Jul
15
2024

How to Calculate Annual Percentage Yield (APY)

By | Debt Payoff, Financial Independence, money | Comments Off on How to Calculate Annual Percentage Yield (APY)

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.

Understanding Annual Percentage Yield (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

Earn up to 4.00% APY with a high-yield savings account from SoFi.

No account or monthly fees. No minimum balance.

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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 4.00% 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.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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.

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Jul
15
2024

Guide to Overdraft Lines of Credit

By | Credit, money, Money & Life | Comments Off on Guide to Overdraft Lines of Credit

An overdraft line of credit is a pre-approved loan attached to your checking account. If you don’t have enough money in your account to cover a transaction (such as a debit card transaction or automatic bill payment), the line of credit kicks in and covers the overdraft. This prevents denied and failed transactions, overdraft fees, non-sufficient fund fees, and potentially other fees and headaches. However, these credit lines come with costs of their own. Are they worth it? Here are key things to know about overdraft protection lines of credit.

🛈 Currently, SoFi does not provide members an overdraft line of credit.

What Is an Overdraft Line of Credit?

An overdraft line of credit is a feature offered by banks and credit unions that links your checking account to an established line of credit. If you sign up for this type of overdraft protection, you can borrow against that line of credit to cover shortfalls when (or if) you overdraw your checking account.

For example, let’s say your checking account is low on cash due to some unexpected expenses, then an automated payment goes through or a check you wrote a while ago (and forgot about) gets cashed. With an overdraft line of credit, the bank or credit union will cover that overage by drawing from your credit line. The payments will go through and you won’t get hit with a non-sufficient funds (NSF) or bounced check fee.

However, there are still costs involved. Credit unions and banks that offer an overdraft line of credit will typically charge a transfer fee each time you draw from the credit line. On top of that, you’ll pay interest on the borrowed balance until you pay it off.

How Overdraft Lines of Credit Work

Typically, if your checking account doesn’t have enough money to cover a debit card purchase, check, or online bill payment, the bank will either cover the pending transaction and charge you overdraft fee, or they will reject the transaction and charge you a fee for insufficient funds (you may also get hit with a fee from the party that was expecting payment).

If you have a checking account with an overdraft line of credit, on the other hand, any overdraft is automatically withdrawn from your line of credit and deposited into your account. You will typically be charged a small fee for each overdraft that is covered. You’ll also pay interest on the money you borrow from your credit line.

An overdraft protection line of credit has a preset amount it can cover on your behalf, which can range from $500 to $7500 or more. As with other lines of credit, you only pay a transfer fee or interest if you actually borrow money from the credit line.

Banks and credit unions often have requirements for customers to qualify for an overdraft line of credit, such as maintaining a specific account balance for a certain period of time, depositing money regularly into the account, having a positive credit history, and having minimal overdrafts in your recent banking history.

What Happens if You Use Your Overdraft Line of Credit?

If you use your overdraft line of credit, the bank or credit union will typically charge a transfer fee and interest on the balance provided for your purchase. For example, say you spend $100 at the grocery store using your debit card but only have $60 in your account. The transaction will go through and your overdraft line of protection kicks in, putting $40 in your account.

You’ll pay a small fee for the cash transfer (usually around $12) and the $40 balance will start accruing interest until it’s paid back in full. You’ll need to repay the amount you borrowed according to the terms set by your bank. Typically, you need to make monthly payments, either manually or by having them automatically deducted from your checking account.

Keep in mind that once you use an overdraft line of credit, it can have an impact on your credit, since it qualifies as a loan. Paying off the balance in a timely fashion can have a positive impact on your credit, while carrying a high balance and/or making late payments can have a negative impact on your credit.

Recommended: Can You Overdraft a Credit Card?

Pros and Cons of Overdraft Lines of Credit

An overdraft line of credit can save you in a pinch but can also cause unwanted financial consequences. Here are some benefits and potential pitfalls to consider.

Pros of Overdraft Lines of Credit

•   Provides a safety net. Overdraft credit lines (which often come with high limits) can help you afford necessary expenses and handle emergencies without taking out a loan.

•   Transactions won’t fail. With an overdraft line of credit, debit card purchases, online bill payments, and checks will go through successfully, even if you don’t have the funds in your account to cover them.

•   May be cheaper than other options. The transfer fee plus the interest charges can end up costing less than overdraft fees and the penalties for returned payments and checks.

•   Can help you build credit. Drawing from your credit line and then paying off your balance responsibly can have a positive impact on your credit.

Cons of Overdraft Lines of Credit

•   Not everyone qualifies. Approval for the line of credit may involve passing lender requirements, such as keeping a certain average account balance, signing up for direct deposit, and having a strong credit history.

•   Fees can add up. Typically, you incur a transfer fee for every advance. Some lenders also charge annual fees and account fees for overdraft lines of credit.

•   Interest rates tend to be high. Overdraft lines of credit tend to have high interest rates because there’s no collateral from the borrower, which increases risk to the lender.

•   Could negatively impact your credit. If you carry a high balance and/or don’t make your payments on time, an overdraft credit line could have a negative impact on your credit.

Alternatives to Overdraft Lines of Credit

While overdraft lines of credit offer convenience and might help you save money, other options might be more beneficial depending on your situation. Here’s a breakdown of the alternatives to overdraft lines of credit.

Effective Account Management

Effectively managing your checking account and finances can help you avoid overdrafts altogether. This entails regularly monitoring your account balance, signing up for “low balance” alerts, and always keeping a cushion of cash in your checking account.

Link Another Account to Your Checking Account

Linking your checking account to another financial account, such as a savings account, can provide a safety net in case of insufficient funds. If a transaction will overdraft your checking account, funds will automatically transfer from the linked account to cover the shortfall.

This option avoids overdraft fees and ensures that your transactions are not declined due to insufficient funds. However, you may pay a transfer fee when the protection is triggered, and you’ll need sufficient funds in your linked deposit account to cover the overdrawn amount to use this service.

Opt Out of Overdraft Coverage

If all of your bank’s overdraft protection options involve costs, you might consider going without overdraft coverage. If you go this route, your bank will decline any transactions that would bring your account into the negative. This could put you in a difficult situation if you can’t make a needed purchase, but you’ll avoid overdraft fees and/or running up interest.

Consider Switching Banks

You may be able to find a bank with generous overdraft protections for checking accounts. For example, some banks offer grace periods after overdrafts, such as one business day to cover the overage without incurring any penalties. In addition, many financial institutions have reduced or eliminated their overdraft fees.

Recommended: Switching Bank Accounts When in Overdraft

The Takeaway

Overdraft lines of credit give bank and credit union customers immediate access to funds to cover transactions and avoid costly overdraft and non-sufficient fund fees.

While they can cover emergency expenses and prevent transactions from failing when your account balance is low, high interest rates and credit implications can lead to other challenges. Alternatives to using an overdraft line of credit include: effective account management, linking accounts, and/or finding a bank with favorable overdraft policies.

FAQ

Does tapping into your overdraft line of credit affect your credit score?

Tapping into your overdraft line of credit means taking on debt, which can impact your credit. If you consistently make timely payments and manage that debt responsibly, it can have a positive impact on your credit history. Conversely, if you fail to repay the borrowed amount on time, it could lead to negative marks on your credit report.

How does an overdraft protection line of credit work?

An overdraft line of credit is a safety net for checking accounts, providing funds to cover transactions that exceed available balances. When faced with insufficient funds, the bank or credit union extends a predetermined line of credit, allowing the transaction to proceed without incurring overdraft fees. The customer then repays the borrowed amount, along with any applicable fees and interest.

Can you overdraw your credit limit?

No, you cannot overdraw beyond the credit limit set for your overdraft line of credit. Your bank establishes a maximum limit based on your creditworthiness and financial history. If a transaction exceeds this limit, it will typically be declined, and you may still face fees for insufficient funds. It’s important to be aware of your credit limit and monitor your account to avoid transactions that might exceed it.

Photo credit: iStock/gzorgz

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

*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.

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.

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

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Jul
15
2024

What Is Check Cashing?

By | Financial Independence, money, Money & Life | Comments Off on What Is Check Cashing?

When you cash a check, you receive the amount of cash stated on the check. What are known as check cashing services let you cash all sorts of checks — like payroll, government, or personal checks — and receive your money on the spot, even if you don’t have a bank account.

While these services offer convenience and quick access to cash, they typically have high check cashing fees. Read on to better understand how check cashing services work and their pros and cons.

How Does Check Cashing Work?

Check cashing services can offer a way for those without a bank account to cash a check. Currently, about 6% of all Americans are unbanked, according to the Federal Reserve, meaning they are not served by a bank or similar financial institution. They lack the kind of checking accounts that serve as the day-to-day financial hub of most people’s lives. That means they likely can’t walk into a bank branch and get cash for a check.

Instead, they may use check cashing services, such as brick-and-mortar stores like Amscot and Check City. These businesses are designed for simple transactions like cashing checks, paying bills, buying money orders, and possibly securing payday loans.You may also find check cashing services available at major retailers like Kroger and Walmart.

Check cashing services can also offer convenience to those who have bank accounts. Say you receive a check in your mail on Saturday and would like to cash it to repay a friend on Sunday. Your bank is unlikely to be open, so you might use a check cashing service to complete this transaction.

How Check Cashing Works

Using a check cashing service is typically a straightforward process.

•   You present the check and proof of identification.

•   Once verified, you’ll pay a fee for this service and leave with your cash in hand, ready to use.

The transaction fee can range between 1% to 12% of the check amount, depending on the particular location. Some check cashing services will cap the fee. For example, Walmart has a maximum fee of $4 for cashing a pre-printed check of up to $1,000 value, at the time of publication, and a maximum fee of $8 for pre-printed checks over $1,000 in value.

Check cashing services are helpful if you:

•   Don’t have a bank account

•   Need immediate cash

•   Live in areas without nearby bank branches or prefer the extended hours offered by some check-cashing services

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Common Types of Checks Cashed

There are several common types of checks that can be brought to check cashing services.

Payroll Checks

A payroll check is a type of check that your employer issues, typically on a regular schedule — like once a week or biweekly. You can usually receive your paycheck in the mail or in person; many people opt for direct deposit.

Government or Tax Refund Checks

Government checks come directly from the government, as the name indicates, and can cover various forms of aid, such as financial assistance, grants, Social Security benefits, and unemployment benefits. Another familiar type of government check is a tax refund check from the IRS.

Personal and Business Checks

You can use personal checks to pay bills or send money to friends and family. On the other hand, companies issue business checks for a wide range of business-related transactions. Both types are common and can be cashed at check cashing services.

Recommended: Paying for Food Delivery With a Checking Account

Average Check Cashing Fees

The fees for cashing a check usually range from 1% to 12% of the check’s value. The exact amount depends on the check cashing service you use, the type of check, its amount, and other factors.

For example, at Walmart, you might pay a maximum fee of $4 for pre-printed checks up to $1,000, as noted above. At Amscot, fees for check cashing vary: 9.99% of the check’s amount for personal checks and 2.5% for tax refunds.

Factors Affecting Check Cashing Fees

Several factors influence the check cashing fee, including:

•   Type of check: Payroll, government, and personal checks often have different fee structures.

•   Check amount: Higher amounts might incur higher flat fees or percentage-based fees.

•   Check cashing service: Different businesses will set their own fee schedules.

•   Location: Due to local laws, fees for check cashing can vary by state or region.

Risks of Using Check Cashing Services

Before using a check cashing service, it’s important to understand the risks involved:

•   Upselling high-interest payday loans: Many check-cashing places might try to sell you high-interest payday loans. These loans are very risky and expensive, potentially trapping you in a cycle of debt. While it might be convenient to cash your check there, try to avoid any payday loan offers — they can be prohibitively expensive.

•   Target for theft: Cashing a check might seem convenient, but leaving the premises with a large sum of cash can be risky. It makes you a target for theft since people know you’re probably carrying cash.

•   Getting caught in a problematic cycle: Using check cashing services can trap you in a cycle of fees. It can also mean missed opportunities to build financial stability with a bank or credit union.

Pros and Cons of Using a Check Cashing Service

Here’s a closer look at the upsides and downsides of using a check cashing service.

Pros

•   Check cashing services often operate outside of regular banking hours, which can be convenient.

•   Funds are typically accessible immediately, without delays or holds.

•   They provide essential financial services to underserved and unbanked individuals, allowing them to cover expenses such as rent and bills and access their tax refunds or Social Security checks.

Cons

•   Check cashing services charge high fees, usually 1% to 12% of the amount cashed.

•   Locations may try to upsell customers on high-interest payday loans.

•   No opportunities for relationship-building benefits of banks, such as higher rates on certificates of deposit (CDs).

•   No safe storage for money, as funds are not insured like they would be in a bank.

Where To Cash Checks for Free

Here are a few free ways to cash a check versus using check cashing services:

•   Direct deposit: Direct deposit provides an automated way to get paid. Your paycheck goes straight into your account electronically without needing a physical check or a trip to the bank. It’s hassle-free and saves you from paying check-cashing fees. However, you do need a bank account for this.

•   Mobile or online check deposit: If you have a bank account, one of the easiest ways to deposit a check is by using your phone with mobile deposit. Usually, you sign into your bank account, snap a photo of the front and back of your check, and deposit it into your account. But keep in mind you may have to wait a day or two to access the deposited funds.

•   Cashing a check at the issuing bank: If you can’t cash a check at your own bank or credit union (or don’t have a bank account), you could try the bank or credit union that issued the check. You can find their name on the front of the check. Depending on the bank’s policy, you might be able to cash it there without any check cashing fees.

The Takeaway

Whether or not you have a bank account, check cashing services can provide convenience and flexibility. However, they often charge high fees and present other risks. Understanding these dynamics can help you decide whether to opt for these services or explore alternatives, like trying to cash checks at the issuing bank.

If you are looking for a bank that offers flexible, high-yield accounts, see what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Are check cashing fees negotiable?

Check cashing fees usually cannot be negotiated. These fees are determined by the check cashing service and depend on factors like the type and amount of the check.

Do I need ID to cash a check?

Yes, you usually need to provide identification when cashing a check. However, each bank, credit union, or check-cashing service may have different requirements for what qualifies as acceptable ID.

How long does it take to cash a check?

When you visit a check cashing service, you can typically walk out with your funds almost immediately.

Photo credit: iStock/s-cphoto

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

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*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.

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.

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

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What Is a Gold IRA? How Do You Invest in One?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Gold IRA? How Do You Invest in One?

While it’s common for people to use their IRA to invest in stocks, bonds, and other securities, it’s also possible to set up a self-directed IRA to invest in physical gold bars, coins, or bullion.

Although the assets within a self-directed IRA are considered alternative investments, these accounts still follow the standard IRS rules regarding tax advantages, annual contribution limits, and so forth.

That said, not all brokers offer self-directed IRAs. And investing in gold within an IRA may be more expensive owing to the cost of storing a physical commodity like gold.

Establishing a Gold IRA Account

It’s important to understand that there isn’t a dedicated “gold IRA” that’s geared toward investing in gold alone (or any other type of precious metal). Rather, investors interested in investing in gold or other types of alternative investments can set up what’s known as a self-directed IRA (or SIDRA) in order to choose investments that aren’t normally available through a traditional IRA account.

While alternative investments can be illiquid, volatile, or subject to other risk factors, investors interested in alts may be curious about the potential for greater diversification since these assets typically don’t move in tandem with conventional markets. In the case of precious metals, they can be an inflation hedge.

Understanding Self-Directed IRAs

Typically, most IRA providers only allow you to invest in securities like stocks, bonds, ETFs or mutual funds. If you want to invest in gold by buying shares in an ETF focusing on gold, or by purchasing stock in a gold mining company, then a traditional IRA custodian is fine.

But if you want to hold physical gold in your IRA, you’ll need to find a broker that will allow you to set up a self-directed IRA.

Self-directed IRAs and self-directed Roth IRAs allow account holders to buy and sell a wider variety of investments than regular traditional IRAs and Roth IRAs.

While a custodian or a trustee administers the SDIRA, the account holder typically manages the portfolio of assets themselves. These accounts may also come with higher fees than regular IRAs owing to the higher cost of storing physical assets like gold.

That said, a self-directed IRA follows the same general rules as ordinary IRAs in terms of tax rules, withdrawal restrictions, income caps, and annual contribution limits (see details below). A self-directed IRA can be set up as a traditional, tax-deferred account, or a self-directed Roth IRA.

Setting Up a Gold IRA Account

Once you’ve found an IRA custodian or brokerage that allows you to open a self-directed IRA and purchase physical gold, you can fund your account. Be sure you’re working with a reputable, experienced precious metals IRA custodian, and that the company is registered with the SEC (Securities and Exchange Commission) and with FINRA (Financial Industry Regulatory Authority).

The two most common ways to fund a gold IRA are by contributing cash or transferring money from an existing IRA or 401(k) account.

After you’ve funded your account, your broker will purchase the physical gold and store it for you. These same steps will hold true if you want to invest in other precious metals, including silver or platinum.

Alternative investments,
now for the rest of us.

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

Gold Standards for IRAs

Just as with a silver IRA, there are restrictions on the physical gold you are allowed to hold in an IRA. Any gold that is held in an IRA must be at least 99.5% pure.

Some common types of gold coins that are allowed to be held in a gold IRA include American Eagle bullion or coins, Canadian Maple Leaf coins and Australian Koala bullion coins.

Managing a Gold IRA Portfolio

The process for managing an IRA invested in gold is similar to managing an IRA that holds any commodity or security.

When you open a gold IRA, you will issue instructions to your broker to buy and sell physical gold, just as you would if you were buying stocks in a more traditional IRA. The value of your gold IRA portfolio fluctuates with the value of the physical gold that you hold.

You are not allowed to hold the gold yourself while it is part of your IRA. If you want to take possession of the physical gold bullion in your gold IRA, you will need to make a withdrawal from your IRA — which is subject to standard IRS rules governing IRA withdrawals.

An early withdrawal before age 59 ½ may result in taxes and/or penalties, so make sure you understand the terms before you take a withdrawal from a self-directed IRA.

Recommended: Portfolio Diversification: What It Is and Why It’s Important

Tax Advantages and Drawbacks of Gold IRAs

Remember that an IRA invested in gold still follows the basic structure and tax rules of traditional and Roth IRAs. The annual contribution limit for a regular, Roth, or self-directed IRA is $7,000 for tax year 2024, or $8,000 for those 50 and older.

•   With a self-directed traditional IRA, you save money that’s considered pre-tax (just as in a traditional IRA account). The value of the assets within the account may grow over time, but taxes are deferred. This means you will owe tax on the money when you withdraw it, which you can do without penalty starting at age 59 ½.

•   With a self-directed Roth IRA you make after-tax contributions, just as you would with a regular Roth IRA. Here the money grows tax free over time. In the case of a Roth account, qualified withdrawals are tax free starting at age 59 ½, as long as you have had the account for at least five years, according to the five-year rule.

In addition, investors who want to set up a Roth SIDRA must meet certain income requirements (the same income caps as for a regular Roth IRA). For single and joint tax filers: in order to contribute the full amount to a Roth IRA you must earn less than $146,000 (for single filers) or $230,000 (if you’re married, filing jointly), respectively. See IRS.gov for additional details, or consider consulting a tax professional.

One of the biggest drawbacks of a gold IRA is that the money in your IRA is generally intended for retirement. That means that if you withdraw the money in any IRA before you reach 59 ½, you may have to pay additional taxes and/or a 10% penalty. Another drawback is that you are limited by how much you can contribute to a gold IRA each year.

The Takeaway

There isn’t a specific type of IRA called a gold IRA — this is just a common way to refer to a self-directed IRA that is used to invest in physical gold. A gold IRA might be a traditional or a Roth IRA, which each come with certain tax advantages. Any gold that you hold in a self-directed IRA must be at least 99.5% pure. Additionally, not all brokers allow you to self-direct your investments and hold gold in your IRA.

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 types of gold investments can be held in a gold IRA?

Like other commodities including silver or platinum, there are specific rules about what kinds of gold investments can be held in a gold IRA. Gold must be at least 99.5% pure to be eligible to be held in an IRA. This includes coins like the Australian Koala, Canadian Maple Leaf, or American Eagle.

How do you set up and fund a gold IRA account?

The most important step to setting up and funding a gold IRA is to find a custodian that will allow you to open a self-directed IRA and invest in precious metals. Once you have found a custodian that will, simply follow their account setup instructions. Then you can fund your gold IRA, by either making a new contribution, or transferring money from a 401(k) account or an existing IRA.

What are the tax benefits and restrictions associated with a gold IRA?

The tax benefits and restrictions of a self-directed gold IRA are the same as any other IRA. With a traditional gold IRA, you may be eligible for a tax deduction in the year that you make a contribution, but you’ll owe taxes on withdrawals. With a Roth gold IRA, you don’t get a tax deduction when you make your contribution — instead, your withdrawals are tax free. In most circumstances, you will have to pay taxes and/or penalties if you make a withdrawal before age 59 ½.

Photo credit: iStock/JohnnyGreig

SoFi Invest®

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

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

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

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

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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.

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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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houses with percent symbol mobile

How Much Equity Do You Have in Your Home?

By | Budgeting & Goals, Home Ownership, personal_loan | Comments Off on How Much Equity Do You Have in Your Home?

Making monthly mortgage payments can feel like chipping away at an iceberg, especially in the beginning. Savvy homeowners take heart that each payment earns them a little more ownership in their property. But do you know exactly how much ownership, commonly called “equity,” you currently have? Knowing how to calculate home equity can help you feel a growing sense of satisfaction as you make those mortgage payments.

Simply put, home equity is the difference between the value of a property and the outstanding balance of all mortgages, liens, and other debt on the property. Read on to determine how much of your home you really own, what you can do to increase your equity, and how you can leverage that equity to make it work harder for you.

Key Points

•   Home equity represents the difference between a property’s current market value and the outstanding mortgage balance, calculated using the formula: Home Equity = Home Value – Home Debt.

•   To accurately determine home value, homeowners can use online property tools or request a professional appraisal from their mortgage lender.

•   The loan-to-value ratio (LTV) helps represent home equity, indicating the percentage of a home’s value that is borrowed, with lenders typically allowing a maximum LTV of 80%.

•   Increasing home equity can be achieved through larger down payments, making extra mortgage payments, or refinancing to shorter-term loans, alongside strategic home improvements.

•   Homeowners can usually borrow 80%-85% of their home equity, and options like Home Equity Lines of Credit (HELOCs) allow for flexible borrowing against property value over time.

How to Calculate Your Home Equity

As noted above, home equity is the difference between your home’s current value and the outstanding balance of your mortgage and other debt on the property. It’s a simple equation:

Home Equity = Home Value – Home Debt

How to Find Your Home’s Value

To estimate your home value, you can use the purchase price of your home, but that doesn’t account for any appreciation in value. For a precise calculation of your home equity, you’ll need to know your home’s current value with appreciation. You can get an estimate of your home’s value with an online property tracking tool. These calculators approximate the appreciation of your home by comparing it with similar properties in the area. While helpful, these tools can’t provide an exact measure.

To determine your real-time home value, you’ll need to contact your mortgage lender and request an official appraisal. Your lender will conduct an inspection and evaluation of what your home is worth in the current market. The appraiser may ask you for documentation of any work you’ve done on your home to come to a more exact figure.

How Much Is Left on Your Mortgage?

Calculating home equity also involves knowing what you owe on your current home mortgage loan. You can find your mortgage payoff amount (which is different from your balance) on your lender’s online portal. Add to that the outstanding amount you owe on any second mortgages, liens (for unpaid taxes or child support, for example), home equity lines of credit, and any other loans that use your home for collateral. The sum of these items is your home debt, the last figure in the equity equation.

Using the Loan-to-Value Ratio to Represent Home Equity

The loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed — it’s like the opposite of equity. Lenders set maximum LTVs, typically 80%, for home equity loans. This means homeowners cannot borrow more than 80% of their home’s value.

You can calculate your LTV by dividing your outstanding home debt, discussed above, by your home’s appraised value:

LTV = Home Debt ÷ Home Value

For example, if your home is worth $375,000, and you still owe $200,000, your LTV is 53%. (200,000 ÷ 375,000 = .53) This means you still owe 53% of the equity in your home. Subtract 53 from 100 to see how much equity you have built in your home: Your available equity is 47%.

Examples of Home Equity Calculations After 1, 3, 5, 10 Years

The table below shows how much equity a fictional homeowner accumulates over the first 10 years of their mortgage. This assumes an initial home value of $300,000, with annual appreciation of 10%, a mortgage APR of 7.5%, and a monthly payment of $1678.11. The LTV is rounded to the nearest whole percentage. (The actual annual appreciation for American homes over the last 10 years on average was 7.4%.)

Year Home Value Loan Balance Home Equity LTV
0 $300,000 $240,000 $60,000 80%
1 $330,000 $237,596 $92,404 72%
2 $363,000 $235,196 $127,803 65%
3 $399,300 $232,611 $166,689 58%
4 $439,230 $229,825 $209,405 52%
5 $483,150 $226,822 $256,327 47%
6 $531,470 $223,587 $307,882 42%
7 $584,620 $220,101 $364,519 38%
8 $643,080 $216,343 $426,736 34%
9 $707,380 $212,294 $494,085 30%
10 $778,120 $207,931 $570,188 27%

Recommended: How Much Will a $300,000 Mortgage Cost You?

What Is a Good Amount of Home Equity?

Common wisdom says that it’s smart to keep at least 20% equity in your home. This is why many lenders limit your LTV to 80%. To borrow against your home, then, you’ll typically need more than 20% equity.

Fortunately, that’s not a problem for most homeowners. Research firm Black Knight recently estimated that Americans have $193,000 of “accessible” home equity on average, over and above the recommended 20%. This is mostly due to rising home values.

Recommended: How Home Ownership Can Help Build Generational Wealth

How Much Home Equity Can You Take Out?

The amount of equity you can take out depends on the lender and the type of loan. However, most lenders will allow you to borrow 80%-85% of your home’s appraised value. The other 15%-20% remains as a kind of financial cushion.

A homeowner who doesn’t want to take out a home equity loan but needs cash might consider a Home Equity Line of Credit (HELOC). A HELOC allows owners to pull from their property’s equity continually over time. Borrowers can take only what they need at the moment. HELOCs use the home as collateral, which might not appeal to all borrowers.

Tips on Increasing Home Equity

Your initial home equity is determined by your down payment. The larger the down payment, the more equity a homeowner has right off the bat. The average down payment among American homebuyers is currently 13%. But a down payment of 20% or more can qualify borrowers for more favorable mortgage rates and also helps you avoid paying for private mortgage insurance.

After the down payment, home equity typically accumulates in three ways: monthly mortgage payments, appreciation, and home improvements. Beyond waiting for their home to appreciate, homeowners can increase their equity in several ways:
Pay more than your minimum mortgage payment each month. The extra money will go toward your principal, increasing your equity more quickly. Learn how to pay off a 30-year mortgage in 15 years.

Make biweekly payments instead of monthly. Your mid-month payment will incrementally lower your interest due. And by the end of the year, you’ll have made an extra mortgage payment.

Make strategic home improvements. Certain updates increase your home’s value more than others.

Refinance to a shorter-term loan. By refinancing to a 10- or 15-year mortgage instead of a standard 30-year, each mortgage payment will increase your equity at a faster rate.

The Takeaway

Calculating home equity involves subtracting your mortgage payoff balance (found on your lender’s website) from your home’s current value. To get the most accurate idea of your home’s market value, you’ll need an appraisal by your mortgage lender, which can cost $300-$450. Homeowners typically can’t borrow more than 80%-85% of their home equity. Knowing how to calculate equity in your home can be a first step in determining how to use that equity to fund renovations or another important expense.

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

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

How do you determine your home equity?

To quickly estimate your home equity, subtract the amount you owe on your current mortgage from your home’s current value.

What is the formula to calculate home equity?

To figure out home equity, simply subtract the amount you owe on your home mortgage loan (and any other loan you may have that is secured by your home) from your home’s current value.

How much equity can you borrow from your home?

A lender will generally let you borrow 80%-85% of your home’s value, minus the amount you owe on your mortgage. Some lenders allow you to borrow more.

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.

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

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

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.

²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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

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

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