A SEP IRA, or simplified employee pension, can be set up by either an employer at a small business or by someone who is self-employed. For 2024, you can contribute up to 25% of your total compensation or a maximum of $69,000, whichever is less, to a SEP IRA. For 2025, you can contribute the lesser of up to 25% of your total compensation or a maximum of $70,000.

Employers get a tax deduction when they contribute to their employees’ IRAs, and they’re also allowed to contribute on a “discretionary basis” (meaning the employer doesn’t have to contribute in years where it’s not as financially feasible for the company.) For employees, this option may allow you to contribute a greater amount than other IRAs, depending on your income.

4. Open the IRA Account

Once you decide where to open an IRA, you’ll need to follow through with doing so. The process to open an IRA can vary a bit from provider to provider, but it’s generally pretty straightforward.

What You’ll Need to Open an IRA

•   A copy of your government-issued ID

•   Personal information, including contact information and Social Security number

•   Details on intended beneficiaries

5. Fund Your Account

Once your account is opened, you’ll receive guidance on funding an IRA. If you want to fund your account through an electronic transfer, you’ll be asked to provide banking information. It’s also possible to roll over existing retirement accounts — and yes, it is possible to open an IRA if you have a 401(k) already.

In 2024 and 2025, you can contribute up to $7,000 a year to a traditional or Roth IRA, or up to $8,000 if you’re 50 or older. If you take home more than the maximum earnings allowed for a Roth IRA but still prefer a Roth IRA over a traditional account, you might be able to contribute a reduced amount of Roth IRA contribution limits. An IRA contribution calculator can help you get an idea of how much you can contribute this year.

In many cases, it’s a good idea to invest as much as you can up to that amount each year to take full advantage of the power of compound growth.

A retirement calculator can help you figure out whether you’re on track for retirement. A quick rule of thumb: By the time you’re 30, it’s typically good to have the equivalent of one year’s salary saved.

Rolling Over a 401(k) into an IRA

If you’re leaving a job with an employee-sponsored retirement plan, you can roll over your 401(k) into a traditional IRA. When you roll money over from a 401(k), there’s no limit to how much you can add to an IRA at that time. Going forward, additional contributions will be capped at the typical IRA contribution limit.

6. Select Your Investments

Investors can choose to invest in stocks, bonds, mutual funds, low-cost index funds, or exchange-traded funds (ETFs) — or a combination thereof – through a financial institution.

One popular type of investment fund geared toward retirement savings is a “target date fund.” A target date fund is calibrated to the year you plan to retire, and it’s meant to automatically update your mix of assets, like stocks and bonds, so they’re more aggressive earlier in life and more conservative as you approach retirement.

Ultimately, the mix of investments in your IRA should depend on your personal risk tolerance, lifestyle, and retirement goals.

Investing in Your Retirement

Once you’re familiar with how to open an individual retirement account, the process itself is pretty straightforward — possibly the biggest lift involved is deciding which IRA suits your personal situation and retirement goals best: a traditional, Roth, or SEP IRA. From there, you’ll need to decide where to start a Roth IRA or other type or IRA, then go through the formal process of starting an IRA, which includes providing certain information, funding the account, selecting a contribution amount, and deciding where to invest your funds.

That can all sound like a lot, but getting started on saving for your retirement doesn’t have to be difficult. SoFi Invest makes opening an IRA simple — it’s possible to sign up in less than five minutes. You can be as involved in the investment process as you want to be — either with hands-on investing or our automated investing technology, in which our algorithm will recommend an appropriate mix of investments based on your age and retirement goals.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How much money is required to open an IRA?

There’s no universal minimum amount required to open an IRA. That being said, some providers will have minimum requirements.

Can you open an IRA all on your own?

Yes, it’s definitely possible to open an IRA on your own. The process is simple, similar to opening a bank account, and you can do so at most banks, brokerages, or other financial institutions. Often, it’s possible to start an IRA online.

Can you open an IRA at a bank?

Yes, many banks offer IRAs. You can also open an IRA at credit unions, brokerages, and investment companies.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.
CalculatorThis retirement calculator is provided for educational purposes only and is based on mathematical principles that do not reflect actual performance of any particular investment, portfolio, or index. It does not guarantee results and should not be considered investment, tax, or legal advice. Investing involves risks, including the loss of principal, and results vary based on a number of factors including market conditions and individual circumstances. Past performance is not indicative of future results.

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.

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.

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Jan
07
2025
Should I Put My Bonus Into My 401k? Here's What You Should Consider

Should I Put My Bonus Into My 401(k)? Here’s What You Should Consider

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Should I Put My Bonus Into My 401(k)? Here’s What You Should Consider

If you received a bonus and you’re wondering what to do with the bonus money, you’re not alone. Investing your bonus money in a tax-advantaged retirement account like a 401(k) has some tangible advantages. Not only will the extra cash help your nest egg to grow, you could also see some potential tax benefits.

Of course, we live in a world of competing financial priorities. You could also pay down debt, spend the money on something you need, save for a near-term goal — or splurge! The array of choices can be exciting — but if a secure future is your top goal, it’s important to consider a 401(k) bonus deferral.

Here are a few strategies to think about before you make a move.

Key Points

•   Investing a bonus in a 401(k) can significantly enhance retirement savings and offer potential tax benefits.

•   Bonuses are subject to income tax withholding, which may reduce the expected amount.

•   Contribution limits for a 401(k) are $23,000 in 2024 and $23,500 in 2025 for those under age 50. Those aged 50 and over can make an additional catch-up contribution.

•   If 401(k) contributions are maxed out, considering an IRA or a taxable brokerage account is beneficial.

•   Allocating a bonus to a 401(k) or IRA can reduce taxable income for the year, potentially lowering the tax bill.

Receiving a Bonus Check

First, a practical reminder. When you get a bonus check, it may not be in the amount that you expected. This is because bonuses are subject to income tax withholding. Knowing how your bonus is taxed can help you understand how much you’ll end up with so you can determine what to do with the money that’s left, such as making a 401(k) bonus contribution. The IRS considers bonuses as supplemental wages rather than regular wages.

Ultimately, your employer decides how to treat tax withholding from your bonus. Employers may withhold 22% of your bonus to go toward federal income taxes. But some employers may add your whole bonus to your regular paycheck, and then tax the larger amount at normal income tax rates. If your bonus puts you in a higher tax bracket for that pay period, you may pay more than you expected in taxes.

Also, your bonus may come lumped in with your paycheck (not as a separate payout), which can be confusing.

Whatever the final amount is, or how it arrives, be sure to set aside the full amount while you weigh your options — otherwise you might be tempted to spend it.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement by opening an IRA account. The money you save each year in a traditional IRA is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

What to Do With Bonus Money

There’s nothing wrong with spending some of your hard-earned bonus from your compensation. One rule of thumb is to set a percentage of every windfall (e.g. 10% or 20%) — whether a bonus or a birthday check — to spend, and save the rest.

To get the most out of a bonus, though, many people opt for a 401k bonus deferral and put some or all of it into their 401(k) account. The amount of your bonus you decide to put in depends on how much you’ve already contributed, and whether it makes sense from a tax perspective to make a 401(k) bonus contribution.

Contributing to a 401(k)

The contribution limit for 401(k) plans in 2024 is $23,000; for those 50 and older you can add another $7,500, for a total of $30,500. The contribution limit for 401(k) plans in 2025 is $23,500; for those 50 and older you can add another $7,500, for a total of $31,000. For 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500), for a total of 34,750. If you haven’t reached the limit yet, allocating some of your bonus into your retirement plan can be a great way to boost your retirement savings.

In the case where you’ve already maxed out your 401(k) contributions, your bonus can also allow you to invest in an IRA or a non-retirement (i.e. taxable) brokerage account.

Contributing to an IRA

If you’ve maxed out your 401k contributions for the year, you may still be able to open a traditional tax-deferred IRA or a Roth IRA. It depends on your income.

In 2024, the contribution limit for traditional IRAs and Roth IRAs is $7,000; with an additional $1,000 if you’re 50 or older. In 2025, the contribution limit for traditional IRAs and Roth IRAs is also $7,000; with an additional $1,000 if you’re 50 or older.

However, if your income is over $161,000 (for single filers) or over $240,000 (for married filing jointly) in 2024, you aren’t eligible to contribute to a Roth. For 2025, you can’t contribute to a Roth if your income is over $165,000 (for single filers) or over $246,000 (for married filing jointly). And while a traditional IRA doesn’t have income limits, the picture changes if you’re covered by a workplace plan like a 401(k).

If you’re covered by a workplace retirement plan and your income is too high for a Roth, you likely wouldn’t be eligible to open a traditional, tax-deductible IRA either. You could however open a nondeductible IRA. To understand the difference, you may want to consult with a professional.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Contributing to a Taxable Account

Of course, when you’re weighing what to do with bonus money, you don’t want to leave out this important option: Opening a taxable account.

While employer-sponsored retirement accounts typically have some restrictions on what you can invest in, taxable brokerage accounts allow you to invest in a wider range of investments.

So if your 401(k) is maxed out, and an IRA isn’t an option for you, you can use your bonus to invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds, and more in a taxable account.

Deferred Compensation

You also may be able to save some of your bonus from taxes by deferring compensation. This is when an employee’s compensation is withheld for distribution at a later date in order to provide future tax benefits.

In this scenario, you could set aside some of your compensation or bonus to be paid in the future. When you defer income, you still need to pay taxes later, at the time you receive your deferred income.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Your Bonus and 401(k) Tax Breaks

Wondering what to do with a bonus? It’s a smart question to ask. In order to maximize the value of your bonus, you want to make sure you reduce your taxes where you can.

One method that’s frequently used to reduce income taxes on a bonus is adding some of it into a tax-deferred retirement account like a 401(k) or traditional IRA. The amount of money you put into these accounts typically reduces your taxable income in the year that you deposit it.

Here’s how it works. The amount you contribute to a 401(k) or traditional IRA is tax deductible, meaning you can deduct the amount you save from your taxable income, often lowering your tax bill. (The same is not true for a Roth IRA or a Roth 401(k), where you make contributions on an after-tax basis.)

The annual contribution limits for each of these retirement accounts noted above may vary from year to year. Depending on the size of your bonus and how much you’ve already contributed to your retirement account for a particular year, you may be able to either put some or all of your bonus in a tax-deferred retirement account.

It’s important to keep track of how much you have already contributed to your retirement accounts because you don’t want to put in too much of your bonus and exceed the contribution limit. In the case where you have reached the contribution limit, you can put some of your bonus into other tax deferred accounts including a traditional IRA or a Roth IRA.

Recommended: Important Retirement Contribution Limits

How Investing Your Bonus Can Help Over Time

Investing your bonus may help increase its value over the long-run. As your money potentially grows in value over time, it can be used in many ways: You can stow part of it away for retirement, as an emergency fund, a down payment for a home, to pay outstanding debts, or another financial goal.

While it can be helpful to have some of your bonus in cash, your money is typically better in a savings or investment account where it has the potential to work for you. If you start investing your bonus each year in either a tax-deferred retirement account or non-retirement account, this could help you save for the future.

Investing for Retirement With SoFi

The yearly question of what to do with a bonus is a common one. Just having that windfall allows for many financial opportunities, such as saving for immediate needs — or purchasing things you need now. But it may be wisest to use your bonus to boost your retirement nest egg — for the simple reason that you may stand to gain more financially down the road, while also potentially enjoying tax benefits in the present.

The fact is, most people don’t max out their 401(k) contributions each year, so if you’re in that boat it might make sense to take some or all of your bonus and max it out. If you have maxed out your 401(k), you still have options to save for the future via traditional or Roth IRAs, deferred compensation, or investing in a taxable account.

Keeping in mind the tax implications of where you invest can also help you allocate this extra money where it fits best with your plan.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Is it good to put your bonus into a 401(k)?

The short answer is yes. It might be wise to put some or all of your bonus in your 401(k), depending on how much you’ve contributed to your workplace account already. You want to make sure you don’t exceed the 401(k) contribution limit.

How can I avoid paying tax on my bonus?

Your bonus will be taxed, but you can lower the amount of your taxable income by depositing some or all of it in a tax-deferred retirement account such as a 401(k) or IRA. However, this does not mean you will avoid paying taxes completely. Once you withdraw the money from these accounts in retirement, it will be subject to ordinary income tax.

Can I put all of my bonus into a 401(k)?

Possibly. You can put all of your bonus in your 401(k) if you haven’t reached the contribution limit for that particular year, and if you won’t surpass it by adding all of your bonus. For 2024, the contribution limit for a 401(k) is $23,000 if you’re younger than 50 years old; those 50 and over can contribute an additional $7,500 for a total of $30,500. In 2025, the contribution limit for a 401(k) is $23,500 if you’re under age 50, and those 50 and up can contribute an additional $7,500 for a total of $31,000. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

Photo credit: iStock/Tempura

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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.

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21 Items You Can Recycle and Make Money

21 Items That You Can Recycle for Money

By | Budgeting & Goals, money | Comments Off on 21 Items That You Can Recycle for Money

Most of us are aware that diverting waste from landfills is a “green” practice that can benefit the planet. But did you know that recycling everyday items — from metal cans to cooking oil — can also put some green in your wallet?

With a little time, effort, and know-how, you can recycle the following 21 items to generate some extra cash. After all, one person’s trash can be another person’s treasure. Read on to learn more.

Key Points

•   Recycling everyday items like cans, bottles, and electronics can earn money while benefiting the environment.

•   Items such as cooking oil, hair, and gift cards can also be recycled for cash, providing additional income opportunities.

•   Non-financial benefits of recycling include reducing landfill waste, preventing pollution, and conserving natural resources, contributing to environmental sustainability.

•   Companies like TerraCycle offer fundraising opportunities that involve recycling trash, which can benefit schools and nonprofits.

•   Selling used items like clothes, toys, and bed sheets online or at consignment shops can provide extra income, promoting a circular economy.

Is Recycling Financially Worth It?

The practice of waste diversion can help reduce our growing trash problem and be well worth it for businesses and local governments. But whether it’s worth it as a way of making money from home (or mostly from home) will depend on several factors.

You may need to do the following:

•   Seek out a recycling center or collection point.

•   Prepare the items for recycling (washing, sorting) according to the center’s specifications.

•   Make a tax-deductible donation vs. receiving a cash payment.

Recycling can be a positive way to earn a bit of extra money during your off-hours from your full-time job. If you are a freelancer, you’ll need to determine whether the time spent is worth it, as it might take away from higher-paying hourly work.

Recommended: 39 Passive Income Ideas to Build Wealth

How Much Do You Get Per Item You Recycle?

Recycling can become a green way to earn money, but it can be a challenge to estimate how much you’ll make.

Redemption centers for clothes, glass bottles, or scrap metal pay varying amounts from state to state. For example, in New York State, you can get 5 cents for every returned aluminum can, while Michigan offers 10 cents per can.

You can do a little research to determine where you’ll get the most cash for what’s otherwise considered trash and which items yield the most money back.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

21 Everyday Items That You Can Recycle for Money

Whether your goal is downsizing your life and decluttering, making additional dollars, or both, purging your household of unused items can lead to a cleaner environment and fuller piggy bank.

Wondering what you can recycle for money? Here are 21 ideas:

1. Cans

On the list of what to recycle for money, aluminum beverage cans are typically near the top. They are light and easily compacted and can often be redeemed at your local supermarket for five or 10 cents a piece.

Beyond bagging up the recyclable cans in your home, you can collect them from your workplace, friends, and family members. Or you might find many after an event, such as a block party or community concert.

2. Glass Bottles

As with cans, you can collect around five to 10 cents for each glass bottle you return to a store. Retailers may require you to empty and rinse them before returning.

3. Plastic Bottles

Another item to recycle for money: plastic bottles, which are everywhere. Did you know that an estimated 2.5 million of them are being thrown away every hour in the United States? You can earn around five to 10 cents for every plastic bottle recycled, depending on where you live.

4. Scrap Metal

Another item that can be recycled for money is scrap metal. It’s one of the more lucrative items to sell. At some scrap yards, you can get over $2 per pound for copper and 40 to 70 cents per pound for aluminum. To find it, look for local construction sites where workers might appreciate your hauling it away. You can also check local community boards, such as Freecycle and Craigslist.

5. Cardboard

Many of us get a lot of home deliveries, resulting in numerous boxes waiting to be recycled. You can get cash for your cardboard, around $46 – $62 per bale or about 42 cents to 62 cents per pound.

You might not be capable of storing (or baling) large amounts of cardboard. But you can research local places that will buy cardboard boxes in relatively small quantities. There are websites, like BoxCycle, that will buy your cardboard and reuse it.

If you reach out to friends, family, offices, and restaurants, you can accumulate a decent sized bundle to tie up and sell. You might also check any local college campuses after move-in day.

6. Junk Cars

If you want to cash in on your rusty pickup truck, a scrap yard might pay for it, perhaps basing the price on the metal they can recycle from it. There are also a lot of companies that will buy your car regardless of its condition. Do an online search, and review the possibilities. You may also find charities that you know and like that will pick up your car and provide you with a receipt for the donation. This could result in a significant tax savings if you itemize and include it in your charitable contribution deduction.

7. Clothes

Perhaps it’s time to clean out your closet to make some cash. You can sell your gently used clothes for quick cash. Websites (such as Poshmark, thredUP, eBay, and Etsy), in-person consignment stores, and hybrid businesses such as The RealReal are just some of the options.

8. Cooking Oil

When you’re considering what you can recycle to make money, cooking oil likely doesn’t come to mind. But if you own or run any type of restaurant, there are companies that will pay for rancid or used cooking oil. It can be reused as biofuel.

9. Hair

Hair can be a surprisingly lucrative thing to repurpose. Wig makers and hair extension companies may pay $150 to $600 for long, uncolored human hair. Typically, you need at least 10 inches to sell. In addition to searching for wig and extension businesses online, you might even find buyers on CraigsList and Ebay.

10. Makeup Containers

Many beauty supply stores will take back your old lipstick, eyeshadows, and other makeup containers. They’ll recycle it properly and, in many cases, give you cash-back reward points towards a product purchase.

11. Gift Cards

Sometimes, a well-meaning person will give you a gift card you have no intention of using. If you have unused gift cards lying in a drawer, there are websites, like CardCash and Raise, that will buy them from you or provide a marketplace where you can sell them.

These websites generally collect a fee, however — you won’t get what your card was worth. But better to collect some cash than have the card collect dust in a drawer.

Recommended: Gift Cards vs. Prepaid Debit Cards

12. Electronics

Some electronics contain hazardous materials and can’t be disposed of in your regular trash or recycling. But that doesn’t mean that taking care of e-waste is a losing proposition. Certain companies will offer money for your old electronics — computers, rechargeable batteries, and calculators, to name a few. Apple may let you trade in a laptop, tablet, or other devices for a credit, or recycle it for free.

Just make sure the company isn’t greenwashing, a practice whereby companies profess to be environmentally friendly with their e-waste, but actually aren’t. Do a bit of research before you hand off your electronics.

13. Cell Phones

Need more inspiration for things you can recycle for money? There are financial (on top of environmental) benefits to not just tossing your old phone. Many cell phone providers like AT&T and Verizon will give you a gift card or vouchers for a phone you’re no longer using. These can be used toward purchasing a new product.

Recommended: Tips for Overcoming Bad Financial Decisions

14. Car Batteries

Has your car battery stopped working? This is another item you may be able to recycle and make money. There are auto part stores and junk yards that will give you cash for your car battery — anywhere from $7 to $30 dollars. Some auto part retailers will give a store credit toward future purchases.

15. Ink Cartridges

There are many office supply stores, including Staples and Office Depot, that will recycle your used ink and toner cartridges and offer cash-back rewards.

There may be limits on how many ink cartridges you can bring back per month and certain spending requirements in order to qualify for the rewards.

16. Wine Corks

Do you love drinking wine? If so, don’t toss the corks when you open a bottle. Some craft enthusiasts, manufacturers, and other businesses are willing to buy popped wine corks. Artistic types can turn them into anything from picture frames to wall art and beyond. By listing yours on sites like Ebay and Craigslist, you can get about 5 cents per cork.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.00% APY, with no minimum balance required.

17. Holiday Lights

Those strands of holiday lights that once brought you cheer can now bring you cash. You can box up and ship your old, broken lights to Holiday LEDS and receive 10% off your next purchase.

18. Toys

You can earn money selling gently used toys to consignment shops, second-hand shops, and online. You’ll give your budget a boost and bring joy to another child.

19. Bed Sheets

Here’s another way to recycle and earn some cash: If you recently upgraded your mattress from, say, a full to a king, you can sell your used bed sheets, as well as your towels, curtains, and other fabrics, on sites such as Facebook Marketplace and Ebay.

Recommended: 37 Places to Sell Your Stuff

20. Tennis Balls

Around 125 million tennis balls get tossed out as garbage in the U.S. every year, but you might be able to make some money on them. One savvy person packaged gently used tennis balls in a four-pack muffin container and wound up earning thousands of dollars for a local charity. See if you can try your own version of her clever idea.

21. Trash

While this way to recycle and earn cash may not directly benefit your bank account, it’s a good one to know about. Small businesses, schools, and nonprofits with a lot of garbage can turn it into a fundraising opportunity. Companies such as TerraCycle will donate money to your cause for every piece of trash, often including hard-to-recycle items. There are paid and sponsored opportunities, and your school could earn $50 for every five shipments you send them.

The Takeaway

With a little research and effort, you can turn your used and unwanted items into extra money. Recycling items can be a big win for your pocketbook and the planet. Whether you focus on collecting cans, unwanted clothes, cardboard, or corks, you can wind up with some extra cash while doing good.

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

How many items are recycled a year?

America recycles around 69.1 million tons of material a year. Paper makes up about 66.5% of recycled materials, followed by metals (12.6%), wood (4.5%), plastics (4.5%), and glass (4.4%).

What can you recycle for money?

There are lots of items you can recycle for money: cans, metal, old cars, used clothing, electronics, and even human hair and cooking oil.

What are the non-financial benefits of recycling?

Even if you don’t get paid, recycling reduces the amount of waste sent to a landfill, prevents pollution, and conserves energy and natural resources.

Photo credit: iStock/Eric Panades Bosch

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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.

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

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

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
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How Do You Get a Land Loan?

How Do You Get a Land Loan?

By | Family Finances, Home Ownership, mortgage | Comments Off on How Do You Get a Land Loan?

Land loans allow borrowers to purchase acreage, or a piece of land, often with the intention of building a home there or developing the plot for business.

Because of the inherent risk to lenders, land loans can be challenging to obtain. The rate and required down payment are typically higher than those of traditional mortgage loans, and the repayment term is often shorter.

Let’s dig into land loans and look at some alternatives.

What Is a Land Loan?

A land loan, also referred to as a “lot loan,” finances a piece of land. Borrowers may have plans to build a home or start a business on the land, but they also might want to keep the plot for just fishing or hunting. Developers can also get land loans to build homes or businesses.

A land loan is different from a construction loan, which is typically a short-term loan to build or rehab a home. With a land loan, the borrower might not have immediate plans to develop the land or build the house.

A land loan can be more challenging to obtain because, unlike with traditional types of mortgage loans, there is no home to serve as collateral for the lender. Thus, lenders may have stricter requirements and higher rates attached to a land loan.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Types of Land Loans

The land loan rate and terms you get — and the down payment you’re required to make — may depend on the type of land you’re trying to buy.

Raw Land

Securing financing for raw land can be challenging. Land that has never been built on, also called unimproved land, is entirely undeveloped, meaning it lacks roads and electrical, water, and sewage systems.

To improve your chances of loan approval, it’s a good idea to have a comprehensive development plan to show lenders.

Of course raw land is generally cheaper than land that has been partially developed, but because it is virtually untouched, it is not possible to know what major issues await when you start development.

Recommended: How to Find a Contractor for Home Remodeling

Improved Land

Because improved land is developed, with utilities routed to the property and road access achieved, lenders may be more willing to offer financing. But acreage featuring these improvements typically costs more than raw land.

How to Find Land Loan Lenders

Finding land loan lenders can prove to be more challenging than finding a lender for a traditional mortgage.

Potential land buyers can try these routes for securing financing:

•   Local banks and credit unions: If your personal bank doesn’t issue land loans or you’re struggling to find a big-name financial institution that offers them, you might have more luck with a local bank or credit union.

•   Online lenders: Searching the web allows you to compare land loan rates from the comfort of your couch. It also means you can read reviews about the lenders before applying.

•   USDA loans for low-income borrowers: The U.S. Department of Agriculture offers Section 502 direct loans to help low- to moderate-income individuals or households purchase homes or buy and prepare sites, including providing water and sewage systems, in rural areas. The rate is well under current market rates. The term is as long as 38 years. Down payments are not usually required.

•   SBA loans: Business owners planning to use land for a business may qualify for a 504 loan through the U.S. Small Business Administration. The SBA and a lender issue loans for up to a combined 90% of the land purchase cost. The rate is based on market rates.

Recommended: What Is a USDA Loan?

What Are Typical Land Loan Rates and Terms?

Like any other loan, the interest rate will largely depend on your credit score. That said, land loan rates are typically higher than traditional mortgage rates, thanks to the inherent risk and only the land as collateral.

And the repayment term? A land loan from a bank often is a five-year adjustable-rate loan with a balloon payment at the end. Rarely you might find a 30-year fixed-rate loan through a financial institution in the Farm Credit System.

The Federal Deposit Insurance Corp. (FDIC) recommends loan-to-value (LTV) limits. Lenders may set down payment requirements even greater than the FDIC proposes, however.

•   For raw land, the FDIC advises a 65% LTV, meaning borrowers must put 35% down.

•   For land development, the FDIC recommends a 75% LTV, meaning borrowers must put 25% down.

•   For construction of a one- to four-family residence on improved land, the FDIC calls for an 85% LTV, meaning borrowers must put 15% down on the land loan.

If you don’t plan to develop the land, the rate and down payment could be steep.

If you do build a home on the land, you may be able to refinance the land loan into a traditional mortgage.

Alternatives to Land Loans

A land loan is not your only option when purchasing a lot. One of these alternatives to land loans may be a better choice for you:

Construction-to-Permanent Loans

If you plan to build a house in short order, this kind of loan could work. At first, you would make interest-only payments on the purchase price of the land. The loan then allows for draws until the house is done, often 12 months from closing. The loan then converts to a permanent mortgage, sometimes with the same rate.

You may need to make a down payment of at least 20% of the total loan amount. The rate for construction loans in general is higher than a regular mortgage.

FHA, VA, and USDA single-close loans are also available to eligible borrowers.

Seller Financing

Though not as common as traditional financing, owner financing is when the current landowner acts as the lender. Also called a land contract, this type of financing does not involve a bank, credit union, or traditional lender.

While it can be beneficial for those who cannot secure a land loan, buyers have fewer consumer protections working in their favor.

Home Equity Loan or HELOC

If you have significant equity in your primary home, you may qualify for a home equity loan. Your home would serve as the collateral for the loan.

Similarly, you may be able to finance the land purchase with a home equity line of credit (HELOC) or a cash-out refinance.

How much home equity can you tap? Many lenders will let you borrow up to 85% of your home equity, the home’s current value minus the mortgage balance, but some allow more than that.

Personal Loan

Though personal loan rates may be higher than home equity products’ and you may need to pay off the loan in a shorter time, it might be possible to use a personal loan to finance your land purchase.

You’ll receive the funds quickly, and an unsecured personal loan requires no collateral.

What You Need to Know Before Applying for a Land Loan

Before applying for a land loan, it’s important to educate yourself about land development and to understand the details of the specific lot you’re interested in.

Survey

When buying a large plot of land, knowing the boundaries can be more challenging. Hiring a surveyor to mark the boundaries can be helpful before applying for the loan.

Utilities and Roads

Unspoiled land may be beautiful, but it can be difficult to develop. Understanding what utilities and roads are available — or how to make them available and how much it will cost to do so — is important before applying.

Zoning

When considering a land purchase, it’s a good idea to research any zoning restrictions in that area. Before purchasing land, you’ll want to know that you can actually build on it the way you envision.

The Takeaway

Land loans allow borrowers to purchase land to develop as they see fit. Because there is more risk involved for the lender, it can be challenging to find a land loan, and the rates and terms tend to be less favorable than those of typical mortgages.

A personal loan, cash-out refinance, home equity loan, or seller financing may also allow a land buyer to hit pay dirt.

SoFi offers fixed-rate personal loans from $5,000 to $100,000 and a cash-out refinance.

And SoFi brokers a home equity line of credit that allows qualified homeowners to access up to 90%, or $500,000, of their home’s equity.

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.

FAQ

Is it hard to get a loan to buy land?

Getting a loan for a land purchase can be more difficult than getting a traditional mortgage. Fewer lenders offer land loans, and because there is more risk involved, they typically require a higher down payment, impose higher interest rates, and offer shorter repayment terms.

Are land loans higher interest?

Land loan rates are typically higher than traditional mortgage rates because there is no home to act as collateral for the lender. Interest rates may vary depending on credit scores and the down payment amount.

What is the first step to apply for a land loan?

First, research land loan lenders. Before applying, it’s also smart to devise a plan that shows the lender how you will develop the land, accounting for things like utilities, land boundaries, roads, and construction costs.

Photo credit: iStock/shapecharge

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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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✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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