Oct
16
2023

Who Regulates My Bank?

By | Family Finances, Life & Career, money | Comments Off on Who Regulates My Bank?

If you’re curious about how banks are regulated and your money is protected, it’s important to understand that multiple agencies help keep America’s financial institutions safe and compliant with the law. Some of the key regulatory agencies you may hear about are the Office of the Comptroller of the Currency (OCC), the Federal Reserve (the Fed), and the Federal Deposit Insurance Corporation (FDIC), although there are others involved as well.

This topic has been in the spotlight recently. You may have read the headlines and wondered who those agencies were and how they knew when to spring into action to help ensure that customers’ finances didn’t suffer.

Here, you can learn more about how bank regulation works, including:

•   What is the history of bank regulation?

•   What exactly do bank regulators do?

•   Who regulates banks?

What Do Bank Regulators Do?

Now that you have read about a few of the critical moments in U.S. banking regulation history, you may be interested to get a little more insight into what bank regulation accomplished during the ups and downs of America’s economy.

Here are some of the key points to know about what bank regulators do and how they can provide a sense of financial security:

•   Review the financial health of banks and step in as they deem necessary

•   Regulate foreign banks that are in business in the United States

•   Examine banks to make sure their practices are safe, sound, and fair

•   Intervene if banks are failing and ensure that depositors are protected up to the limits of insurance (and sometimes beyond, as mentioned above).

Recommended: Guide to Opening a Bank Account as a Non-US Citizen

Who Regulates Banks?

The next aspect to delve into is who has the responsibility of regulating banks and can intervene when they deem necessary. Here are the three key players when it comes to oversight of commercial banks:

Office of the Comptroller of the Currency

The Office of the Comptroller of the Currency (OCC) is an independent bureau within the U.S. Department of the Treasury. Its role is to charter, regulate, and supervise America’s national banks and federal savings associations.

In addition, the OCC oversees federal branches and agencies of foreign banks doing business on U.S. soil.

The OCC describes its mission as:

•   Ensuring that these institutions conduct business in a safe and sound manner

•   Determining that there is equitable access to financial services and customers are treated fairly

•   Making certain that the banks it oversees are complying with all applicable laws and regulations.

The Federal Reserve

The Federal Reserve, or the Fed, is responsible for regulating a different set of entities: some state chartered banks, certain nonbank financial institutions, bank and financial holding companies, and foreign banking organizations.

The Federal Reserve is America’s central bank, and has a broad jurisdiction as it works to promote the health of the U.S. economy and the stability of the financial system. Among its key functions are:

•   Conducting on-site and off-site examinations of banks to make sure they are operating in accordance with applicable laws.

•   Making sure that banks have enough capital available to withstand economic fluctuations. This can involve reviewing balance sheets, projections, and other financial materials.

•   Possibly reviewing “resolution plans,” which detail how a financial organization would resolve a situation in which it was in financial trouble or failed.

Recommended: Federal Reserve Interest Rates Explained

The Federal Deposit Insurance Corporation

As mentioned above, the FDIC plays a role in insuring its member banks so that, in the rare event of a bank failure, depositors are covered for $250,000 per account holder, per ownership category, per insured institution.

However, the FDIC does more than this. It also supervises state-chartered banks that are members of the Federal Reserve. It this capacity, it oversees more than 3,500 banks, and does the following:

•   Checks for safe and sound operations

•   Examines institutions to be sure they are complying with consumer protection regulations and laws.

A Brief History of Bank Regulation

America’s banking history has taken some twists and turns, as regulation has gone in and out of favor. Here are some key points in U.S. banking to consider:

•   In 1791, the First Bank of the United States was created, but its charter was not renewed in 1811. The reason? While the bank provided some stability to the new nation’s economy, people worried that it put too much financial control in the hands of the federal government.

•   State banks began to flourish and funded the War of 1812, but, with a large amount of credit being extended, the federal government stepped in again, chartering the Second Bank of the United States in 1816.

•   There were again worries that the federal government had too much power over the nation’s purse strings. In 1836, the Second Bank was dissolved.

•   An era of free banking emerged, without federal oversight or, in many cases, the need to have an official charter to do business. The federal government tried to rein this in with the National Banking Act of 1863; the OCC was formed to charter banks and ensure that they backed their notes with U.S. government securities.

•   The next few decades were a bit of a bumpy ride, with bank panics, such as the Panic of 1907, occurring. The Federal Reserve was created in 1913 to help bring order to the economy.

•   With the debilitating Great Depression, which began in 1929, new regulations were needed. The FDIC was formed in 1933 to help shore up the faltering economy.

•   More recently, after a period of deregulation, the government responded to the financial crisis of 2007 and the subsequent Great Recession. It passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, designed to improve accountability and financial transparency in America’s financial system.

•   In 2021, President Biden signed an executive order that charged federal regulators with improving their oversight of bank mergers, as part of a larger effort to increase competition in the country’s economy.

•   An example of financial regulation in action occurred in mid-March 2023, when the federal government stepped in as two banks faltered. The government even took the step of guaranteeing deposits over the typical FDIC insurance maximum of $250,000 per depositor, per ownership category, per insured institution.

Recommended: How Much Money Do Banks Insure?

Who Regulates Credit Unions?

Not everyone, however, keeps their accounts at a bank. There are other financial institutions, such as credit unions.

If you have an account (or multiple accounts) at a credit union, the institution that holds your money will be regulated at either the state or federal level. The National Credit Union Administration (NCUA) has oversight of federal credit unions. State-chartered credit unions are regulated by their state.

Also, credit union accounts can be insured by NCUA vs. FDIC. It’s NCUA that provides $250,000 coverage per depositor, per ownership category, per insured institution.

Who Regulates Savings and Loan Associations?

As of 2023, there are 624 savings and loan associations (sometimes called “thrifts”) operating in the U.S. While these financial institutions used to be federally regulated by the Office of Thrift Supervision (OTS), that bureau ceased to operate in 2010.

Now, savings and loans are regulated by the Fed and the OCC. These organizations are tasked with ensuring the thrifts are following the applicable laws and operating safely and soundly.

How Do I Know Who Regulates My Bank?

If you are curious about how your own bank is regulated, you can try the following, which will narrow down the field somewhat. The OCC, which regulates national banks and savings associations, has a “Who Regulates My Bank?” website.

If you don’t get the answer you are seeking there, you can call the OCC Customer Assistance Group at 800-613-6743 for further assistance.

The Takeaway

Banking regulation helps keep our financial institutions safe and sound and compliant with the appropriate laws. It also helps protect our economic stability and consumers’ deposits.

Several agencies are involved in banking regulation, such as the Fed, FDIC, OCC, and NCUA. While they rarely need to take action such as overseeing a bank closure, it can be wise to know who they are and how they function. This can help you feel more secure, knowing that they are there, backing you up; transparency in financial matters is important.

If you’re looking for a home for your funds, SoFi can be the reliable, transparent banking partner you seek. When you open an online bank account with SoFi, you pay no account fees and earn a competitive annual percentage yield (APY), which can help your money grow faster. Plus, you have tools at your disposal to help increase your savings, such as Vaults and Roundups. And, with our Checking and Savings, you’ll spend and save in one convenient place and be able to track your money with our easy-to-navigate app.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

How do I know which agency regulates my bank?

The agency that regulates your bank will likely depend on the kind of bank that holds your money: The Office of the Comptroller of the Currency (OCC) oversees national banks and federal savings associations; the Federal Reserve (the Fed) regulates some state-chartered banks, certain nonbank financial institutions, bank and financial holding companies, and foreign banking organizations; and the Federal Deposit Insurance Corporation (FDIC) supervises state-chartered banks that are members of the Federal Reserve.

Does the FDIC regulate banks?

The FDIC regulates state-chartered banks that are members of the Federal Reserve. In addition, an array of banks are insured by the FDIC. This means that clients’ accounts are insured for $250,000 per depositor, per ownership category, per insured institution.

What level of government regulates banks?

Banks are typically regulated by the federal government, with the Office of the Comptroller of the Currency (OCC), the Federal Reserve (the Fed), and the Federal Deposit Insurance Corporation (FDIC) overseeing many banks. State-chartered banks may also be regulated by their state’s agency.

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

SoFi members with direct deposit activity can earn 4.20% 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 4.20% 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 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Oct
16
2023

Guide to Adding a Beneficiary to a Bank Account

By | Family Finances, Life & Career, money, Money & Life | Comments Off on Guide to Adding a Beneficiary to a Bank Account

Adding a beneficiary to a bank account is similar to naming a beneficiary to a life insurance policy or retirement account. A bank account beneficiary is entitled to receive the assets in the account when you pass away.

Should you name a beneficiary to your bank accounts? Maybe, if you’d like to ensure that the money goes to a specific person, group of persons, or entity after you die.

There are, however, some bank account beneficiary rules to keep in mind when deciding how to handle your accounts. Here, you’ll learn more about:

•  What a bank account beneficiary is

•  What privileges a beneficiary has

•  The pros and cons of naming a beneficiary to a bank account.

What Is a Beneficiary on a Bank Account?

A bank account beneficiary is an individual or entity who’s entitled to inherit assets once the account owner passes away. Generally, the beneficiary to a bank account can be anyone you choose to name, including:

•  A spouse

•  Adult children

•  Siblings or other relatives

•  Trusts

•  Charitable organizations.

It may be possible to name a minor as the beneficiary to a bank account if your financial institution allows it. However, you might be better off appointing someone to act as a custodian for them and naming that person as the beneficiary, since leaving assets to children can get tricky from a legal perspective.

You could also set up an account in their name if you want to establish an account for a minor. The minimum age to open a bank account alone is typically 18 or 19, depending on which state you live in. However, parents can open youth savings accounts or teen checking accounts on behalf of minor children.

All beneficiaries to the account have an equal share. So, if you have five adult children and you name each of them as beneficiaries to your bank account, it would be a five-way split when it’s time to divide the assets. Each person would receive 20%.

Bank Account Beneficiary Rules

If you’re interested in naming one or more beneficiaries to your bank accounts, it’s helpful to understand a little more about how it works. Your bank can offer more information on adding beneficiaries or removing them, if necessary. In the meantime, here are a few key things to know.

Is a Beneficiary Required?

You’re not required to name a beneficiary to a bank account. However, if you’re opening a new bank account, the bank might ask you if you’d like to name one or more beneficiaries.

Is there an advantage to naming a bank account beneficiary? There are a couple, actually.

•  Naming a beneficiary ensures that the person you choose will inherit the assets in your account after you’re gone.

•  Bank accounts that have a beneficiary are not subject to probate. Probate is a legal process in which a deceased person’s assets are inventoried, outstanding debts are paid, and remaining assets are distributed to their heirs. It can be costly and time-consuming, but accounts with named beneficiaries are exempt from the process.

Can Beneficiaries Interact With Your Account?

You might be wondering what control, if any, a beneficiary might have over your account. For example, when can a beneficiary withdraw money from a bank account?

The simple answer is that a beneficiary can’t do anything with the account until you pass away. Unless you add them as a joint owner, they wouldn’t be able to make withdrawals or get information about the account.

Once you pass away, however, the money becomes theirs. At that point, they could do whatever they like with it since they technically own it. Keep in mind that naming a beneficiary wouldn’t prevent a government withdrawal from your account if your balance is offset for unpaid debts.

Recommended: What Is Private Banking?

Does Marriage Affect Beneficiary Rules?

Whether marriage impacts bank account beneficiary rules can depend on how the account is owned and what state law dictates.

If you and your spouse are both listed as joint account owners, for instance, then the beneficiary you name would likely need to wait until both of you pass away to collect any money. An account that’s owned solely by you could be passed on to your beneficiary without any of the money going to your spouse.

However, your spouse may be able to contest the beneficiary designation with the probate court. You may also need your spouse’s consent to leave assets in a bank account to someone other than them after your death.

If you get divorced and your spouse was the beneficiary to your bank account, you’d likely want to update that designation. Otherwise, they’d still be entitled to any money from the account after you’re gone.

Are There Any Downsides to Having a Beneficiary?

Naming a beneficiary to a bank account has its upsides, but there are some potential drawbacks to keep in mind as well.

•  The beneficiary can do what they want with the money once they inherit it. If you’d like to have a say in how they manage those funds after you’re gone, you might be better off leaving the money in a trust instead. With a trust, you can specify exactly how and when your heirs can access their inheritance.

•  Beneficiary designations can also get tricky if you change your mind later. You may need to close the account and open a new one to remove a beneficiary, depending on your bank’s policy.

•  Naming beneficiaries can also be problematic if it causes infighting among your heirs. For example, you might name your daughter the beneficiary to your checking account but not your son. That could lead to squabbles between them and even legal disputes if your son challenges the beneficiary designation after your death.

Do All Banks Allow Beneficiaries?

Do bank accounts have beneficiaries automatically? Usually, the answer is no. But most banks allow you to name a beneficiary to bank accounts. Credit unions can allow them too. You can check with your bank to see if naming one or more beneficiaries is an option.

If your bank does allow beneficiaries, it’s a good idea to familiarize yourself with the rules. For example, the bank might restrict who you can name and the number of beneficiaries allowed. Or it might have certain guidelines for changing or removing beneficiaries later.

Can you open a bank account for someone else if your bank doesn’t allow beneficiaries? You might be able to, depending on the bank’s rules. For example, you could set up a joint account for yourself and someone else or open an account for a minor child. Either one could allow you to bypass beneficiary designation rules.

Payable-on-Death Accounts vs. Bank Account Beneficiaries

When you open a new bank account you may be able to designate it as a payable on death (POD) account. Payable on death means that when you pass away, the money in the account is payable to the beneficiary or beneficiaries that you named at the account opening.

It’s possible to add a beneficiary to a bank account after the fact. That may be as simple as filling out a form or logging onto online banking and adding the beneficiary’s information to an existing account. The money in the account would still be payable on death to the beneficiary once you pass away.

Whether your bank specifically refers to your account as payable on death or not, the beneficiary rules are the same. Anyone who’s named to inherit the assets in the account would not be able to touch them until after you’ve died.

Recommended: How Many Bank Accounts Should I Have?

The Takeaway

Adding a beneficiary to a bank account could make transferring money to loved ones easier, especially if you’d like them to be able to sidestep probate or just feel financially secure during a trying time. If you’re not sure whether you can add a beneficiary to a bank account or not, you can ask your bank for more details.

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 4.20% APY on SoFi Checking and Savings.

FAQ

Can a beneficiary take over a bank account?

A beneficiary is entitled to inherit a bank account when the original account owner passes away. Someone who is listed as a beneficiary, but not a joint owner, would not be able to take over the account or access it during the owner’s lifetime.

What happens when you add a beneficiary to your bank account?

When you add a beneficiary to your bank account, you’re telling the bank that you’d like the money in the account to go to that person (or persons) when you pass away. The beneficiary would be able to inherit the account from you after your death.

Who gets the money in your bank account after your death?

If you name one or more beneficiaries to a bank account, then those beneficiaries would be entitled to get the money in your account when you pass away. On the other hand, if you don’t name a beneficiary, then your bank account can get included in your estate. It would then be distributed to your heirs, according to the terms of your will or state inheritance law if you die intestate (without a will).

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

SoFi members with direct deposit activity can earn 4.20% 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 4.20% 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 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

This article is not intended to be legal advice. Please consult an attorney for advice.

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Oct
16
2023
Who Qualifies for FAFSA? Find Out if You Do

Who Qualifies for FAFSA? Find Out if You Do

By | Going to College, Student Loans, student_loan | Comments Off on Who Qualifies for FAFSA? Find Out if You Do

Students who are enrolled at least half-time at an eligible school, are a U.S. citizen or eligible non-citizen, and meet other requirements can receive financial aid through the Free Application for Federal Student Aid (FAFSA®).

According to Education Data Initiative, the average cost for undergraduate students attending a four-year private nonprofit institution is $38,768 in tuition and fees per year. For students attending in-state public four year institutions, the average is $9,678 in tuition alone. Living on campus bumps these numbers up to $55,840 and $26,027 per year, respectively.

If you can’t afford to pay for this cost out-of pocket, understanding the FAFSA requirements can help you possibly fund this worthwhile expense.

What Is FAFSA?

The FAFSA is the official application form to request financial aid for higher education from the U.S. government. It determines whether undergraduate and graduate students are eligible to receive federal grants, work-study, and federal student loans. Federal aid can only be used toward qualifying college expenses.

It’s also often used by states and schools to see if you’re eligible for its student aid programs. Some private entities might also use it to determine your eligibility for their own financial aid programs.

Recommended: What Costs Does a Student Loan Cover?

How FAFSA Works

Students must complete the FAFSA before each college year. Applications must be received by the June 30 deadline. However, you can begin submitting your FAFSA for the following school year starting on October 1, and states and colleges often have earlier deadlines for state- and school-sponsored aid.

Some federal aid is granted on a first-come, first-served basis. Many of the aid programs are based on need, though some — like Direct Unsubsidized Student Loans and Direct PLUS Loans — are not.

To start, you’ll have to create a Federal Student Aid (FSA) ID online. If you’re a dependent student, one of your parents also needs to create their own FSA ID. While filling out the FAFSA, you may need to reference or submit supporting documentation, such as your Social Security number, bank account statements and tax return details, and possibly a parent’s financial paperwork, too.

After submitting the FAFSA, you’ll receive a Student Aid Report (SAR), which is an overview of the information you included on your FAFSA. Once your FAFSA is processed, you’ll receive a financial aid offer from your school. It will outline the types of federal student aid you’re eligible for, the amounts, and instructions on how to accept the award offer.

After you’ve selected the financial aid options you want to accept, the funds will be sent directly to your school. Then, your school will apply the funds to your unpaid account balance.

The FAFSA may also be used to apply for financial aid for summer classes.

FAFSA Requirements

FAFSA qualifications include academic and financial criteria. Although some federal aid programs, like the federal Pell Grant, require you to demonstrate financial need, you might still qualify for other federal aid options if you meet the remaining FAFSA eligibility requirements.

Education Requirements

The level of education you’ve completed must meet the minimum requirements to qualify for a college or career school program. This includes a high school diploma or General Education Development certificate from a state-approved school or setting.

Citizenship or Residency and Social Security Number

Another of the FAFSA eligibility requirements is that students must be a U.S. citizen or U.S. National with an active Social Security number.

Eligible non-citizen students might still be eligible for federal aid if they have:

•   A permanent resident Green Card (Form 1-551, I-151, or I-551C)

•   An arrival-departure record (I-94)

•   A T-VISA

•   Battered Immigrant Status

Be Enrolled or Accepted

Students must also be enrolled as a regular student at a degree- or certificate-granting school. To meet FAFSA qualifications for a Direct student loan, you must be enrolled at least half-time.

Maintain Satisfactory Academic Performance

Returning students who are applying for federal financial aid must maintain Satisfactory Academic Progress (SAP).

Each school determines its own SAP criteria, which includes minimum GPA, minimum passing grades for courses, number of required course credits or hours, and the timeline it deems necessary to advance toward a degree or certificate.

Age and Dependency Status

Your dependency status determines whose information you’ll need to include on your FAFSA. Dependent students are required to provide their parents’ financial information on their FAFSA while independent students might not need to.

Generally, you’re considered an independent student if at least one of the following applies to you:

•   For the school year you’re applying for aid, you’ll be 24 years old by January 1.

•   You’re married or separated (but not divorced).

•   You’re a graduate-level student.

•   You have children and provide more than half of their support.

•   You have other dependents in your household whom you provide more than half of their support.

•   You’re in the U.S. armed forces and on active duty (non-training).

•   You’re a U.S. armed forces veteran.

•   Since turning age 13, your parents were deceased, you were in foster care or a ward or dependent of the court.

•   You’re an emancipated minor or are in a legal guardianship.

•   You’re an unaccompanied homeless or self-supporting youth at risk of homelessness.

Income Limits

A common misconception is that students or their parents must earn below a certain income to meet FAFSA eligibility requirements. However, there is not a FAFSA income limit for student applicants and their families.

Required Documents to Submit FAFSA

Although you won’t need to submit copies of additional documents with your FAFSA, you’ll need to refer to certain documents to complete your application. It may also be helpful to keep these documents on file in case your school requests to see them.

Social Security Number

You’ll need your Social Security number to include on your FAFSA form. If you’re a dependent, the form also asks for your parents’ Social Security number. If they don’t have one, enter all zeros without dashes.

W-2s and Untaxed Income Records

A main FAFSA requirement to successfully complete the application is reporting your income, and your parents’ income, if applicable. Make sure to reference all W-2s and untaxed income documentation, like interest income, child support, or other noneducation benefits.

If you are a dependent student, you’ll need to provide information from both yours and your parent’s W-2.

Tax Returns

You’ll need to reference your most current tax return information as well as your parents’ tax returns if you’re a dependent student. If you’ve already filed your tax return for the year, you might be eligible to use the IRS Data Retrieval Tool to transfer your tax information into the FAFSA.

Asset Records

You’ll also need to include your and your parents’ deposit account balances, like checking and savings, on your FAFSA. Similarly, investments, like stocks, bonds, and real estate that isn’t your primary home, must be included on your FAFSA form.

Alternatives to Federal Aid

Outside of the FAFSA application, there are other avenues to secure funds to pay for your higher education.

Savings

Consider tapping into existing savings, if your financial aid award comes up short. Doing so might help you avoid taking on more student loan debt.

There are certain accounts such as 529 savings plans that are designed to help parents and families save for their child’s education.

Grants

Research non-federal grants from your state, school, nonprofit, or other private organization. These funds don’t need to be repaid.

Scholarships

Scholarships are another aid source that doesn’t need to be repaid after leaving school. Find state-, school-, or private-sponsored scholarships to find more cash. There are online databases such as Scholarships.com that aggregate information on available scholarships. Take a look to review eligibility criteria and application requirements.

Part-Time Work

If you can manage balancing schoolwork with a part-time job, earning an income while enrolled in school can help you pay your way through your education.

Private Student Loans

Private student loans are available through private lenders, like banks, credit unions, and online institutions. These loans come with varying terms and interest rates, and can help cover the gap between your cost of attendance and existing financial aid.

When comparing private student loans and federal student loans, know that private lenders aren’t required to offer the same benefits or protections as federal student loans. As a result, private student loans are generally considered an option only after other sources of financing have been exhausted.

The Takeaway

Regardless of your or your family’s income, it’s generally worth submitting an application if you meet the FAFSA requirements. Since it’s a free application, there’s nothing to lose and much to gain if you’re eligible for aid, including scholarships and grants that don’t need to be repaid.

If you still need financial aid after submitting your FAFSA and searching for scholarships, consider a SoFi private student loan. It’s a zero fee loan option that offers competitive rates for qualifying borrowers.

Get pre-qualified in just a few minutes.

FAQ

How much or little income do you need to qualify for aid through FAFSA?

There are no income requirements for FAFSA applicants. Instead, a variety of factors determine whether a student is eligible for federal aid, including the school’s cost of attendance, the student’s year in school, their dependency status, family size, and more.

What is the maximum amount of money FAFSA gives?

The maximum amount of aid you can receive through the FAFSA depends on which federal aid programs you qualify for. Different programs have varying limits.

For example, the maximum Pell Grant award changes annually; for the 2024-25 award year the limit is $7,395. Direct Loans also have their own annual and aggregate borrowing limits.

How does parent income affect FAFSA aid?

Parent income that’s reported on a student’s FAFSA is used to calculate the applicant’s Expected Family Contribution (EFC). The EFC is a number on an index that helps schools determine your financial need if you attend its school. It also identifies your eligibility for certain financial aid programs like the Pell Grant or Direct Subsidized Loans.

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 Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

Photo credit: iStock/Lipik1
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16
2023

Tenancy in Common vs. Joint Tenancy With Right of Survivorship

By | Home Ownership, mortgage | Comments Off on Tenancy in Common vs. Joint Tenancy With Right of Survivorship

Tenancy in common and joint tenancy with right of survivorship describe two different models of ownership for people who share a property. The main difference between tenancy in common vs. joint tenancy is how property is treated when one of the owners passes away. Joint tenants are entitled to inherit the other person’s share of the home, while tenants in common are not.

That’s an important distinction to understand if you’re considering buying a home or another piece of real estate with someone else. Whether it makes sense to hold property as joint tenancy vs. tenancy in common can depend on your situation and overall financial plan.

What Are Joint Tenants With Right of Survivorship?

What is joint tenancy? In simple terms, it’s a means of owning property or assets equally with someone else. For example, if you own a home as a joint tenant with right of survivorship, both you and the other tenant have an undivided interest in the property. You both have an equal right to live in and use the home and when one of you passes away, the other tenant will automatically inherit the property.

In order for a joint tenancy to exist, these four things must be true:

•   Each owner’s interest is equal.

•   Each owner acquired their interest in the property at the same time.

•   Owners agree to have the right of survivorship.

•   The property title must specify a joint tenancy vesting.

Joint tenancy arrangements can only exist between individuals. That means that a trust cannot be listed as a joint tenant on a property with an individual. It’s important to note that states can place additional restrictions on when a joint tenancy arrangement exists, what rights each tenant has, and when ownership is terminated, so check the rules for your state before making a decision.

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

Examples of Joint Tenants With Right of Survivorship

There are different scenarios in which you might own property with someone else. For instance, you might have a joint tenant with right of survivorship situation if:

•   You get married and jointly purchase a home with your spouse. Your mortgage document specifies that you’re both listed as joint tenants of the property once the sale is complete.

•   Your aging parent decides to add you as a joint tenant to their bank account or sets up a joint brokerage account so that you can inherit those assets once they pass away, without having to go through the probate process.

•   You purchase an investment property with your sibling, agreeing to share in the ownership of the property and any profits gleaned from renting it out. You also split the costs of owning and maintaining it.

The common thread here is what happens to the property or assets being shared when one of you passes away. In that case, the other joint tenant is entitled to inherit it automatically.

Pros and Cons of Joint Tenants With Right of Survivorship

Joint tenancy with right of survivorship can hold some advantages for co-owners of a property or other asset. If you’re a first-time homebuyer, for instance, then making a purchase with someone else as joint tenants could make it more affordable. Home mortgage loans can be easier to qualify for when there are two borrowers in the mix.

Once the purchase is complete, you’d both own the home equally and share responsibility for the mortgage payments, taxes, maintenance, and upkeep. That’s a plus if you live in a more expensive area. (When comparing the cost of living by state, for instance, it’s easy to see that some locations come with a higher price tag.)

Being a joint tenant can also simplify things should one tenant pass away. Rather than having to go through probate, which can be lengthy and time-consuming, the surviving owner in a joint tenancy can inherit the property right away.

As far as the downsides go, there are some limitations. For one thing, joint tenants cannot share their ownership share of the property without the consent of the other tenant. Think about the previous example of buying a rental property with a sibling: Let’s say you decide you’d like to sell, but your sibling doesn’t want to sell her half, and nor does she want to buy you out. That’s where it gets messy.

Joint tenancy arrangements can also cause issues if you’d like to leave your share of the home to someone besides the other tenant, such as your children. Legally, you wouldn’t be able to do that; you’d need to have a tenancy in common arrangement instead. And if you’d like to get a home equity line of credit based on your equity in the property, your lender might require the other tenant’s consent to do so.

Recommended: The Cost of Living in California

What Are Tenants in Common?

What does tenants in common mean? Tenancy in common is an ownership arrangement in which two or more people share a property or asset. Ownership can be split equally between all tenants but it doesn’t have to be.

All co-tenants have the right to use the property. Two important differences between this and joint tenancy with right of survivorship: A tenant in common could sell their share without the other tenants’ consent. And when a tenant in common passes away, their share of the property would go to their heirs and if they have no heirs, to their estate.

Examples of Tenants in Common

There are different reasons for choosing to hold property as tenants in common vs joint tenancy ownership. Here are some examples of how it might work if you share a property with one or more individuals.

•   You purchase an investment property with two of your siblings. Your oldest sibling put down half of the down payment, so you agree that they should get a 50% share of the property while you and your other sibling get 25% each.

•   You’ve purchased a home with your significant other as tenants in common, but the relationship goes south. You both agreed to split the home 50/50 and you decide to sell your share to your former partner’s cousin who wants to move in.

•   You get remarried and buy a home with your new spouse, agreeing that you’ll get 60% ownership while your spouse gets 40%. Both of you have adult children from a previous relationship. You choose a tenants in common arrangement so that when you pass away, your children — not your spouse — will inherit your 60% ownership share in the property.

How you decide to share ownership in a tenancy in common situation is up to you. It may be easiest to make the split equal but if one person has more money invested in the property than another, it might be more fair to give them a larger share.

Pros and Cons of Tenants in Common

Some of the pros and cons of tenancy in common are similar to those associated with joint tenancy. For instance, buying a home can be more affordable when you own it with someone else or multiple people. There are no limits to the number of people you can include in a tenancy in common arrangement.

Tenancy in common also allows you some flexibility since you can sell your share at any time. You can also leave your property to your heirs, rather than having it automatically go to your co-owners.

In terms of drawbacks, owning a property as tenants in common can be tricky if one tenant passes away and you don’t get along with the person who inherits it. For example, if your ex-partner’s child inherits their share and they don’t want to own the home, they might try to force its sale. That’s a worst-case scenario, but it’s something to consider if you’re buying a home with a non-spouse.

Tenants in common also share responsibility for taxes and other financial obligations associated with the property. If you buy a home with another person or multiple people and one of them isn’t pulling their weight, you may be forced to pick up the slack.

What’s the Difference Between Joint Tenants With Right of Survivorship and Tenants in Common?

The difference between joint tenancy vs. tenants in common centers largely on who owns what and what happens to their ownership share when they die. In a joint tenancy situation, both owners share the property equally. Each one is entitled to inherit the property from the other should one of them pass away.

Tenants in common don’t have that same right. Instead, their share of the property goes to their heirs or estate when they pass away. That means that tenancy in common doesn’t avoid probate the way that a joint tenancy would. Additionally, tenancy in common does not guarantee equal ownership of the property.

Recommended: How to Get a Mortgage in 2023

How to Transfer Property Held in Joint Tenancy After One Joint Tenant Has Died

When property is held in a joint tenancy arrangement, one tenant automatically inherits the other tenant’s share when they pass away. There’s no need to transfer the deed or title to the property if both tenants were already listed on it. You wouldn’t need to go through probate either.

You may be required to file a copy of the deceased tenant’s death certificate along with an affidavit certifying your joint tenancy status with your register of deeds or county clerk’s office. An estate planning attorney can help you to determine what documentation, if any, might be necessary to affirm your ownership in the property.

What if you want to transfer property you inherited as a joint tenant? In that case, you’d most likely need to deed the property over to the new owner. For example, you could get a warranty deed to transfer a property you inherited from your husband to your oldest child if you’d like them to own it. Keep in mind that if you’re giving the property to them, that could potentially trigger gift tax.

Tips on How to Plan Your Estate

Estate planning allows you to have some control over what happens to your assets. Some of the things to consider when creating an estate plan include:

•   Whom you would like to inherit your assets when you pass away

•   How minor children will be provided for and taken care of, if you’re a parent

•   What will happen to property you own with someone else, either as joint tenants or tenants in common

•   How any debts you leave behind will be handled

There are different financial tools that you can use to create an estate plan, starting with a last will and testament. A will allows you to outline your specific wishes for whom you’d like to inherit your assets. You can also use a will to name a guardian for minor children.

If you have a more complicated estate, you might consider establishing a trust as well. A trust allows a trustee of your choosing to manage your assets on behalf of your beneficiaries, according to the terms and conditions you set. For instance, you might establish a trust to set aside money for the care of a child with special needs or to ensure that your adult children don’t blow through their inheritance.

Life insurance is another piece of the puzzle. A life insurance policy can provide a death benefit to your loved ones should something happen to you. They could use that money to pay final expenses, pay off debts, or simply cover day to day living expenses if needed. Talking to a financial advisor or estate planning attorney can help you decide what elements to include in your plan.

The Takeaway

Understanding the difference between joint tenancy vs. tenancy in common matters if you’re planning to buy a home with someone else. There are different rights and responsibilities associated with each type of ownership, and you’ll want to determine the best option for you before you get to 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

What is a primary difference between joint tenancy and tenancy in common?

In a joint tenancy situation, both owners have an equal right to the property. When one joint tenant passes away, the other automatically inherits their ownership share. In a tenancy in common arrangement, the heirs of a joint owner would be entitled to inherit their share of the property when they die.

How does a tenancy in common differ from a joint tenancy with right of survivorship?

In a tenancy in common arrangement, when one owner passes away, their heirs receive their share of the property. In a joint tenancy with right of survivorship agreement, each joint owner stands to inherit the other owner’s share of the property should one of them pass away.

What is the advantage of being tenants in common?

Tenants in common can sell their ownership share of the property, without requiring the other owner’s permission, and new owners can be added to the arrangement. When making their estate plan, tenants in common also have the flexibility to leave their share of the property to whomever they wish.

Photo credit: iStock/fotodelux

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 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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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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Oct
16
2023

How Does Mortgage Interest Work?

By | Home Ownership, Money & Life, mortgage | Comments Off on How Does Mortgage Interest Work?

Mortgage interest is, simply put, the money you pay the bank for the service of lending you the amount you need to buy your home. Interest is expressed as a percent of the loan amount. It is usually rolled right into your monthly mortgage payment of the principal and interest.

This means interest can be something of a hidden cost to homebuyers, especially those on the market for the first time. But it’s still an expense that can really add up. That’s why it’s important for buyers to set themselves up for the best (i.e., lowest) mortgage rate possible.

Here’s what you need to know, including:

•   What is mortgage interest?

•   How does mortgage interest work?

•   How are mortgage rates set?

•   How does an adjustable vs. fixed mortgage differ?

•   How can you get the lowest mortgage rate?

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

What Is Mortgage Interest?


When a bank offers a borrower a significant sum of cash to purchase a house, they’re offering a valuable service, one they expect to be paid for. While an origination or processing fee may apply, the main way a bank makes money on offering a mortgage (or any kind of loan, for that matter) is by charging interest.

Interest is generally expressed as an interest rate, or a percentage of the amount of money you borrow. A lower rate means a lower overall loan cost, since you’ll pay less interest over time.

First-time homebuyers often overlook the impact of interest on the total cost of their home purchase, but it can be significant.

•   An example: At a mortgage interest rate of 6%, a buyer could expect to pay $382,599 on a 30-year mortgage loan of $330,000 This equals a total cost of $712,599, most of which would be interest.

As you can see, it pays to find the lowest rate possible! Fortunately, there are some things you can do as a borrower to set yourself up for the lowest rate possible. It is, however, worth noting that many factors affecting interest rates are out of the borrowers’ control.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

How Are Mortgage Rates Set?


Mortgage rates are calculated using a complex set of factors including both the borrower’s financial status and the health of the economy.

While there’s a lot to say about the economy’s impact on mortgage rates, the simplest rule of thumb is this:

•   When the market is doing well, interest rates tend to be higher.

•   When the market is not doing so great, interest rates tend to be lower.

Mortgage rates also tend to increase with increasing inflation.

Many think that mortgage rates are set by the Federal Reserve (otherwise known as the Fed), but this is a misunderstanding. The Fed sets short-term interest rates that banks use between themselves, but this figure does influence the interest rates of consumer loans including mortgages. So if the Fed’s interest rate is high, chances are mortgage interest rates will be pretty high, too.

Personal financial factors that affect mortgage rates include your credit score, the size of your down payment, and whether the house will be your primary residence or a secondary home or investment property. Generally, rates are higher when the loan is a riskier investment for the bank, which can make sense. The greater the danger of default, the more the servicer wants to be sure they get paid.

Types of Mortgage Rates


There are a variety of mortgage offerings available. You may see offers with varying rates for:

•   Loans designed for lower-income earners, such as FHA, USDA, and VA loans

•   Loans of different lengths, such as a 15-year vs. 30-year home loan

•   Jumbo loans, for those borrowing a larger sum of money to finance a home.

However, one of the biggest decisions is which of the two main types of mortgages, fixed-rate and adjustable-rate, you choose.

Fixed Rate vs Adjustable Rate Mortgages

Fixed-rate mortgages, as their name implies, have one fixed interest rate over the entire lifetime of the loan. If you sign a contract for a fixed-rate mortgage at 5.75%, you can expect to pay that same 5.75% interest rate throughout its term.

Adjustable-rate mortgages, on the other hand, adjust the interest rate depending on market factors. They may start with a fixed rate for a certain amount of time, such as five, seven, or even 10 years. Thereafter, your interest rate (and therefore your monthly mortgage payment) will change over time.

These mortgages can be attractive since they often offer lower rates upfront, and they may come with rate caps to protect borrowers from excessive interest rates. It’s worth noting, though, that they can also be harder to predict and budget for in the long run.


💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

Why You Have to Pay Interest on Mortgage Loans

As mentioned briefly above, paying interest compensates a lender for extending you a chunk of cash to buy a home and pay it back over time.

Interest can be one of the key ways that banks make money. For instance:

•   A financial institution might pay customers 3% interest on the money they keep on deposit.

•   The bank might then use some of that money to fund home loans on which borrowers might pay 6.75% in interest.

•   The difference between the 6.75% that the bank is earning on loans vs. the 3% it is paying depositors is part of the way a bank profits and stays in business.

How Lenders Calculate Your Mortgage Payments


As you learned above, interest is rolled right into your home mortgage loan payment. But exactly how much of that money is interest? And how much is going toward the mortgage principal (i.e., the borrowed cost of the home itself)?

The answer depends on where in the loan’s term you are: Earlier on in the mortgage, most of your payment will go to interest. Again, this makes sense: The bank wants to make sure they get paid for their services, even if you decide to repay the mortgage early or stop paying the loan entirely.

Even in the beginning, some of your monthly payment will go to principal — along with any taxes or insurance you may also be paying as part of the mortgage.

Eventually, though, the principal will represent the majority of your payment. The moment when this happens is known as the “tipping point” of a loan — and it’s yet another reason to look for the lowest rate possible. The lower your interest rate, the more quickly your tipping point will arrive, which means you’ll grow your home equity more quickly.

How Interest Works for Different Types of Mortgages


You’ve already read about the two main types of interest: fixed-rate vs. adjustable-rate home loans. But how else does interest on a mortgage work?

Here’s one other option to know about: There is also such a thing as an interest-only mortgage, which allows the borrower to pay — you guessed it — only interest for the first three to 10 years of the loan. Interest-only mortgages can be either fixed-rate or adjustable-rate loans, as described above, but all of them carry some risks since monthly payments can rise so sharply after the initial interest-only period.

How to Get a Lower Mortgage Interest Rate


By this point, you’re probably on board with the idea of finding a good mortgage interest rate.

Given the cost of living in states across the United States — and especially in expensive states like California — keeping housing costs as low as possible is a priority.

While it’s not all under a borrower’s control, there are some ways to ensure your interest rate is as low as it can be. Here are some tips to help.

Get Your Finances in Ship Shape


Although there are lots of things you can’t control about your mortgage interest rate, it’s worth it to take advantage of the things you can. That means getting your financial profile into the best possible shape before applying for a mortgage: reviewing and building your credit score, paying down debt ahead of time, amassing a larger down payment, and, if possible, increasing your income. These steps may take some effort up front, but they can really pay off over time.

Shop Around For Lower Interest Rates


While interest rates are relatively consistent across the market, banks do compete with each other to offer the lowest rates possible — and attract more borrowers. That benefits you because it means shopping around, even just a little bit, can be worthwhile. Reducing your rate by even half a percentage point can save you tens of thousands of dollars over a 30-year loan.

Look into Paying Points

While this may not be the right option for everyone, if you can put additional funds down on some home loans, you could get a better rate. A point equals 1% of your mortgage amount, and if you can pay a point, you can usually lower the rate on your mortgage by 0.25% over the life of the loan.

Recommended: Cost of Living in California

How Mortgage Interest Deduction Works


Although it’s not a way to lower the cost of interest, the mortgage interest deduction allows you to deduct the amount of money you pay on mortgage interest from your taxable income — which lowers what you owe to Uncle Sam come April. In general, how the mortgage interest deduction works is for up to $750,000 in home loan debt.

Tips on Mortgage Interest

Here are a couple of additional ways to get the best deal possible on your mortgage rate:

•   Try the online mortgage calculators that are available. Not only can you get a feel for monthly payments in different scenarios, you can also compare different products, such as a 30-year vs. a 15-year home loan.

•   Consider whether a qualified mortgage broker could help you find offers to suit your needs. These professionals can work as an intermediary between prospective homebuyers and lenders to facilitate the process and research a variety of options.

The Takeaway


Mortgage interest is the money a bank charges for the service of providing a home loan, expressed as a percentage of the loan amount. Getting a lower mortgage interest rate is an important way to keep your home — and your life — affordable over the long run.

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 is interest calculated on a mortgage?


How does interest work on a mortgage? Prevailing Interest rates are calculated as a percentage that is based on a variety of economic factors. In terms of borrowers doing the math for a specific interest rate on a certain loan, there are online tools to help with that. And while borrowers can’t control the market, they can work ahead of time to ensure their financial profile is in good shape to get the lowest interest rate possible.

How much interest is paid on a 30-year mortgage?


That depends on the rate, among other factors. For example, a 30-year mortgage for $400,000 at a rate of 6.82% and on a house purchased for $425,000 would cost $540,717 in interest. The total payment of principal and interest would be $940,717. However, if that rate were 5.50%, the borrower would spend only $417,703 in interest.

Do you pay mortgage interest monthly?


Yes, you typically pay mortgage interest monthly. Most home loans roll interest right into their monthly payment, though the amount you pay in interest versus principal will change over time.

Photo credit: iStock/Chainarong Prasertthai

*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.

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 for more information.

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.

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

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ 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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