Jul
19
2023
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Should You or Your Child Take Out a Loan for College?

By | Family Finances, Student Loans, student_loan | No Comments

The desire to help your kid pay for college so they can focus on their studies is a strong one, but it’s important to consider your options when it comes to borrowing money. Parents have a couple of options for borrowing to help pay for their child’s college education. They can borrow a Parent PLUS Loan — a type of federal loan — or a private student loan to help their child pay for college. Though, it may not always make sense for parents to take on debt on behalf of their child’s education.

Read on for a high-level overview of which types of student loans you could apply for, as well as some advantages and disadvantages of taking out those loans in your name.

Key Points

•   Parents can consider two primary options for financing their child’s college education: Parent PLUS loans, which are federal loans, and private student loans from individual lenders.

•   Parent PLUS loans offer fixed interest rates and flexible repayment options, but they require the child to complete the FAFSA before applying.

•   Private student loans may provide lower interest rates for parents with strong credit histories and allow for fixed or variable rates with customizable repayment terms.

•   Taking out loans in a parent’s name can reduce financial burden on the child, but repayment responsibility and the potential negative impact on credit scores must be considered.

•   Before resorting to loans, maximizing federal aid, scholarships, and grants is usually recommended to minimize future financial obligations.

What Are Parent Student Loan Options?

As mentioned, parents interested in borrowing a loan to help their students pay for college have two main options. The first is a Parent PLUS loan, a federal loan available through the Direct Loan program. The other is borrowing a parent loan from a private lender.

Parent PLUS Federal Student Loans

Parent plus loans are a type of federal student loan that can be borrowed by the parent of an undergraduate student to help their child pay for college education costs. The benefits of a Parent PLUS loan can include:

•   A fixed interest rate (for loans first disbursed on or after July 1, 2023, and before July 1, 2024, the interest rate is 8.05%)

•   Deferment under certain conditions

•   Flexible repayment options

•   Possible eligibility for Public Service Loan Forgiveness

To apply for a Parent PLUS loan, your child must first file the Free Application for Federal Student Aid, also known as FAFSA®. Then, eligible parents of undergraduate students can fill out the Direct PLUS Loan Application online.

It’s not possible to transfer a Parent PLUS loan to your child. However, Parent PLUS refinancing with a private lender may allow your child to refinance a Parent PLUS loan in their name.

Keep in mind that your child may be eligible for federal student aid including federal loans, scholarships, and grants too. If your child is taking out federal student loans, they may be eligible for:

•   Direct Subsidized Loans. These loans are subsidized by the federal government and students are not responsible for paying accrued interest while they are enrolled, during the loan’s grace period, or during qualifying terms of deferment.

•   Direct Unsubsidized Loans. These loans are not subsidized by the federal government and student borrowers are responsible for accrued interest costs on the loan while they are enrolled in school.

•   Direct PLUS Loans (for graduate school). These loans are available for graduate students.

Depending on demonstrated financial need, your child may qualify for a combination of these loan types in addition to scholarships, grants, or work-study. However, if all other federal aid is exhausted, the Parent PLUS loan might be an option to supplement your child’s tuition payments after federal aid, scholarships, or grants.

Private Student Loans for Parents

When federal student loan options are exhausted, some students and parents may turn to private loans to help fund their education. Parents can take out a private loan in their own name to pay for college for their student. If you have a strong credit history, you might consider a private loan over the PLUS loan — there’s a chance you could potentially qualify for a lower interest rate.

With a private student loan, you may have the option of a fixed- or variable-rate loan, potentially giving you more flexibility on repayment. With a private student loan, you might have the chance to choose the term length of a loan as well.

Your child can also apply for private loans, but in many cases, they’ll require a cosigner.

Private Student Loans for Parents vs Parent PLUS Loans

This table provides a high-level overview of the differences between private student loans for parents and Parent PLUS loans.

Private Student Loans for Parents

 Parent PLUS Loans
To apply, interested parents will need to fill out an application with an individual private lender. To apply, students first need to fill out the FAFSA®. Then parent’s can fill out the Direct PLUS Loan Application on the Student Aid website.
The application process will usually involve a credit check. This will be used to help determine the loan terms an applicant qualifies for, in addition to other factors. There is a credit check, however it will not be used to determine terms like the interest rate. Interest rates on Direct PLUS loans are set annually by congress.
Interest rates may be fixed or variable. Interest rates are fixed.
Repayment plans will be determined by the individual lender. PLUS loans qualify for some federal repayment plans.

Pros and Cons of Taking the Loan Out in Your Name

Taking out a student loan for your child in your name — federal or private — could mean less of a financial burden on your child as they enter college. Since the loans are in your name, it’s not up to your child to pay them, even after a degree is earned.

The Pros

Borrowing can be a tool to help you pay for your child’s education. If you can afford to make the loan payments without sacrificing your own financial security, this could be a helpful move for your child.

Another pro is that the loan payments will be made in your name — that means they’ll count toward your credit history. If you’re able to make all of the loan payments on-time, it could prove to have a beneficial impact on your credit score.

If you have a strong credit history, you could potentially qualify for a more competitive interest rate than your child could.

The Cons

The most obvious con is that while you’ll be able to help your child pay for college, you’ll need to repay the money with interest. Other types of aid like scholarships, grants, and Direct Subsidized or Subsidized loans borrowed by your child are generally prioritized over a parent loan.

Again, because the loan is in your name, any late payments or issues will be attributed to your personal credit history. Things like late payments have the potential to impact your credit score.

There’s nothing wrong with wanting to borrow for your child’s future, just consider all your options and think about what you, or they, can afford to pay back. It’s almost always a good idea to maximize federal aid and scholarships before resorting to loans of any kind.

The following table provides an overview of some of the pros and cons for borrowing as a parent to help your student pay for college.

Pros

 Cons
Parent student loans can allow parents to help pay for their child’s college education. Loans will need to be repaid with interest. Students and their families generally will prioritize other types of aid that don’t require repayment or that have a lower interest rate.
Parent student loans are in the name of the parent borrower. Therefore the parent may benefit from any boost in credit score from making on-time payments. A parent’s credit score could be negatively impacted if they are unable to make their monthly payments.

The Takeaway

Parent PLUS Loans are federal loans that allow parents of undergraduate students to help pay for their child’s education. These loans have a fixed interest rate and are eligible for most federal repayment plans.

Parents with a strong credit history may be able to qualify for more competitive interest rates through a private student loan. SoFi offers student loans for parent borrowers. There are no fees, competitive rates for qualifying borrowers, and applications are entirely online.

Learn more and find out if you qualify for a SoFi parent student loan in just a few minutes.

FAQ

Which type of student loans can parents take out on behalf of the student?

Parents with undergraduate students have two options for borrowing to help their child pay for college. They can borrow a Direct PLUS loan through the federal government or a private loan from a private lender.

Who is responsible for paying back Parent PLUS loans?

Parent PLUS loans are in the parent’s name. The parent is solely responsible for repaying the loan.

What to do if you aren’t able to take out a Parent PLUS loan?

If you aren’t able to borrow a Parent PLUS loan you can consider adding a cosigner to your PLUS loan application. This may help your chances of getting approved. Additionally, if you are applying for a private loan, you may have the option of adding a cosigner which could potentially improve your chances of gaining approval or securing a more competitive interest rate.

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.

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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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.

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Jul
19
2023

Tips on How to Choose The Right ETF

By | invest, Investing | Comments Off on Tips on How to Choose The Right ETF

ETFs are tradable funds that investors can buy and sell on stock exchanges all day. They typically hold a basket of assets, such as stocks or bonds, and mirror the moves of another underlying index. Since its start almost three decades ago, the ETF industry has taken the financial world by storm, and there are thousands of different ETFs on the market that investors can choose from.

But each investor is different, and some ETFs likely won’t be a good fit for their portfolio or strategy. Learning to choose or pick ETFs that do fit your strategy can take some practice, but it’s good to have some guidelines in mind.

How Do I Pick an ETF?

There’s no right or wrong way to pick an exchange-traded fund (ETF), but you can follow a process to help you determine which securities may be the best fit for you. It starts with picking an asset class.

Step 1: Pick the Asset Class

Because the performance of an ETF is so closely tied to an underlying index, investors need to first decide which underlying asset class they want exposure to. The main asset classes are stocks, bonds, currencies, and commodities.

Risk is generally inversely correlated to return. So riskier assets have the potential to deliver greater returns, while safer assets tend to deliver reliable, albeit smaller, returns. Stocks are considered to be a riskier, more volatile asset class. Commodities even more so. Meanwhile, bonds tend to be safer but also deliver more muted returns.

Keep in mind, just because an investor buys an ETF that gives them exposure to one asset class, that doesn’t preclude them from buying another that invests in another market. In fact, it’s a healthy portfolio diversification strategy to allocate one’s money into different asset classes, a practice known as asset allocation.

Step 2: Narrow the Focus

Once an investor has chosen their asset class, they can dive deeper within that market. When it comes to stock ETFs, this usually involves picking an industry – like technology or financial – that they’d like to get greater exposure to. Equity ETFs may also focus on a specific attribute a stock can have. Or dividend ETFs, which hold shares of companies with regular payouts.

For bond ETFs, investors can decide between funds that invest in U.S. government-bond versus bonds issued by countries abroad, as well as investment-grade (higher quality) company debt versus high-yield (junk) bonds.

More recently, thematic ETFs have taken off. These are stock funds that tend to be much narrower than the traditional sector ETF. They can focus on a niche subsector, like robotics, electric cars or blockchain, or even modern trends, like the gig economy or working from home.

There are pros and cons to thematic ETFs: while they’re often marketed as a convenient way to wager on an investment story, they also tend to underperform the broader market. Thematic ETFs have also been criticized for being too narrow and not offering the wide breadth that ETFs were originally designed to offer.

Step 3: Explore Different ETF Strategies

ETFs began as a way to provide investors access to broad markets with a single investment. Since then however, the popularity of the industry has led to the creation of numerous different kinds of ETFs, some of which employ complex strategies.

Here are some of the different ETF types:

•   Leveraged ETFs allow investors to make magnified bets on different assets or markets. So instead of replicating the move of the underlying index exactly, leveraged ETFs will produce a move that’s 2x or 3x.

•   Inverse ETFs let investors wager against an asset, so shorting or betting that the price of a market will go down. So if on a given day, the underlying market goes down, the inverse ETF’s price will go up.

•   Actively Managed ETFs invest in assets without following an index. While ETFs are usually a form of passive investing–the strategy of tracking another index–actively managed ETFs are like stock-picking strategies packaged into a tradable fund.

•   Smart-Beta & Factor ETFs use a rules-based system — such as stock weightings, valuations, or volatility trends — to choose the investments in a fund. These funds are often considered a hybrid between passive and actively managed ETFs.

•   Currency-Hedged ETFs are funds that let investors wager on a basket of overseas stocks, while mitigating the risk that stems from currency fluctuations.

Step 4: Look at ETF Costs

A fundamental reason why ETFs have become so influential is their low cost. Low ETF fees have compressed costs across the board in asset management. The average expense ratio of most ETFs has fallen over time. Expense ratios are a percentage of assets subtracted each year. So, an expense ratio of 0.45% means that the charge is $4.50 for every $1,000 invested each year.

Because the vast majority of ETFs tend to be passive, they tend to be much cheaper than mutual funds, many of which are still actively managed. More complex ETFs like leveraged funds, or actively managed ones, tend to have higher expense ratios. But some passive ETF fees have hit rock-bottom levels.

Step 5: Other Ways to Analyze ETFs

What about how well an ETF has done? Should that matter? While profitability can make an investment look more attractive, it shouldn’t be the only factor investors use when determining which ETF to buy. That’s because in investing, past performance is not indicative of future results.

For ETFs, another key measure of performance is how well it tracks the underlying index. Tracking errors, when a move in the ETF veers from one by the market it’s designed to track, can come up from time to time, particularly in leveraged funds or ones that invest in stocks overseas.

Looking at the assets under management (AUM) can be a helpful way to pick an ETF. A larger AUM can signal an ETF’s popularity, which in turn makes it more likely that it’s liquid, or easy to trade without impacting prices.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

How to Find an ETF’s Holdings, Prospectus, and Fact Sheet

Another touted perk of ETFs is their transparency. Investors can look up what’s exactly in a fund by going to the ETF provider’s website and searching for the fund. Contacting the ETF provider directly for this information is also possible. ETF providers are required to update this information regularly.

Securities and Exchange Commission (SEC) regulation also requires that ETF providers make easily available an ETF’s prospectus. The prospectus has information about the ETF including its investment objective, the risks, fees, as well as expenses. For investors interested in an ETF, one of the most important things they can do is research the fund by carefully reading the prospectus.

Similarly, ETF fact sheets act like quick summaries of the fund, giving key information like performance, the top holdings, and other portfolio characteristics. ETF providers typically produce fact sheets every quarter and make them available on their website.

The Takeaway

Choosing an ETF from the thousands out there can seem daunting, but taking a step-by-step approach can help individuals sort through the multitude of options. A key step investors can take in researching ETFs is reading the fund’s prospectus, where they’ll find vital information on the investment objectives as well as potential risks.

Considerations include which asset class an investor wants to invest in; how broad or narrow of an exposure they want; costs — which are usually shown as expense ratios; and lastly, an ETF’s size can give clues on the popularity and liquidity of the fund. One ETF, on its own, can provide some diversification. However, some people choose to use a number of ETFs as building blocks to assembling a well-balanced portfolio.

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

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

SoFi Invest®

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

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

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


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Probability of Member receiving $1,000 is a probability of 0.028%.

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19
2023
Understanding the Different Types of Mortgage Loans

What Are the Different Types of Home Mortgage

By | Family Finances, Home Ownership, mortgage | No Comments

If you’re in the market for a mortgage, you may be overwhelmed by all the different options — conventional vs. government-backed, fixed vs. adjustable rate, 15-year vs 30-year. Which one is best?

The answer will depend on how much you have to put down on a home, the price of the home you want to buy, your income and credit history, and how long you plan to live in the home. Below, we break down some of the most common types of home mortgages, including how each one works and their pros and cons.

Fixed-Rate vs. Adjustable-Rate Loans

When choosing the best type of mortgage for your needs, it helps to understand the difference between adjustable-rate mortgages and fixed-rate mortgages. Each option has advantages and disadvantages. Here’s a closer look.

Pros

 Cons
Fixed-Rate Mortgage Your monthly payment is fixed, and therefore predictable. If rates drop, you have to refinance to get the lower rate.
Adjustable-Rate Mortgage The initial interest rate is usually lower than a fixed-rate mortgage. Once the intro period is over, ARM rates adjust, potentially raising your mortgage payment.

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

Fixed-Rate Mortgage

With a fixed-rate mortgage loan, the interest is exactly that — fixed. No matter what happens to benchmark interest rates or the overall economy, the interest rate will remain the same for the life of the loan. Fixed loans typically come in terms of 15 years or 30 years, though some lenders allow more options.

This type of mortgage can be a good choice if you think rates are going to go up, or if you plan on staying in your home for at least five to seven years and want to avoid any potential for changes to your monthly payments.

Pro: The monthly payment is fixed, and therefore predictable.

Con: If interest rates drop after you take out your loan, you won’t get the lower rate unless you’re able to refinance.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate home loan is the most common type of mortgage and the longest term length available for mortgages.

Monthly payments are generally lower than shorter-term mortgages because the loan is stretched out over a longer term. However, the overall amount of interest you’ll pay is typically higher, since you’re paying interest for a longer period of time. Also, interest rates tend to be higher for 30-year home loans than shorter-term mortgages, since the longer term poses more risk to the lender.

15-Year Fixed-Rate Mortgage

A 15-year loan allows you to build equity more quickly and pay less total interest. Loans with shorter terms also tend to come with lower interest rates, since they pose less risk to the lender.

On the flipside, the shorter term means monthly payments may be much higher than a 30-year mortgage. This type of loan can be a good choice for borrowers who can handle an aggressive repayment schedule and want to save on interest.

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) has an interest rate that fluctuates according to market conditions.

Many ARMs have a fixed-rate period to start and are expressed in two numbers, such as 7/1, 5/1, or 7/6. A 7/1 ARM loan has a fixed rate for seven years; after that, the fixed rate converts to a variable rate. It stays variable for the remaining life of the loan, adjusting every year in line with an index rate. A 7/6 ARM, on the other hand, means that your rate will remain the same for the first seven years and will adjust every six months after that initial period. A 5/1 ARM has a rate that’s fixed for five years and then adjusts every year.

Many ARMs have rate caps, meaning the rate will never exceed a certain number over the life of the loan. If you consider an ARM, you’ll want to be sure you understand exactly how much your rate can increase and how much you could wind up paying after the introductory period expires.

Pro: The initial interest rate of an ARM is usually lower than the rate on a fixed-rate loan. This can make it a good deal for borrowers who expect to sell the property before the rate adjusts.

Con: Even if the loan starts out with a low rate, subsequent rate increases could make this loan more expensive than a fixed-rate loan.

Recommended: First-Time Home Buyer’s Guide

Conventional vs. Government-Insured Loans

Mortgages can also be broken down into two other categories: conventional loans, which are offered by banks or other private lenders, and government-backed loans, which are guaranteed by a government agency. Here’s a breakdown of conventional vs. government-insured loans, including how each works, and their pros and cons.

Conventional Loan

This is the most common type of home loan. Conventional mortgages must meet standards that allow lenders to resell them to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. This is advantageous to lenders (who can make money by selling their loans to GSEs) but means stiffer qualifications for borrowers.

Pro: Down payments can be as low as 3%, though borrowers with down payments under 20% have to pay for private mortgage insurance (PMI).

Con: Conventional loans tend to have stricter requirements for qualification than government-backed loans. You typically need a credit score of at least 620 and a debt-to-income ratio under 36%.

Government-Insured Loan

If you have trouble qualifying for a conventional loan, you may want to look into a government-insured loan. This type of mortgage is insured by a government agency, such as the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA).

FHA Loan

FHA loans are not directly issued from the government but, rather, insured by the FHA. This protects mortgage lenders, since if the borrower becomes unable to repay the loan, the agency has to handle the default. Having that guarantee significantly lowers risk for the lender.

As a result, qualifying for an FHA loan is often less difficult than qualifying for a conventional mortgage. This makes an FHA mortgage a good choice if you have less-than-stellar credit scores or a high debt-to-income (DTI) ratio.

Pro: With a FICO® credit score of 500 to 579, you may be able to put just 10% down on a home; with a score of 580 or higher, you may qualify to put just 3.5% payment.

Con: FHA mortgages require you to purchase FHA mortgage insurance, which is called a mortgage insurance premium (MIP). Depending on the size of your down payment, the insurance lasts for 11 years or the life of the loan.

💡 Quick Tip: Check out our Mortgage Calculator to get a basic estimate of your monthly payment.

VA Loan

The U.S. Department of Veterans Affairs backs home loans for members and veterans of the U.S. military and eligible surviving spouses. Similar to FHA loans, the government doesn’t directly issue these loans; instead, they are processed by private lenders and guaranteed by the VA.

Most VA loans require no down payment. However, you’ll need to pay a VA funding fee unless you are exempt. Although there’s no minimum credit score requirement on the VA side, private lenders may have a minimum in the low to mid 600s.

Pro: You don’t have to put any money down or purchase mortgage insurance.

Con: Only available to veterans, current service members, and eligible spouses.

FHA 203(k)

Got your eye on a fixer-upper? An FHA 203(k) loan allows you to roll the cost of the home as well as the rehab into one loan. Current homeowners can also qualify for an FHA 203(k) loan to refinance their property and fund the costs of an upcoming renovation through a single mortgage.

The generous credit score and down payment rules that make FHA loans appealing for borrowers often apply here, too, though some lenders might require a minimum credit score of 500.

With a standard 203(k), typically used for renovations exceeding $35,000, a U.S. Department of Housing and Urban Development (HUD) consultant must be hired to oversee the project. A streamlined 203(k) loan, on the other hand, allows you to fund a less costly renovation with anyone overseeing the project.

Pro: If you have a credit score of 580 or above, you only need to put down 3.5% on an FHA 203(k) loan.

Con: These loans require you to qualify for the value of the property, plus the costs of planned renovations.

USDA Loan

A USDA loan is a type of mortgage designed to help borrowers who meet certain income limits buy homes in rural areas. The loans are issued through the USDA loan program by the United States Department of Agriculture as part of its rural development program.

Pro: There’s no down payment required, and interest rates tend to be low due to the USDA guarantee.

Con: These loans are limited to areas designated as rural, and borrowers who meet certain income requirements.

Conforming vs. Nonconforming Loans

Conventional loans, which are not backed by the federal government, come in two forms: conforming and non-conforming.

Conforming Loans

Mortgages that conform to the guidelines set by government-backed agencies (such as Fannie Mae and Freddie Mac) are called conforming loans. There are a number of criteria that borrowers must meet to qualify for a conforming loan, including the loan amount.

For 2023, the ceiling for a single-family, conforming home loan is $726,200 in most parts of the U.S. However, there is a higher limit — $1,089,300 — for areas that are considered “high-cost,” a designation based on an area’s median home values.

Typically, conforming loans also require a minimum credit score of 630­ to 650, a DTI ratio no higher than 41%, and a minimum down payment of 3%.

Pro: Conforming loans tend to have lower interest rates and fees than nonconforming loans.

Con: You must meet the qualification criteria, and borrowing amounts may not be sufficient in high-priced areas.

Nonconforming Loans

Nonconforming mortgage loans are loans that don’t meet the requirements for a conforming loan. For example, jumbo loans are nonconforming loans that exceed the maximum loan limit for a conforming loan.

Nonconforming loans aren’t as standardized as conforming loans, so there is more variety of loan types and features to choose from. They also tend to have a faster, more streamlined application process.

Pro: Nonconforming loans are available in higher amounts and can widen your housing options by allowing you to buy in a more expensive area, or a type of home that isn’t eligible for a conforming loan.

Con: These loans tend to have higher interest rates than nonconforming loans.

Common Types of Mortgages: Conventional, Fixed-Rate, Government Backed, Adjustable-Rate

Reverse Mortgage

A reverse mortgage allows homeowners 62 or older (typically those who have paid off their mortgage) to borrow part of their home equity as income. Unlike a regular mortgage, the homeowner doesn’t make payments to the lender — the lender makes payments to the homeowner. Homeowners who take out a reverse mortgage can still live in their homes. However, the loan must be repaid when the borrower dies, moves out, or sells the home.

Pro: A reverse mortgage can provide additional income during your retirement years and/or help cover the cost of medical expenses or improvements.

Con: If the loan balance exceeds the home’s value at the time of your death or departure from the home, your heirs may need to hand ownership of the home back to the lender.

Jumbo Mortgage

A jumbo loan is a mortgage used to finance a property that is too expensive for a conventional conforming loan. If you need a loan that exceeds the conforming loan limit (typically $726,200), you’ll likely need a jumbo loan.

Jumbo loans are considered riskier for lenders because of their larger amounts and the fact that these loans aren’t guaranteed by any government agency. As a result, qualification criteria tends to be stricter than other types of mortgages. Also, in some cases, rates may be higher.

You can typically find jumbo loans with either a fixed or adjustable rate and with a range of terms.

Pro: Jumbo loans make it possible for buyers to purchase a more expensive property.

Con: You generally need excellent credit to qualify for a jumbo loan.

💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

Interest-Only Mortgage

With an interest-only mortgage, you only make interest payments for a set period, which may be five or seven years. Your principal stays the same during this time. After that initial period ends, you can end the loan by selling or refinancing, or begin to make monthly payments that cover principal and interest.

Pro: The initial monthly payments are usually lower than other mortgages, which may allow you to afford a pricier home.

Con: You won’t build equity as quickly with this loan, since you’re initially only paying back interest.

Recommended: What’s Mortgage Amortization and How Do You Calculate It?

The Takeaway

There are many different types of mortgages, including fixed-rate, variable rate, conforming, nonconforming, conventional, government-backed, jumbo, and reverse mortgages. It’s a good idea to research and compare different loan programs, consult with lenders, and, if needed, seek advice from a mortgage professional to determine the best type of home loan for your specific circumstances.

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 are the different types of mortgages?

There are several types of mortgages available to homebuyers, each with its own characteristics and requirements. Some of the most common types include:

•  Conventional mortgage This type of mortgage is not insured or guaranteed by a government agency.

•  FHA loan Insured by the Federal Housing Administration (FHA), FHA loans are popular among first-time homebuyers. They offer more lenient credit requirements and allow for a lower down payment (as low as 3.5%).

•  VA loan These loans are available to eligible veterans, active-duty service members, and eligible surviving spouses, and come with favorable rates and terms.

•  USDA Loan Issued by the U.S. Department of Agriculture, these loans are designed for low- and moderate-income homebuyers in rural areas. They offer low interest rates and may require no down payment.

•  Jumbo mortgage A jumbo mortgage is a loan that exceeds the loan limits set by Fannie Mae and Freddie Mac.

•  Fixed-rate mortgage The rate stays the same for the entire life of the mortgage.

•  Adjustable-rate mortgage (ARM) The interest rate is initially fixed for a specific period, then typically adjusts annually based on market conditions.

What are the 4 types of qualified mortgages?

Qualified mortgages are mortgages that meet certain criteria set by the Consumer Financial Protection Bureau (CFPB) to ensure borrowers can afford the loans they obtain. The four main types of qualified mortgages are:

•  General qualified mortgages These mortgages adhere to basic criteria set by the CFPB.

•  Small creditor qualified mortgages These loans have more flexible requirements for small lenders.

•  Balloon payment qualified mortgages These mortgages allow for a balloon payment at the end of the term.

•  Temporary qualified mortgages This type of qualified mortgage provides a transition period for loans that were eligible for purchase or guarantee by Fannie Mae or Freddie Mac but no longer meet those standards.

Which type of home loan is best?

The best type of home loan depends on your financial situation, goals, and preferences.

If you have a significant down payment and strong credit, you might consider a conventional mortgage. If, on the other hand, you have limited funds for a down payment and lower credit scores, you might consider a Federal Housing Administration (FHA) home loan.

VA loans benefit eligible veterans and service members, while USDA loans are for homebuyers in rural areas.

Whether to choose a fixed-rate or adjustable-rate mortgage will depend on your long-term plans and tolerance for risk.

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

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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 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.

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Jul
19
2023
How to Start Saving for Your Child's College Tuition

How to Start Saving for Your Child’s College Tuition

By | Budgeting & Goals, Life & Career, student_loan | No Comments

Saving for kids’ college expenses can be a massive undertaking, but a critically important one. If you’re a parent, you’ve probably heard the mantra that education is the key to a successful future for your child. You’re also likely aware that college isn’t cheap, and it isn’t getting cheaper.

The escalating costs of college may have you worried about how to pay for higher education. You’re smart to think about how to start saving for college, even if your kids are still young. If you truly want to give your child the gift of a college education and free them from overwhelming student debt, the time to plan is now.

When to Start Saving for Your Kids’ College Tuition

Generally speaking, the sooner you can start saving for your kids’ college fund or overall education, the better. Tuition, even at in-state public schools (which tend to be the least-expensive options for many people) are already in the four and five-figures territory, depending on where you live. And, as noted, it’s unlikely that costs are going to decrease in any meaningful way in the near future.

For parents who paid for college using student loans, emphasizing saving for their children’s college expenses may be a no-brainer. Those parents may benefit from looking through a student loan refinancing guide, too, to see if they can free up space in their budget to increase their capacity for saving – more on that in a minute.

Yes, there are schools that offer free tuition, but it’s probably best to plan on paying for attendance – you never know what could happen going forward.

With that in mind, it’s never too early to start socking away money for your children’s education. Getting a head start gives your money more time to grow over the long term and to rebound after any dips.

It also means you can recalibrate if your child seems to be on track for scholarships related to sports or academic achievements, or if your child decides to forgo college. Keep in mind that the money you save will generally affect the financial aid package your child qualifies for.

Before you launch a college savings plan for your kids, it’s best to have your other financial ducks in a row. You might first focus on paying off any credit card balances or other high-interest debt. Then you might want to make sure you’ve paid off your own student loans (or looked at student loan refinancing, at least) and saved an emergency fund (generally three to six months’ worth of living expenses), and are on track in terms of saving for retirement.

After all, your child always has the option to take out student loans, but you can’t rely on that to pay for a crisis or retirement. You wouldn’t want to have saved for your kids’ college only to burden them with your living expenses after you retire because you haven’t built a nest egg.

Again, if you’re still grappling with your own student loan debts, you can experiment with a student loan refinance calculator to see if refinancing can make it easier to pay it off, and put you in a better position to start saving for your child’s education.

The Best Ways to Save for Child’s College

If you’re ready to start saving for higher education, you may be tempted to keep that cash reserve in a savings account. While it might seem like that would protect your funds from market ups and downs, you might actually be losing money.

That’s because even accounts with the best interest rates aren’t keeping up with the pace of inflation. Especially if your child won’t be going to college for a while, investing your savings is a way you might see your money grow. Keep in mind that investments can lose money.

It’s also worth mentioning, again, that many parents may still be struggling with their own student loan debts. As such, it’s worth asking: should you refinance your student loans? It’s worth considering, at the very least, or speaking with a financial professional about if you think it may help you save for your child’s college expenses.

Here are some of the best ways to save for a child’s college:

529 Plans

A 529 plan, also known as a “qualified tuition plan,” allows you to save for education costs while taking advantage of tax benefits (the plan is named after the section of the Internal Revenue Code that governs it). 529 plans break down into two categories: educational savings plans and prepaid tuition plans.

Educational savings plans, which are sponsored by states, allow you to open an investment account for your child, who can use the money for tuition, fees, room and board, and other qualifying expenses at any college or university. You can also use up to $10,000 a year to pay for schooling costs before college.

You can invest the money in a variety of assets, including mutual funds or target-date funds based on when you expect your child to go to college. The specific tax benefit depends on your state and plan. Generally, you contribute after-tax money, your earnings grow tax-free, and you can withdraw the money for qualified expenses without paying taxes or penalties. If you withdraw money for anything else, you’ll pay a 10% tax penalty on earnings.

Not all states offer tax benefits, so be sure to look into this when choosing your plan.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.


Prepaid tuition plans, as you may expect, allow you to prepay tuition and fees at a college at current prices. These plans are only available at certain universities, usually public institutions, and often require you to live in the same state. A prepaid tuition plan can save you a lot of money, given how much college costs are increasing each year.

Depending on the state and the 529 plan, you may be able to deduct contributions from state income tax. However, if your prepaid tuition plan isn’t guaranteed by the state, you might lose money if the institution runs into financial trouble. You also run the risk that your child will choose to go to a school that’s outside the area covered by the plan.

Coverdell Education Savings Account

Like a 529 educational savings plan, a Coverdell ESA allows you to set up a savings account for someone under age 18 to pay for qualified education expenses. The money can be invested in a variety of stocks, bonds, or other assets, and grows tax-free.

Your contributions are not tax-deductible, and the plan is only available to people who earn under a certain income threshold.

When your child withdraws the funds for qualified educational expenses, they won’t pay taxes on it. The money can also pay for elementary or secondary education. But note that you can only contribute $2,000 per year to a Coverdell ESA per beneficiary.

UGMA and UTMA Accounts

You can open a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account on behalf of a beneficiary under 18, and all the assets in it will transfer to the minor when he or she becomes an adult (at age 18 to 25, depending on the state).

Young adults are able to use the funds for anything they want. That means they won’t be limited to qualified education expenses. Another plus is that you can contribute as much as you want. The downside is that there are no tax benefits when contributions are made. Earnings are taxable.

A custodial account is an irrevocable gift to the minor named as the beneficiary, who receives legal control of the account at the age of majority.

The Takeaway

Given the increasing costs of higher education, parents are smart to save for a child’s college early and often. But rather than keep the money in a savings account, they’d likely benefit by choosing an option that lets their money grow.

The more popular routes for doing so often involve 529 Plans, Coverdell Education Savings Accounts, and UGMA and UTMA accounts. But you’ll need to do some thinking and research before deciding on the right strategy and accounts for you and your child. Just remember: The sooner you start saving, the better — generally speaking.

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

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

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

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

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

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