Sep
16
2024

ESG, SRI, and Impact Investing Strategies: How Are They Different?

By | Growing Wealth, invest, Investing | Comments Off on ESG, SRI, and Impact Investing Strategies: How Are They Different?

Impact investing is a broad category that includes a wide range of strategies; among them are two that are focused on the environment as well as social and governance issues: ESG (for environmental, social, and governance issues) and SRI (for socially responsible investing).

Investors who are interested in making an impact with their investing dollars may want to consider funds that embrace ESG or SRI strategies, but impact investing can include other goals as well (e.g., investing in or avoiding certain industries or sectors, or goals).

While there are ways in which these three strategies overlap, it’s important to understand the distinctions as they pertain to your own investing goals.

Key Points

•   Impact investing refers to strategies that focus on having a measurable impact on certain companies, industries, or sectors.

•   Impact investing is a broad category that can include a range of strategies, including ESG (environmental, social, and governance) and SRI (socially responsible investing), as well as others.

•   As investor interest in ESG and SRI strategies has grown, so have inflows to funds that adhere to certain standards.

•   Despite investor interest, standards and metrics vary widely when it comes to ESG, SRI, or any other type of impact investing.

Understanding ESG, SRI, and Impact Investing

These days, numerous companies seek to meet certain ethical, social, environmental, or other standards. While some criteria have been inspired by the United Nations’ Principles for Responsible Investment, or the U.N.’s 17 Sustainable Development Goals, investors need to bear in mind that the definition of ESG, SRI, and impact investing can vary from company to company, from country to country.

Nonetheless, investor interest in these strategies continues to grow. In fact, 67% of asset owners (e.g. institutional investors) say that over the last five years ESG standards have become even more critical to the investment process, according to a 2023 survey by Morningstar, the fund research and rating company.

As a result a number of companies have developed proprietary screening tools and scoring methods to help investors assess different investments, including stocks, bonds, ETFs, and more.

Defining ESG, SRI, and Impact Investing

That being said, the lack of clearcut ESG and SRI standards dates back to the very beginnings of these strategies.

As early as the 18th century, religious groups like the Methodists would take a financial stand against certain societal problems (e.g., the slave trade or alcohol and tobacco manufacturing) by not investing in related organizations. This values-based approach became known over time as impact investing.

Today, ESG and SRI investing can be considered modern offshoots of that philosophy — but typically with a focus on investing proactively in certain companies or sectors with the goal of supporting specific changes or outcomes.

It’s still possible to invest in ESG and SRI strategies that explicitly avoid certain industries, companies, or types of products (e.g., avoiding companies known to use child labor).

Impact investing tends to be used interchangeably with the term values investing, as well as ESG and SRI investing, but again these strategies have different aims and standards.

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Impact Investing

The goal of impact investing is for investments to have a positive, measurable impact in a given area. That might mean avoiding industries (e.g. alcohol or weapons), or investing directly in social, environmental, political, or other concerns.

Some mutual funds or exchange-traded funds (ETFs) may utilize impact investing strategies, but impact investing may also involve private funds, such as closed-end private equity and venture capital funds. This is partly because some public companies have to prioritize financial goals to meet shareholder expectations or earnings forecasts, and impact goals alone may not suffice (more on profitability below).

Following are some examples of impact investing categories:

Impact Category

 Metrics
Environmental

•   Trees planted

•   Solar panels installed

•   Greenhouse gas emissions limited or reduced

Women’s Empowerment

•   Female founders supported

•   Number of female employees

Jobs and Education

•   Jobs created

•   Income creation

•   Access and enrollment targets
Affordable Housing

•   People housed

•   Number of units built
Essential Services

•   Individuals in need of bank accounts

•   Patients served in medical facilities

ESG Investing

ESG stands for environmental, social, and governance factors. It’s a set of criteria that can help investors evaluate companies according to how well they uphold or meet relevant criteria, in addition to financial concerns.

ESG investing is considered a form of sustainable or impact investing, but companies that embrace this term theoretically must focus on positive results in those three areas.

When ESG strategies started gaining more attention in the 1960s, some investors assumed ESG investing was primarily about values and ethics. Over time investors come to realize that ESG strategies may also impact a company’s financials. For example, ESG reporting can help illuminate potential risks to company performance, not only progress toward sustainability goals.

Still, adoption of ESG reporting and analysis has been slow owing to a lack of consistency around standards and metrics for meeting these criteria. While the SEC adopted new rules in early 2024 to help “standardize climate-related disclosures by public companies and in public offerings,” it soon stayed those rules when a number of groups filed petitions for review in multiple courts of appeals.

Overall, there is still quite a bit of variance in these standards.

However, the table below shows some common ways to assess a company’s adherence to ESG standards:

Environmental

 Social

 Governance
Energy consumption Community engagement and support Diversity in the board of directors
Waste and pollution Human and labor rights Management performance
Climate change mitigation and adaptation Health and safety impacts on products, local areas, etc. Executive compensation
Conservation and protection of biodiversity Shareholder relations Corruption
Resource management, such as water usage and sanitation Employee relations Disclosures and transparency

SRI

Socially responsible investing, or SRI, is another impact investing category that focuses on social and ethical issues. SRI mutual funds were among the first values-based investment products on the market.

While SRI is similar to ESG, it’s more broadly defined. Unlike ESG investing, which revolves around a set of standards, SRI doesn’t have clearly defined criteria, and investment strategies vary depending on the company.

SRI-focused investors might choose to avoid certain investments or industries, or choose companies that specifically work on or donate to certain causes. Investors may need to evaluate companies and funds based on their own criteria.
SRI investing strategies can include a focus on one or more of the following:

•   Alternatives to fossil fuels (e.g., clean energy like wind or solar technologies)

•   Avoiding so-called vice industries like alcohol, tobacco, cannabis, gambling

•   Investing in female or minority-led companies, or companies with a social justice mission

•   Avoiding companies relating to arms manufacturing and the military

•   Investing in companies that adhere to human rights standards

•   Supporting specific environmental outcomes, e.g. mitigating air and water pollution, safer agricultural practices, and so on

Is Sustainable Investing Different from ESG, SRI, and Impact Strategies?

Sustainable investing strategies can encompass SRI as well as ESG strategies. And while some investors use sustainable investing and impact investing interchangeably, it’s important to remember that not all impact investing is sustainable in nature.

Can SRI or ESG Investing Be Profitable?

The performance of SRI and ESG strategies versus their conventional peers have long been subject to debate. Nonetheless, the value of assets allocated to ETFs with an ESG focus has grown steadily in the last two decades. As of November 2023, according to data from Statista, the value of global assets in ESG funds was $480 billion — a substantial jump from $5 billion in 2006.

Investors interested in SRI and ESG strategies may want to examine the FTSE4Good Index Series: a compilation of stock indexes that track companies that seek to meet certain criteria or achieve certain environmental, social, or corporate governance goals. Morningstar has also developed a sustainability rating system, in use since 2016.

The Takeaway

Investors may want to bear in mind that, with the steady growth of ESG and SRI strategies in the last couple of decades, investment opportunities that focus on having an impact on the world are likely to expand.

In addition, the underlying goal of these strategies is to make a difference and potentially see a profit as well. That said, impact strategies overall don’t reduce investment risk factors; all types of impact investing, including ESG and SRI strategies, are subject to the same economic and market risk factors as conventional strategies.

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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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Sep
16
2024

What Is the Reverse Budgeting Method?

By | Budgeting & Goals, Family Finances, money | Comments Off on What Is the Reverse Budgeting Method?

The reverse budgeting method is an approach that prioritizes savings. Budgets typically start by looking at monthly bills and expenses and allocating whatever is left over to saving. Reverse budgeting turns this approach on its head — it considers savings first and spending second.

Also known as the “pay yourself first” method, reverse budgeting starts by allocating a certain amount of your monthly income to your savings goals (such as retirement or an emergency fund). Whatever is left over after that is how much you have to spend. Essentially, it involves pretending that your paycheck is smaller than it actually is.

If your top goal is saving or you’ve tried budgeting in the past without complete success, the reverse budget might be for you. Here’s what reverse budgeting means and how it works.

Key Points

•   Reverse budgeting prioritizes savings by allocating a portion of income to savings goals first, then spending the remainder on other expenses.

•   Reverse budgeting simplifies budgeting since you can focus on saving a predetermined amount and then spend the rest as needed or desired.

•   The reverse budgeting method can help achieve financial goals faster and allows guilt-free spending within remaining income limits.

•   Reverse budgeting may not be ideal for those with high-interest debt or irregular income.

•   Automating savings and periodically reassessing the budget are key steps to making reverse budgeting work effectively.

Reverse Budgeting Explained

The reverse budgeting method prioritizes setting money aside for your savings and investing goals. This might include building an emergency fund, saving for a new car or down payment on a house, or investing for retirement. Once that money has been set aside, the rest of your income can be used to cover your living expenses.

Reverse budgeting usually involves setting up automatic contributions to savings, typically on payday. As a result, the money leaves your bank account before you get a chance to spend it. That’s why this method is also known as the “pay yourself first” approach.

How Reverse Budgeting Differs from Traditional Budgeting

Making a budget typically involves listing all of your monthly expenses and assigning a portion of income to each category (e.g., housing, groceries, transportation). The goal is to ensure that expenses don’t exceed income, and any leftover funds can be saved or invested. This approach often requires meticulous tracking and discipline to avoid overspending in any category.

By contrast, reverse budgeting starts by looking at your financial goals and the things you want to save for. It helps you determine how much you need to put aside each month to accomplish them. You then subtract that sum from your monthly pay; what’s left is how much you have to spend on everything else.

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Steps to Create a Reverse Budget

Creating a reverse budget tends to be less complicated than setting up other types of budgets. It doesn’t require establishing spending categories and totals for how much you will spend on each. That said, there are a few steps involved. Here’s a look at how to do a reverse budget.

1. Assess Your Spending

To know how to set your savings goals, you’ll need to get a general sense of your current cash flow. You can do this by pulling the last few months of financial statements, then adding up how much is coming in and going each month on average. You might also want to make a list of your essential monthly expenses, as well as how much you tend to spend each month on nonessentials.

This type of spending audit will give you a clear picture of your spending patterns. It can also help you identify any discretionary spending you may be able to reduce to accommodate your savings goals. There are also budgeting apps that can do a lot of this work for you. Start by seeing what your financial institution offers that could help with this process.

2. Identifying Your Savings Goals

Next, you’ll want to think about your savings goals. These might include building an emergency fund, saving for a down payment on a house, doing a home renovation, going on a vacation, paying for a wedding, contributing to retirement accounts, or any other financial objectives.

You’ll likely want to set your savings goals in terms of dollars as well as the timeframe within which you want to work.

3. Allocate Income to Savings

Once you’ve identified your savings goals, you might pick just a couple to start with. For each, as noted, you’ll have determined how much money you’ll need, along with a realistic timeline for reaching the goal. With that information in mind, you can then allocate a portion of your income to each goal.

For example, if you want to save $5,000 for an emergency fund over the next year, you would need to save approximately $417 per month.

As you go through this step, you’ll want to be realistic about how much you can afford to siphon off your paycheck for savings. It’s important to have enough spending money left over to cover your bills and also have some fun.

Recommended: 10 Most Common Budgeting Mistakes

4. Automate Your Saving

To ensure consistency and reduce the temptation to spend your savings, it’s a good idea to automate the saving process. If you have a 401(k) at work, you can do this by letting your employer know how much of your paycheck to put into your retirement account.

For shorter-term goals, consider setting up an automatic transfer from your checking account to a savings account for the same day each month, ideally right after you get paid. Some employers even allow you to split up your direct deposit into two different bank accounts.

5. Make Adjustments as Needed

Once you’re living on your reverse budget, you may find that you don’t have enough wiggle room to comfortably cover your bills and everyday spending. Or you might realize that you can afford to put more money towards savings and, in turn, reach your goals faster. Either way, it’s important to periodically reassess your reverse budget and, if necessary, make some adjustments in your savings rate.

This is especially important as your life circumstances and financial goals change. If you get a raise, for example, consider increasing your savings rate (this can help you avoid lifestyle creep). Conversely, if you encounter unexpected expenses, you may need to temporarily reduce your savings rate to accommodate these costs.

Pros and Cons of Reverse Budgeting

As with any financial strategy, reverse budgeting has its advantages and disadvantages. Understanding these pros and cons can help you determine if this method is right for you.

Pros of Reverse Budgeting

First, consider the upsides of reverse budgeting:

•   It can help you reach your goals faster: One of the main advantages of reverse budgeting is that it takes savings right off the top of your paycheck. This can help you build an emergency fund, save for a major purchase, or invest for retirement more quickly than traditional budgeting methods.

•   Low maintenance: Reverse budgeting simplifies the budgeting process. Instead of meticulously tracking every expense category, you focus on saving a predetermined amount and spend the remainder as you see fit. This low-maintenance approach can be particularly appealing for those who find traditional budgeting too time-consuming and/or restrictive.

•   Spending without guilt: With reverse budgeting, you can enjoy spending within the limits of your remaining income. Since your savings goals are already met, you have the freedom to spend on discretionary items without worrying that you are derailing your future progress.

In these ways, the reverse budgeting method can help you prioritize savings and achieve financial security.

Recommended: The Most Important Components of a Successful Budget

Cons of Reverse Budgeting

Next, keep these potential downsides of reverse budgeting in mind:

•   It could lead to overspending: Since reverse budgeting doesn’t require setting up spending categories and strict spending limits for each one, you could end up overspending on certain things. Then, you might have to dip into savings to cover the shortfall.

•   You might be better off focusing on debt: If you have high-interest debt, paying down those balances could provide a better return on investment than saving or investing. If this is the case, a more traditional budgeting approach that prioritizes debt repayment might be more effective.

•   Not ideal for people with variable income: Reverse budgeting generally depends on earning a set amount of money each month. For people with variable income, such as freelancers or those with seasonal work schedules, maintaining a fixed savings rate could be challenging.

The Takeaway

Reverse budgeting, also known as the “pay yourself first” method, prioritizes saving and simplifies the entire budgeting process. By automating saving, it also reduces the chance that you’ll spend money today that you were intending to set aside for the future. However, reverse budgeting may not be the best approach if you have a lot of high-interest debt or your income fluctuates. You might be better off with another budgeting technique.

Choosing the right banking partner can also help you budget more effectively.

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FAQ

How does reverse budgeting help with saving money?

Reverse budgeting helps with saving money by prioritizing savings over expenditures. With this approach, you allocate a set percentage or amount of your income to savings first and then use the remaining amount to cover your expenses. This ensures that you don’t spend money you were planning to use for future goals.

Can reverse budgeting work for irregular income?

Reverse budgeting can be challenging for those with irregular income, such as gig workers. Here’s why: It relies on setting aside a certain amount of money into savings each month — before other expenses are paid. If your income fluctuates significantly, it may be difficult to meet your savings goal monthly.

However, you may be able to make it work by taking a flexible approach. For example, you might set a minimum savings rate based on your lowest expected income and then, during higher-income months, increase your savings contributions. Building an emergency fund can also help smooth out the fluctuations.

Is reverse budgeting suitable for paying off debt?

Reverse budgeting isn’t ideal for paying off debt, since it focuses on saving first, which can divert funds from debt repayment. If you have significant high-interest debt, prioritizing debt repayment might provide better financial benefits in the long run compared to the returns from savings or investments.

However, you might consider a hybrid approach — allocating a portion of your income to debt repayment and another to savings, ensuring you address both goals.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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.

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Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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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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Sep
16
2024

40-Year Mortgage: What You Need to Know

By | Financial Topics, Home Ownership | Comments Off on 40-Year Mortgage: What You Need to Know

40-year mortgages aren’t exactly what you think they are, and we’re here to clear up the confusion. Yes, a 40-year mortgage is only 10 years longer than the traditional 30-year mortgage, but the increased time to amortize interest makes it significantly more expensive. Though it may seem more affordable on a month-to-month basis, the increased amount of interest you’ll pay over the entire loan makes it hard to pay off the principal and build equity.

Additionally, 40-year mortgages are not backed by the federal government, so it can be hard to find a lender that originates them.

Here’s a deep dive on exactly what they are, how to qualify for one, how much they cost, how they compare with other loan terms, and what factors you’ll want to consider if you’re thinking about a 40-year mortgage.

Understanding a 40-Year Mortgage

To understand a 40-year mortgage, it’s important to look at how the mortgage market works and where a 40-year mortgage fits. With a traditional 30-year mortgage, the loan is typically sold on the secondary mortgage market to be bundled into securities by government-sponsored enterprises Fannie Mae and Freddie Mac.

To be eligible for sale, the loan must meet certain criteria to be considered a “qualified” mortgage. One of these criteria is that the loan term must not be longer than 30 years (the average mortgage term length in the U.S. is three decades). So a 40-year loan isn’t considered a qualified mortgage. You might also see it referred to as a “nonconforming loan.”

Because a 40-year mortgage can’t be backed by the government, it’s harder and more expensive to originate. As a result, this type of mortgage often doesn’t make sense for borrowers or lenders.

Recommended: What Is Mortgage Curtailment?

How a 40-Year Mortgage Works

When lenders do offer 40-year mortgages, there are a number of different ways these loans can be structured.

•  ARM: The 40-year mortgages can be adjustable-rate mortgages (ARMs) where the interest rate adjusts every five or ten years.

•  Interest-only for 10 years + 30-year term: They can also operate like a 10-year interest-only loan tacked on to the front of a traditional 30-year mortgage.

•  Fixed 40-year term: They can also work as a 40-year fixed loan, much like a 30-year fixed-rate loan.

Most 40-year loans require that the property be owner occupied. But the biggest hurdle you’ll encounter in the mortgage process is finding a lender that offers 40-year mortgages. Qualification works as it does with a 30-year loan, but because the lender has to keep the loan on its books, it will be extra judicious about lending when it comes to a 40-year mortgage.

40-year Loan Modification

If you’re reading up on 40-year mortgages, you may run across the term as it relates to home loan modifications. Borrowers with FHA loans (from the Federal Housing Administration) who got into financial trouble during the COVID-19 pandemic may have the opportunity to have their loans modified (or “recast”) into 40-year loans.

Advantages and Disadvantages

With a typical 40-year mortgage, it’s clear what the advantage is because there’s only one: a lower monthly payment. A lower monthly payment may make buying a home possible for some borrowers, so it’s tempting to look at a 40-year mortgage despite the drawbacks.

The lone pro, as well as the risks and drawbacks of a 40-year mortgage, can be summarized as follows:

Pros

 Cons
Lower monthly payment Pay more in interest over a 40-year term
May have a higher interest rate
Builds equity more slowly
Hard to find a lender who offers this loan type

Qualifying for a 40-Year Mortgage

Qualifying for a 40-year mortgage is similar to qualifying for other types of mortgages. In addition to the loan type and interest rate the lender can offer you, other mortgage qualification factors may include:

•  Credit score. There is no minimum score required specifically for 40-year mortgages but generally, the better the score, the better your rate.

•  Income verification. The lender will examine your employment history and how reliable your source of income is.

•  Debt-to-income ratio. How much debt you have affects how large a mortgage you can take on. Higher debt equals less borrowing power.

•  Down payment. The down payment affects the loan-to-value ratio, which affects how much the lender is willing to lend and what rate it will offer.

Recommended: How to Get a Home Loan

Comparing 40-Year Mortgage to Other Loan Terms

When you look at the costs on a 40-year mortgage, it becomes very clear what the tradeoff is. Here is an example using interest rates available in August 2024. Note that the 40-year example has a rate that adjusts every five years, so the total interest paid is an estimate.

Mortgage amount

 Interest rate

 Monthly payment (principal and interest only)

 Total interest paid over the term
40-year 5/5 adjustable rate mortgage $450,000 6.625% $2,674.73 $833,870.52
30-year fixed mortgage $450,000 6.500% $2,844.31 $573,950.20
15-year fixed mortgage $450,000 6.250% $3,858.40 $244,512.52

For a 40-year loan, you’ll pay $833,870.52 in interest for a $450,000 mortgage. In total, that’s $1,283,870.52 you’ll pay for the $450,000 loan.

The monthly payment on a 40-year mortgage is only about $200 less for a $450,000 mortgage. All told, you would save nearly $300,000 by choosing a mortgage term of 30 years vs. a 40-year mortgage. Borrowers who opt for the lowest payment with an idea that they would pay off the mortgage early would be wise to make sure they understand whether there are prepayment penalties before signing on the loan.

Factors to Consider with a 40-Year Mortgage

Because of how much more you’ll pay for a 40-year mortgage vs. 30-year mortgage, a 40-year loan comes with some serious considerations.

Long Repayment Period

A 40-year mortgage loan will take much longer to pay off. And because you’re paying a greater percentage of interest in the beginning of your loan, it will be hard to pay down the principal for quite some time.

Building Equity Is Difficult

As noted above, a 40-year mortgage loan makes building equity more difficult because of the increased interest costs. Difficulty building equity can make it harder to move because you may not have adequate profits from the home sale to make a down payment on your next home. It can also make refinancing challenging.

Interest Costs Are High

When you look at a mortgage calculator, you may be quite shocked at how much more interest you’ll pay on a 40-year mortgage when compared to a 30-year mortgage, as illustrated previously.

When a 40-Year Mortgage Makes Sense

A 40-year mortgage could make sense if:

•  You plan to refinance to a different mortgage term in the future. If you need to keep monthly costs as low as possible and refinance at a later date, such as when you’re renovating your home, then you may want to consider a 40-year mortgage.

•  It makes a difference in home affordability. If the difference between buying a home and not buying a home is a 40-year mortgage, you’re probably thinking about the 40-year mortgage. Hopefully, you could refinance down the line and save yourself a large chunk of money.

As mentioned previously, the high cost of a 40-year mortgage is a major drawback. The total amount of the mortgage works out to be hundreds of thousands more when compared with a traditional 30-year mortgage. Be sure you’re aware of the increased costs and risks before committing to a 40-year mortgage.

Note: SoFi does not offer a 40-year mortgage. However, SoFi does offer conventional mortgage loan options.

The Takeaway

The 40-year mortgage isn’t common and there are few scenarios where it makes sense. When you compare a 30-year mortgage with a 40-year mortgage, you’ll only pay a couple hundred dollars more per month on a 30-year mortgage, but you’ll save hundreds of thousands of dollars over the life of the loan. If you’re considering a 40-year mortgage, consult a lender you trust. They will have many tools at their disposal for helping you afford a home of your own.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Are 40-year mortgages widely available?

No, 40-year mortgages are not common because they aren’t considered conforming, qualified mortgages. Qualified mortgages follow guidelines set by the government so they’re less risky and able to be bought by Fannie Mae and Freddie Mac. A 40-year mortgage falls outside the maximum allowable 30-year term for a qualified mortgage.

Can I refinance a 40-year mortgage later?

Yes, you can refinance a 40-year mortgage at a later date, provided you can qualify for the new loan you’re applying for.

Is a 40-year mortgage a good option for first-time homebuyers?

There are serious downsides to a 40-year mortgage. It may have a more affordable monthly payment than a 15- or 30-year mortgage, but you’ll have a hard time building equity (which is important for first-time homebuyers) and you’ll pay much more in interest over 40 years than you would 30 years.

Photo Credit: iStock/gradyreese

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.


SoFi Mortgages
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.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

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Sep
16
2024

How Much Is the Down Payment for a $500K House for First-Time Homebuyers?

By | Financial Topics, Home Ownership | Comments Off on How Much Is the Down Payment for a $500K House for First-Time Homebuyers?

Half a million dollars may seem like a lot, even for a nice house — but in many American cities these days, it’s close to the norm. For example, in Portland, Oregon in July 2024, the average home value hovered around $540,000. The good news? These days many mortgage programs allow qualified first-time homebuyers to put down as little as 3%, which means your down payment could be a relatively reasonable $15,000 on a $500,000 home.

Below, we’ll dive into the details about how to afford a $500,000 house.

How Much Income Do I Need to Afford a $500K Home?

Before you start to think about saving up a down payment, you may be wondering — do I make enough money to make the mortgage payments in the first place? Spoiler alert: There’s not one easy answer to the question, “How much should I be making to afford a $500,000 house?” But there is some quick math we can do to help figure out your ballpark.

For starters, keep in mind that many financial experts recommend spending no more than 30% of your gross monthly income — the amount you make before taxes are deducted — on housing. That’s about a third.

With that in mind, you can use a mortgage payment calculator to get a sense of what your monthly mortgage payments might look like. If you put $15,000 down on a $500,000 house for a 30-year home loan at a 7% interest rate, you’d pay about $3,200 per month toward your mortgage. That means you’d want to be making about three times that amount, or $9,600 per month, to comfortably afford the mortgage. That’s a yearly income of about $115,000.

Keep in mind that the $3,200 per month figure does not include expenses like mortgage insurance, homeowners insurance, or property taxes. So you would probably need a higher annual income to fully support your home purchase. If you apply the 28/36 rule, which states that your annual housing costs should be no more than 28% of your annual income, you would have about $3,500 to apply to housing. Assuming you don’t have a lot of debt eating away at your paycheck, you would need to earn around $150,000 each year to afford a $485,000 mortgage on a $500,000 home when insurance and taxes are factored in.

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

Questions? Call (844)-763-4466.

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How Much Is the Down Payment for a $500K House?

How much of a down payment you’ll be required to put down on a $500,000 house depends on what kind of mortgage you take out — and your creditworthiness as a borrower. The lowest down payment a first-time homebuyer would likely be able to get away with is 3%, or $15,000, while a full 20% down payment would be $100,000. That’s quite a range!

What Are the Down Payment Options for a Home Worth $500K?

Here’s the breakdown of the various down payment options for a home worth $500,000, depending on the type of mortgage you look into (and qualify for as a first-time homebuyer).

•   Those taking out a conventional home loan and wanting to avoid paying mortgage insurance would need to come up with $100,000 for a 20% down payment.

•   However, these days, qualified borrowers can get a conventional mortgage with a down payment as low as 3%, or $15,000 in this case. Other buyers may need to pony up 5%, or $25,000.

•   Government-backed FHA loans (Federal Housing Administration loans) are specifically designed for first-time homebuyers, and their minimum down payment is 3.5%, which works out to $17,500 for a $500,000 house.

•   Those who qualify for loans backed by the U.S. Department of Veterans Affairs (VA loans) may be able to buy a home without any required down payment at all, though putting down something can help you build equity faster. You can also look into down payment assistance programs.

What Does the Monthly Mortgage Payment Look Like for a $500K Home?

There’s not one set formula for what your specific monthly mortgage payment will look like for a $500,000 home — because each loan is individually written based on your credit score, debt-to-income ratio (DTI), and other pieces of your financial profile. The size of your down payment, the length of the loan’s term, and other factors will also influence the final figure.

That said, if you put down $15,000 toward a $500,000 home on a 30-year fixed-interest home loan at 7.00%, you could expect to make monthly payments of about $3,200. Given that the median household income in the U.S. is just over $75,000, that payment may be tough for many Americans to make. If your income can’t support a $500,000 home, you could consider looking for more affordable places to live in the US.

On the other hand, if you were able to save up the full $100,000 down payment, the $500,000 house would cost closer to $2,700 per month. Or if you could score an interest rate just one percentage point lower, your payments would be $2,900 per month — even if you put down only the same $15,000.

What to Do Before You Apply for a $500K Home Mortgage?

A mortgage on a $500,000 home is a substantial amount of debt to go into. You stand to save a lot of money by ensuring you get the very best loan terms you possibly can.

That’s why it’s a good idea to ensure you’re in the best financial standing possible before you put in your application. That means lowering your overall debt level (focusing especially on high-interest debt like credit card balances), carefully tending your credit score, and ensuring your income is both ample and reliable.

Should I Get Preapproved Before Applying for a Mortgage?

Getting preapproved for a mortgage gives you a leg up in a busy housing market. If you see a home you like and you’ve already got a preapproval letter in hand, you’ll be better able to swoop in before other prospective buyers.

That said, the mortgage preapproval process does usually entail a “hard” credit check (unlike a prequalification), so this step is best left for those who are very serious and ready to move if the right house shows up.

How to Get a $500K Home Mortgage

Applying for a mortgage — even a big one — is easy. Most of it can be done from the comfort of your home, online. You’ll be required to upload documentation proving your income and assets, but once you’ve gathered all the materials, the actual application is unlikely to take more than an hour to complete.

However, given the potential cost of a mortgage on a $500,000 home — whose interest could easily add up to hundreds of thousands of dollars over its three-decade term — it’s worth shopping around to ensure you’re getting the very best deal you can. Even just half a percentage point of interest can make a big difference over such a long span of time.

Recommended: The Cost of Living by State

The Takeaway

The full 20% down payment for a $500,000 home comes out to $100,000. That said, depending on your creditworthiness, you may be able to get away with putting down a much lower payment — as little as $15,000 if you’re a first-time homebuyer.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How much should I make to afford a $500,000 house?

You need an income of $115,000 per year to cover the costs of a mortgage and closer to $150,000 to afford a mortgage plus expenses such as mortgage insurance and property taxes on a $500,000 house. The more debt you have, such as a car payment or student loan, the greater your income will need to be. The size of your down payment is also a factor. The greater the down payment, the lower your income would need to be to cover your monthly costs.

What credit score is needed to buy a $500,000 house?

Each mortgage lender has its own algorithm for qualifying borrowers. That said, many mortgage lenders look for a score of at least 620, and if you’re taking out a larger mortgage, the higher your score, the better the terms you’ll likely qualify for.

How much is a $500K mortgage per month?

The answer to this question depends on the loan’s term and the interest rate you qualify for. For those with a lower interest rate, the payment might be about $2,700 per month, while for those with a higher interest rate, the mortgage might top $3,200. Remember this is for principal and interest only. After homeowners insurance, mortgage insurance, and property taxes your expenses will be higher.

Photo Credit: iStock/ Credit:Eleganza

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.


SoFi Mortgages
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.

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.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency. †Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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Sep
16
2024

How Much Is the Down Payment for a $300K House for First-Time Homebuyers?

By | Home Ownership, mortgage | Comments Off on How Much Is the Down Payment for a $300K House for First-Time Homebuyers?

The median price for single-family homes and condos was $360,000 in the second quarter of 2024. So as expensive as it might sound, $300,000 is squarely in the price range of many first-time homebuyers these days.

If you go by the old rule of thumb and save up a 20% down payment, that means forking over $60,000 up front on a $300,000 home sale. However, most contemporary mortgages allow buyers to put down far less — first-time homebuyers can put down as little as 3%, which comes out to $9,000 on a $300,000 home. That said, there will likely be other upfront expenses to contend with, so saving up even more than that is still a good idea.

Let’s take a closer look at how to prepare for a $300,000 home purchase — including not only your down payment but also the amount of income you need to support your purchase.

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

Questions? Call (888)-541-0398.

How Much Income Do I Need to Afford a $300K Home?

There’s not one simple answer to this question — because the real question is, “How much income will it take to afford my mortgage payment?” And that question depends on how much your home loan payment turns out to be, whether you have to pay private mortgage insurance (PMI), and more. However, there is some quick napkin math we can do to help get an estimate.

Many financial experts say you shouldn’t be spending more than about 30% of your gross monthly income on housing. To simplify this even further, let’s just say a third of your gross income.

From here, we can do some reverse engineering and estimating to figure out how much income would likely comfortably support a $300,000 home purchase.

Using a mortgage calculator, supposing you purchase a $300,000 home with a $9,000 down payment and a 7.00% interest rate, you can see that your monthly payments would turn out to be about $1,900 a month. (Note: These figures are only estimates, and your real monthly payment will depend on your creditworthiness, your lender’s unique algorithm, and other factors.)

Using that one-third rule above, you’d need to be earning about $5,700 per month ($1,900 times three) before taxes to make your mortgage payments without overextending yourself financially. That comes out to an annual income of about $68,400.

Using a mortgage calculator with taxes and insurance, will get you even closer to your true monthly number. When you factor in taxes and homeowners insurance, your monthly payment would be closer to $2,300. Returning to the one-third rule, you would need an annual income of $82,800.

Of course, if you have large amounts of existing debt, you may need a higher income to comfortably make your payments. Still, this is a good point of reference to start with.

Recommended:The Cost of Living by State

How Much Is the Down Payment for a $300K House?

As mentioned above, the 20% down payment you’d need to avoid paying PMI is $60,000 for a $300,000 house. But with conventional mortgages that allow qualified first-time homebuyers to put down as little as 3%, your down payment could be just $9,000. (Depending on your credit score and other financial information, you may need to put down 5%, which would come out to $15,000.)

Keep in mind, though, that the down payment isn’t the only upfront expense of homeownership. It doesn’t include closing costs, which could be as much as 3% to 6% of the home purchase price (which means another $9,000 to $18,000, for a $300,000 home). You’ll also need to factor in expenses related to moving, furnishing, repairing, and renovating your new home.

What Are the Down Payment Options for a Home Worth $300K?

Which down payment you’ll qualify for depends on the type of mortgage you take out and your credit history.

•   No matter what type of mortgage you choose, if you put down 20%, or $60,000, you’ll avoid paying mortgage insurance (PMI) as part of your monthly payment.

•   If you qualify for a conventional mortgage, you may be eligible to put down as little as 3%, or $9,000. (Other borrowers may be qualified for 5%, or $15,000.)

•   Those who qualify for an FHA home loan as a first-time homebuyer may put down as little as 3.5%, or $10,500.

•   If you’re an active service member, veteran or surviving spouse, you may qualify for a VA loan. In some cases, you may be able to get a VA loan without any down payment at all.

If even a modest down payment feels out of reach, down payment assistance programs can also help.

What Does the Monthly Mortgage Payment Look Like for a $300K Home?

Again, your monthly mortgage payment will vary depending on your down payment, interest rate, the term of the loan (usually 15 or 30 years), and more. In calculating your specific loan options, your lender will take into consideration your personal credit factors as well as your DTI (debt to income) ratio.

Using a mortgage payment calculator can help. A calculator would show that someone who puts down $9,000 on a $300,000 home for a 30-year fixed-interest mortgage at 7.00% would pay approximately $1,936 per month (not including property taxes, MIP, or homeowners insurance). Note that because of the way loans are amortized, the bulk of your monthly payments will go toward interest, rather than principal, during the first part of the loan’s lifetime.

What to Do Before You Apply for a $300K Mortgage

If you want to maximize your chances for approval when applying for a $300,000 mortgage, consider taking some time to get your financial affairs in order. (Sometimes, life circumstances like a new job or a new baby mean you have to buy a home quickly, so you may not have time to make everything as shiny as you’d like.)

What does this mean? Paying down large existing debts, especially high-interest debt like credit card balances, can lower your DTI and win you more favorable mortgage terms (not to mention making it easier to make ends meet as far as other monthly expenses). Finding ways to increase your income can also improve your application — and make your financial life easier.

Should I Get Preapproved Before Applying for a Mortgage?

Getting preapproved is a great way to understand how much mortgage is available to you based on your current financial standing — and to signal to real estate professionals and sellers that you’re serious. Preapproval differs from prequalification in that it usually does require a “hard” credit check, so you should only do it if you’re truly ready to buy a house when the right one comes along — but if you are, it’ll give you the chance to get your foot in the door quickly.

Recommended: The Best Affordable Places in the U.S.

How to Get a $300K Mortgage

These days, applying for a mortgage is pretty easy and can usually be done in the comfort of your own home. You’ll likely need to upload documentation proving your income and identity to your lender’s online portal — or if you’re more comfortable doing so, you may be able to apply in person and supply documents on paper or via fax.

The Takeaway

The answer to the question “how much is the down payment for a $300K house?” could be as little as $9,000 or as much as $60,000 — or more. In some cases a zero down payment loan is even possible. It all depends on what kind of mortgage you want and qualify for, as well as how much you can reasonably afford to fork over at the closing table.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I afford a $300K house on a $70K salary?

If you have minimal debts then a $70,000 salary might be enough to afford a $300,000 house. The size of your down payment and your mortgage interest rate will be important variables. Try to keep your monthly house payments below a third of your monthly gross income.

How much do you need to make to afford a $300K house?

There’s not one set answer to this question, because plenty of factors other than income influence your ability to qualify for a mortgage and comfortably make the payments. A good rule of thumb is to ensure you’re paying no more than a third of your gross monthly income toward housing. You would need an annual income of $82,800 to comfortably afford a $300,000 house when you factor in the mortgage payment, homeowners insurance costs, and taxes.

What credit score is needed to buy a $300,000 house?

Each lender has their own qualification schema as far as credit scores and other creditworthiness markers are concerned. That said, generally speaking, a credit score of at least 620 will help you qualify for more types of mortgages and open your options for shopping around.

Photo credit: iStock/undefined undefined

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.


SoFi Mortgages
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.

¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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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