SoFi

Both apartments and condominiums share quite a number of traits but differ in ownership. Apartments are often found in large residential complexes owned by a company. These complexes are often operated by professional property managers. Condos are also usually located in large residential complexes, but each condo unit is typically owned by an individual owner.

If you’re browsing the market for a rental, you’ve likely encountered a dazzling array of condos and apartments, and you might rent either type of property. The question of condo vs. apartment gets more complex if you’re debating whether to buy a condo or rent an apartment.

What Is a Condo?

A condo is a residential unit within a collective living community, where each individual condo is owned by a private owner, but the cost of maintaining communal areas is shared by all owners. While condos are often located in high-rise buildings, they can also take the form of a collection of standalone properties, each designated a “condo unit.”

One benefit to renting a condo is that you can deal directly with your landlord rather than a management office, which may mean more personalized attention for your needs.

For buyers, the purchase price for a condo can be significantly lower than the cost of most single-family homes.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

What Is an Apartment?

An apartment is a rental unit within a building, complex, or community. Often, an apartment complex is managed by a property management company, which serves as both landlord and leasing agent for all of the units on the premises. In big cities, “apartment” is sometimes used as shorthand for a condo or co-op unit. If you’re choosing between a co-op and a condo to rent or buy, you’ll want to know how they differ, and whether you’re ready to buy an apartment.

Rental apartments may be located in high-rises but can also be found in larger homes that have been subdivided into separate units.

Renting an apartment offers greater mobility than buying a property, which makes it a flexible option if you’re only planning on staying in an area for a couple of years. A full-time management office or private landlord takes care of leasing, rent payments, and repairs.

Where They Differ

Now that we’ve covered the condo vs. apartment basics, let’s dive deeper into some key dimensions in where they differ.

Ownership

Each unit in a condo development is usually owned by a private homeowner. Unless the condo owner retains the services of a property manager, prospective renters can expect to deal with the condo owner directly when it comes to rental applications, monthly rent payments, and any maintenance issues that arise over the course of their lease.

Apartments are often managed by a property management company that may also own the apartment complex. Effectively, this makes the company the landlord for the entire property. Prospective apartment tenants will usually submit their application and rent payments through the apartment leasing office, while full-time maintenance staffers are on call to deal with any repairs. Of course, some apartments are in smaller buildings owned by individuals. In that case, a renter might deal directly with the property owner just as a renter in a condo does.

In either case, landlords may be amenable to your desire to negotiate rent in order to take you on or keep you. Paring the rent is the main goal in such a negotiation, but you can always ask for other benefits in lieu of a rent reduction.

Property Taxes

Renters aren’t responsible for paying property taxes, making them a non-issue in the apartment vs. condo choice. However, if you’re deciding whether to purchase a condo, understand that you’re responsible for paying property taxes for your unit every year. If you decide to rent your condo out, you should also expect to be taxed on any rental income you collect.

Design

Regardless of structure type, condo owners retain the right to make cosmetic adjustments to the interior of their properties. So if you’re interested in renting in a particular condo complex and you don’t like the design choices an owner has made, consider looking at other units that are available for rent — you may find a very different look and feel in another unit. Apartments within a rental complex, in contrast, typically share similar, if not identical, layouts and designs regardless of which unit you choose.

Amenities

The amenities of both apartments and condos vary widely and often depend on when and how they were built. Generally speaking, condos are more likely to offer customized amenities, like state-of-the-art appliances and granite countertops, that reflect the tastes and habits of their owners.

Fees

Apartments and condos of similar quality and in the same area should rent for around the same cost. Both condos and apartments often charge the following fees:

•   Application fee

•   First and last month’s rent

•   Security deposit

•   Credit and background check fee

•   Pet fees and deposit

•   Parking fee

Renters may find that condo owners are more willing to negotiate on things like fees than apartment management teams, as these are private owners trying to keep their units rented out for income purposes.

Buying a condo will mean paying monthly maintenance fees that cover insurance for and upkeep of common areas, water and sewer charges, garbage and recycling collection, condo management services, and contributions to a reserve account.

Community

Condos usually have a greater sense of community than apartment complexes, given that their residents are likely to stay around longer. In many cases, residents consist of the condo owners themselves.

By contrast, renters living in apartments often intend to stay for only a couple of years. While that’s not to say that there aren’t occasional resident get-togethers at some apartment complexes, you’re less likely to encounter the same faces over several months.

If you’re renting a condo, expect to abide by rules set by the homeowners association. These can sometimes be fairly strict. Apartments have their own set of rules that may be less stringent.

Renting and Financing

Renting an apartment involves one monthly rent payment, in addition to any utilities you’re responsible for. Of course, when you leave the apartment, you leave with just your security deposit, assuming all payments have been made and no damage has been done.

Financing a condo and purchasing the property allows you to lock in your monthly mortgage payments at a steady long-term rate and gives you the chance to start building equity. In exchange, you’ll be required to make a down payment and be responsible for any taxes, insurance, and maintenance fees, among other costs.

Deciding whether it’s better to buy a condo or to rent — or to get a house or condo — is a complicated decision that depends on your personal finances and your lifestyle. If you’re thinking about settling down, have a stable job with steady income, and have enough saved up for a down payment with an emergency fund to spare, buying a condo or house may be the right choice for you. However, if you’re still exploring the area or have variable income with limited savings, it may be best to continue renting. For those trying to decide between renting an apartment and financing a condo or house, a mortgage help center can help provide answers.


💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

Maintenance

Most apartment complexes have an on-site building supervisor who can address maintenance issues. Given that the owner of a large apartment complex oversees all of the units, they’re incentivized to employ someone full time to attend to the day-to-day affairs. This often means that apartment owners can react faster than condo owners, who sometimes don’t even live on the premises.

By contrast, condo units are usually owned by landlords, and most of them hire a third-party contractor to come in and make repairs as necessary. In some cases, condo owners may be handy and handle the repairs on their own.

If you buy a condo, you’ll have a regular maintenance fee that covers the shared parts of the property, but because condo owners typically own just the interior of their unit, any repairs in the condo unit will be separate. (It’s a good idea to pore over the covenants, conditions, and restrictions to see exactly what is part of your unit or part of the common elements.)

Condominium vs Apartment: A Side-by-Side Comparison

To help sum it all up, here’s a quick guide to the condo and apartment traits discussed above.

Condo vs Apartment: Which One May Be Right for You?

Whether a condo or apartment is right for you depends on your preferred rental experience. If you’re looking for something that feels a little more akin to home and don’t mind dealing directly with your landlord when discussing repairs and rent payments, a condo (or an apartment in a small privately owned apartment building) may be the better option for you.

On the other hand, if you prefer dealing with a full-time staff of property managers, want something more structured, and don’t mind cookie-cutter corporate apartments, an apartment may be the better rental option for you.

Prospective condo buyers will want to keep their finances and monthly budget in mind when deciding if they want to rent or buy. While the idea of building equity is appealing, settling down and committing to a mortgage isn’t for everyone. You’ll want to thoughtfully evaluate your ability to make monthly payments and whether you want to stick around an area.

The Takeaway

In the condo vs. apartment comparison, you’ll pay similar costs when renting properties of similar quality. Things get more complex if you’re debating whether to buy a condo or rent an apartment, as there are myriad added costs for condo owners in exchange for the chance to build equity.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Why are condos more expensive than apartments?

In general, condos and apartments of comparable quality cost around the same amount to rent. A condo owner, however, will likely face higher monthly costs than an apartment renter, thanks to the added costs that come with owning a property, including mortgage payments, taxes, insurance, and maintenance fees. Over time, the added expense may be offset by the equity built through mortgage payments.

Which retains more value, condos or apartments?

Over the long run, both a condo and an apartment in a co-op building can lose or gain value. Whether your specific property appreciates will depend on local market factors and on upkeep of your unit as well as of the larger complex.

Can I get a loan to buy a condo or co-op apartment?

A qualified buyer can finance a condo with a government-backed or conventional mortgage loan. Getting a loan for buying into a housing cooperative can be more difficult. The buyer is purchasing shares that give them the right to live in the unit — personal property, not real property. That’s one reason that some lenders do not offer financing for co-ops.

Photo credit: iStock/Michael Vi

*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.

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

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

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

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

SOHL0124011

The IRS divides income into taxable and nontaxable categories. In general, income is taxable unless there’s a law exempting it.

As you’d expect, all taxable income must be included on your yearly income tax return. But here’s the twist: Nontaxable income may also need to be listed on your return, too.

Because anything tax-related is complicated, we’ll show you some examples of taxable and nontaxable income.

What Is Nontaxable Income?

You might think that nontaxable income is money that you can plausibly leave off your tax return. However, that’s not the case. Nontaxable income won’t be taxed even if you include it on your tax return. On the flip side, leaving income off your tax return won’t shield you from taxes. It just means you’ll be liable for those taxes, plus late fees and penalties, when the IRS figures it out — and they usually do. For questions about your specific income tax liabilities, consult an accountant or tax advisor.

Nontaxable Income Examples

The IRS provides a chart on nontaxable income limits — or how much you need to earn before you’re required to file an income tax return. For example, a single person age 65 or over can earn up to $15,700 without needing to file a federal tax return. A head of household under age 65, meanwhile, can earn up to $20,800 without needing to file.

There are many other types of income besides what appears on a W-2 or 1099. Here are examples of income that’s nontaxable, even if you might think otherwise.

•   Inheritances and bequests. Money and other assets you inherit are typically exempt from federal income tax. That’s because any taxes are levied before the estate is settled, and the threshold for estate taxes is high: $13.61 million in 2024.

•   Cash gifts. In 2024, gifts up to $18,000 are excluded from taxes. Above that, the gift giver typically pays the tax.

•   Rebates. This refers to cash you receive back from a retailer, manufacturer, or dealer.

•   Life insurance payouts. If cashed in after someone dies.

•   Scholarships. If used to pay school tuition and fees. However, when the funds are used to pay for room and board or personal expenses, they may be taxable.

•   Alimony for divorces finalized after 2018, and child support payments.

•   Welfare payments

💡 Quick Tip: Online tools make tracking your spending a breeze: You can easily set up budgets, then get instant updates on your progress, spot upcoming bills, analyze your spending habits, and more.

How Taxable Income Works

All taxable forms of income must be listed on your IRS return and will count toward whatever tax bracket you’re in.

Taxable income can include funds that aren’t yet in your bank account, such as when a check arrives but you don’t cash it during the tax year. The IRS offers examples of this to provide clarity. For instance, if your mail carrier tries to deliver a check to you on the final day of the tax year but you “are not at home to receive it,” that counts as income for the current year. If the check was mailed but couldn’t reach you during the tax year, that money goes toward next year.

Types of Taxable Income

Taxable income comes in three forms: money, property, and services. Money includes wages, salaries, self-employment income, and commissions; royalties, strike pay; rental income; and alimony if the divorce was finalized before 2019. Stock market gains are another example of taxable income.

Fringe benefits are typically taxable. This category could include a company vehicle, holiday gifts from your employer in cash or gift certificate form, an off-site gym membership, or childcare services.

Nontaxable vs Taxable Income

Putting money away for retirement often involves depositing funds into a tax-sheltered account to benefit from the IRA or 401(k) tax deduction. With these accounts, there’s a tax impact when you make your contributions or withdraw your money but not at other times. These retirement accounts come with annual contribution limits, though, so you may decide to invest in taxable accounts when those limits are reached.

When opening a taxable brokerage account, the goal is tax-efficient investing instead of the tax-deferred investing that happens with an IRA or 401(k). This can include investing into long-term stocks or municipal and treasury bonds.

Recommended: What Is a Taxable Account?

Examples of Income That Is Both Taxable and Nontaxable

If your employer pays for your tuition, it can be nontaxable. But if it goes over a certain amount, it can become taxable. The same is true with employer-paid group life insurance. You may also want to take a close look at the category of “unearned income.”

Unearned income is passively earned income that you make without working. This can include retirement distributions, Social Security benefits, interest from bank accounts, stock dividends, and so forth. It also includes debt cancellation or forgiveness, which can be taxable or nontaxable, depending whether it was canceled or forgiven for less than the amount due.

How to Reduce Your Tax Liability

Reducing taxable income makes good sense. Some strategies to consider include:

•   Choosing the right filing status

•   Maxing out your retirement contributions

•   Deducting qualified health care expenses

•   Opening a 529 savings plan if your children may attend private school or college

Another strategy is to reduce or avoid capital gains tax. You can do that a few ways:

•   Donating appreciated shares of stock. This applies when you have held the stock for more than a year.

•   Selling stocks at a loss to offset capital gains, which can reduce your taxable income.

•   Investing in property via a Qualified Opportunity Fund. You can temporarily defer paying taxes on your gains.

Each of these strategies can be complex, and professional help is recommended.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

The IRS divides income into taxable and nontaxable categories. With the second, the income may or may not need to be listed on your federal tax return, even though taxes aren’t owed. Some common forms of nontaxable income include inheritances, cash gifts of $18,000 or less, scholarships that cover school tuition and fees, alimony, child support, and welfare payments.

Taxable income can be “earned” on the job, as with wages, salaries, and commissions. Unearned income is the term for passive revenue, such as stock gains in taxable accounts, interest on savings, and benefits you receive from your employer. To prepare for tax time, it can help to have a quality money tracker app that gives you high visibility into what you’ve spent.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What is an example of nontaxable income?

Nontaxable income examples include child support payments and, as of 2019, alimony. Other examples include inheritances (which may be taxed in other ways) and cash gifts from friends or family. Contributions to an IRA may be partially or fully tax deductible, depending on your income and filing status. The funds would be taxed only when you make a withdrawal.

What are some examples of income that is taxable?

Money earned through a salary, wages, and self-employment income are some of the most common types of taxable income. Other types include royalties, commissions, rental income, and strike pay.

What are four items that are taxable income?

Wages, salaries, self-employment income, and commissions are four commonly applicable forms of taxable income.

Photo credit: iStock/andresr

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

SORL0124018

Saving up enough money for a down payment on your first home is a major life goal. But sometimes it feels like the goalpost is always moving. How much do you need to save for a down payment, exactly? Friends say they put down 10%. Your parents talk about a 20% benchmark. And some programs allow borrowers to put down just 3%.

Bottom line: There are traditional numbers that many people stand by, but these days, the old guidelines don’t always apply. And that’s a good thing, given that at the end of 2023, the median home listing price in the U.S. was $384,683, according to Zillow. Twenty percent of that —almost $70,000 — is a substantial chunk of change for most people.

This article will demystify how different down payment amounts can impact your mortgage choices and help you better identify the home mortgage loan that bests fit your financial scenario to put you on the road to owning your own home.

Why Does a 20% Down Payment Seem like the Magic Number?

If you’re thinking about buying your first home, you’ve likely heard that a 20% down payment has traditionally been the standard. Generally speaking, putting down this much on your new home helps lenders view you as a less risky borrower, which may ultimately help you get a better deal on your loan terms.

In addition, having this significant chunk of equity in the home allows for value fluctuations and the borrower is less likely to find themselves underwater or upside down on their mortgage in a declining market.

Plus, with a 20% down payment, you won’t have to buy private mortgage insurance (PMI). PMI protects the lender in case of loan default but it can cost anywhere from 0.140% to 2.33% of your total loan amount annually depending upon many factors. (Don’t confuse PMI with MIP, which is the Mortgage Insurance Premium required by the Federal Housing Administration on its FHA loans.)

And then there’s the most obvious perk of a 20% down payment: Putting more money down up front means that you’ll owe less, which normally equates to lower monthly mortgage payments and less interest charged over the life of the loan.

But let’s face it: Even if you’re making a decent — heck, a pretty awesome — salary, saving up 20% of the total cost of a home can be difficult, especially if you’re paying rent, juggling student loans, and trying to reach other long-term goals, including saving for retirement. That’s likely why many buyers put down less than 20%. In the 2023 National Association of Realtors® Profile of Home Buyers and Sellers report, first-time homebuyers financed an average of 92% of their home’s cost and repeat buyers financed 81% of the purchase price.

There may be some very valid reasons why it would be beneficial for you to put down less than 20% on your dream house. Again, it will depend on your exact financial circumstances and long term goals, but it could be worth considering the following:


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

Preserving Your Nest Egg

Putting 20% down on a home might force you to rely heavily on funds you’ve worked hard to save, and liquidating these funds, even for an investment like a home, may not always be in your best interest.

Allocating a big chunk of change to a house before you’ve covered your other important life expenses — such as an emergency fund equal to at least three months of expenses — may not be the most prudent option for you in the long run. (You’ll also want to make sure you keep in reserve funds for closing costs and any moving expenses and furnishing expenses associated with purchasing a home.)

And then there’s retirement savings: You may be able to borrow money to pay for school, to buy a new car, and to buy a home, but you definitely can’t borrow money to pay for your retirement. So you may want to consider alternatives before you dip too deeply into your retirement savings.

While you can withdraw qualified funds up to $10,000 from a traditional or Roth IRA without penalty to buy your first home, there are still taxes to consider. With a traditional IRA, you have to pay taxes on the amount you withdraw, but with a Roth IRA, no taxes will be due if you’ve had the account for at least five years. Taking the $10,000 could help you in the long run, especially if you expect income boosts as you make strides in your career.

If you are considering putting other financial goals on hold in order to buy your home, it might make sense to take a step back and look at your overall financial profile. This could help you see what makes the most sense for your circumstances. Our in-depth first-time homebuyer guide extensively covers such topics.

Protecting Your Other Big Financial Goals

By putting less money down on your home, you’ll likely be able to make more headway on other short-term financial goals, such as paying off student loans and credit cards, as well as your long-term goals, such as saving up for retirement.

You may also be able to invest more, which could help you grow your hard-earned cash. If you have other important financial goals that need achieving, you may want to consider waiting until you’ve reached them before buying a home, or you could choose to put less money down so that you don’t have to abandon your other financial objectives.

Exploring Your Down Payment Options

If you’re considering putting down less than 20%, it is a good idea to try plugging different down payment amounts into a home affordability calculator to see how they affect your monthly payments. Also take a look at your monthly income vs. your ongoing monthly expenses — which could include car payments, insurance premiums, credit card bills, and any other debts.

Mortgage lenders, whether banks or mortgage brokers, are required to figure out a borrower’s ability to repay the loan before making it. So you can also get prequalified for a home loan in order to see what type of interest rate and borrowing power a lender might feel you qualify for based on your income, expenses, and estimated down payment.


💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.1

The Right Down Payment Percentage is Personal

Everyone’s financial picture looks different, so if you find yourself in a situation where you can’t afford to put down a full 20% but still want to purchase a home, there are numerous options. If you’ve done your homework and gotten prequalified, you know how your down payment might affect your loan terms. You can also look into whether or not you are eligible for a VA loan, backed by the U.S. Department of Veterans Affairs, which allows for 100% financing? Or perhaps you qualify as a first-time homebuyer, which may allow for as little as 3% down? (You might be surprised to learn that if you haven’t owned a primary residence in the last three years, you are considered a first-time homebuyer.)

An FHA loan could also be an option. Borrowers with FICO® credit scores of 580 or more may qualify for a down payment of 3.5%. You will have to pay the FHA mortgage insurance premium (MIP), mentioned above, but it could be worth it, especially if putting down a smaller down payment allows you to get in the housing market instead of paying high rent, or own in a place where home prices seem to be on an upward trajectory.

The Takeaway

When searching for the perfect home, you’ll want to shop around in order to find your best fit — there’s no one size fits all. The same is true of your down payment percentage. But rest assured, although a 20% down payment might be tradition, it’s hardly a loan requirement, and there are many home loans that will allow you to put down less than 20% — and many financial circumstances in which a lower down payment amount is the right choice.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

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

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

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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.

SOHL0124026

Mutual funds are a type of investment vehicle that rope together numerous types of securities in one basket. They’re similar to exchange-traded funds, or ETFs, in that way, but there are some key differences. They can provide investors with an easy and turnkey way to build a diversified portfolio, often with a manager watching over the fund.

The ABCs of Mutual Funds

Mutual funds are funds, or a basket of different securities, that are packaged together and sold, in shares or fractional shares, to investors.

Mutual funds were designed for people to get started investing with small amounts of money. You can think of them as suitcases filled with different types of securities, such as stocks and bonds. Buying even one share of the fund immediately invests you in all the individual securities the fund holds.

The primary benefit of mutual funds is instant portfolio diversification. Say you invest in a mutual fund that holds stocks of every company in the S&P 500. If one company in the S&P 500 goes bankrupt, your fund might lose some value, but you most likely won’t lose everything. But if your whole investment was in that one company’s stock, you’d lose all or most of your money.

How Mutual Funds Work

A mutual fund itself is actually a company that pools investors’ resources and invests it on their behalf. They create a fund of many different investment types, and manage it on behalf of the group of investors.

Mutual funds can be managed actively or passively. Passively managed funds attempt to track an index, such as the Russell 2000 (an index of 2,000 small-cap U.S. companies). In other words, if one company leaves the index and another one joins, the fund sells and buys those company’s stocks accordingly. The risk and return of these funds is very similar to the index.

Actively managed mutual funds attempt to beat the performance of an index. The idea is that with careful investment selection, they will get higher returns than the index.

Different Types of Mutual Funds

There are numerous types of mutual funds that investors can choose to invest in.

Breaking Down Various Mutual Fund Types

Mutual funds can invest in stocks, bonds, real estate, commodities, and more. There are tens of thousands of mutual funds that cover every investing strategy you can imagine. Those can include asset class funds, sector funds, or target date funds, among many others.

Asset Class Funds

Asset classes are groups of similar assets that share similar risks, such as stocks, bonds, cash, or real estate. Some funds specialize in a particular type of investment or asset class — for example, large cap growth stocks or high yield bonds. These mutual funds assume that you or your adviser will choose the strategic mix of funds that’s right for you.

Sector or Industry Funds

Some funds will attempt to represent all or most of the stocks in a particular sector or industry. What’s the difference? Sectors are broader than industries — for example, oil is an industry, but energy is a sector that also includes coal, gas, wind, and solar companies. The stocks in each industry or sector share similar characteristics and risks.

Target Date Funds

A target date fund will provide you with a mix of asset classes (for example, 20% bonds and 80% stocks). They assume you will terminate the fund some year in the future, usually when you retire, and they shift to less risky investments as the target year approaches.

Target-date funds are intended to be a generic, low-cost solution to retirement saving and. They can be a good choice for a 401(k) investment if you don’t have the time or expertise to pick funds.


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

The Financial Mechanics of Mutual Funds

As mentioned, mutual funds pool money from a group of investors and invest it for them in various securities. That seems simple enough — but figuring out how to price shares is a bit more involved.

The Pricing Puzzle: Net Asset Value Explained

Mutual funds are companies, and investors purchase shares of the company. Share prices of mutual funds are also called net asset value, or NAV, and NAV corresponds to the net value of all the fund’s assets, with liabilities subtracted. Then, the number is divided by the number of shares outstanding.

In effect, investors can calculate share prices using the NAV formula if they wish.

Fee Structures: Costs Associated with Mutual Fund Investing

There are also costs associated with mutual funds. All mutual funds have some expenses, but they can vary a lot from one fund to another. It’s important to understand them, because fund expenses can have a big impact on your returns over time.

Another problem with actively managed funds is that they typically cost you more because funds are paying people who make investment decisions, and they are making more trades, which have transaction costs. As such, you may want to look out for operating expenses or transaction fees.

You won’t get a bill, but your returns on the fund will be reduced by the fund’s expenses. Some brokerage firms also charge commission for buying mutual funds.

The Pros and Cons of Investing in Mutual Funds

Like all investments, mutual funds have their pros and cons that investors should consider.

Benefits of Diversification and Professional Management

The two biggest pros or advantages of mutual funds are likely the built-in diversification that they offer investors, and professional management. The diversification element allows many investors to take a “set it and forget it” approach to their portfolio management, and many may find confidence knowing that professional fund managers are steering the ship.

Considering the Risks: No Guarantees and Potential for High Costs

Cons include the fact that there’s no guarantee in terms of returns (there never are when investing!), and the costs associated with mutual funds. As noted, mutual funds may incur additional costs compared to other investment types, depending on the individual fund. That may turn some investors off.

Taxes and Cash Drag: The Other Side of Mutual Funds

Taxes are another potential con for mutual funds, as investors will need to pay capital gains taxes on mutual fund payouts throughout the year — and they won’t have much control over that, either. And cash drag (or performance drag), which refers to the difference between returns between two investments when one incorporates trading costs, can be another thing for investors to think about.

Mutual Fund Investments and You

How can you determine if mutual funds are right for your strategy or portfolio? It may require some consideration of your goals, time horizon, and risk tolerance.

Are Mutual Funds Right for Your Portfolio?

There’s no way to say definitively that a certain investment or investment type, like mutual funds, are “right” for any given investor. But in a general sense, mutual funds may be a good choice if you’re a new or young investor, and looking to add some out-of-the-box investments to your portfolio. Again, mutual funds are typically already diversified, to a degree, and are managed by professionals.

Can You Cash Out Anytime? Understanding Liquidity

Mutual funds are not as liquid as stocks or other investments, but they are fairly liquid. That’s to say that if you want to cash out or sell your mutual fund holdings, a prospective trade will only execute once per day — after the stock markets close at 4pm ET. Conversely, stocks can trade any time during market hours.

Mutual Funds Compared to ETFs

Mutual funds are, in many ways, similar to other types of investments, like ETFs.

Mutual Funds vs ETFs: A Comparative Analysis

Mutual funds have been around since the 18th century, but exchange-traded funds, or ETFs, are relatively new, having debuted in the early 1990s. Traditional (old-school) mutual funds are issued by the fund sponsor when you buy them and redeemed when you sell them.

They are priced once a day, after the market closes, at the value of all the underlying securities in the fund divided by the number of fund shares — again, their net asset value (NAV).

Exchange Traded Funds (ETFs) trade on stock exchanges throughout the day. You buy them from and sell them to another investor — just like a stock.

Since the assets in the fund are constantly changing value throughout the day, and the fund price is set by market supply and demand, it might trade a little higher or lower than its NAV at different points in the day, but ETFs generally track their NAV very closely. Both traditional funds and ETFs can be actively or passively managed.

ETFs have two advantages — liquidity and cost. Even though you may pay a commission for buying or selling them—just like a stock, they generally have lower expenses that more than make up for it.

Since they can be bought or sold whenever the market is open, you don’t have to wait until the end of the day to buy or sell. This liquidity can be a big advantage on days when the market is way up or way down.

Understanding Fund Classes and What They Mean for Your Investment

There are some mutual funds that offer classes of shares, or different types of shares (similar to some stocks). The different classes of shares tend to correlate to the types of fees or expenses associated with them. Investors may find Class A, Class B, and Class C shares on the market for certain funds.

Class A shares tend to charge fees up front and have lower ongoing expenses, which may be attractive to long-term investors. Class B shares may have high exit fees and expense ratios. Class C shares tend to have mid-level expense ratios and small exit fees, and are often popular with the typical investor.

Getting Started with Mutual Funds

If you think mutual fund investing is a good option for your strategy, getting started can be relatively simple.

Steps to Your First Mutual Fund Investment

The first thing to do if you’re looking to invest in mutual funds is to sit down and do some homework. As discussed, there are myriad mutual funds out there, and they’re all different. You’ll want to pay close attention to what each fund offers, the costs associated with it, and the risks, too.

If you’ve found a mutual fund that you think is a good fit for your portfolio, you’ll want to choose a brokerage or platform that will allow you to buy shares of a given fund, or otherwise have an account that you can trade with, such as a retirement account.

From there, it’s more or less about placing an order and executing the trade. And, after that, managing and rebalancing your portfolio every so often.

Working With Financial Advisors: Finding Guidance in Mutual Fund Investing

As with all investments, if you feel that mutual fund investing has thrown you for a loop or is over your head, you can and maybe should reach out to a financial professional for guidance. Advisors of various types should be able to help you figure out which funds may be a good fit, describe their fees and risks, and help you make a wise selection that will help put you on track to reaching your financial goals.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

The Takeaway

Mutual funds are companies that pool investors’ money, and then invest it in numerous types of securities on their behalf. Investors can purchase or invest in shares of mutual funds and add them to their portfolios. Mutual funds can be useful to new or beginner investors, as they offer built-in diversification, and active management.

They do have higher costs than other investments, though, which is something investors should consider. Further, there are thousands of mutual funds on the market, which may be overwhelming to some. If you’re interested in investing in mutual funds, it may be a good idea to speak with a financial professional for guidance.

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

SoFi Invest®