May
10
2022
What Is Vega in Options Trading?

Vega Options, Explained

By | Growing Wealth, invest, Investing | Comments Off on Vega Options, Explained

What Is Vega in Options Trading?

Vega is one of the Greeks — along with delta, theta, and gamma. And the Greeks, itself, is a set of indicators that quantitative analysts and traders use to measure the effect of various factors on prices of options contracts. Traders can use the Greeks to hedge against risks involved in trading options. Each indicator in the Greeks helps analysts to understand the level of risk, volatility, price direction, value over time, and interest rate of a particular options contract.

As a unit of measure, vega tries to assess, theoretically, the amount that a security’s price will change with every percentage point that its price fluctuates. So vega reflects how sensitive a contract is to changes in the price of its underlying security. When an underlying asset of an options contract has significant and frequent price changes, then it has high volatility, which also makes the contract more expensive.

How Vega Works

Vega changes over time as the price of the underlying asset changes and the contract moves closer to its expiration date. Because vega is always changing, investors tend to track it on an ongoing basis while they are invested in an options contract.

When options still have time before they expire, the vega is said to be positive. But when an options contract nears its expiration date, then vega decreases and becomes negative. This is because premiums are higher for future options than they are for options that are close to expiring. When an option’s vega is higher than the amount of the bid-ask spread, the option has what is known as a competitive spread. If vega is lower than the bid-ask spread, then the spread is not competitive.

Vega is a derivative of implied volatility.

Implied Volatility

The term, implied volatility is simply an estimate of where the price of an underlying security may be now, was in the past, or will be going forward. In pricing options, implied volatility is mostly used to predict future price fluctuations. Traders sometimes use a sigma symbol (𝞂) to represent implied volatility.

Traders use options pricing models to calculate implied volatility. These models try to estimate the speed and amount that an underlying security’s price changes — its volatility. As the volatility of the underlying asset shifts, the vega also changes. Pricing models can estimate volatility for present, past, and future market conditions. But, as the calculation is just a theoretical prediction, so the actual future volatility of the security may differ.

Characteristics of Vega

•   Vega relates to the extrinsic value of an option, not its intrinsic value.

•   Vega is always positive when an investor purchases calls or puts.

•   It Is negative when writing options.

•   Vega is higher when there is more time until the option expires.

•   It’s lower when the option is close to expiring.

•   When the option is at the money, vega is highest.

•   When the option is in- or out-of-the-money, vega decreases. In other words, vega is lower when the market price of the underlying security is farther from the option strike price.

•   When implied volatility increases, the option premium increases.

•   When implied volatility decreases, the option premium decreases.

•   The effect vega has on options trading is based on various factors that affect the option’s price.

•   When gamma is high, vega is generally also high.

•   Vega shows an investor the amount that an option should theoretically change for every percentage its underlying security’s volatility changes.

•   Vega can also be calculated for an entire portfolio of options to understand how it is influenced by implied volatility.

What Does Vega Show?

Vega shows the theoretical amount that an option’s price could change with every 1% change in implied volatility of the underlying asset. It can also be used to show the amount that an option’s price might change based on the volatility of the underlying security — that is, how often and how much the security’s price could change.

Traders generally omit the percentage symbol when referring to vega, or volatility. And some analysts, too, display it without a percentage symbol or decimal point. In that case, a volatility of 16% would be displayed as “vol at 16.”

Vega Options Example

Let’s say stock XYZ has a market price of $50 per share in February. There is a call option with a March expiration date with a price of $52.50. The option has a bid price of $1.50 and an ask price of $1.55.

The option’s vega is 0.25, and it has an implied volatility of 30%. Because vega is higher than the bid-ask spread, this is known as a competitive spread. A competitive spread does not mean the trade will be profitable or that it is automatically a good trade to enter into, but it is a positive sign.

The implied volatility of the underlying security increases to 31%. This changes the option’s bid price to $1.75 and changes the ask price to $1.80. This is calculated as

(1 x $0.25) + bid-ask spread

Conversely, if the implied volatility goes down 5%, the bid price would decrease to $0.25 and the ask price decreases to $0.30.

How Can Traders Use Vega in Real-Life?

Vega tends to be less popular with investors than the other Greeks (Delta, Theta, and Gamma) mostly because it can be difficult to understand. But vega has a significant effect on options prices, so it is a very useful analytic tool.

Benefits of Vega

If investors take the time to understand implied volatility and its effect on options prices, they’ll find that vega can be a useful tool for making predictions about future options price movements. It also helps with understanding the risks of trading different types of options contracts. Looking at the implied volatility of options can even guide investors as they choose which options to buy and sell. Some traders even utilize changes in volatility as part of their investing plan — with strategies like the long straddle and short straddle. Vega plays a key role in using these options trading strategies.

Vega Neutral: Another Strategy

For traders who want to limit their risk in options trading, the vega neutral strategy helps them hedge against the implied volatility in the market of the underlying security. Traders use the vega neutral strategy by taking both long and short option positions on a number of options. By doing this, they create a balanced portfolio that has an average vega of around zero. The zero value means that their options portfolio will not be affected by changes in the implied volatility of the underlying security, thereby reducing the portfolio’s level of risk.

Start Trading Stocks With SoFi Invest

Vega, one of the Greeks, along with the concept of implied volatility relate to advanced trading techniques. Trading options is usually appropriate for experienced traders.

Options are popular with investors who want exposure to assets with lower overhead capital requirements. If you’re looking to begin trading options, an options trading platform like SoFi’s can help. Its intuitive design makes it user-friendly. Investors can trade options from the mobile app or web platform and access educational resources about options if needed.

Trade options with low fees through SoFi.

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

Disclaimer: 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.
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.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
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.

Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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May
05
2022
What Is Gamma in Options Trading?

What Is Gamma in Options Trading?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Gamma in Options Trading?

Gamma is one of the indicators that comprise the Greeks, a model for pricing options contracts and discerning their risks. Traders, analysts, portfolio managers, and other investment professionals use gamma — along with delta, theta, and vega — to quantify various factors in options markets. Gamma expresses the rate of change of an option’s delta, based on a $1 price movement — or, one-point movement — of the option’s underlying security. You might think of delta as an option’s speed, and gamma as its acceleration rate.

Understanding Gamma

In the Greeks, gamma is an important metric for pricing options contracts. Gamma can show traders how much the delta — another Greeks metric — will change concurrent with price changes in an option’s underlying security. An option’s delta is relevant for short amounts of time only. An option’s gamma offers a clearer picture of where the contract is headed going forward.

Expressed as a percentage, gamma measures an option’s, or another derivative’s, value relative to its underlying asset. As an options contract approaches its expiration date, the gamma of an at-the-money option increases; but the gamma of an in-the-money or out-of-the-money option decreases. Gamma can help traders gauge the rate of an option’s price movement relative to how close the underlying security’s price is to the option’s strike price. Put another way, when the price of the underlying asset is closest to the option’s strike price, then gamma is at its highest rate. The further out-of-the-money a security goes, the lower the gamma rate is — sometimes nearly to zero. As gamma decreases, alpha also decreases. Gamma is always changing, in concert with the price changes of an option’s underlying asset.

Gamma is the first derivative of delta and the second derivative of an option contract’s price. Some professional investors want even more precise calculations of options price movements, so they use a third-order derivative called “color” to measure gamma’s rate of change.

Recommended: What Is Options Trading? A Guide on How to Trade Options

Calculating Gamma

Calculating gamma precisely is complex and requires sophisticated spreadsheets or financial software. Analysts usually calculate gamma and the other Greeks in real-time and publish the results to traders at brokerage firms. Below is an example of how to calculate the approximate value of gamma. The equation is the difference in delta divided by the change in the underlying security’s price.

Gamma Formula

Gamma = Difference in delta / change in underlying security’s price

Gamma = (D1 – D2) / (P1 – P2)

Where D1 is the first delta, D2 is the second delta, P1 is the first price of the underlying security, and P2 is the second price of the security.

Example of Gamma

For example, suppose there is an options contract with a delta of 0.5 and a gamma of 0.1, or 10%. The underlying stock associated with the option is currently trading at $10 per share. If the stock increases to $11, the delta would increase to 0.6; and if the stock price decreases to $9, then the delta would decrease to 0.4. In other words, for every 10% that the stock moves up or down, the delta changes by 10%. If the delta is 0.5 and the stock price increases by $1, the option’s value would rise by $0.50. As the value of delta changes, analysts use the difference between two delta values to calculate the value of gamma.

Using Gamma in Options Trading

Gamma is a key risk-management tool. By figuring out the stability of delta, traders can use gamma to gauge the risk in trading options. Gamma can help investors discern what will happen to the value of delta as the underlying security’s price changes. Based on gamma’s calculated value, investors can see any potential risk involved in their current options holdings; then decide how they want to invest in options contracts. If gamma is positive when the underlying security increases in value in a long call, then delta will become more positive. When the security decreases in value, then delta will become less positive. In a long put, delta will decrease if the security decreases in value; and delta will increase if the security increases in value.

Traders use a delta hedge strategy to maintain a hedge over a wider security price range with a lower gamma.

Gamma as an Options Hedging Strategy

Hedging strategies can help professional investors reduce the risk of an asset’s adverse price movements. Gamma can help traders discern which securities to purchase by revealing the options with the most potential to offset loses in their existing portfolio. In gamma hedging, the goal is to keep delta constant throughout an investor’s entire portfolio of stocks and options. If any of their assets are at risk of making strong negative moves, investors could purchase other options to hedge against that risk, especially when close to options’ expiration dates.

In gamma hedging, investors generally purchase options that oppose the ones they already own in order to create a balanced portfolio. For example, if an investor already holds many call options, they might purchase some put options to hedge against the risk of price drops. Or, an investor might sell some call options at a strike price that’s different from that of their existing options.

Benefits of Gamma for Long Options

Gamma in options Greeks is popular among investors in long options. All long options, both calls and puts, have a positive gamma that is usually between 0 and 1, and all short options have a negative gamma between 0 and -1. A higher gamma value shows that delta might change significantly even if the underlying security only changes a small amount. Higher gamma means the option is sensitive to movements in the underlying security’s price. For every $1 that the underlying asset increases, the gamma rate increases profits. With every $1 that the asset increases, the investor’s returns increase more efficiently.

When delta is 0 at the contract’s expiration, gamma is also 0 because the option is worthless if the current market price is better than the option’s strike price. If delta is 1 or -1 then the strike price is better than the market price, so the option is valuable.

Risks of Gamma for Short Options

While gamma can potentially benefit long options buyers, for short options sellers it can potentially pose risks. The gamma rate can accelerate losses for options sellers just as it accelerates gains for options buyers.

Another risk of gamma for option sellers is expiration risk. The closer an option gets to its expiration date, the less probable it is that the underlying asset will reach a strike price that is very much in-the-money — or out-of-the-money for option sellers. This probability curve becomes narrower, as does the delta distribution. The more gamma increases, the more theta — the cost of owning an options contract over time — decreases. Theta is a Greek that shows an option’s predicted rate of decline in value over time, until its expiration date.

For options buyers, this can mean greater returns, but for options sellers it can mean greater losses. The closer the expiration date, the more gamma increases for at-the-money options; and the more gamma decreases for options that are in- or out-of-the-money.

How Does Volatility Affect Gamma?

When a security has low volatility, options that are at-the-money have a high gamma and in- or out-of-the-money options have a very low gamma. This is because the options with low volatility have a low time value; their time value increases significantly when the underlying stock price gets closer to the strike price.

If a security has high volatility, gamma is generally similar and stable for all options, because the time value of the options is high. If the options get closer to the strike price, their time value doesn’t change very much, so gamma is low and stable.

Start Investing With SoFi

Gamma and the Greeks indicators are useful tools for understanding derivatives and creating options trading strategies. However, trading in derivatives, like options, is primarily for advanced or professional investors.

If you’re ready to invest, an options trading platform like SoFi’s is worth exploring. This user-friendly platform features an intuitive design, as well as the ability to trade options from either the mobile app or web platform. You can also access a library of educational resources to keep learning about options.

Trade options with low fees through SoFi.

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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.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
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.


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

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.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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May
02
2022
How to Open a Bank Account For a Minor

Guide to Opening a Bank Account for a Minor

By | Budgeting & Goals, Family Finances, money | Comments Off on Guide to Opening a Bank Account for a Minor

Is it time for a young person in your life to start understanding how banking works? Do they get an allowance? Are they raking in some cash for odd jobs? Or perhaps they are just plain curious about how money works, or you’re eager to get them in the habit of saving?

Whatever the trigger, there are plenty of benefits a kid can reap from learning how to bank before they leave the nest. Gaining financial literacy and responsibility is a very good thing. Fortunately, an array of banks and credit unions offer minor accounts designed for exactly this purpose.

Because most state laws and corporate policies don’t enter into contracts with minors — and opening a bank account is a kind of contract — most banks require a child to have an adult as a joint account owner.

That’s where you come in. It’s tempting to simply open an account for your young one at the place you do your banking. But it can also be worth comparing accounts to see which institution offers the best fees, rates, and other features specifically for minor accounts.

To help with your search, here are answers to several frequently asked questions regarding opening a bank account for a minor.

What Do I Need to Open a Bank Account for My Child?

As you shop around for an account, you’ll see that each financial institution has its own rules regarding documentation needed to open a bank account for a minor. In most cases, whether you are opening an account online or in person, you will need the following, in addition to a sum of money (often between zero and $25) to open the account:

Driver’s License

Government-issued photo identification is a gold standard for proving you are who you say you are. If you don’t have a driver’s license, a passport will likely be acceptable.

Social Security Card

You may or may not need the actual card in front of you; just knowing your Social Security number should do the trick.

Child’s Social Security Card

Many people apply for their child’s Social Security number at birth; it’s an important thing to have for obtaining medical coverage or government services. Have those nine digits at the ready.

Child’s Birth Certificate

The bank will want to document that your child is who you say they are. That birth certificate is an important way to do just that.

Proof of Address

A typical way to authenticate your address is with a recent utility bill. If you don’t have a hard copy of your bill lying around, you should be able to easily download a bill from your provider’s online portal.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

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Types of Bank Accounts for Children

As with standard banking, checking and savings are the most common types of accounts for minors. There are, however, some special aspects of both types of accounts when the child is under age 18. These accounts can help teach good money management and support your family savings efforts. Let’s take a closer look at how they work.

Checking Accounts for Children

Minor checking accounts are common offerings at banks. Most accounts are designed for kids ages 13 to 17; in other words, kids who are a little older and ready to learn the budgeting skills needed to balance a checking account. Some teen checking accounts offer interest, and the best of the bunch offer very low or no fees. This is important since teens are unlikely to carry large balances in their checking or savings accounts. You don’t want fees eroding or even erasing their money.

Savings Accounts for Children

Lots of banks offer special savings accounts for kids. Age restrictions vary, but these may be designed for younger children (the 12-and-under set). There are even savings accounts designed for babies. Check at a couple of banks you are considering for this kind of account and compare offerings.

Many of these accounts have competitive interest rates Some, however, require a minimum deposit to earn those rates. In addition to looking into those details, also see what kind of parental controls are available. These typically allow you to monitor the account and control access. This can be a good thing to have in place in case your child decides to go splurge on videogames or the like.

Recommended: How Does a Savings Account Work?

What to Look for in Bank Accounts for Kids

As you look for the best checking and savings accounts for kids, here are a few things to keep in mind.

Interest. As mentioned before, you may want to compare interest rates on a number of children’s savings accounts. Some are quite competitive but may come with other requirements.

Fees. You want a minor banking account that doesn’t charge the same types of fees you find on an adult account. Many banks waive an application fee and the monthly maintenance fee. But debit card and ATM fees may still apply. Because an adult is the joint account owner, sometimes overdraft and other fees are eased. Be sure to check specific fees on the minor account carefully.

Balance Requirements. Sure, you’ll start the account with an initial deposit, but after that, how much do you need to keep at the bank? Kids’ accounts may require a minimum balance to avoid monthly fees or earn the best interest rates.

Aging Out of the Account. Many banks convert kids’ accounts to standard accounts once the child turns 18. This often takes both adults and the account holder by surprise. The conversion can mean adult account fees, minimum balance requirements, overdraft fees, and changes in withdrawal and deposit protocols. With savings accounts, it may mean a change in interest rates and balance requirements.

On the other hand, some banks allow children to keep their minor account well into their twenties. And there may be special considerations for kids who turn 18 and are students. Be sure to understand what your child’s account allows.

Apps and Financial Literacy Features. Many minor accounts offer apps that help you monitor the account and your child’s activities. Some even go so far as to allow you to assign chores and make the decided-upon payments. In addition, you may be able to get a preloaded debit card for your child, which can help teach budgeting in a very hands-on way. When all the money’s gone, your child will likely understand the value of careful tracking expenses.

Notifications. Many banks allow you to sign up for automatic notifications whenever a transaction has taken place on the minor’s account. This not only lets you know that your child may be overspending but you may also be alerted to any suspicious account activity.

Tax Implications

Sometimes, a minor’s account has a small amount of money that slowly accrues as your child deposits birthday money and some summer-job earnings. Other times, a budding entrepreneur or devoted saver might have a higher balance. In either case, interest income on your child’s account may be subject to taxes, specifically what’s known as the “kiddie tax,” which applies to children under 19 and full-time college students under the age of 24. Any unearned income over $2,100 is taxed at the rates that apply to trusts and estates. This is to avoid parents putting large amounts of money in their children’s name and likely lower tax rate.

In addition, funds in your child’s bank accounts can affect their financial aid awards. Because money in a child’s name is weighted more heavily in financial aid formulas than it is for parents’ accounts, you may find high bank account balances work against your student when it comes time to apply for financial aid.

Now that you understand the ins and outs of opening an account for a minor, you can take the next step and figure out the best place for your child to start banking. Congrats on taking this step to foster a healthy financial life for your child.

Open a Bank Account With SoFi

Currently SoFi Bank does not offer accounts to minors. But while you’re researching minor bank accounts, why not take a fresh look at your own banking needs?

If you want an account where you can earn interest, spend, and save all in one place, check out SoFi Checking and Savings. Sign up for direct deposit, and you’ll earn a competitive APY. Plus, you won’t pay account fees and you’ll have access to 55,000+ fee-free ATMs worldwide.

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.

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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.

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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Can You Roll Your Student Loans Into Your Mortgage?

By | Debt Payoff, Home Ownership, Student Loans, student_loan | No Comments

It’s possible to roll student loans into a mortgage using a cash-out refinance. In order to to do this, you’ll already need to have enough equity in your home. While this could potentially help you secure a lower interest rate, it’s not the right choice for everyone. Read on for more information on situations when it may make sense to roll your student loan into a mortgage and other strategies to pay off student loan debt.

Paying Your Student Loans

Paying off one loan with another is a standard form of debt reshuffling or consolidation. When it comes to student loans, though, your options may seem limited. It is, however, possible to roll student loan debt into a new mortgage through a cash-out refinance loan — as long as you have sufficient equity in your home.

But just because you can, it doesn’t mean you should. Here are some tips on how to consolidate student loans into a mortgage — and whether it may be the right move for you.

Rolling Student Loans Into a Mortgage

A cash-out refinance is a type of mortgage loan that enables you to turn a portion of your home’s equity into cash. Simply refinance your existing mortgage for more than what you currently owe into a new loan with new terms and keep the difference.

Once you have the cash in hand, and as long as there are no loan conditions to pay off specific debt with the cashout, you can do whatever you want with it, including paying off your student loans.

You may need to do the legwork of determining how much you need to add to the new proposed loan and may be responsible for ordering the final payoff. If it is not a condition of the new mortgage loan, the lender would normally not request escrow to order the payoff and pay the loan in full at loan closing. If you would like escrow to perform this service for you, just let them know.

Once you’ve completed the loan consolidation process, you may still have the same amount of debt as you did before (possibly more if you added any applicable closing costs to your new loan). You’ll just be paying it all in one monthly payment, based on your new mortgage terms.

If you want to refinance student loans into a mortgage, it could be beneficial in some situations. However, it’s important to understand the benefits and drawbacks of doing so and also to compare the benefits of this option with other alternatives.

One such drawback is that you may no longer be eligible for federal student loan benefits , such as the ability to pursue federal student loan forgiveness or federal student loan repayment plans. This includes income-driven repayment plans, where your monthly student loan repayment changes according to your income.

Pros and Cons of Rolling Student Loans into a Mortgage

Depending on your debt situation and your credit profile, consolidating student loans and your mortgage into new terms could be a smart idea or a terrible one. Here are some of the pros and cons to consider.

Pros of Rolling Student Loans into Mortgage

•   It could lower your interest rate: If you pay a higher interest rate on your student loans and current mortgage vs. a new Cash-Out Refi, consolidating may help reduce how much you pay in overall interest.

•   It could lower your monthly payment: If you qualify for a lower interest rate and choose a longer repayment period with the new loan, it may significantly lower the total amount you pay each month for your mortgage and student loans combined. Keep in mind that extending the life of the loan may mean you pay more in interest in the long-term.

•   It simplifies your finances: Having a single monthly payment might make your finances easier to manage. The fewer monthly payments you have to keep track of, the better. If you have multiple student loans, rolling them into your mortgage can make your life easier.

Cons of Rolling Student Loans into Mortgage

•   You could end up paying more interest over time: Stretching a 10-year student loan repayment term to up to 30 years could end up costing you more in interest, even if the interest rate is lower. Also, if you have paid down a 30 year mortgage for a few years and originate a new 30 year mortgage, you will be extending your existing loan term and may be paying additional interest over the life of the loan.

•   You may not be eligible: To qualify for a cash-out refinance loan, you typically need to have at least 20% equity left over after the new loan amount on the cash-out refinance. Even if you do have more than 20% equity right now, the difference might not be enough to pay your student loan in full.

•   You may pay closing costs: Depending upon the rate and term you choose, you may have applicable closing costs. FannieMae offers a program for student loan cash-out refinance loans. Consider getting a quote for this program and compare the rate and fees of this program to a standard cash-out refi.

•   You may be reducing the amount of available equity in your home: Taking cash out of your home can reduce the amount of available equity in your home. Market value fluctuations can also impact the amount of available equity.

3 Alternatives to Rolling Student Loans into a Mortgage

Before you seriously consider consolidating student loans into a mortgage, it’s important to know what other options you may have for paying down your debt faster.

1. Refinancing Your Student Loans

Whether you have federal or private student loans, you can refinance your student loans with a private lender like SoFi. Depending on your credit, income, and financial profile, you may qualify for a lower interest rate, monthly payment, or both.

You can also gain some flexibility by choosing a longer or shorter repayment term. Keep in mind that refinancing federal student loans means they’ll no longer be eligible for any federal programs or borrower protections, such as income-driven repayment plans.

2. Seeking Repayment Assistance

Employers are increasingly offering student loan repayment assistance as an employee benefit. Well-known companies that provide this repayment benefit include Aetna, Fidelity, PricewaterhouseCoopers, SoFi, and more. If your current employer doesn’t offer student loan repayment assistance, consider finding a job that does when you are next seeking employment.

3. Apply for Student Loan Forgiveness or Grants

Depending on your career path, you may qualify for student loan forgiveness or grant programs. Examples of these programs include (but are not limited to):

•   Health care

•   Veterinary medicine

•   Law

•   Military

•   STEM

If you’re working in one of these fields or a similar one, check to see if there are forgiveness or grant programs for which you may qualify. As previously mentioned, a cash-out refi may make you ineligible to participate in these programs. Check on any possible loss of benefits before considering a refinance of these loans.

Deciding If Rolling Student Loans into a Mortgage Is Right for You

Using a cash-out refinance to consolidate student loans and a mortgage into one affordable monthly payment sounds appealing, especially if you can get a lower interest rate than what you’re currently paying. But it’s crucial to consider all of the costs involved before you make a decision.

A lower interest rate, for instance, doesn’t necessarily mean you’ll pay less interest over the life of the loan. Work with a mortgage loan officer or run an amortization schedule in order to do the math.

Also, keep closing costs in mind. Closing costs can vary depending upon the loan scenario and is tied to factors such as the interest rate you choose, your credit score, loan type, property type, and more.

And paying closing costs is not a given. For instance, you can choose to take a higher interest rate (if it is still lower than what you currently have) and use the lender rebate money built into that higher rate to cover some or all of your applicable closing costs. When the time comes to lock in your rate, speak with your chosen lender about various loan programs and the estimated closing costs tied to each rate and term option.

Finally, take a look at some of the other options out there and determine whether you could potentially save more money in interest with them. The more time you spend researching, the better your chances of settling on the option that is most affordable overall.

Can You Buy a House With Student Loans?

While existing debt can impact whether you’re approved for a loan, or the interest rate and loan terms if you are approved, it’s still possible to buy a house with student loan debt. When you apply for a mortgage, the lender will review your complete financial picture including your debt obligations, which might include student loans, credit card debt, or a car loan.

Debt-to-income ratio is one important consideration for lenders. This is a measurement of how much debt one has in comparison to how much money you earn and lenders rely on this metric to inform whether or not you’d be able to make the monthly payments on a new loan, considering your existing debt. Generally speaking, lenders are unlikely to approve anyone for a mortgage with a debt-to-income ratio higher than 43%, though lenders may be more inclined to lend to someone with a debt-to-income ratio lower at or less than 36%.

Beyond debt-to-income ratio, lenders will also evaluate factors such as the borrower’s credit score.

Before applying, do some number crunching to see what a mortgage might cost and how it will impact your overall debt-to-income ratio. This might be helpful in understanding the mortgage rates you may be eligible for.

In addition to traditional home loans there are programs available for first-time home buyers that might make buying a home with student loan debt more achievable.

Refinancing Student Loans With SoFi

If you are interested in consolidating your student loan debt at a lower interest rate but don’t want to roll them into your mortgage, you may instead want to consider student loan refinancing. With SoFi student loan refinancing, you can refinance your private or federal loans (or both!) with no application fees, origination fees, or prepayment penalties. And you still get the benefit of consolidating your loans to one payment, with a new (and potentially better) interest rate and loan terms. Keep in mind that refinancing any federal loans will eliminate them from federal programs and borrower protections such as income-driven repayment plans or deferment options.

The Takeaway

When paying down student loan debt faster, there’s no one-size-fits-all solution. The more information you gather about your options, the easier it will be to eliminate your debt as quickly as possible.

If you’re interested in refinancing your student loans, consider SoFi. Student loan refinancing at SoFi has no fees and as a SoFi member, borrowers qualify for perks such as career coaching, community events, and more.

Learn more about SoFi student loan refinancing.

FAQ

Is it a good idea to roll your student loans into a mortgage?

Evaluate all loan details carefully before rolling your student loans into a mortgage. Factors such as closing costs, loan term, any additional fees, and interest rate can all influence how much it will cost to borrow money over the life of a loan. In some cases, it may be possible to qualify for a lower interest rate when borrowing a mortgage. In other cases, extending the repayment of your student loans over a 30-year period with your mortgage may make it more expensive. If you have any questions on your personal financial situation, consider speaking with a qualified financial professional or mortgage loan officer who can offer a personalized assessment.

Can student loans be included in a mortgage?

Student loans can be included in a mortgage if you have enough equity in your home. Rolling student loans into a mortgage generally requires the borrower to take out a cash-out refinance loan, which allows you to turn a portion of your home’s equity into cash. Once you have the cashout in hand, you can pay off your existing student loans.

Terms may vary by lender. There are certain programs, such as Fannie Mae’s Student Loan CashOut Refi that specialize in this type of borrowing.

How much of student loans is counted for a mortgage?

Student loans are evaluated as a part of your overall debt-to-income ratio. In general, lenders avoid lending to borrowers with a debt-to-income ratio greater than 43%.

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 Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


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.

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.

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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14
2022
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7 Tips to Prepare for College Decision Day

By | Going to College, Student Loans, student_loan | Comments Off on 7 Tips to Prepare for College Decision Day

After four years of hard work in high school, the college acceptance letters begin to roll in. If a student is lucky enough to receive multiple acceptance offers from colleges, then they have some big decisions to make.

Chances are, they will make that decision by May 1 — also known as College Decision Day. For most colleges and universities across the United States, May 1 is the deadline for prospective students to confirm their admission plans. This is when many students submit a nonrefundable deposit to formalize their choice and new commitment.

Before the big decision day arrives, students and their families will generally want to prepare together. This is a major decision with key factors to consider. Keep reading for seven tips that could help students prepare for college decision day.

1. Get Organized and Know the Deadlines

The college application and acceptance process can be daunting. If a student has multiple offers to choose from, they may find they have tons of information to review and certain deadlines to meet.

Here are some deadlines you can ingest and paperwork you may organize as College Decision Day approaches:

Deadlines

•   Acceptance deadline (not all schools play by the May 1 rule)

•   Deadline for FAFSA®, the Free Application for Federal Student Aid — a key step in receiving financial aid (each college may have its own FAFSA deadline)

•   First-year housing deadline (this varies by school)

Paperwork

•   Acceptance letter

•   Financial aid offers

•   Copies of forms and documents you submit to a college

Keeping a separate folder, either physical or digital, for each school a student has been accepted to can be a helpful way to stay on top of any important paperwork. Marking key dates on the calendar as soon as the applicant comes across them can also aid in relieving unnecessary confusion when preparing for college.

2. Compare Financial Aid Offers

It’s no secret that college can be quite expensive. Before officially deciding which college to attend, it’s important to compare any financial aid offers.

Schools may have different policies and opportunities regarding financial assistance, which can include scholarships and grants. Comparing financial aid packages can help you see which school is most affordable for your budget. Money may not be the deciding factor for a student, but many may take the cost of attendance into consideration.

Once accepted to a college, the student can generally expect to receive a financial aid award letter that outlines what grants, scholarships, loans, and work-study options will be available to them. This can help families calculate the cost of attendance as well as help them understand what their financing options are.

This letter will only account for the first year of enrollment, so it can be worthwhile to request information from each school about how much tuition and fee prices have risen over the past few years.

3. Reserving Spots

To reserve a student’s spot at the college they’ve chosen to accept, they will generally need to pay an enrollment deposit fee. This fee is typically nonrefundable and guarantees the student has a spot at the school. The fee can vary in price from $100 to $1,000, depending on the school. Once school begins, this deposit is applied to the tuition bill or costs relating to housing, orientation, or school fees.

Students who are unable to afford the enrollment deposit may apply for a waiver. You can complete a form from the National Association for College Admission Counseling (NACAC) and submit it to the college where you plan to enroll. The college will decide whether to accept or decline the fee waiver form.

Students who are struggling to make a decision about which college to attend may be tempted to put down multiple deposits to buy themselves some extra time to make a decision. This practice is referred to as “double depositing” and is generally frowned upon as it can negatively impact other applicants, particularly those on a waitlist hoping to enroll.

4. Mull Over the Waitlist

Making a decision about which college to attend can be tricky, especially if the student has been accepted to multiple schools that they are interested in attending. This decision can be even more challenging to make if a student is waiting to hear back from a dream college or has been waitlisted at one of their top picks.

Depending on the applicant and the school, getting off the waitlist and into the school can be competitive. Even if a student makes it off the waitlist, that school may not be worth waiting for.

Students who are accepted after being waitlisted may find that they receive less financial assistance in the form of grants or financial aid by the time they are admitted, as being waitlisted can put them to the back of the line for financial assistance.

Being waitlisted by a school you wish to attend can be disheartening, especially if you remain on the waiting list when College Decision Day arrives. In that circumstance you might consider another institution that may welcome you with open arms.

5. When Decision Day Arrives

Ideally, making a final decision about which college to attend can happen before the national decision day. Waiting until the last minute offers very little wiggle room if something goes wrong with the acceptance process (say a computer glitch or busy phone lines).

That being said, if a student has not accepted their first choice college by May 1 or the specific acceptance dates of each college they received offers from, that should be their top priority. If they have already accepted a college offer, May 1 is a good day to double- and triple-check that they are officially enrolled. Better safe than sorry!

Next, rejecting the colleges the student won’t be accepting is another step to take. By not accepting the offer, the student will lose their spot, but the sooner they reject an offer, the sooner the college may be able to offer their spot to another student on the waitlist.

6. If a Student Misses the Deadline

Of course, missing the college decision deadline is not ideal and in many scenarios, missing this deadline can eliminate the student’s option of attending the school they are hoping to accept.

If a student misses the deadline, all hope is not lost. Some schools struggle to hit their enrollment targets by May 1. Plus, many schools lose students during the summer due to “summer melt.” Summer melt occurs when an accepted college student does not show up in the fall. Because of this, some schools may have a bit of secret wiggle room in their acceptance policy.

Students who missed the acceptance deadline may want to contact the college’s admissions office as soon as possible to explain their particular situation, especially if there are unique circumstances that led them to missing the deadline. Start by calling the admissions office and follow up on the conversation with an email so that there is an official correspondence that can be tracked. Make sure to be respectful during this process as this is a big favor to ask. Trying won’t cause any harm and this last ditch effort may just pay off.

While most schools have a May 1 acceptance deadline, some schools are on different schedules. This is why it’s important for students to double-check the deadlines for any schools they’ve been accepted to in case one varies. No one wants their dream school to slip through their fingers because they mixed up a deadline.

7. Financing a College Education

If paying for college is a concern, which it is for many families, there are options for easing the burden of paying for a pricey college education.

Once students have accepted a college offer and reviewed their financial aid package, they generally have a firm idea of how much they will need to borrow to fund their education. This is where student loans can come in handy. There are two types of student loans available: federal and private.

Federal Student Loans

The U.S. Department of Education provides federal student loans under its Direct Loan program. This means federal student loans have terms and conditions that are legally set by the federal government. Private lenders do not have to offer the same terms, such as fixed interest rates and income-driven replacement plans, that students can get from federal student loans.

Private Student Loans

Banks, credit unions, online lenders, and select state-based or state-affiliated organizations may offer private student loans. Private lenders set the terms and conditions of these loans, which are generally based on borrower criteria like credit history. Typically private loans are more expensive than federal loans.

The Takeaway

Higher education can prepare students for professional work, but deciding which college to attend is not always a simple or easy choice. Selecting the right school for you may involve several considerations, including the cost of tuition and other expenses associated with college life.

If you need help financing your college experience, SoFi offers private student loans with an entirely digital application process and no fees whatsoever. Potential borrowers can choose between a variable or fixed interest rate and have the option to add a cosigner to the loan.

Learn more about SoFi’s flexible repayment plans and application process for private student loans.

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.

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.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. SoFi Bank, N.A. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

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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