Terminology Archives | Page 28 of 75

Feb

2024

A Beginner’s Guide to 401(k) Retirement Plans

By Pam O’Brien | invest, Investing, Terminology | No Comments

Saving for retirement is one of the most important steps you can take to help secure your financial future. Your employer might offer a 401(k) retirement plan — and possibly matching contributions as well. However, if you’ve never signed up for a 401(k), you might be wondering whether you can afford to take a chunk of money out of your paycheck each pay period, especially if you’re just starting out in your career.

What is a 401(k) exactly and how does it work? Read on to learn about this retirement plan, including how to open and contribute to a 401(k) account, plus how it can help you save for retirement.

What Is a 401(k)?

A 401(k) is a retirement savings plan offered by an employer. You sign up for the plan at work, and your contributions to the 401(k), which may be a percentage of your pay or a predetermined amount, are automatically deducted from your paychecks.

You decide how to invest your 401(k) money by choosing from a number of available options, such as stocks, bonds, and mutual funds.

Employers may match what individual employees contribute to a 401(k) up to a certain amount, depending on the employer and the plan.

How Does a 401(k) Work?

The purpose of a 401(k) is to help individuals save for retirement. Once you sign up for the plan, your contributions are automatically deducted from your paychecks at an amount or percentage of your salary selected by you.

There are two main types of 401(k) plans. Your employer may offer both types or just one. The main difference between them has to do with the way the plans are taxed.

Traditional 401(k)

With a traditional 401(k), contributions are taken from your pay before taxes have been deducted. This means your taxable income is lowered for the year and you’ll pay less income tax. However, you’ll pay taxes on your contributions and earnings when you withdraw money from the plan in retirement.

Roth 401(k)

With a Roth 401(k), contributions to the plan are taken after taxes are deducted from your pay. Because your contributions are made with after-tax dollars, you don’t get an upfront tax deduction. The money in your Roth 401(k) grows tax-free and you don’t owe any taxes on the withdrawals you make in retirement — as long as you’ve had the account for at least five years.

Traditional 401(k) vs Roth 401(k)

Here’s a quick comparison of a traditional 401(k) and a Roth 401(k).

	Traditional 401(k)	Roth 401(k)
Taxes on contributions	Contributions are made with pre-tax dollars, which reduces taxable income for the year.	Contributions are made with after-tax dollars. There is no upfront tax deduction.
Taxes on withdrawals	Money withdrawn in retirement is taxed as ordinary income.	Money is withdrawn tax-free in retirement as long as the account is at least five years old.
Rules for withdrawals	Withdrawals taken in retirement are taxed. Withdrawals taken before age 59 ½ may also be subject to a 10% penalty.	Withdrawals in retirement are not taxed. However, withdrawals taken before age 59 ½ or if the account is less than five years old may be subject to a penalty and taxes.

401(k) Contribution Limits

The amount an employee and an employer can contribute annually to a 401(k) is adjusted periodically for inflation. For 2024, the employee 401(k) contribution limit is $23,000. If you’re 50 or older, you can contribute an additional $7,500 as part of a catch-up contribution.

The overall limits on yearly contributions from both employer and employee combined for 2024 are $69,000. The limit is $76,500, including catch-up contributions, for those 50 and up.

How Does Employer Matching Work?

If your employer offers matching contributions, they will likely use a specific formula to determine the match. The match may be a set dollar amount or it can be based on a percentage of an employee’s contribution up to a certain portion of their total salary. For instance, some employers contribute $0.50 for every $1 an employee contributes up to 6% of their salary.

Employees typically need to contribute a certain minimum amount to their 401(k) in order to get the employer match.

401(k) Withdrawal Rules

The rules for withdrawals from traditional and Roth 401(k)s stipulate that an individual must be at least 59 ½ to make qualified withdrawals and avoid paying a penalty. In addition, a Roth 401(k) must have been open for at least five years in order to avoid a penalty.

When you take qualified withdrawals from your 401(k) in retirement, you’ll be taxed or not depending on the type of 401(k) plan you have. With a traditional 401(k), you’ll pay taxes at your ordinary income tax rate on your contributions and earnings that accrued over time.

If you have a Roth 401(k), however, the qualified withdrawals you take in retirement will not be taxed as long as the account has been open for at least five years.

When you make withdrawals, you can do so either in lump-sum payments or in installments, or possibly as an annuity, depending on your company’s plan.

401(k) Early Withdrawal Rules

Withdrawals taken before an individual reaches age 59 ½ or if their Roth IRA has been open for less than five years, are subject to a 10% penalty as well as any taxes they may owe with a traditional IRA. However, an early withdrawal may be exempt from the penalty in certain circumstances, including:

• To buy or build a first home

• To pay for certain higher education expenses

• The account holder becomes disabled

• The account holder passes away and a beneficiary inherits the assets in their account

• To pay for certain medical expenses

Some 401(k) plans also allow for hardship withdrawals, but there are rules and expenses involved with doing so.

Required Minimum Distributions (RMDs)

If you have a traditional 401(K), you’ll be required to start taking money out of your account at age 73. This is known as a required minimum distribution (RMD) and you’ll need to take RMDs annually. Otherwise, you can face fees and penalties.

The amount of your RMD is calculated based on your life expectancy.

Pros and Cons of 401(k)s

A 401(k) plan comes with benefits for employees, but there are some downsides as well. Here are some of the advantages and disadvantages of a 401(k).

Pros

• Contributions you make to a traditional 401(k) plan may reduce your taxable income, and that money will not be taxed until it’s distributed at retirement.

• Contributions you make to a Roth 401(k) may be withdrawn tax-free in retirement.

• Because you can set up automatic deductions from your paycheck, you are more likely to save that money instead of using it for immediate needs.

• Your employer may match your contributions up to a certain amount or percentage.

• The money is yours. If you change jobs or cannot continue to work, you have the ability to either roll over your 401(k) into an IRA or into your next employer’s 401(k) plan.

Cons

• Investment choices in a 401(k) may be limited. Your employer picks the investments you can choose from, and typically the selection is fairly small.

• You typically can’t make qualified withdrawals from a 401(k) before age 59 ½ without being subject to a penalty and taxes.

• You need to take RMDs from a 401(k)starting at age 73. Otherwise you may owe taxes and penalties.

The Takeaway

A 40I(k) plan is an employer-sponsored retirement savings plan that allows employees to contribute money directly from their paychecks. Plus, in many cases employers will match employee contributions up to a certain amount — meaning your retirement savings will grow faster than if you contributed on your own.

If you max out your 401(k) contributions, another option you might consider to help save for retirement is to open an IRA online. Not only is it possible to have both a 401(k) and an IRA at the same time, but having more than one retirement plan may help you save even more money for your golden years.

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).

Invest with as little as $5 with a SoFi Active Investing account.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of Individual Retirement Accounts (IRAs).

FAQ

Are 401(k)s Still Worth It?

It depends on your retirement goals, but a 401(k) can be worth it if it helps you save money for retirement. Contributions to the plan are automatic, which can make it easier to save. Also, your employer may contribute matching funds to your 401(k), and there may be potential tax benefits, depending on the type of 401(k) you have.

What happens to your 401(k) when you leave your job?

If you leave your job, you can roll over your 401(k) into your new employer’s 401(k) plan or another retirement account like an IRA. You can also typically leave your 401(k) with your former employer, but in that case, you can no longer contribute to it.

What happens to your 401(k) when you retire?

When you retire, you can start to withdraw money from your 401(k) without penalty as long as you are at least 59 ½. You will need to take annual required minimum distributions from the plan starting at age 73.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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Jan

2024

401(a) vs 401(k) Compared

By MP Dunleavey | Budgeting & Goals, Growing Wealth, invest, Preparing for Retirement, Terminology | No Comments

Table of Contents

What Is a 401(a) Plan?
What is a 401(k) Plan?
401(a) vs. 401(k) Contribution Limits
401(a) vs. 401(k) Investment Options
401(a) vs. 401(k) Tax Rules
401(a) vs. 401(k) Rollover Rules
What is a 401(a) Profit Sharing Plan?
Summarizing the Differences Between 401(k) and 401(a) Plans
Summarizing the Similarities Between 401(a) vs 401(k) Plans
Pros and Cons of 401(k) vs 401(a) Plans

A 401(k) plan and a 401(a) plan may sound confusingly similar, but there are some differences between the two retirement accounts.

The biggest differences between 401(k) vs 401(a) plans are in the types of companies that offer them and their contribution requirements. While most private sector companies are eligible to offer 401(k) plans, only certain government and public organizations can offer their employees a 401(a) plan. Employers must contribute to 401(a) plans and can make it mandatory for employees to contribute a pre-set amount as well. By contrast, employers do not have to contribute to 401(k) plans and employees are free to choose whether they want to contribute.

Key Points

• A 401(a) plan is an employer-sponsored retirement account typically available to government workers and employees at educational institutions and nonprofits. Employer contributions are mandatory, while employee contributions may be voluntary.

• A 401(k) plan is offered by for-profit employers as part of the employee’s compensation package. Employers are permitted but not required to contribute to a 401(k) plan.

• For 2023, the total contribution limit — from both employer and employee — is $66,000 for 401(a) and 401(k) plans, with an additional $7,500 catchup contribution allowed for employees age 50 or older.

• Employee contributions to 401(a) or 401(k) plans in 2023 can amount to $22,500, or for people 50 or older the cap is $30,000. However, employee contributions cannot exceed their salary.

• You can borrow from either a 401(a) or a 401(k) plan with restrictions. Withdrawals before age 59 1⁄2 may incur penalties. Employees can begin to withdraw money without penalty when they turn 59 1⁄2.

What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored type of retirement account that typically covers government workers and employees from specific education institutions and nonprofits. It is different from an IRA in that the employer sponsors the plan, determines the investment options that the employees can choose from, and sets the vesting schedule (the amount of time an employee will have had to have worked with the organization before all employer contributions become fully theirs, even if they leave the company).

With IRAs, the individual investor decides how much to contribute and if/when they want to make withdrawals from the account. With a 401(a) plan, employer contributions are mandatory; employee contributions are not. All contributions made to the plan accrue on a tax-deferred basis.

Recommended: IRAs vs 401(k) plans

However, withdrawing from either type of plan may incur penalties for withdrawing money before age 59 ½.

What Is a 401(k) Plan?

A 401(k) plan is a benefit offered by for-profit employers as part of the employee’s compensation package. The employer establishes the plan, along with the investment options the employee can choose from and the vesting schedule. As with 401(a) plans, funds contributed are tax-deferred and help employees save for retirement.

Some employers choose to offer a match program in which the company matches employee contributions up to a specific limit.

401(k) plans are also accessible to entrepreneurs and self-employed business owners.

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

Who Contributes to Each Plan?

Under a 401(a) plan, employer contributions are mandatory, though the employer can decide whether they’ll contribute a percentage of the employees’ income or a specific dollar amount. Employers can establish multiple 401(a) accounts for their employees with different eligibility requirements, vesting schedules, and contribution amounts.

Employee participation is voluntary, with contributions capped at 25% of their pre-tax income.

Under a 401(k) plan, employees can voluntarily choose to contribute a percentage of their pre-tax salary. Employees are not required to participate in a 401(k) plan.

Employers are permitted but not required to contribute to a 401(k) plan, and many will match up to a certain amount — say, 3% — of employees’s salaries.

401(a) vs 401(k) Contribution Limits

For 2023, the total 401(a) contribution limit — from both employer and employee — is $66,000. However, employees with 401(a) plans can also contribute to a 403(b) plan and a 457 plan simultaneously (more on those plans in the 401(a) vs Other Retirement Plan Options section).

Employee contributions for 401(k) plans have a $23,000 limit in 2024 and a $22,500 limit in 2023. Employees who are 50 or older may contribute up to an additional $7,500 for a total of $30,500 in 2024 and a total of $30,000 in 2023. An employee with a 401(k) plan can also have a Roth or traditional IRA. However, there are limits on how much they can contribute to an IRA account — $7,000 for a traditional IRA for 2024 and $6,500 for a traditional IRA for 2023, with an extra $1,000 for people over age 50.

401(a) vs 401(k) Investment Options

401(a) vs 401(k) plans often offer various investment options, which may include more conservative investments such as stable value funds to more aggressive investments such as stock funds. Some 401(a) plans may allow employees to simplify diversified portfolios or seek investment advice through the plan’s advisor.

Most 401(k) plans also offer various investment choices ranging from low-risk investments like annuities and municipal bonds to equity funds that invest in stocks and reap higher returns.

💡 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.

401(a) vs 401(k) Tax Rules

The tax rules in a 401(a) plan may be one difference between a 401(k) and 401(a).

With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. Pre-tax means contributions are not taxed at the time of investment, but later upon withdrawal. After-tax means contributions are taxed before being deposited into the account

A 401(k), on the other hand, is a tax-deferred retirement plan, meaning all contributions are pre-tax. The wages employees choose to contribute to their plan are untaxed upon initial investment. Income taxes only kick in when the employee decides to withdraw funds from their account.

Can You Borrow from Each Plan?

You can borrow from either a 401(a) or a 401(k) plan if you have an immediate financial need, but there are some restrictions and it is possible to incur early withdrawal penalties.

An employer can limit the amount borrowed from a 401(a) plan — and may choose not to allow employees to borrow funds. If the employer does allow loans, the maximum amount an employee can borrow is the lesser of:

• $10,000 or half of the vested account balance, whichever is greater OR

• $50,000

Because the employee is borrowing money from their account, when the employee pays back the loan’s interest, they are paying it to themselves. However, the IRS requires employees to pay back the entire loan within five years . If they don’t pay the loan back, the IRS will consider the loan balance to be a withdrawal and will require taxation on the remaining loan amount as well as a 10% penalty if the employee is under age 59 ½.

Borrowing from a 401(k) plan is similar. Employees are limited to borrowing $50,000 or half of the vested balance — whichever is less. One big difference between borrowing from a 401(a) vs. a 401(k) plan is employees lose out on a tax break if they borrow from their 401(k) because they are repaying it with after-tax dollars. Because the money is taxed again when withdrawn during retirement, an investor is essentially being taxed twice on that money.

Can You Borrow Money from a 401(a) or 401(k) to Buy a Home?

You may be able to use the funds from a 401(a) or 401(k) account to purchase a home. Remember, with 401(a) plans, the employer ultimately decides if loans are permitted from the 401(k).

If you borrow money from your 401(a) or 401(k) to fund the purchase of a home, you have at least five years to repay what you’ve taken out.

The maximum amount you’re allowed to borrow follows the rules stated above:

• $50,000 OR

• The greater between $10,000 or half of what’s vested in your account,

Whichever is less.

When Can You Withdraw From Your Retirement Plan?

Employees can begin to withdraw money from their 401(a) plan without penalty when they turn 59 ½. If they make any withdrawals before 59 ½, they will need to pay a 10% early withdrawal penalty. Once they reach 70 ½, they’re required to make withdrawals if they haven’t already started to.

With a 401(k) plan, if an employee retires at age 55, they can start withdrawing money without penalty. However, to take advantage of this early-access provision, they need to have kept the money in the 401(k) plan and not have rolled it into a Roth IRA.

Employees also need to have ended their employment no earlier than the year in which they turn 55.

Otherwise, the restrictions are the same as with a 401(a) plan, and they can begin to withdraw money penalty-free once they turn 59 ½.

401(a) vs 401(k) Rollover Rules

Generally, 401(a) and 401(k) accounts have similar rollover rules. When an employee chooses to leave their job, they have the option to roll over funds. The employee can choose to roll the account into another retirement plan or take a lump-sum distribution. Generally, if the employee decides to roll over their plan to another plan, they have to do so within 60 days of moving the funds.

The rules for a 401(a) rollover dictate that funds can be transferred to another qualified plan like a 401(k) or an individual retirement account (IRA). The rules for 401(k)s are the same.

If the employee decides to take a lump-sum distribution from the account, they will have to pay income taxes on the full amount. If they are under 59 ½, they will also have to pay the 10% penalty.

Recommended: How To Roll Over a 401(k)

What Happens to Your 401(a) or 401(k) If You Quit Your Job?

If you quit your job, you can leave the money in your former employer’s plan, roll it into the plan of your new employer, transfer it to a Rollover IRA, or cash it out. If you are under age 59 ½ and cash out the plan, you will likely need to pay taxes and a 10% penalty.

However, if you quit your job before you are fully invested in the plan, you will not get your employer’s contributions. You will only get what you contributed to the plan.

A 401(a) profit sharing plan is a tax-advantaged account used to save for retirement. Employees and employers contribute to the account based on a set formula determined by the employer. Unlike 401(a) plans, the employer’s contributions are discretionary, and they may not contribute to the plan every year.

All contributions from employees are fully vested. The ownership of the employer contributions may vary depending on the vesting schedule they create.

Like 401(a) plans, 401(a) profit sharing plans allow employees to select their investments and roll over the account to a new plan if the employee leaves the company. If an employee wants to take a distribution before reaching age 59 ½, they are subject to income taxation and a 10% penalty.

Summarizing the Differences Between 401(k) and 401(a) Plans

The main differences between a 401(k) and 401(a) are:

• 401(a) plans are typically offered by the government and nonprofit organizations, while 401(k) plans are offered by private employers.

• Employees don’t have to participate in a 401(K), but they often must participate in a 401(a).

• An employer decides how much employees contribute to a 401(a), while 401(k) participants can contribute what they like.

• With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. With a 401(k), all contributions are pre-tax.

Summarizing the Similarities Between 401(a) vs 401(k) Plans

A 401(k) vs. a 401(a) has similarities as well. These include:

• Both types of plans are employer-sponsored retirement accounts.

• Employees can borrow money from each plan, though certain restrictions apply.

• There may be a 10% penalty for withdrawing funds before age 59 ½ for both plans.

401(a) vs Other Retirement Plan Options

401(a) vs 403b

A 403b is a tax-advantaged retirement plan offered by specific schools and nonprofits. Like 401(a) and 401(k) plans, employees can contribute with pre-tax dollars. Employers can choose to match contributions up to a certain amount. Unlike the 401(a) plan, employers don’t have mandatory contributions.

For 2024, the employee contributions limit is $23,000. For 2023, the employee contributions limit is $22,500. If the plan allows, 50 or older employees may contribute a catch-up amount of $6,500.

Generally, 403b plans are either invested in annuities through an insurance company, a custodian account invested in mutual funds, or a retirement income account for church employees.

Additionally, 403b plans allow for rollovers and distributions without a 10% penalty after age 59 ½. Like similar plans, employees may have to pay a 10% penalty if they take a distribution before reaching age 59 ½ unless the distribution meets other qualifying criteria.

401(a) vs 457

457 plans are retirement plans offered by certain employers such as public education institutions, colleges, universities, and some nonprofit organizations. 457 plans share similar features with 401(a) plans, including pre-tax contributions, tax-deferred investment growth, and a choice of investments that employees can select.

Employees can also roll over funds to a new plan or take a lump-sum distribution if they leave their job. However, unlike a 401(a) or 401(k) plan, the withdrawal is not subject to a 10% IRS penalty.

Another option offered through 457 plans is for employees to contribute to their account on either a pre-tax or post-tax basis.

401(a) vs Pension

A 401(a) is a defined contribution plan, where a pension is a defined benefit plan. With a pension, employees receive the benefit of a fixed monthly income in retirement; their employer pays them a fixed amount each month for the rest of their life. The monthly payment can be based on factors like salary and years of employment.

With a 401(a), employees have access to what they and their employer contributed to their 401(a) account. In contrast to a pension plan, retirees aren’t guaranteed a fixed amount and their contributions may not last through the end of their life.

Pros and Cons of 401(k) vs 401(a) Plans

Both 401(k) and 401(a) plans have pros and cons.

Pros of a 401(k):

• Employers may match a portion of the employee’s contributions.

• The plan is fairly easy to set up.

• Employees generally have a wide range of investment options.

Pros of a 401(a):

• Lower fees

• Contributions are tax-deferred.

• Both the employer and employee make monthly contributions.

Cons of a 401(k):

• Fees may be high.

• Need to wait until fully vested to keep employer matching contributions.

• Penalty for withdrawing funds early.

Cons of a 401(a):

• Investment choices may be limited.

• Participation may be mandatory.

• Penalty for withdrawing funds early.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Other Retirement Account Options

Roth IRAs

Roth IRAs are funded with after-tax contributions, which means they aren’t tax deductible. However, the withdrawals you take in retirement are tax-free.

You can withdraw the amount you contributed to an IRA at any time, without penalty.

The Roth IRA contribution limit for 2024 is $7,000 ($8,000 if you’re 50 or older) and for 2023 is $6,500 ($7,500 if you’re 50 or older).

Traditional IRAs

A traditional IRA is similar to a 401(k): both plans offer tax-deferred contributions that may lower your taxable income. However, in retirement, you will owe taxes on the money you withdraw from both accounts.

Unlike a 401(k), a traditional IRA is not an employer-sponsored plan. Anyone can set up an IRA to save money for retirement. And if you have a 401 k), you can also have a traditional IRA.

The IRA contribution limit for 2024 is $7,000 ($8,000 if you’re 50 or older) and for 2023 is $6,500 ($7,500 if you’re 50 or older).

HSAs

An HSA, or Health Savings Account, allows you to cover healthcare costs using pre-tax dollars. But you can also use an HSA as a retirement account. At age 65, you can withdraw the money in your HSA and use it for any purpose. However, you will pay taxes on anything you withdraw that’s not used for medical expenses.

In 2024, you can contribute up to $4,150 in an HSA as an individual, or $8,300 for a family. In 2023, you can contribute up to $3,850 in an HSA as an individual, or $7,750 for a family.

Investing In Your Retirement

The largest difference between 401(a) and 401(k) plans is the type of employers offering the plans. Whereas 401(a) plans typically cover government workers and employees from specific education institutions and nonprofits, 401(k) plans are offered by for-profit organizations. Thus, a typical employee won’t get to choose which plan to invest in — the decision will be made based on what organization they work for.

Both 401(a) plans and 401(k) plans do have restrictions that might bother some investors. For example, an employee will be at the mercy of their employer’s choice when it comes to investing options.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is a 401(a) better than a 401(k)?

It’s not necessarily a matter of which plan is “better.” 401(k) plans are offered by private employers, while the government and nonprofits offer 401(a) plans. Both plans allow you to save for retirement in a tax-deferred way.

How are 401(a)s different from 401(k)s?

There are some differences between 401(k) and 401(a) plans. For instance, 401(a) plans are typically offered by the government and nonprofit organizations, while 401(k) plans are offered by private employers. In addition, employees don’t have to participate in a 401(k), but they often must participate in a 401(a). An employer decides how much employees contribute to a 401(a), while 401(k) participants can contribute what they like. And finally, those who have a 401(k) may have more investment options than those who have a 401(a).

Can you roll a 401(a) into a 401(k)?

Yes, you can roll a 401(a) into a 401(k) if you leave your job and then get a new job with a private company that offers a 401(k). You can also roll over a 401(a) into a traditional IRA.

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Jan

2024

Essential Stock Market Terms Every Trader Should Know

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | No Comments

If you are new to trading stocks, the sheer volume of stock market terms can be off-putting. But learning some basic stock trading terminology is a great place to begin before investing any money. For any new investor just getting into trading, getting a grasp on some basic stock market terms can be extremely helpful.

The Significance of Knowing Stock Market Terminology

It’s important to have at least a grasp of some basic stock market terms if you plan on trading or investing. If you don’t do a bit of homework beforehand, you may find yourself feeling in over your head, and grasping for help from family members, friends, or a financial professional.

While there are a multitude of different stock market terms out there, it isn’t terribly difficult to develop an understanding of the basics. Yes, it’ll take some time and practice, but like learning anything else, once you get the hang of it, it should become easier as you move along in your investment journey.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Fundamental Terms

To get a fundamental understanding of the stock market, it can be helpful to start with some relatively basic terms, including the following.

Asset Allocation

Asset allocation involves investing across asset classes in a portfolio in order to balance the different potential risks and returns, and there are three main asset classes, which are typically stocks, bonds, and cash. Asset allocation is closely tied with portfolio diversification.

Asset Classes

There are several asset classes, or types of assets, that investors can invest in. This can include, but is not limited to, stocks, bonds, money market accounts, cash, real estate, commodities, and more. You can also think of certain assets as equities, debt securities, and more.

Bid

Bid, in the context of bid-ask spread, refers to the “bid price” that an investor is willing to pay for a security or investment.

Ask

Ask, in the context of bid-ask spread, is the opposite of bid, and is the lowest price that investors are willing to sell a security for.

Bid-Ask Spread

The bid-ask spread is the difference between the bid and ask price, and can be a measure of liquidity. When the bid and ask prices match, a sale takes place, on a first-come basis if there is more than one buyer. The bid-ask spread is the difference between the highest price a buyer is willing to bid, and the lowest price a seller is willing to ask.

Market Phrases

There are a number of market phrases, or types of jargon that may be used in and around the stock market, too. Here are some examples.

Bull Market

A bull market describes market conditions when a market index rises by at least 20% over two months or more, and is often used to describe high levels of confidence and optimism among investors.

Bear Market

A bear market describes a 20% fall in a market index, and is the opposite of a bull market. It can signal overall pessimism among investors.

Market Volatility

Market volatility refers to how much a market index’s value increases or decreases within a specific period of time. Volatility can occur for a number of reasons.

Investment Vehicles

There are many specific investment vehicles that investors should know about, too, including different types of stocks, bonds, and more.

Bonds

Bonds are a type of debt security, which effectively means that investors are loaning money to the issuer. There are many types of bonds, and they’re often considered to be a less-risky investment alternative to, say, stocks.

Common Stock

Common stock, also known as shares or equity, is like owning a piece of a company. You purchase stock in a company, and receive a proportional part of that corporation’s assets and earnings. The price of stock is different for each company and fluctuates over time.

Preferred Stock

Preferred stock is similar to common stock, but usually grants shareholders some sort of preferential treatment, such as advanced dividend payments, and more.

ETFs

ETFs, or “exchange-traded funds,” are types of funds that trade on exchanges like stocks. Investors can purchase shares of ETFs, which incorporate numerous different types of securities (like a “basket” of different investments), and may offer built-in diversification as an advantage for investors.

Mutual Funds

Mutual funds are companies or entities that pool money from numerous different investors and then invest it on their behalf. A manager oversees a mutual fund, and actively manages it. Investors can purchase shares of mutual funds, which are similar to ETFs in many ways.

Stock Analysis Terms

Analyzing the stock market incorporates its own set of terminology, and it can be helpful for investors to know a bit of the vernacular.

Earnings Per Share (EPS)

Earnings per share, often shortened as “EPS,” is a ratio that helps determine a company’s ability to drive profits for shareholders. It’s a common and oft-cited business metric for investors.

Dividends

A dividend is a payment made from a company to its shareholders, often drawn from earnings. Usually, these are made in cash, but sometimes they are paid out as additional stock shares. They are typically paid on an annual or quarterly basis, and typically only come from more established companies, not startups.

Dividend Yield

Dividend yield refers to how much a company pays out to shareholders on an annual basis relative to its share price. It’s a ratio that’s calculated by dividing the company’s dividend by its share price.

The Price-to-earnings (P/E) Ratio

The price-to-earnings ratio (often written as the P/E ratio, PER, or P/E) is a ratio of a company’s current share price relative to the company’s earnings per share. It can be used to compare performances of different companies.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Price Movements and Pattern Terms

There are also a number of movement and pattern terms that investors may want to familiarize themselves with.

Trading Volume

Trading volume refers to how much trading is happening on an exchange. For a stock trading on a stock exchange, the stock volume is typically reported as the number of shares that changed hands during any given day. It’s important to note that even with an increasing price, if it’s paired with a decreasing volume, that can mean a lack of interest in a stock. A price increase or drop on a larger volume day (i.e., a bigger trading day) is a potential signal that the stock has changed dramatically.

Volume-weighted Average Price (VWAP)

Volume-weighted average price, or VWAP, is a short-term price trend indicator used when analyzing intraday, or same-day, stock charts. It’s a type of technical analysis indicator.

Trading Order Types and Execution

Investors need to know the types of orders that they’re likely to use throughout their investing journey. Those include market orders, limit orders, and stop-loss orders.

Market Order

A market order is the most common type of order, and it means that an investor wants to buy or sell a security as soon as possible at the current market price.

Limit Order

Limit orders are another common type of order, and involve an investor placing an order to buy or sell a security at a specific price or within a specific time frame. There are two types: Buy limit orders, and sell limit orders.

Stop-loss Orders

Stop-loss orders, or sometimes called stop orders, are orders that specify a security to be sold at a certain price.

Day Trading Terms

For the prospective day-trader, there are a slate of terms to know as well.

Day Trading

Day trading involves an investor making short-term trades on a daily or weekly basis in an effort to generate returns off of price fluctuations in the market. There are numerous day trading strategies that investors can utilize.

Pattern Day Trader

A pattern day trader is a designation created by FINRA, and refers to traders who trade securities four or more times within five days. There are rules and stipulations that pattern day traders, and their chosen trading platforms, must follow.

Trading Halt

A trading halt can refer to a specific stock or the entire market, and involves a halt to all trading activity for an indefinite period of time.

Long-term Investment Terms

The opposite of day trading, long-term investing also ropes in its own jargon.

Averaging Down

Averaging down involves a scenario in which an investor already owns some stock but then purchases additional stock after the price has dropped. It results in a decrease in the overall average price for which you purchased the company stock. Investors can profit if the company’s price subsequently recovers.

Diversification

Diversification refers to investing in a wide range of assets and asset classes, as opposed to concentrating investments in a specific area or class.

Dollar-cost Averaging

Dollar-cost averaging is a strategy to manage volatility in a portfolio, and involves regularly investing in the same security at different times, but with the identical amount. Effectively, the cost of those investments will average out over time.

Derivatives and Market Predictors

Getting into the weeds now — derivatives and market predictors are more high-level market elements, but it can be helpful to know some of the terminology.

Futures

Futures, or futures contracts, are a form of derivatives that are a contract between two traders, agreeing to buy or sell an asset at a specific price at a future date.

Options Trading

Options trading involves buying and selling options contracts, of which there are many types.

Arbitrage

Arbitrage refers to price differences in the same asset on different markets. Traders may be able to take advantage of those differences to generate returns.

Financial Health Indicators

We’re not done yet — these terms involve financial health indicators.

Debt-to-equity (D/E)

Debt-to-equity is a financial metric that helps investors determine risks with a specific stock, and is calculated by dividing a company’s equity by its debts.

Liquidity

Market liquidity is essentially how easily shares of stock can be converted to cash. The market for a stock is “liquid” if its shares can be sold quickly, and the act of selling only minimally impacts the stock price.

Profit Margin

Profit margin refers to how much profit is generated from a trade when expenses are considered. Lowering related expenses can increase profit margin, all else being equal.

Economic Terms

Knowing some key economic terms can be helpful when trying to size up larger economic and market trends.

Volatility

Volatility refers to the range of a stock price’s change over time. If the price stays stable, then the stock has low volatility. If the price jumps from high to low and then back to high often, it would be considered more of a high-volatility stock.

Economic Bubbles

Economic bubbles or market bubbles are often created by widespread speculative trading, and involve a runup or buildup of prices for a given asset, which can be detached from its actual value. Eventually, the bubble tends to burst and investors may incur a loss.

Recession

A recession is a period of economic contraction, and is usually accompanied by higher unemployment rates, business failures, and lower gross domestic product figures. Recessions are officially declared by the Business Cycle Dating Committee at the National Bureau of Economic Research.

Adaptation and Risk Management

For particularly savvy investors, knowing some terms relating to adaptation and risk management can also be helpful when navigating the markets.

Sector Rotation

Sector rotation involves investing in different sectors of the economy at different times, and rotating holdings between those sectors in an effort to generate the biggest returns.

Hedging

Hedging is an investment strategy that involves limiting risk exposure within different parts of a portfolio, and there are many methods or strategies for doing so.

The Takeaway

Learning some basic stock market terms can go a long way toward helping an investor navigate the markets, and there are a lot of terms and jargon to get familiar with. But doing a bit of homework early on can be enormously helpful so that you’re not trying to figure things out on the fly as an investor.

While you’re not going to learn everything right off the bat, if you start to spend a lot of time investing and trading, you’re likely to quickly catch on to certain terms, while others will come with time. As always, if you have questions, you can reach out to a financial professional for help — or do a bit more research on your own.

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®

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

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Jan

2024

What Is a Guarantor Loan and How Do I Get One?

By Jamie Cattanach | Financial Independence, personal_loan, Terminology | Comments Off

If so, a guarantor loan might be an option worth looking into. With this type of loan, the guarantor (often a close friend or family member) agrees to repay the loan if the borrower can’t. Since this reduces risk to the lender, guarantor loans can make it possible for those with poor or limited credit to qualify for an unsecured personal loan.

However, guarantor loans come with risks and costs — for both the borrower and the guarantor. Here are some things to consider before you apply for a guarantor loan.

What Is a Loan With a Guarantor

A guarantor loan is typically an unsecured personal loan that requires the primary borrower to have a financial backer, or guarantor. A guarantor may be required because the borrower has not yet established credit or has had credit issues in the past (such as a history of late or missed debt payments). It’s still considered the borrower’s loan, but the guarantor is legally obligated to cover payments and any other fees if the borrower defaults on the agreement.

This guarantee reduces the lender’s risk and enables them to advance the money at a reasonable annual percentage rate (APR). However, APRs for guarantor loans are generally higher than APRs for regular personal loans.

💡 Quick Tip: Need help covering the cost of a wedding, honeymoon, or new baby? A SoFi personal loan can help you fund major life events — without the high interest rates of credit cards.

How Do Guarantor Loans Work?

Guarantor loans work in the same way as other types of personal loans — you borrow a lump sum of money from a lender, which you are able to use for virtually any purpose. You then pay it back (plus interest) in monthly installments over a set period of time, which may be anywhere from one and seven years.

The only difference is that a third party (your guarantor) is part of the loan agreement. The guarantor is legally bound to make payments on the loan in the event that you default. A loan default is generally defined as missing payments for several months in a row but the exact meaning will depend on the lender.

While the guarantor bears responsibility for repaying the debt, this individual doesn’t have any legal right to the loaned money or anything purchased with the loan proceeds.

Are You Guaranteed to Get a Loan With a Guarantor?

Although it can certainly help your case, there’s no guarantee that you’ll qualify to take out a loan with a guarantor. Approval depends on the financial profiles of you and your guarantor and the eligibility requirements of the lender.

Who Can Be a Guarantor for Loans?

A guarantor doesn’t need to be anyone specific — it could be a parent, sibling, friend, or even a colleague. You generally want to choose someone you trust and feel comfortable openly discussing your finances with. That’s most likely going to be a family member or a close friend.

Guarantors also need to have a good credit history and typically be at least age 18 (though some lenders require a higher minimum age). Some lenders also require the guarantor to be a homeowner. As part of the application process, guarantors will need to undergo a credit check and provide proof of identification and income, as well as bank details and statements.

What Should I Look for in a Guarantor Loan?

Like any other loan, it’s generally a good idea to look for a guarantor loan with a competitive APR and low or no fees. You’ll also want to carefully consider the monthly payments and be sure you can comfortably afford to make them. While this is crucial with any loan, it’s particularly important with a guarantor loan, since your guarantor will be on the hook for repayment if you fall behind. This could impact your credit as well as put a significant strain on your relationship with your guarantor.

How Much Can I Borrow for a Guarantor Loan?

Many lenders offer personal loan amounts ranging anywhere from $500 to $50,000 (and sometimes up to $100,000 for borrowers with excellent credit). Loan amounts for guarantor loans will depend on which lender you choose as well as your financial situation and your guarantor’s credentials (such as their credit score and income).

Guarantor Loan Requirements

Guarantor loans have eligibility requirements such as minimum credit scores and income thresholds that the guarantor will have to meet. Here’s a closer look.

Credit Score

While the borrower’s credit score might be poor or fair, the guarantor’s credit score should be considerably higher in order to secure the loan.

Proof of Residency

A guarantor will need to provide proof of residency. This can be done by showing documents such as a utility bill, a mortgage or rental agreement, or bank statements.

Income

The guarantor will need to verify a consistent income that’s sufficient to make payments on the loan if the primary borrower cannot. They will need to be able to show proof of income through bank account statements, pay stubs, invoices, and/or tax returns.

Age Requirements

The guarantor must be at least 18 years old, though some lenders have an age requirement of 21 or 22. They will need to show proof of age (and identity) with a government-issued photo ID.

Recommended: How to Apply for a Personal Loan

Types of Guarantors

Guarantors aren’t just for personal loans, and they don’t always take on the full financial responsibility of the agreement they’re entering into. Here’s a look at some different types of guarantors.

Guarantors as Certifiers

A guarantor may act as a certifier for someone looking to land a job or get a passport. These guarantors pledge that they know the applicant and they are who they say they are.

Limited vs Unlimited

Acting as a guarantor doesn’t always mean you’re responsible for the entire loan if the primary borrower fails to repay it. Limited guarantors are liable for only part of the loan or part of the loan’s timeline. Unlimited guarantors, however, are responsible for the full amount and full term of the loan.

Lease Guarantor

A guarantor may be required to cosign an apartment lease if the renter has limited credit and income history. In the event that the tenant is unable to pay the rent or prematurely breaks the lease agreement, the guarantor is responsible for paying any money owed to the landlord.

Guarantors vs Cosigners

Guarantors and cosigners play similar roles in a lending agreement — they pledge their financial responsibility for the debt to strengthen the primary borrower’s application. And, in both cases, these individuals may become responsible for repaying the debt.

However, there are some key differences between a guarantor and a cosigner. The main one is that a cosigner is responsible for repayment of the debt as soon as the agreement is final and will need to cover any missed payments. A guarantor, on the other hand, is only responsible for repayment of the debt if the primary borrower defaults on the loan.

There are also differences in terms of credit impacts. A cosigner will have the loan added to their credit report and any positive or negative payment information that the lender shares with the consumer credit bureaus can have a positive or negative impact on their credit. Becoming a guarantor, on the other hand, will typically not have an impact on an individual’s credit unless the primary borrower defaults on the loan. At that point, the loan will appear as part of the guarantor’s credit report.

Pros and Cons of Guarantor Loans

Pros of Guarantor Loans	Cons of Guarantor Loans
Offers a lending option for people who cannot qualify for a loan on their own	Can be more expensive when compared to a standard personal loan
Helps borrowers avoid expensive and risky predatory loan products	Less choice of lenders compared with the wider personal loan market
Can help borrowers build their credit	Defaulting on the loan could strain your relationship with the guarantor

A guarantor loan can allow you to borrow money even if you have limited or less-than-ideal credit. It can also help you avoid expensive and risky subprime loans that are marketed to borrowers with bad credit. In addition, the proceeds of a guarantor loan can be used for virtually any purpose, including emergency expenses (such as a car repair or medical bill) and lifestyle expenses (like a wedding or home improvement project).

As with all forms of credit, getting a guarantor loan can help you establish or build your credit, provided you manage the debt responsibly and keep up with your payments. Stronger credit can give you access to loans with better rates and terms in the future, without the need for a guarantor.

But these loans also come with some downsides. For one, guarantor loans can be expensive, often with higher APRs than other types of personal loans. Also, you’ll want to make sure you can keep up with the payments. Should you default, you’ll not only be hurting yourself but also the person who signed on as your guarantor.

Another downside is that there are fewer guarantor loans on the market than traditional personal loans. This can lead to less choice of lenders, making it harder to shop around and find a good deal.

💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

What Happens if a Guarantor Cannot Pay?

A guarantor is legally obligated to repay the loan if the primary borrower defaults. If the borrower defaults and the loan is a secured loan, then the guarantor’s home could be at risk if the borrower defaults on the repayments and the guarantor is also unable to pay. This is not the case for unsecured guarantor loans, but the lender will still pursue the guarantor for the repayment of the debt, possibly through the courts.

Alternative Options to a Guarantor Loan

What if you don’t have a trusted person to ask to be your guarantor or you don’t want to ask anyone to take on this responsibility? Here are some alternatives to a guarantor loan that you could consider.

• Secured credit card: If you have some cash, you could pledge that as collateral on a secured credit card. Responsible use of this type of credit card could help you build your credit history so you can improve your chances of future loan approval. Interest rates on secured credit cards can be higher than regular credit cards, and there may be fees associated with their use.

• Flex loan: A line of credit that is similar to a credit card, a flex loan can also be used to build credit. Borrowers can use funds up to their credit limit, repay those funds, and borrow them again. Interest rates on flex loans tend to be high, and there may be fees assessed daily or monthly or each time the loan is used.

• Loan from a friend or family member: Perhaps the person you ask to be a guarantor doesn’t want to take on that responsibility, but they are willing to directly loan you the money. A loan from family or a friend can be an option to consider, but you’ll want to be sure to have a written agreement outlining the expectations and responsibilities of both parties. This will go a long way to minimizing miscommunication and hurt feelings. Keep in mind that this is not an option that will help you build your credit history.

The Takeaway

Getting approved for an unsecured personal loan is more likely if you have a solid credit history, an above-average credit score, and sufficient income to satisfy a lender’s qualification requirements. If you’re lacking one or more of these things, you might consider other types of loans, which might include a guarantor loan.

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.

FAQ

What are guarantor loans?

A guarantor loan is typically a type of personal loan that requires the primary borrower to have a financial backer, or guarantor. The guarantor agrees to pay the debt if the primary borrower defaults on the loan agreement.

How do I get a guarantor for a loan?

You might consider asking a trusted friend or family member to be a guarantor. This person should be someone who has solid credit and sufficient income to cover the loan payments should you default on the loan.

Are you guaranteed to get a loan with a guarantor?

No. Having a guarantor may strengthen a loan application, but it’s up to each individual lender to assess the qualifications of both parties.

Photo credit: iStock/fizkes

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.

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

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Jan

2024

Choosing Between a Mortgage Recast and a Mortgage Refinance

By Jody McMaster | Home Ownership, mortgage, Terminology | No Comments

If your monthly mortgage payment no longer fits your lifestyle or financial goals, you may be able to change it with mortgage refinancing or recasting. Recasting and refinancing are two ways a borrower can save on mortgage costs — sometimes a jaw-dropping amount. To understand which might be best for you, it helps to understand the difference between them and the pros and cons of each.

Table of Contents

Recasting vs Refinancing
Pros and Cons of Recasting
Pros and Cons of Refinancing
The Takeaway

Key Points

• Mortgage recasting involves making a large payment towards the principal and recalculating monthly payments on the remaining balance.

• Refinancing replaces an existing mortgage with a new one, potentially with different terms and rates.

• Recasting keeps the original loan’s term and rate but lowers monthly payments due to the reduced principal.

• Refinancing can lower interest rates and monthly payments, and may allow for cash-out options.

• Both options aim to reduce mortgage costs, but the best choice depends on individual financial situations and goals.

Recasting vs Refinancing

Recasting is the reamortizing of an existing mortgage, meaning the lender will recalculate your monthly payments. Refinancing involves taking out a completely new mortgage with a new rate, and possibly a new term, and paying off your old mortgage in the process.

Note: SoFi does not offer mortgage recasting at this time.

Recasting

If your lender offers mortgage recasting and your loan is eligible, here’s how it works: You make a large lump-sum payment — $10,000 might be required — toward the principal balance of your mortgage loan. The lender recalculates the monthly payments based on the new, lower balance, which shrinks the payments. The lender may charge a few hundred dollars to reamortize the loan.

Mortgage recasting does not change your loan length or interest rate. But because your principal amount is lower, you’ll have lower monthly payments and will pay less interest over the life of the loan.

If you were to put a chunk of money toward your mortgage principal and not recast the loan, your payments would not change, though the extra principal payment would reduce your interest expense over the life of the loan.

Who might opt for mortgage recasting? Someone who has received a windfall and wants to put it toward the mortgage might like this option. Sometimes it’s someone who has bought a new home but hasn’t sold the previous one. Once the old home is sold, the homeowner can use some of the proceeds to recast the new mortgage.

Another fan of recasting might be someone who wants to use the lump sum to pay their loan down to 80% of the home’s value so they can stop paying for private mortgage insurance (PMI).

FHA, VA, and USDA loans are not eligible for mortgage recasting. Some jumbo loans are also excluded. If you want to change the monthly payments on those types of mortgages, you’ll need to refinance your loan.

Refinancing

When you seek refinancing, you’re applying for a brand-new loan with a new rate and terms and possibly from a new lender. Most people’s goal is a lower interest rate, a shorter loan term, or both.

While finding a competitive offer might take some legwork, refinancing could help you save money. A lower interest rate for a home loan of the same length will reduce monthly payments and the total amount of interest paid over the life of the loan.

A homeowner who refinances to a shorter term, say from 30 years to 15, will pay much less total loan interest. Fifteen-year mortgages also often come with a lower interest rate than 30-year home loans.

Equity-rich homeowners who’d like to get their hands on cash may find cash-out refinancing appealing.

Pros and Cons of Recasting

Mortgage recasting lowers your monthly mortgage payments and lets you save on total loan interest while keeping the same interest rate. Since you recast your mortgage with your existing lender, the process is pretty straightforward, and the cost could be as low as $150.

There are some potential drawbacks to mortgage recasting, however. Making a large lump-sum payment means you could be trading liquidity for equity, and creating financial instability if unexpected expenses arise or if the housing market takes a downward turn.

If you have other debts with higher interest rates, you may want to avoid mortgage recasting. It could make more sense to use the money you would put toward the principal to pay down your higher-interest debt first.

“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.

Recommended: Cash-Out Refinance vs HELOC

Pros and Cons of Refinancing

If you are eligible to refinance, you won’t need a large cash source in order to lower your mortgage payments. Instead, your main goal is to qualify for a lower interest rate. If you succeed, you will save a lot of money in interest over time.

With a cash-out refi, you can use that money for whatever you need: pay down higher-interest debt, add to the college fund, or remodel your kitchen.

Refinancing involves what looks like a bummer: closing costs, which could range from 2% to 6% of the remaining principal. You’re taking out a new mortgage, after all. Some lenders will let you roll closing costs into your loan.

A lower rate could make it all worthwhile, though. It’s a good idea to calculate the break-even point, when interest savings will exceed closing costs. Everything beyond that break-even point will be savings.

Reducing your loan term with a refi could result in a higher mortgage payment but tremendous interest savings over the life of the new loan.

Refinancing may make sense for homeowners who are planning to stay put for years; those who want to switch their adjustable-rate mortgage to a fixed-rate one; and borrowers with FHA loans who want to shed mortgage insurance premiums (MIP), on a loan they’ve paid down or a home that has appreciated. Most FHA loans carry mortgage insurance for the life of the loan.

No matter the home financing topic, find a lender willing to provide transparent answers to your mortgage questions.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

The Takeaway

A mortgage recast vs. refinance: different animals with similar aims. A recast requires a lump sum but will shrink payments and total loan interest. A mortgage refinance may greatly reduce borrower costs and sometimes free up cash. Which one is right for you will depend on your current loan terms and your available cash, among other factors.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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

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A Beginner’s Guide to 401(k) Retirement Plans

What Is a 401(k)?

How Does a 401(k) Work?

Traditional 401(k)

Roth 401(k)

Traditional 401(k) vs Roth 401(k)

401(k) Contribution Limits

How Does Employer Matching Work?

401(k) Withdrawal Rules

401(k) Early Withdrawal Rules

Required Minimum Distributions (RMDs)

Pros and Cons of 401(k)s

Pros

Cons

The Takeaway

FAQ

Are 401(k)s Still Worth It?

What happens to your 401(k) when you leave your job?

What happens to your 401(k) when you retire?

401(a) vs 401(k) Compared

What Is a 401(a) Plan?

What Is a 401(k) Plan?

Get a 1% IRA match on rollovers and contributions.

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

Who Contributes to Each Plan?

401(a) vs 401(k) Contribution Limits

401(a) vs 401(k) Investment Options

401(a) vs 401(k) Tax Rules

Can You Borrow from Each Plan?

Can You Borrow Money from a 401(a) or 401(k) to Buy a Home?

When Can You Withdraw From Your Retirement Plan?

401(a) vs 401(k) Rollover Rules

What Happens to Your 401(a) or 401(k) If You Quit Your Job?

What Is a 401(a) Profit Sharing Plan?

Summarizing the Differences Between 401(k) and 401(a) Plans

Summarizing the Similarities Between 401(a) vs 401(k) Plans

401(a) vs Other Retirement Plan Options

401(a) vs 403b

401(a) vs 457

401(a) vs Pension

Pros and Cons of 401(k) vs 401(a) Plans

Other Retirement Account Options

Roth IRAs

Traditional IRAs

HSAs

Investing In Your Retirement

FAQ

Is a 401(a) better than a 401(k)?

How are 401(a)s different from 401(k)s?

Can you roll a 401(a) into a 401(k)?

Essential Stock Market Terms Every Trader Should Know

The Significance of Knowing Stock Market Terminology

Fundamental Terms

Asset Allocation

Asset Classes

Bid

Ask

Bid-Ask Spread

Market Phrases

Bull Market

Bear Market

Market Volatility

Investment Vehicles

Bonds

Common Stock

Preferred Stock

ETFs

Mutual Funds

Stock Analysis Terms

Earnings Per Share (EPS)

Dividends

Dividend Yield

The Price-to-earnings (P/E) Ratio

Price Movements and Pattern Terms

Trading Volume

Volume-weighted Average Price (VWAP)

Trading Order Types and Execution

Market Order

Limit Order

Stop-loss Orders

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