Tools & Calculators Archives

Mar

2025

What Is APY

By Timothy Moore | Financial Independence, Growing Wealth, money, Terminology, Tools & Calculators | Comments Off

Annual percentage rate, or APY, is the rate of interest earned on a savings or investment account in one year, including compound interest (the interest you earn on interest). Unlike the nominal interest rate, which does not consider the impact of interest compounding, APY provides a more accurate picture of how much you’ll earn in an account over the course of one year. This allows you to compare different financial products and make informed decisions about where to put your money for the best returns.

Read on to learn the basic APY meaning, how to calculate annual percentage yield, and some of the limitations of APY.

What Is APY?

An abbreviation for annual percentage yield, APY indicates how much interest a bank account, such as a high-yield savings account or certificate of deposit (CD), earns in one year, expressed as a percentage.

An APY includes the effect of compounding interest, which is when you earn interest on both the money you’ve saved (principal) and the interest you earn. Depending on the bank and type of account, interest on an account can compound (i.e., get calculated and added) yearly, monthly, quarterly, or daily. The more frequently an account compounds, generally, the more the account will earn.

That’s why it’s important to consider APY — and not just the interest rate — when looking for a bank account. Comparing APYs helps you compare financial products as apples to apples by letting you know the real return on the account. Almost all savings accounts, and some checking accounts, have an APY.

Simple Interest vs Compound Interest

Understanding APY involves knowing the difference between simple and compound interest. With simple interest, an account holder earns interest only on the principal, or the initial amount of money they deposited. With compound interest, on the other hand, an account holder earns interest on the principal along with the accrued interest.

Compound interest helps your money grow faster, as you’ll earn interest on your interest. The frequency of compounding is important; the more often your interest compounds, the more money you’ll generally earn. An account may compound interest daily, monthly, quarterly or annually.

When it comes to savings and investment accounts, simple interest is less common than compound interest.

Recommended: Difference Between APY vs Interest Rate

Calculating APY

There is a specific formula for calculating APY. To use it, you’ll need to know your interest rate and how frequently the interest compounds.

APY = (1 + r/n)^n – 1

Where:

• ^ = to the power of

• r = the nominal interest rate

• n = the number of compounding periods per year

APY Calculation Examples

To see how much compounding frequency can affect your APY, let’s look at four examples with the same interest rate but four different compounding periods (annually, quarterly, monthly, and daily).

• Annual compounding interest: n = 1

• Quarterly compounding interest: n = 4

• Monthly compounding interest: n = 12

• Daily compounding interest: n = 365

Assume a nominal interest rate (r) of 5.00%.

Annual compounding interest:

APY = (1 + .05/1)^1 – 1

APY = 5.00%

Quarterly compounding interest:

APY = (1 + .05/4)^4 – 1

APY = 5.09%

Monthly compounding interest:

APY = (1 + .05/12)^12 – 1

APY = 5.12%

Daily compounding interest:

APY = (1 + .05/365)^365 – 1

APY = 5.13%

As you can see, the more often interest is compounded, the higher the APY is. Choosing an account or investment that compounds daily will yield a higher amount earned from interest at the end of the year.

Fortunately, you don’t have to do any fancy calculations to learn the APY of a bank account. To help people compare accounts and accurately estimate possible earnings, banks are required to display account APYs.

Recommended: Use this APY calculator to start comparing APY.

Fixed vs Variable APY

Another factor to consider with APY is whether it is fixed or variable. Savings accounts, checking accounts, and money market accounts are typically variable rate accounts. This means the APY can change over time depending on market conditions.

Fixed rate accounts, on the other hand, have an APY that does not change during the term of the account. For example, a certificate of deposit (CD) account usually has a fixed APY for the term of the CD. No matter what happens to market rates, the APY will stay the same.

Both types of APYs have pros and cons. Locking in a fixed APY can be beneficial if market rates go down after you open the account. However, it could be a negative should market rates go up, since you won’t benefit from the increase.

Recommended: What Is a High-Yield Checking Account?

Limitations and Considerations of APY

Knowing the APY for an account or investment can tell you a lot, but there are other factors to consider when choosing where to put your money. Here are a few other things to keep in mind.

• Fees and penalties: Some financial products come with monthly and incidental fees or penalties that can impact the effective return. APY calculations typically do not account for these additional costs, so it’s a good idea to consider them when evaluating the overall profitability of a deposit account or investment.

• Liquidity: While CDs often have higher, fixed APYs compared to traditional savings accounts, your money is tied up until the maturity date. That means you can’t access that money in the event of an emergency if you want to earn the interest you were promised upon investing.

• Fixed vs. variable: A high-yield savings account may advertise a high APY right now, but it is likely variable. This means that as the market changes, the interest rate could go down. It’s a good idea to routinely check how much interest your savings account (or checking account or money market account) is earning. If the APY has significantly dropped, you may want to consider opening a bank account with a higher APY elsewhere.

• Inflation: Inflation erodes the purchasing power of money over time. While APY provides a return rate, it does not account for inflation. To understand the real rate of return on any type of account or investment, it’s important to adjust an APY for inflation.

• Taxes: Interest earned on savings accounts is typically subject to taxes. The APY does not consider the impact of taxes on the effective return. So it’s important to factor in tax obligations when evaluating the net return on an investment.

The Takeaway

Understanding and calculating APY is essential for making informed financial decisions. Whether you’re evaluating savings accounts or investment products, APY provides a clear picture of the true return, accounting for the effects of compounding interest. By comparing APYs, you can see how different savings vehicles stack up against each other. This can help you choose the most profitable options and optimize your financial growth.

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 3.80% APY on SoFi Checking and Savings.

FAQ

What is the difference between APY and APR?

APY stands for annual percentage yield and tells you how much interest you’ll earn on a deposit or investment account over the course of one year, including compounding interest (which is when your interest also earns interest). APR stands for annual percentage rate and represents the annual cost of borrowing money. It includes the interest rate plus any fees and costs associated with the loan or line of credit to reflect the real cost of borrowing.

How do you calculate the APY for a savings account or investment?

To calculate the annual percentage yield (APY) for a savings account or investment, you can use this formula:

APY = (1 + r/n)^n – 1

Where:

• ^ = to the power of

• r = the nominal interest rate

• n = the number of compounding periods per year

Banks and credit unions are required to display the APY of their financial products, so you generally don’t need to do any calculations. If you know the APY and how much you’ll be depositing, you can use an online APY calculator to determine how much interest you’ll earn by the end of the year.

What factors can affect the APY of a financial product?

The main factors that affect the annual percentage yield (APY) of a financial product are the nominal interest rate and how often the interest compounds (meaning gets calculated and added to the account). Generally, the higher the interest rate and the more often it compounds, the higher the APY.

About the author

Timothy Moore

Timothy Moore is a personal finance writer and editor and a Certified Financial Education Instructor. His work has been featured on sites such as USA Today, Forbes, Business Insider, LendingTree, LendEDU, and Time. Read full bio.

SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

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

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBK-Q224-1890757-V1

Mar

2025

What Is a Student Checking Account?

By Janet Siroto | Financial Topics, Going to College, Growing Wealth, Life & Career, Life Stages, Terminology, Tools & Calculators | Comments Off

A student checking account is a bank account that is specially designed for students in their teens and early 20s. This type of account typically offers the same tools as a regular checking account, like a debit card and checks, but may have lower fees and minimal balance requirements to make banking more accessible for young adults. Some student bank accounts may also offer extra perks like sign-on bonuses and financial education tools tailored to students.

But student bank accounts also come with some limitations, such as low or no interest and certain eligibility requirements, so it’s important to weigh the pros and cons before choosing this type of account. Here are key things to know about student checking accounts, including their requirements and costs, and how they compare to traditional checking accounts.

Key Points

• Student checking accounts can offer students a secure, user-friendly, and low-cost way to handle their finances while they’re in school.

• Student bank account features can include no account, ATM, or overdraft fees, along with perks like financial education programs and cash back.

• To open a student checking account, you typically need to provide personal details and proof of school enrollment.

• Students under age 18 may need a parent or guardian to co-own and cosign their student bank account.

• After graduation, a financial institution may automatically convert a student checking account to a standard checking account.

What Are Student Checking Accounts?

A student checking account is a type of bank account tailored specifically for students, typically those in college. These accounts function similarly to traditional checking accounts but come with benefits tailored to young adults who may be new to banking.

Like a standard checking account, a student checking account allows you to easily deposit, withdraw, and transfer funds. These accounts typically offer a debit card, checks, mobile banking, and ATM access to facilitate shopping and bill paying. Some checking accounts may also pay a small amount of interest (especially if your account is with an online bank).

Unlike traditional checking accounts, however, student bank accounts are generally limited to students and usually require proof of enrollment in school. They also tend to charge lower and fewer fees compared to traditional accounts, along with lower balance requirements. In addition, some student accounts offer additional benefits, such as rewards programs and overdraft forgiveness.

Student Checking Account Features

Here’s a closer look at the features that a typical student checking account may offer:

• Low (or no) minimum balance requirements: Typically, students are not required to maintain a high balance in order to avoid monthly fees or keep the account open.

• Free ATM access: Many banks provide fee-free access to a large network of ATMs, making it easy to access funds whether you’re on campus or home for the summer.

• Overdraft protection: You may have the option to link your checking account to a savings account or receive alerts to prevent overdrafts. Some student accounts also forgive overdrafts, which means you won’t be hit with a fee if you accidentally overdraft your account.

• Mobile and online banking: Once you set up your account, you can typically check your balance, make payments, and transfer funds on the go via an app or online platform.

• Debit card access: Debit cards are linked to your checking account and allow you to make purchases (both online and in-store), as well as withdraw cash at ATMs.

• Direct deposit: A student checking account will typically allow you to have your paychecks or financial aid directly deposited into the account, which can give you faster access to your funds.

• Rewards programs: Many student checking accounts offer cash back on purchases made with your debit card, which can help you save money on everday expenses.

• Financial education resources: A student account often comes with tools to help students budget, save, and track expenses.

Recommended: Savings Account Calculator

Who’s Eligible to Open a Student Checking Account?

Student checking account eligibility requirements can vary among financial institutions. In general, these accounts are limited to certain age groups, which can be anywhere from age 13 to 25. If you’re below the age at which you can open a bank account, which is age 18 in most states, you will likely need to open a joint student account with a parent, guardian, or another adult.

To open a student bank account, you must typically also be a current student. This generally means full-time enrollment but some banks may allow part-time students to open a student bank account. Either way, you will likely need to provide proof of enrollment to be approved for a student account.

When you graduate school and/or age out of a student checking account, the financial institution may automatically convert your student account into a standard checking account.

Recommended: How to Deposit a Check

Pros and Cons of Student Checking Accounts

Student checking accounts come with numerous benefits, but also a few downsides. Here’s a look at how the pros and cons stack up.

thumb_up

Pros:

• No or low monthly fees

• No or low minimum deposit required

• No or low minimum balance requirements

• No or low fees for overdrafting

• May offer exclusive student perks

thumb_down

Cons:

• Must meet eligibility criteria

• May need to open the account in person

• Joint account holder may be required

• Pays little or no interest

• Account conversion after graduation

Advantages of Student Checking Accounts

• Waived or discounted monthly fees: Banks will often waive or reduce monthly maintenance fees for student checking accounts.

• Low or no initial deposit: You may be able to open a student checking account with a small, or no, initial deposit.

• Reduced minimum balance requirements. You may avoid being charged a fee or having your account closed due to not having a certain amount of money in your account.

• Lower (or no) penalties for overdrafts: A student account will often charge reduced penalties for overdrafts compared to traditional accounts. Some student accounts may not charge any overdraft fees.

• Special perks: Some accounts come with exclusive benefits like cash back rewards, student sign-up bonuses, and educational resources tailored for students.

Disadvantages of a Student Bank Account

• Limited availability: Only students can apply, and eligibility ends after graduation or when you turn a certain age.

• May need to visit a branch: While some banks allow you to apply for a student account online, many require you to come into a branch and apply in person.

• Low or no interest on deposits. As with a traditional checking account, student checking accounts generally pay little to no interest on any money sitting in the account.

• You may need a cosigner: Some banks only allow students (especially those under age 18) to open a joint account with a parent or a guardian. This means you may need an adult to cosign your student account when you open it.

• Potential conversion fees: Once you’re no longer a student, or turn a certain age (such as 25), the account may be converted into a regular checking account and start charging monthly fees.

How to Choose Between Different Student Checking Accounts

Choosing the right student checking account involves understanding your needs and finding the right match. Here are some considerations:

• Can you open the account on your own, or will you need a joint account holder due to your age?

• What are the requirements in terms of your school enrollment status?

• What are the monthly fees, if any?

• Will your money on deposit earn any interest? If so, how much?

• How much is the minimum initial deposit when opening the account?

• Must you maintain a certain balance in the checking account to avoid fees?

• What happens if you overdraft your account?

• Is there a sign-up bonus or are any rewards (such as cash back for using your debit card)?

• What kinds of financial education programs are available in conjunction with the student checking account?

• Does the bank have branches and/or ATMs in convenient locations?

• Will your account automatically become a standard checking account when you finish your education or age out of the student checking account?

How to Open a Student Bank Account

Once you’ve figured out which bank is your choice for a student account, you’ll typically follow these steps to open a checking account:

• Find out if you can sign up online or if you need to apply in person at a branch, and whether or not you’ll need an adult cosigner.

• Provide your personal information (such as your home address, phone number, and Social Security number) and school information (e.g., school name, address, and phone number).

• Provide a driver’s license, a student ID, or another official photo ID.

• Supply proof of enrollment in a school (if required). This might be a school report card, transcript, or acceptance letter, or your student ID.

• Have your cosigner provide their information (if required).

• Make an initial deposit (if required). Some banks require an initial deposit of $10 or $25; others may allow you to open your account without any cash at first.

Once your application is reviewed and approved, you may be able to start using your account right away. However, it can take up to 10 days or longer for your debit card and paper checks to arrive in the mail. Once that happens, you’re all set to start fully using your student banking account — congrats!

The Takeaway

A student checking account can be a great tool for a young person learning how to manage their finances. With features like low fees, mobile banking, and overdraft forgiveness, these accounts can provide the flexibility and convenience students need. However, it’s important to shop around and compare different options, understand the terms, and prepare for the transition to a regular checking account after graduation.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

Do student checking accounts charge monthly fees?

Many student checking accounts do not charge monthly fees. Banks will often waive or reduce maintenance fees as a benefit to students, helping them manage their finances without extra costs. Some banks will also waive or discount other fees, such as overdraft and ATMs fees, for students. However, it’s important to read the account terms carefully to understand any potential charges before you open a student checking account.

Can I open a student checking account if I’m an international student?

International students are often eligible to open a student checking account in the U.S. Requirements vary by bank but you may need to provide both a foreign and U.S. address, two forms of ID (such as a passport, U.S. student ID, and/or foreign driver’s license), and a foreign tax identification number (FTIN). It’s a good idea to check with specific banks to determine their policies for international students.

What happens to a student checking account after you graduate?

After your scheduled graduation date, your student checking account will likely convert into standard checking accounts, which may include monthly maintenance fees and different account terms. Some banks offer a grace period of a few months post-graduation before making the transition. To avoid unexpected fees, it’s important to check with your bank about post-graduation policies and consider switching to an account that offers benefits that are better suited to your financial situation.

photo credit: iStock/Iryna Melnyk
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

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

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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Mar

2025

Understanding Palladium Investment

By Rebecca Lake | Growing Wealth, invest, Investing, Terminology, Tools & Calculators | Comments Off

Palladium investment is gaining popularity as investors seek precious metal options beyond gold and silver. That’s in part because alternative investments, such as precious metals, can provide portfolio diversification and the potential for returns. Though there are significant risks to be aware of, too.

Palladium investing may be attractive to some investors due to its relative rarity and affordability compared to gold, and it’s fairly easy to buy and sell. But it’s important to understand how this asset class works before diving in. Let’s look at how to invest in palladium and the pros and cons of holding precious metals in a portfolio.

Key Points

• Palladium prices are influenced by supply and demand, with major production in Russia and Africa.

• Significant demand for palladium comes from the automotive industry, especially for catalytic converters.

• Major companies in the palladium industry include Norilsk Nickel, Anglo American Platinum, and Sibanye-Stillwater.

• Investment options in palladium include physical bars, coins, ETFs, futures, and shares in mining companies.

• Investing in palladium offers diversification and inflation protection but involves storage costs, price volatility, and liquidity risks.

What Is Palladium?

Palladium is a silvery-white element that assumes a solid form at room temperature but can be heated to a liquid state. Part of the platinum group of metals, palladium was first discovered in 1803 by William Hyde Wollaston, an English chemist. It was named after the asteroid Pallas, which was discovered around the same time.1

Common uses for palladium include:

• Watch springs

• Surgical instruments

• Dental fillings and crowns

• Electrical contacts

• Catalytic converters

Palladium can also be used to make jewelry and forms white gold when alloyed with gold.

Recommended: What Are Alternative Investments?

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Start trading funds that include commodities, private credit, real estate, venture capital, and more.

The Palladium Market

Interest in palladium investments has grown in recent years as demand for it remains steady.

Supply and Demand Dynamics

Supply and demand can influence pricing for any good, including palladium and other precious metals. Palladium’s relative scarcity influences the supply side, while demand is determined by the market. Several factors affect the availability of palladium and demand for it, including:

• Production. In its pure form, palladium is most often found in Russia and Africa, with smaller concentrations in Australia, Canada, the U.S., and Finland. Slowdowns in production can affect supply and in turn, drive up prices if demand remains high.2

• Recycling. Recycling can re-introduce palladium into the supply. When recycling increases, the supply can increase to help meet demand and keep prices stable.

The largest demand for palladium comes from the automobile industry, according to the World Platinum Investment Council (WIPC). An uptick in global vehicle production in 2023, in particular, sparked a surge in demand for palladium which led to a supply deficit. However, that deficit is on track to become a surplus by 2026 thanks to recycling, according to the WIPC.3

Key Players in the Palladium Industry

Several companies operate in the palladium market, though one claims the title as the largest producer. Norilsk Nickel (Nornickel) is a global leader in palladium production and mining. It holds the largest position for palladium and nickel production in the world market and is also a key producer of platinum, rhodium, and copper.4

Other top palladium producers include:

• Anglo American

• Platinum, LTD.

• Sibanye-Stillwater

• Impala Platinum Holdings, LTD.

• Vale

These companies mine palladium along with other platinum group metals, though on a smaller scale than Nornickel.

Investment Options for Palladium

Investing in precious metals like palladium is not one-size-fits-all and there are several ways to do it. The most common ways to own palladium as an investment include:

• Buying and selling palladium bars

• Trading palladium coins

• Investing in palladium exchange-traded funds (ETFs)

• Trading palladium futures

The first two options may be preferable if you’d rather make a tangible investment in precious metals. Palladium bars or coins are relatively easy to buy, though they do require proper storage to preserve the metal’s integrity.

Palladium ETFs offer exposure to a basket of investments in a single vehicle, without requiring any type of physical holding. Palladium futures, meanwhile, are speculative investments that can offer higher returns but carry more risk.

Factors Influencing Palladium Prices

Palladium prices can fluctuate based on a variety of factors, starting with supply and demand. When supply shrinks and demand increases, that can result in a higher price. As of January 23, 2025, the price was around $1,000. That’s significantly below the average closing price of $2,388.36 registered in 2021.9

Supply and demand can, in turn, be affected by factors that affect palladium pricing. Geopolitical events that disrupt production in countries where palladium mining has a sizable footprint, for instance, can send prices soaring if there’s a significant reduction in available supply.

The global economy also plays a part. If the global economy is strong overall, that can lead to more demand for palladium and potentially higher prices. When the global economy begins to slow, on the other hand, prices may fall if demand declines.

Recommended: Why Alternative Investments?

Advantages of Investing in Palladium

Palladium and precious metals in general can offer some advantages to investors. Here are some of the best reasons to consider palladium investment.

• Diversification. Alt investments like palladium can add a degree of diversification to your portfolio.

• Accessibility. Some alternative investments, like classic cars, often have a higher barrier to entry. Investing in palladium, by contrast, is relatively easy and there are multiple ways to do it.

• Inflationary protection. Palladium and precious metals are considered to be an inflationary hedge, which can help protect your purchasing power if consumer prices rise.

You can even use palladium to fund your retirement through a self-directed IRA. Along with gold, silver, and platinum, it’s one of four precious metal investments the IRS allows with these tax-advantaged accounts.

Risks Associated With Palladium Investment

Palladium investing is not risk-free and it’s important to consider the potential downsides before adding precious metals to your portfolio. Here are some of the most significant risks associated with owning palladium as an investment.

• Storage costs. If you’re buying palladium bars or coins you’ll need to store them properly, which may require an additional investment of both time and money.

• Pricing volatility. Palladium pricing is highly sensitive and a change in market conditions or a geopolitical event could result in a substantial shift overnight.

• Liquidity. Precious metals are liquid assets since they can easily be sold for cash, but the price you get may be below your expectations depending on the timing of the transaction and the overall condition of the market.

The initial investment for palladium bars or coins is also a consideration. If you have $1,000 to invest you’d have to consider carefully whether you’d rather use that to buy one palladium bar, or invest in 10 shares of a palladium ETF that’s trading for $100.

💡 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.

How to Buy and Store Physical Palladium

If you want to invest in physical palladium you can purchase bars or coins from a reputable dealer. You may buy palladium through a local bullion dealer that sells palladium bars and coins, or from an online company.

The advantage of buying locally is being able to physically see what you’re buying before you make a purchase. You can ask questions and should you decide to buy, walk away with your bars or coins in hand without paying a shipping fee. If you plan to sell your bars or coins, you could take them back to the same dealer to get an offer.

With an online dealer, you’re limited to reading descriptions and viewing pictures of the coins or bars you plan to buy. Once you’re ready to invest, you’ll have to arrange to send payment and pay shipping costs to transport your bars or coins to you.

When it’s time to store your coins or bars you may choose to do so at home or in a safe deposit box at your bank. If you store your palladium at home you may want to invest in a specially-made box that’s designed to hold precious metals and keep it inside a fireproof safe.

Should you go the bank route, note that safe deposit boxes and their contents are not FDIC-insured.

Palladium ETFs and Mutual Funds

Palladium ETFs and mutual funds offer exposure to palladium and precious metals investments in a single basket. Exchange-traded funds trade on an exchange like stocks while mutual funds settle once per day.

If you’re considering a palladium ETF, look at the underlying investments to know what you’ll own. For example, Aberdeen Physical Palladium Shares ETF (PALL) holds palladium bars in a secure vault so you can own physical precious metals indirectly. Other palladium ETFs, meanwhile, may invest in palladium mining companies instead.

Aside from holdings, consider the expense ratio, which is the price you’ll pay annually to own a palladium ETF or mutual fund. Also, look at the fund’s history to see how its price and return profile have trended over the years. Just remember that past history is not an indicator of future performance.

Investing in Palladium Mining Companies

If you’re comfortable trading individual stocks you might trade shares of palladium mining companies. Trading stocks versus investing through an ETF or mutual fund has pros and cons.

You’ll need to decide how much to invest and which companies to invest in, based on their performance outlook, risk profile, and share price. You’ll also need to have a strategy for holding those stocks. Ask yourself:

• How long will you hold the shares?

• What are the tax implications of selling those shares at a gain?

• How much of your total portfolio will you allocate to palladium and/or other precious metals?

You’ll need a brokerage account to buy and sell stock shares online but it’s relatively easy to get started. The first step is finding a brokerage that offers access to palladium stocks or futures. From there, you’ll just need to set up an account to start investing.

Palladium vs. Other Precious Metals

Palladium has one notable characteristic working in its favor compared to other precious metals. It’s much rarer than gold or silver, which can potentially drive up the price through imbalances in supply and demand.

The downside, however, is that palladium prices tend to be more volatile than gold or silver prices. That means you’re trading off a certain amount of stability and taking more risk with palladium investments.

Liquidity is also a concern, as gold and silver investments may be easier to sell on the fly. Palladium, though gaining ground as an investment, is still a relatively new player compared to gold and silver. Investors who are looking to buy precious metals may bypass palladium for investments they perceive as being more price-stable.

Recommended: Understanding the Gold/Silver Ratio

The Takeaway

Investing in palladium may be new territory for you and if it is, it’s important to do your research beforehand. Specifically, you should have a good understanding of what can affect palladium prices and how its risk/reward profile aligns with your risk tolerance.

If you’re brand-new to online investing, consider looking for a brokerage that charges minimal fees and offers an easy, online account setup. The sooner you start investing, the sooner you can get on track with your financial goals. In the meantime, check out our guide to alternative investments to learn more about building a portfolio with precious metals.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What industries drive the demand for palladium?

The automotive industry is the biggest demand driver for palladium, according to the WPIC. Vehicle manufacturers use palladium to make catalytic converters which help power cars and trucks.

How does palladium compare to other precious metals as an investment?

Palladium has a higher scarcity factor than gold, silver, and other precious metals. When supply is low relative to demand, prices may soar. The biggest risk with palladium investments, however, is price volatility. That’s something to consider if you’re debating how to invest in gold vs. palladium or other precious metals.

What are the ways to invest in palladium?

You have several possibilities for owning palladium as an investment. You might choose to buy palladium bars or coins and store them, or you could invest online with palladium ETFs or mutual funds. Trading individual shares of palladium mining companies is also an option.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/Delmaine Donson

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Mar

2025

How Is HELOC Interest Calculated?

By Alene Laney | Growing Wealth, mortgage, Tools & Calculators | Comments Off

The interest you’ll pay on a home equity line of credit (HELOC) is typically calculated by multiplying the daily interest rate by the average daily balance for the billing cycle. (This is called the average daily balance method.) The lower your daily balance, the less interest you’ll pay.

The variable nature of a HELOC interest rate is a big factor in this equation. Many HELOCs allow for interest rate adjustments once a month — so the amount of interest you pay varies from month to month, based on both your balance owed and your rate.

U.S. households had more than $396 billion in outstanding HELOC balances at last count, so plenty of homeowners are looking to minimize the amount of interest they pay. If you’re one of them, here’s a rundown of how interest is calculated on a home equity line of credit so you can take steps to minimize your costs whenever possible.

Key Points

• HELOC interest is usually calculated using the average daily balance method.

• The HELOC interest rate is determined by adding a lender margin to the prime rate.

• Interest rates on HELOCs are variable and often change monthly.

• Early payments and additional payments can reduce overall interest paid.

• Interest is charged only on the amount borrowed from the credit line.

Basics of HELOC Interest Rates

To understand how does HELOC interest work and how much interest you’re being charged, it’s helpful to know the basics of how HELOC interest is calculated. Home equity line of credit interest rates are usually variable, so they can move up or down based on market conditions. Your monthly payment changes as a result. There is usually an interest rate ceiling and floor on a HELOC, which govern the highest and lowest the interest rate can go on your loan — so there are some controls built into this process.

How are HELOC rates calculated? The interest rate you pay is made up of two parts: the prime rate and a lender’s profit margin.

Your HELOC Interest Rate = Prime Rate + Lender Margin

The lender’s margin stays the same throughout the life of your loan, but the prime rate can fluctuate based on market conditions.

HELOC Interest Calculation Methods

There are a few different ways your lender can calculate interest, though the average daily balance method is the one you’ll most likely see.

Average daily balance: An average daily balance calculation involves finding the average daily balance for the month and then multiplying it by the interest rate. This is the most common HELOC interest calculation method.

Adjusted balance method: The adjusted balance is where the lender subtracts any payments you made during the period to calculate interest charges from the “adjusted balance.”

Previous balance method: In this method, the lender uses the amount owed at the beginning of the period to calculate interest charges.

Recommended: What Is a HELOC?

Factors Affecting HELOC Interest Calculations

Several factors affect HELOC interest calculations. These include your annual percentage rate (APR), the extent to which you use your credit line, and whether you’re in the HELOC’s draw or repayment period.

APR

As mentioned previously, one of the defining characteristics of a HELOC is the variable APR, which can change over the course of the term. For many HELOC lenders, the interest rate can be adjusted once per month. But you still want to obtain the lowest possible interest rate at the outset of your line of credit.

Your personal qualifications and the attributes of your property and loan are the biggest factors in determining your APR. Some of these include:

• Credit history: Your credit score and credit history factor into the interest rate your lender will offer you. A better credit score translates into a better interest rate on your loan.

• Line amount: How large your HELOC credit line is will affect your interest rate.

• Equity: Generally, the more equity you leave in your home, the better interest rate you’re eligible for.

• Occupancy: An owner-occupied property typically gets a lower HELOC interest rate than an investment property, although some people do use HELOCs to fund investment properties because they think they can use a HELOC to build wealth.

Of course, it’s recommended to always shop around for a HELOC to ensure you find your best available rate.

Recommended: HELOC vs. Home Equity Loan

Credit Utilization

Lower charges on your HELOC create lower interest charges because with a HELOC, you only pay interest on what you borrow. A HELOC payment calculator can help you estimate what your monthly payment would be on your HELOC based on how much of the credit line you have used and your interest rate.

Draw vs. Repayment Period

With many HELOCs, there is a draw period and a repayment period. The draw period is where your minimum payment covers the interest charged on the loan. The repayment period is where you pay principal and interest in installment payments.

When it comes to the interest charges during the draw vs. the repayment period, the calculation is the same, but the interest rate may be different. The main difference is the principal doesn’t go down if you’re making interest-only payments during the draw period. Some borrowers may also have a fixed interest rate when they enter the repayment period.

Sample HELOC Interest Calculations

It’s helpful to look at the process of calculating HELOC interest rates and see a couple examples to understand how it works. Here’s a complete breakdown of the most common method for calculating HELOC interest, the average daily balance. Yes, it’s a lot of math — but if you have a HELOC, your lender runs the numbers for you and sends you a monthly bill.

Step 1: Find the Average Daily Balance

Add each day’s balance together, then divide by the number of days in the billing cycle.

Average daily balance = Total of daily balances / Days in the billing cycle

Example 1: You have a $10,000 balance for each of the 30 days of the billing cycle.
Average daily balance = ($10,000 X 30 days) / 30 days
Average daily balance = $10,000

Example 2: You have a $10,000 balance for two days into the billing cycle and then pay it off. Average daily balance = ($10,000 + $10,000) / 30 days
Average daily balance = ($20,000) / 30 days
Average daily balance = $666.67

Step 2: Find the Daily Periodic Rate of Your HELOC

To find the daily periodic rate of your HELOC, divide the APR on your statement by 365.

Daily periodic rate = APR/365

Example: Your APR is 9.49%
Daily periodic rate = 9.49%/365
Daily periodic rate = .026%

Step 3: Find the Daily Interest Charge

You’ll find the daily interest charge by multiplying the average daily balance by the daily periodic rate.

Daily interest charge = Average daily balance X daily periodic rate

Example 1: $10,000 average daily balance with a .026% daily periodic rate.
Daily interest charge = $10,000 X .026%
Daily interest charge = $2.60

Example 2: $666.67 average daily balance with a .026% daily periodic rate.
Daily interest charge = $666.67 X .026%
Daily interest charge = $.17

Step 4: Find the Total Interest Charges for the Billing Cycle

Multiply the daily interest charge by the number of days in the billing cycle. For this example, we’ll use 30.

Total interest charges = Daily interest charge X Days in the billing cycle

Example 1: $10,000 average daily balance
Total interest charges = $2.60 X 30
Total interest charges = $78

Example 2: $667.67 average daily balance
Total interest charges = $.17 X 30
Total interest charges = $5.10

In this side-by-side comparison, the borrower who paid off the balance after two days saved over $70 in interest costs for the month.

Strategies to Minimize HELOC Interest Costs

Paying less interest is a smart move if you can swing it. If you need to use your HELOC to finance a large expense, keep these tips in mind to help you save on interest.

Make purchases toward the end of the billing cycle. With the daily balance interest calculation, you want to minimize the number of days you’re paying interest on a purchase. If possible, make purchases with your HELOC toward the end of your billing cycle and make payments shortly thereafter.

Pay earlier in the billing cycle. Since the interest is calculated daily based on the money you still owe, paying it earlier in the billing cycle can reduce the amount of interest you’ll pay. And if you can pay down the principal (as in example 2, above), even better.

Make extra payments. Extra payments reduce the principal, which reduces how much interest you’ll pay.

Convert to a fixed-rate loan. Converting your HELOC into a fixed-rate loan could lower your interest costs if you can lock in a lower interest rate. And even if you can’t, converting to a fixed rate protects you from further rate increases and ensures you have a predictable payment amount from month to month going forward.

Recommended: How HELOCs Affect Your Taxes

Comparing HELOC Interest to Other Borrowing Options

Here’s how a HELOC stacks up against home equity loans, personal loans, and credit cards.

Home Equity Loan

This is a different type of home equity loan that offers a fixed interest rate. Like a HELOC, it uses your home’s equity as collateral, but unlike a HELOC, with a home equity loan you receive your funds in a lump sum upfront and start repaying the principal, plus interest, immediately.

If you’re comparing interest rates on a HELOC vs. home equity loan, you’ll typically see lower interest rates in HELOCs initially, but over the years, a HELOC can adjust many times, whereas a home equity loan will always have the same interest rate.

Personal Loan

A personal loan usually has a higher interest rate than either HELOCs or home equity loans. However, your home isn’t used as collateral on the loan, which is a big upside. In early 2025, the average interest rate for personal loans was over 12%.

Credit Cards

Credit cards have significantly higher interest rates than either HELOCs or personal loans. Average credit card interest rates in early 2025 are over 21%. They’re very flexible, but shouldn’t be relied on as a lending tool because of the high interest rates.

The Takeaway

Paying less interest on your HELOC is a smart move for your finances. If you know how is a home equity line of credit interest calculated, you’ll understand how much you’re paying for borrowing money on a HELOC and use smart strategies to pay less. You might also give yourself a head start by paying more than the interest-only payment during the draw period, so that by the time you enter the repayment period, you’ve chipped away at your balance and lowered your payment amount.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

How often does a HELOC interest rate change?

HELOCs are typically variable-rate loans, and while it’s up to the lender to determine how often they change, the rate can change each month. Some HELOCs offer the option to lock in a certain amount borrowed, and the portion you’ve locked becomes a fixed-rate loan with a repayment schedule.

Can I deduct HELOC interest on my taxes?

There are a few scenarios where you can deduct HELOC interest on your taxes. If you use the funds to buy, build, or improve your residence, the interest is tax deductible. However, you would need to itemize your deductions, so consult with a tax advisor. This deduction may change after the 2025 tax year — another good reason to speak with an advisor.

What’s the difference between simple and compound interest for HELOCs?

The daily balance method used by HELOCs is considered simple interest. Compound interest is where interest is charged on top of interest, which isn’t a common way of computing interest for HELOCs. All of the specifics about your HELOC — including your interest rate, how often the variable rate may change, and your rate floor and ceiling, among other things — should be spelled out in your HELOC agreement.

Photo credit: iStock/Prostock-Studio

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Mar

2025

Can You Get a HELOC on an Investment Property?

By Rebecca Lake | Growing Wealth, Home Ownership, mortgage, Terminology, Tools & Calculators | Comments Off

A home equity loan, or HELOC, is a revolving line of credit that’s secured by your home. You can use a HELOC to access the equity you have in your home, which is the difference between what you owe on your home and what it’s worth.

It’s possible to get a HELOC on an investment property if you meet a lender’s requirements. There are both pros and cons to using a home equity line of credit on an investment property, which is important to understand before moving forward.

Key Points

• To qualify for a HELOC on an investment property, a loan-to-value (LTV) ratio below 75% to 80% is typically required.

• A credit score of 670 or higher is generally needed for a HELOC on an investment property.

• Advantages of a HELOC include flexible access to cash, potentially lower interest rates, and possible tax deductions.

• Disadvantages include difficulty in qualifying, reduced equity, and unpredictable interest rates.

• Alternative financing options include a HELOC on a primary home, a personal loan, and a cash-out refinance.

Understanding HELOCs for Investment Properties

An investment property HELOC is a home equity line of credit that’s secured by an investment property that generates income. This might be a home that you exclusively rent out full-time or one that you rent seasonally.

Typically, when someone gets a HELOC, they borrow against their primary residence (the home they live in). Your home secures the HELOC, and the amount you can borrow is based on your credit scores and the amount of equity you have.

An investment property equity line of credit works much the same way, but the difference is that it’s tied to your rental home. You might tap into your investment property equity using a HELOC to:

• Fund renovations or repairs on the property

• Consolidate high-interest debts

• Pay for a large expense

• Cover a financial emergency

Investment property HELOCs, like HELOCs generally, have a draw period of 5 to 10 years, in which you can access your credit line. This is followed by a repayment period that may last 5 to 25 years.

Recommended: HELOC Definition

Eligibility Criteria for Investment Property HELOCs

Qualifying for a HELOC on a primary residence usually isn’t that different from getting a home loan to buy property. Getting a HELOC for investment property, however, may entail jumping through a few additional hoops.

Equity Requirements

The first requirement for a home equity loan or HELOC on investment property is equity. (Again, equity is the difference between what you owe on the home and what it’s worth.) Lenders use something called the loan-to-value (LTV) ratio to measure your home equity. Your LTV ratio is the amount you’re financing compared to what your home is worth.

Typically, lenders look for an LTV ratio of 85% to 90% if you’re getting a HELOC on a primary residence. So you’d need 10% to 15% equity to qualify.

The required LTV for a HELOC on investment properties, on the other hand, might be 75% or 80% instead. Essentially, you’d need more equity to qualify.

Why? Because it’s a riskier loan for the lender. If you were to experience financial hardship, you would likely want to preserve the home you live in and would prioritize payments on that mortgage above those on your investment property.

A HELOC on rental property, like any HELOC, is a junior lien — which means that it takes a backseat to first mortgage liens for repayment. So if you did lose your investment property to foreclosure, your first mortgage on the property would get paid off from the proceeds of the sale before a HELOC lender would be paid. Read our detailed HELOC loan guide to learn more about this borrowing option.

Credit Score Standards

A credit check is typical for a home equity line of credit. For most mortgages, including HELOCs, lenders look for a FICO® credit score of 620 or higher. (FHA loans accept borrowers with scores as low as 500.)

Credit score requirements may be higher for HELOCs, however, since there’s more risk for the lender. So you may need a score of 670 or better to qualify. That’s a “good” credit score, according to FICO.

If your credit could use some improvement, focus on paying bills on time and reducing your overall debt levels. You could also improve your credit utilization by requesting higher limits for your credit cards. Just don’t run up more debt against your new limit.

Property Type and Condition

Aside from your finances, lenders also scrutinize the property when deciding whether to approve a HELOC on an investment property. An in-person appraisal may be required to assess its condition and make sure that it’s an eligible property type.

Since the home secures your HELOC, the lender will want to make sure that it’s accurately valued and in good shape. The lender may also ask questions about your tenants and leasing agreement to assess how consistent your rental income is.

Pros and Cons of Using a HELOC on an Investment Property

Should you get a HELOC for an investment property? There are some compelling reasons to consider it, but there are downsides as well. It’s important to weigh both sides before making a decision.

Advantages

Here’s what a HELOC on a rental property has to offer, in terms of benefits.

• Convenience. A HELOC offers flexible access to cash for home improvements, emergencies, or any other reason.

• Low rates. HELOCs may be less expensive than other borrowing options, such as personal loans or credit cards.

• Possible tax deduction. You can deduct the interest you pay if you’re using a HELOC exclusively to renovate or repair your investment property.8 This rule may change after the 2025 tax year; consult a tax advisor about all deductions.

• Lower payments initially. You may only have to make interest payments in the draw period.

• Less risk. If you experience a significant financial setback and default on the line of credit, at least you aren’t risking your primary residence.

Disadvantages

Getting a HELOC on investment property isn’t always the right move. Here are some downsides of an equity line on investment property to consider.

• Difficult to qualify. Not all lenders offer HELOCs for rental properties and it may be challenging to find one that will approve you.

• Unpredictability. If you have a variable-rate HELOC, your interest rate is subject to change, which could make your payments less affordable if rates rise.

• Cost. Lenders may charge higher interest rates or higher fees for HELOCs on investment property, adding to your overall cost.

• Shrinking equity. Taking out a HELOC reduces your available equity, which could put you at risk of becoming upside down if home values decline.

• Less flexibility. Any balance owed on a HELOC often needs to be paid when you sell the house. This might affect how quickly you can sell your investment property should you wish to do so.

Alternative Financing Options

A HELOC isn’t the only way to get cash when you need it. You might consider other possibilities, including:

• HELOC on your primary home. If you can’t get a HELOC on an investment property, you may still qualify for one on the home you live in. Shopping around to compare mortgage rates can help you see what you might qualify for.

• Personal loans. Personal loans let you borrow a lump sum of money, and unlike a HELOC, they aren’t tied to your home.

• Credit cards. Credit cards could be a good alternative to a HELOC if your card has a low rate or you’re earning generous rewards when you spend. For instance, you might use a card that earns cash back at home improvement stores to save money on remodeling projects.

• Cash-out refi. A cash-out refinance replaces your existing mortgage loan with a new one. You take your equity out in cash at closing. This could be a simpler way to get access to funds and potentially lower your rate and/or monthly payments.

Recommended: Mortgage Preapproval

Steps to Obtain a HELOC on an Investment Property

Getting a HELOC on a rental property takes some planning. Here’s what you’ll need to do.

Assess Your Financial Situation

First, look at where you are financially. Consider your:

• Credit scores

• Income

• Existing debt (including mortgage payments for your primary residence, rental property, and credit cards)

• Budget and expenses

• Home equity

• Borrowing needs

You can use a home equity calculator to gauge whether you have the right LTV required to get a HELOC on an investment home. A HELOC repayment calculator can help you estimate how much of your budget might go to payments. If you haven’t checked your credit, you can pull your reports for free through AnnualCreditReport.com or with free credit monitoring.

Prepare Necessary Documentation

If you think a HELOC is the right move, the next step is organizing your documents. Generally, you’ll need to have copies of your:

• Pay stubs

• W-2s

• Tax returns for the most recent year

• Bank account statements

If you’re self-employed, your lender might ask for a profit and loss statement and cash flow statement. You may also need to provide two years’ worth of tax and income statements versus one.

Submit Your Application

Assuming you’ve chosen a lender, the next step is applying. If you’re applying for a HELOC online, you should be able to upload any supporting documentation the lender requests.

As you go through the application, complete all required fields and double-check for accuracy. Once you submit your application, the lender will take the next steps which are checking your credit and scheduling an appraisal.

You’ll need to pay the appraisal fee, along with any other closing costs. The appraisal fee is usually due upfront, while other fees can be paid on closing.

The Takeaway

Getting a HELOC on an investment property can unlock extra cash, but it may not be suitable for every situation. Before you move forward with a home equity line of credit, it’s important to know what you can expect and how a HELOC tied to an investment property is different from one tied to your primary home.

Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

What are the typical interest rates for HELOCs on investment properties?

HELOCs on investment properties tend to have higher interest rates than HELOCs on primary residences, or mortgages used to buy a home. You may pay several percentage points more to borrow, and it’s entirely possible to see double-digit HELOC rates.

Are there tax implications when using a HELOC on an investment property?

You might be able to deduct the interest you pay on a HELOC for your rental property if you’re using the money for repairs or improvements. You’ll need to consult a tax advisor, however, and be mindful that this rule may change after the 2025 tax year.

How does a HELOC on an investment property affect my credit score?

HELOCs show up on a credit report. When you apply for a HELOC, it adds an inquiry to your report, which can knock a few points off your score. As long as you pay your HELOC on time, however, you can get those points back.

Can I use a HELOC from my primary residence to fund an investment property?

You can use a HELOC from your primary residence to fund an investment property, but it isn’t always easy. Lenders may be more stringent with credit, income, and equity requirements when you borrow against your primary home to buy a rental home.

What are the risks associated with taking a HELOC on an investment property?

The primary risk associated with getting a HELOC on an investment property is losing the home to foreclosure. If you can’t manage the added debt load or your rental income dries up, you could risk the loss of the property if the bank takes it back.

Photo credit: iStock/gorodenkoff

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Step 1: Find the Average Daily Balance

Average daily balance = Total of daily balances / Days in the billing cycle

Step 2: Find the Daily Periodic Rate of Your HELOC

Daily periodic rate = APR/365

Step 3: Find the Daily Interest Charge

Daily interest charge = Average daily balance X daily periodic rate

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