Whether trying to consolidate debt with a personal loan or thinking about a loan to pay for a major life event, taking on debt is a financial move that warrants some consideration.
It’s important to understand the financial commitment that taking on a personal loan — or any other debt — entails. This includes understanding interest rates you might qualify for, how a loan term affects the total interest charged, fees that might be charged by different lenders, and, finally, comparing offers you might receive.
Shopping around and comparing loans can increase your confidence that you’re getting the best interest rate on a loan.
What’s a Good Interest Rate on a Loan?
You may see advertisements for loan interest rates, but when you get around to checking your personal loan interest rate, what you’re offered may be different than rates you’ve seen. Why is that? A loan company may have interest rate ranges, but the lowest, most competitive rates may only be available to people who have excellent credit, as well as other factors.
When shopping around for a loan, you can generally check your rate without affecting your credit score. This pre-qualification rate is just an estimate of the interest rate you would likely be offered if you were to apply for a loan, but it can give you a good estimate of what sort of rate you might be offered. You can compare rates to begin to filter potential companies to use to apply for a loan.
💡 Quick Tip: SoFi lets you apply for a personal loan online in 60 seconds, without affecting your credit score.
Getting a Favorable Interest Rate on a Loan
The potential interest rate on a loan depends on a few factors. These may include:
• The amount of money borrowed.
• The length of the loan.
• The type of interest on your loan. Some loans may have variable interest (interest rates can fluctuate throughout the life of the loan) or a fixed interest rate. Typically, starting interest rates may be lower on a variable-rate loan.
• Your credit score, which consists of several components.
• Being a current customer of the company.
For example, your credit history, reflected in your credit score, can give a lender an idea of how much a risk you may be. Late payments, a high balance, or recently opened lines of credit or existing loans may make it seem like you could be a risky potential borrower.
If your credit score is not where you’d like it to be, it may make sense to take some time to focus on increasing your credit score. Some ways to do this are:
• Analyzing your credit report and correcting any errors. If you haven’t checked your credit report, doing so before you apply for a loan is a good first step to making sure your credit information is correct. Then you’ll have a chance to correct any errors that may be bringing down your credit score.
• Work on improving your credit score, if necessary. Making sure you pay bills on time and keeping your credit utilization ratio at a healthy level can help improve your credit score.
• Minimize opening new accounts. Opening new accounts may temporarily decrease your credit score. If you’re planning to apply for a loan, it may be good to hold off on opening any new accounts for a few months leading up to your application.
• Consider a cosigner or co-applicant for a loan. If you have someone close to you — a parent or a partner — with excellent credit, having a cosigner may make a loan application stronger. Keep in mind, though, that a cosigner will be responsible for the loan if the main borrower does not make payments.
When you compare loan options, it can be easy to focus exclusively on interest rates, choosing the company that may potentially offer you the lowest rate. But it can also be important to look at some other factors, including:
• What are the fees? Some companies may charge fees such as origination fees or prepayment penalties. Before you commit to a loan, know what fees may be applicable so you won’t be surprised.
• What sort of hardship terms do they have? Life happens, and it’s helpful to know if there are any alternative payment options if you were not able to make a payment during a month. It can be helpful to know in advance the steps one would take if they were experiencing financial hardship.
• What is customer service like? If you have questions, how do you access the company?
• Does your current bank offer “bundled” options? Current customers with active accounts may be offered lower personal loan interest rates than brand-new customers.
💡 Quick Tip: Fixed-interest-rate personal loans from SoFi make payments easy to track and give you a target payoff date to work toward.
Choosing a Personal Loan For Your Financial Situation
Interest rates and terms aside, before you apply for a loan, it’s a good idea to understand how the loan will fit into your life and how you’ll budget for loan payments in the future. The best personal loan is one that feels like it can comfortably fit in your budget.
But it also may be a good idea to assess whether you need a personal loan, or whether there may be another financial option that fits your goals. For example:
• Using a buy now, pay later service to cover the cost of a purchase. These services may offer 0% interest for a set amount of time.
• Transferring high-interest credit card debt to a 0% or low-interest credit card, and making a plan to pay the balance before the end of the promotional rate.
• Taking on a side hustle or decreasing monthly expenses to be able to cover the cost of a major purchase or renovation.
• Researching other loan options, such as a home equity loan, depending on your needs.
A loan is likely to play a big part in your financial life for months or years, so it’s important to take your time and figure out which loan option is right for you. And it’s also important to remember that interest rate is just one aspect of the loan. Paying attention to details like potential fees, hardship clauses, and other factors you may find in the small print may save you money and stress over time.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
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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.
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.
Fractional reserve banking is an economic system that goes on behind the scenes at the institutions where you keep your money. It allows the bank to keep only a fraction of the money on deposit as cash for withdrawal.
The rest of the funds kept with the bank may be loaned out for other purposes. This allows the bank to make money and stay in business, and it can also help keep the economy humming along.
Learn more about fractional reserve banking, its history, and its pros and cons here.
What Is Fractional Reserve Banking?
The system of banking used most widely around the world today is called Fractional Reserve Banking (FRB). In this system, only some of the money that exists in bank accounts is backed by physical cash that people can withdraw. Banks can then take the extra money and lend it out, which theoretically helps to expand the economy.
This is a debt and interest creation system which is essentially the entire backbone of the modern-day economy.
In simpler terms, if someone goes to the bank and deposits cash, the bank only holds on to a certain amount of that cash, and they lend the rest of that out to individuals and businesses. Most checking accounts don’t pay any interest, so the bank gets to lend out the money for no cost.
Most banks have been required to keep a certain amount of the money that gets deposited available as cash, generally 10%, but this can vary based on the value of deposits held by the bank. This cash is called reserves or the reserve requirement.
Banks also earn interest from the Federal Reserve on the reserves that they hold, which is called the “interest rate on reserves” (IOR). If the Federal Reserve increases the amount of reserves that banks must hold, this takes money out of the circulating economy, and vice versa.
Fractional reserve banking is one of the main ways that banks make money, as they earn on the difference between any interest they pay to customers and the interest they charge borrowers for taking out loans.
💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.
The History of Fractional Reserve Banking
The origins of fractional reserve banking aren’t entirely clear, but the system is generally believed to have been created during the Middle Ages. At that time, more and more people began storing their money in banks, and the banks wanted to be able to transfer coins between customer accounts, rather than storing the exact coins that were deposited until the future time when the customer wanted to withdraw them. This evolved into deposits being treated as a sort of IOU, and the system continued to develop from there.
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Requirements of Fractional Reserve Banking
In addition to the percentage of money that banks are required to keep on hand, there are other requirements set by the Federal Reserve for the fractional reserve banking system. Banks must send reports detailing the deposits, reserve cash, and other information about transactions to the Federal Reserve on a regular basis.
Typically, large banks (whether traditional vs. online) with more than $124.2 million in assets were required to keep 10% in reserves, but smaller banks had different requirements. Banks with assets between $16.3 million and $124.2 million were required to hold 3% in reserves, and banks with under $16.3 million in assets were not required to hold any reserves.
However, in March 2020, the Federal Reserve Board lowered the reserve requirement to 0% across the board.
The Fractional Reserve Multiplier Equation
Although it can’t be calculated precisely, the impacts of fractional reserve banking on the economy can be estimated using what is called the multiplier equation. This equation helps figure out how much money can potentially be created from bank lending.
The equation is:
Initial Deposit x 1/Reserve Requirement
For example, if a bank has $500 million in total assets and it was required to hold 10% in reserves, that would be $50 million. Using the multiplier equation, the calculation would be:
$500 million x 1/10% = $5 billion
This means that $5 billion can potentially be created in the economy through the system of fractional reserve banking. This is different from printing new money and is simply an estimate of the impacts of FRB.
There are both upsides and downsides to the fractional reserve banking system. Some of the pros are:
• Banks can use most of the money that gets deposited to grant loans and earn interest on those loans.
• Banks also earn interest on the reserves they hold.
• The system helps grow the economy.
Most of the time the system works well. Banks make money on interest, money gets released into the economy, and much of the time that money helps borrowers to earn money as well. The idea is that borrowers invest money into their home, business, or other activities, which in turn helps them grow their wealth. They then pay the bank back for the loan and the cycle continues.
However, some of the cons of fractional reserve banking are:
• Banks don’t have a lot of physical cash on hand, which can be a problem if there is a bank run. During the Great Depression, most banks had to close because too many people were trying to take cash out and the banks didn’t have enough.
• During an economic downturn (or what is known as a recession), the FRB system largely stops working, since the economy is no longer expanding. The problem with the system is that there is a constant need for economic growth in order to pay back the constantly increasing amounts of debt created through lending. In order to keep growing, more investment is needed, which creates even more debt. When the economy stops growing, there isn’t enough money to pay back all the debt.
• If there is too much inflation, this lowers the value of money.
• If people default on loans, this lowers the price of assets, lowering the value of things like real estate that people hold.
• Sometimes central banks and governments attempt to help the economy or make political moves by making adjustments to the FRB system, such as changing interest rates. Although these changes can sometimes help in the short term, they usually result in long-term negative effects, such as inflation.
• As occurred in the 2009 financial crisis, not all debt is “good” debt, meaning not all of it results in productive economic activity. When it becomes too easy to obtain a loan, inexperienced business owners and real estate investors can get a cheap loan when they can’t necessarily afford it. In the years before 2009, a lot of people took out cheap loans in the peak of the housing market, thinking that housing prices would continue to rise.
The Fed had lowered interest rates so much that practically anyone could take out a loan. When the market crashed, these people weren’t able to pay back loans, and the value of the real estate also crashed.
The economic cycle of upturns and downturns is an inevitable part of the fractional reserve banking system.
The Takeaway
The fractional reserve banking system is an economic system that typically requires banks to keep a certain amount of cash on hand for withdrawals. The rest of the money may be loaned out and used for other purposes, which helps the bank earn money and the economy grow.
This is going on behind the scenes when you bank. Many people are interested in finding a bank that suits their financial and personal needs, however, with features such as a competitive interest rate and rewards.
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.
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.
It’s possible to consolidate or refinance your student loans into one loan with a single monthly payment. The major difference between these two options is that consolidation is offered through the federal government for federal student loans only. Refinancing is done with a private lender and can include both federal and private student loans.
When you consolidate student loans with the federal government through the Direct Loan Consolidation program, the new interest rate is the weighted average of your prior rates, rounded up to the nearest one-eighth of a percent.
Another option is student loan refinancing, which can be completed with a private lender. If you refinance, the new interest rate on your loans is based on factors like current market rates, your credit profile, your employment history, and your debt-to-income ratio.
Understanding the differences between consolidation versus refinancing is critical before deciding to take the plunge — especially since private refinancing means you lose your federal student loan benefits.
• Student loan consolidation combines multiple federal loans into one federal loan through the Direct Loan Consolidation program.
• The new interest rate from consolidation is the weighted average of previous loans, rounded up to the nearest one-eighth of a percent.
• Refinancing student loans through private lenders can include both federal and private loans, potentially lowering the interest rate based on personal credit.
• Refinancing results in the loss of federal loan benefits, such as forgiveness programs and income-driven repayment plans.
• It’s crucial to compare both consolidation and refinancing options to determine which best suits individual financial situations and goals.
What Is Federal Student Loan Consolidation?
You can combine your federal student loans into one by taking out a Direct Consolidation Loan from the government.
Consolidating your loans may help simplify your repayment process if you have multiple loan servicers. However, consolidating doesn’t typically result in any interest savings, as the rate is simply the weighted average of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent.
In some cases, consolidating your loans may also be necessary if you are interested in enrolling in an income-driven repayment plan. In order to use a Direct Consolidation Loan, you must have at least one Direct Loan or one Federal Family Education Loan (FFEL).
What Is Student Loan Refinancing?
When you refinance student loans, it means you are borrowing a new loan which is then used to pay off the existing student loans you have. You can refinance both federal and private student loans. The new loan will have a new interest rate and terms, which as mentioned, are based on personal factors such as an individual’s credit history, employment history, and debt-to-income ratio.
Refinancing is completed with a private lender and borrowers may have the choice between a fixed or variable interest rate. In some cases, borrowers who refinance to a lower interest rate may be able to spend less in interest over the life of the loan. To get an idea of what refinancing your student loans could look like, you can take a look at SoFi’s student loan refinancing calculator.
It’s important to note that when you refinance student loans with a private lender, you lose access to federal loan forgiveness programs and payment assistance programs, such as income-driven repayment plans and student loan deferment.
Comparing Student Loan Refinancing and Consolidation
As previously mentioned, consolidation can be completed for federal student loans through a Direct Consolidation Loan. Refinancing is completed with private lenders and can be done with either federal and/or private loans. An important distinction is that Direct Loan Consolidation allows borrowers to retain the federal benefits and borrower protections that come with their federal loans, while refinancing does not.
Depending on how a borrower’s financial situation and credit profile has changed since they originally borrowed their student loans, refinancing could allow borrowers to secure a more competitive rate or preferable terms. The rate and term on a refinanced loan will be determined by the lender’s policies and the borrower’s financial situation and credit profile, including factors such as credit score, income, and whether there is a cosigner.
Private Student Loan Refinancing Rates
It may be possible for borrowers to qualify for a more competitive interest rate by refinancing their student loans with a private lender. As of June 2023, current student loan refinance rates with SoFi start at 4.99% APR with autopay for fixed rate loans and 5.99% APR with autopay for variable rate loans. As noted previously, the rate you get typically depends on your total financial picture, including your credit history, income, and employment history.
Borrowers may also consider applying for student loan refinancing with a cosigner, which could potentially help them qualify for a more competitive interest rate.
Why Interest Rates Aren’t the Only Thing to Consider
Interest rates aren’t the only thing to consider when deciding whether to consolidate or refinance. If you go with a Direct Consolidation Loan, keep in mind that you might pay more overall for your loans, since this usually lengthens your repayment term. You may also lose credit toward loan forgiveness for any payments made on an income-based repayment plan or the Public Service Loan Forgiveness program.
If you refinance with a private lender, you’ll no longer be eligible for federal loan protections, including deferment and forbearance. Some private lenders, however, do offer their own benefits, such as a temporary pause on payments if you lose your job through no fault of your own.
It’s important to think carefully before consolidating or refinancing your student loans. Consider things like whether or not you plan on using federal benefits, and if a prospective private lender offers any options for relief if you hit a rough patch.
Even if you get a lower interest rate, make sure you can afford the new monthly payments before committing. And remember that this information is just a starting point for your decision. Don’t be afraid of doing more research and trusting you’ll make the right decision for you.
The Takeaway
Consolidating federal student loans can be done through the federal government with a Direct Consolidation Loan. The interest rate on this type of loan is the weighted average of the interest rates on the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. When you consolidate, you keep your federal benefits and protections.
Refinancing student loans allows borrowers to combine both federal and private student loans into a single new loan with a new interest rate. The rate may be variable or fixed, and will be determined by the lender based on criteria like market rates and the borrower’s credit history. Again, refinancing will eliminate any federal loans from borrower protections, including income-driven repayment plans.
Depending on an individual’s personal circumstances, either consolidation or refinancing may make more sense than the other. If refinancing seems like an option for you, consider SoFi. SoFi offers an easy online application, competitive rates, and no origination fees.
See if you prequalify with SoFi in just two minutes.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
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.
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 .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
Taxes are part of life, but many people would like to know if there are any ways to lower their tax bill.
While paying no taxes isn’t likely, there are ways you can use the tax code to reduce your taxable income and tax liability. These range from knowing the right filing status to maxing out your retirement contributions to understanding which deductions and credits you may qualify for.
Read on to learn some smart strategies for lowering your tax bill without running afoul of the IRS.
1. Choosing the Right Filing Status
If you’re married, you have a choice to file jointly or separately. In many cases, a married couple will come out ahead by filing taxes jointly.
Typically, this will give them a lower tax rate, and also make them eligible for certain tax breaks, such as the earned income credit, the American Opportunity Credit, and the Lifetime Learning Credit for education expenses. But there are certain circumstances where couples may be better off filing separately.
Some examples include: when both spouses are high-income earners and earn the same, when one spouse has high medical bills, and if your income determines your student loan payments.
Preparing returns both ways can help you assess the pros and cons of filing jointly or separately.
💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.
2. Maxing Out Your Retirement Account
Generally, the lower your income, the lower your taxes. However, you don’t have to actually earn less money to lower your tax bill.
Instead, you can reduce your gross income (which is your income before taxes are taken out) by making contributions to a 401(k) retirement plan, a 403(b) retirement plan, a 457 plan, or an IRA.
The more you contribute to a pre-tax retirement account, the more you can reduce your adjusted gross income (AGI), which is the baseline for calculating your taxable income. It’s important to keep in mind, however, that there are annual limitations to how much you can put aside into retirement, which depend on your income and your age.
Even if you don’t have access to a retirement plan at work, you may still be able to open and contribute to an IRA. And, you can do this even after the end of the year.
While the tax year ends on December 31st, you may still be able to contribute to your IRA or open up a Roth IRA (if you meet the eligibility requirements) until mid April.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 4.20% APY on savings balances.
Up to 2-day-early paycheck.
Up to $2M of additional FDIC insurance.
3. Adding up Your Health Care Costs
Healthcare expenses are typically only deductible once they exceed 7.5% of your AGI (and only for those who itemize their deductions). But with today’s high cost of medical care and, in some cases, insurance companies passing more costs onto consumers, you might be surprised how much you’re actually spending on healthcare.
In addition to the obvious expenses, like copays and coinsurance, it’s key to also consider things like dental care, Rx medications, prescription eyeglasses, and even the mileage to and from all medical appointments.
4. Saving for Private School and College
If you have children who may attend college in the future, or who attend or will attend private school, it can pay off to open a 529 savings plan.
Even if your children are young, it’s never too early to start setting aside money for their education. In fact, because of the long-term compounding power of investing, starting early could help make college a lot more affordable.
A 529 savings plan is a type of investment account designed to help parents invest in private schools or colleges in a tax-advantaged way. While you won’t typically get a federal tax deduction for the money you put into a 529, many states offer a state tax deduction for these contributions.
The big tax advantage is that no matter how much your investments grow between now and when you need the money, you won’t pay taxes on those gains, and any withdrawals you take out to pay for qualified education expenses will be tax-free.
5. Putting Estimated Tax Payments on Your Calendar
While this move won’t technically lower your taxes, it could help you avoid a higher than necessary tax bill at the end of the year.
That’s because Income tax in the United States works on a pay-as-you-go system. If you are a salaried employee, the federal government typically collects income taxes throughout the year via payroll taxes.
If you’re self-employed, however, it’s up to you to pay as you go. You can do this by paying the IRS taxes in quarterly installments throughout the year.
If you don’t pay enough, or if you miss a quarterly payment due date, you may have to pay a penalty to the IRS. The penalty amount depends on how late you paid and how much you underpaid.
The deadlines for quarterly estimated taxes are typically in mid-April, mid-July, mid-September, and mid-January.
You may be able to claim a deduction for donating to charities that are recognized by the IRS. So it’s a good idea to always get a receipt whenever you give, whether it’s cash, clothing and household items, or your old car.
If your total charitable contributions and other itemized deductions, including medical expenses, mortgage interest, and state and local taxes, are greater than your available standard deduction, you may wind up with a lower tax bill.
Note: For any contribution of $250 or more, you must obtain and keep a record.
7. Adding to Your HSA
If you have a high deductible health plan, you may be eligible for or already have a health savings account (HSA), where you can set aside funds for medical expenses.
HSA contributions are made with pre-tax dollars, so any money you put into an HSA is income the IRS will not be able to tax. And, you typically can add money until mid-April to deduct those contributions on the prior year’s taxes.
That’s important to know because HSA savings can be used for more than medical expenses. If you don’t end up needing the money to pay for healthcare, you can simply leave it in your HSA until retirement, at which point you can withdraw money from an HSA for any reason.
Some HSAs allow you to invest your funds, and in that case, the interest, dividends, and capital gains from an HSA are also nontaxable.
You may be able to lower your tax bill by deducting up to $2,500 of student loan interest paid per year, even if you don’t itemize your deductions.
There are certain income requirements that must be met, however. The deduction is phased out when an individual’s income reaches certain thresholds.
Even so, it’s worth plugging in the numbers to see if you qualify.
9. Selling Off Poorly Performing Investments
If you have investments in your portfolio that have been down for quite some time and aren’t likely to recover, selling them at a loss might benefit you tax-wise.
The reason: You can use these losses to offset capital gains, which are profits earned from selling an investment for more than you purchased it for. If you profited from an investment that you held for one year or less, those gains can be highly taxed by the IRS.
This strategy, known as tax-loss harvesting, needs to be done within the tax year that you owe, and can help a taxpayer who has made money from investments avoid a large, unexpected tax bill.
The Takeaway
The key to saving on taxes is to get to know the tax code and make sure you’re taking advantage of all the deductions and credits you’re entitled to.
It can also be helpful to look at tax planning as a year-round activity. If you gradually make tax-friendly financial decisions like saving for retirement, college, and healthcare throughout the year, you could easily reduce your tax burden and potentially score a refund at the end of the year. If you do score a tax refund, you can put it to good use, paying down debt or earning interest in a bank account.
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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.
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.
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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.
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Mortgage rates have risen considerably recently, from an average of 2.96% for a 30-year fixed-rate loan at the end of 2021 to around 6% to 7% at the midpoint of 2023. But despite it being more expensive to borrow money for a home, refinancing is still an attractive option for many homeowners. It allows you to replace your current mortgage with a new, potentially more advantageous one.
Perhaps you decided that you’d like to change your loan term, or you received a windfall you’d like to put toward lowering your mortgage ASAP. Another possibility is that you’ve built up equity and would like to tap it in a cash-out refinance.
Whatever your situation may be, here’s what you need to know about refinancing a home mortgage loan, from whether it’s right for you to what steps are involved to how much it will cost.
What Is Mortgage Refinancing?
Mortgage refinancing occurs when you replace one home loan with a new one. You might do so for such reasons as:
• To get a different loan term (say, 15 years instead of 30, or vice versa)
• To get a better interest rate
• To tap your home equity
• To make a switch between a fixed- and adjustable-rate loan
• To get rid of mortgage insurance on an FHA loan.
You need to go through the loan application process, underwriting, and closing again and pay the related costs. The new loan will pay off the old one. Then, going forward, you pay the new lender every month instead of your previous one.
Mortgage Refinancing Costs
Refinancing will generally cost from 2% to 5% of your loan’s principal value in closing costs. That’s a significant range, so it can be wise to shop around to make sure you’re getting the best deal.
Since you’re essentially applying for a new loan, you will likely need a chunk of cash at the ready if you choose to refinance. For this reason, it’s important to consider those refinancing costs compared to the potential savings. A good rule of thumb is to be certain you can recoup the cost of the refinance in two to three years — which means you shouldn’t have immediate plans to move.
There are helpful online calculators for determining approximate costs for a mortgage refinance. Of course, this will only be an estimate, and each lender will be different. As you do your research, lenders can provide final closing cost information alongside a quote for your new mortgage rate.
When you refinance, you also have to consider closing costs. Some lenders may not have origination fees, but instead charge the borrower a higher interest rate.
If you have a history of managing credit well and a strong financial position, there are some mortgage refinancing lenders that will probably reward you by offering a better rate than they would charge those with lesser credentials.
The process can take anywhere from 30 to 45 days or longer to complete. Factors that impact timing include the complexity of the loan, your ability to submit materials in a timely fashion, and the efficiency of the lender and/or broker.
If you want the process to move quickly, you may want to look for mortgage lenders who offer more streamlined service and a better customer experience. This may mean working with an online lender versus, say, a brick-and-mortar bank.
How to Refinance a Home Mortgage Loan
When you refinance a home mortgage, you are essentially repeating the same process as when you originally bought your property. This time, however, instead of the loan going to the homeowner you are buying a house from, funds will first go to the financial institution that holds your current mortgage. Once that loan is paid off, your newly refinanced loan kicks in. You start making payments to the new lender.
Because you are replacing one mortgage with another, you can expect the steps to be similar as they were when you got your original loan, from shopping around for the best loan for your situation to providing the necessary documentation to closing.
Steps in the Mortgage Refinancing Process
Here’s a closer look at the process:
1. Determine your goal. The first (and arguably most important) step is to determine what you want to get out of your mortgage loan refinance. There are several mortgage refinance types, but “rate and term” and “cash-out” are the two most common.
Just as the name implies, a “rate and term” refinance updates the interest rate, the term (or duration) of the loan, or both. You can also switch between an adjustable- vs. a fixed-rate loan.
It is important to understand that not every refinance will save you money on interest. For example, if you extend the loan term from 15 to 30 years, you may lower your monthly payment, but you could end up paying more money in interest over the course of your loan.
Once you determine your goal, your primary focus will be determining whether the fees are worth what you’ll gain.
With a cash-out refinance, you are using increased equity in your home to take out additional money on your mortgage.
This is usually done to fund common home repairs or pay off other, higher-interest debt. While this kind of loan can be an excellent tool if you use it wisely, as with all loans, it’s rarely advisable to take out more than you absolutely need.
2. Check your credit score and credit history for errors. Your credit score is an important factor in determining whether you get a better rate. Make sure you take time to clear up anything that’s been reported erroneously on your credit report. You might also want to remedy, say, an unpaid bill that was forwarded to a collection agency. These are factors that can lower your score.
3. Research your home’s approximate value. Check comparable sale prices — not just listing prices — in your neighborhood to get an idea of what your house is worth. If the value of your home has gone up significantly and improves your loan-to-value ratio (LTV), this will be helpful in securing the best refinancing rate.
4. Compare refinance rates online. It’s wise to shop around and see what at least a few lenders offer. Don’t forget to ask about all costs involved. Most financial institutions should be able to give you an estimate, but the accuracy can depend on how well you know your credit score and LTV ratio.
5. Get your paperwork together. The process will move faster if you have your pay stubs, bank statements, tax filings, and other pertinent financial information ready to go.
6. Have cash on hand. Refinancing brings charges, and at closing, such items as overdue property taxes can need to be paid, too. Make sure you can cover these costs.
7. Track the lender’s progress. Once the process is underway, keep an eye on how well things are moving ahead. What typically happens: The lender will likely send an appraiser for a home inspection. After the loan documentation and appraisal are submitted, loan officers determine the interest rate and create the loan closing documents. The closing is then scheduled with the refinancing company, mortgage broker, and your attorney.
Reasons to Refinance
As mentioned above, there are several typical reasons to refinance:
• Reducing your monthly payment
• Paying off your loan sooner
• Changing the loan terms or type (fixed- vs. adjustable-rate)
By refinancing your home loan, your monthly mortgage payments might be reduced. This in turn could free up money in your budget to go toward other goals, like paying down credit card debt or pumping up your emergency fund.
In addition, you might pay off your loan sooner, which could save you a considerable amount in interest over the life of the loan.
Refinancing your mortgage might also allow you to tap equity in your home. This could be useful if, say, you need those funds for educational or other expenses coming your way.
Also, some people who switch from an adjustable- to a fixed-rate loan may feel more secure with a set, unwavering payment schedule.
Beyond the tips mentioned above, you may also benefit from keeping these points in mind:
• Think carefully about no-closing-cost loans. Yes, not paying closing costs can sound appealing, but there’s a good chance you will wind up with a higher interest rate and paying more over the life of the loan.
• Make your appraisal a success. It can be distressing to have an appraisal come in low and throw a wrench into the works as you try to refinance. If there’s a glaring issue (rotting porch posts, for instance), it might be wise to fix it before the appraiser visits.
• Prioritize requests for paperwork and documentation when your file is moving through underwriting. Not doing so can cause the process to drag on for longer than anyone might want.
The Takeaway
Depending on your financial situation and goals, refinancing your home loan can be a wise move. You may be able to lower your monthly payments, or you might shorten your loan term, thereby saving a considerable amount in interest. Another reason to refinance: To tap the equity you have built up in your home and use that cash elsewhere. The process is very similar to shopping for, applying for, and closing on your current mortgage. It will involve doing your research, providing documentation, and paying closing costs.
If refinancing is right for you, see what SoFi offers. With a SoFi Mortgage Refinance, you’ll find competitive rates, flexible terms, and a streamlined process, all of which can help you find just the right loan for your life.
SoFi: The smart way to refinance your mortgage.
FAQ
What is the average refinance fee?
Typically, you can expect to pay between 2% to 5% of the loan’s principal in closing costs when refinancing a mortgage.
Is it expensive to refinance?
The cost of refinancing will typically vary with the amount of the loan you are seeking. If closing costs are, say, 3.5% of the loan principal, that will be $3,500 on a $100K loan and $35,000 on a $1 million loan. It can also be helpful to compare these closing costs to the benefits of refinancing. For instance, you might free up more money every month to pay down pricey credit card debt, or you might shorten your loan term and pay less interest over the life of the loan when refinancing.
Why is it so expensive to refinance a mortgage?
When you refinance a loan, you are replacing your current loan with a new one. Closing costs are assessed to cover the expenses involved, including appraisal fees and other charges.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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 .
