What does EBITDA Stand For?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Here’s a quick breakdown of each letter of the acronym:

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Q: Why is EBITDA Important?

By using the EBITDA formula, investors can quickly compare several companies they might be interested in investing in. EBITDA is a tool used by many financial advisors to help their clients make investment decisions and to build portfolios. It’s also useful for business owners to calculate their EBITDA each year to see how their company is performing.

Aug

2023

What Is the Ebitda Formula?

By AJ Smith | Growing Wealth, Investing, Terminology | Comments Off

EBITDA is an acronym that stands for earnings before interest, taxes, depreciation, and amortization. The EBITDA formula is a common way for companies to assess their performance. By looking at earnings without deducting taxes, interest, or other expenses, it’s easier to assess business results and compare them to other companies in the same industry.

The EBITDA formula can also be useful for investors. When investing in the stock market, it’s important to research companies before buying shares of their stock, and EBITDA is a basic measure of profitability that can help investors gauge an organization’s performance.

💡 Recommended: NOPAT vs EBITDA

What Is EBITDA, and How Is EBITDA calculated?

The EBITDA formula is a way of considering a company’s net income — without deducting costs like interest, taxes, depreciation, and amortization. The idea is to create a more apples-to-apples view of how different companies’ perform. Two similar companies in the same industry could have very different tax rates or different capital structures (which can impact debt, and therefore interest paid), making it hard to compare one to the other.

By not deducting certain expenses that aren’t related to performance, EBITDA helps level the playing field and help investors evaluate companies.

EBITDA is also relatively easy to calculate. The information can be found on a company’s balance sheet and income statement. Here’s a quick breakdown of each letter of the acronym, and why it matters in the EBITDA formula:

Earnings

Earnings are a company’s net income over a specific period of time like a fiscal year or a quarter. This number can be found on the company’s income statement; it’s essentially the bottom line, after subtracting all expenses from total revenue.

Interest

This refers to any interest that the company pays on loans and debts. In some cases interest might include interest income, in which case you’d use the total interest amount (interest income – interest paid). Interest is added back to total earnings in the EBITDA formula because the amount of interest paid depends on the types of loans and funding a company has. This number can muddy the waters, when trying to compare two companies that might have very different financing situations.

Taxes

Federal, state, and local taxes are also added back because tax rates depend on where a company is based geographically, and where they conduct business. Thus, taxes aren’t something that a company has much control over, so they aren’t an indicator of performance.

Depreciation & Amortization

Depreciation calculates the decreasing value of tangible physical assets or capital expenditures over time (e.g., equipment, vehicles, buildings, etc.). Amortization is a way to account for the expenses of non-tangible assets like intellectual property, like patents and copyrights.

Depreciation and amortization are added back to earnings because they are non-cash expenses. As such, they don’t necessarily reflect on a company’s overall performance or profitability.

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EBITDA Formula and Calculation

EBITDA can be calculated simply by adding a company’s interest, taxes, depreciation, and amortization to net income. Another method is to add a company’s operating income — or Earnings Before Interest and Taxes (EBIT) to its non-cash expenses of depreciation and amortization.

Earnings, or net income, can be calculated as follows:

Net income = Revenue – Cost of Goods Sold – Expenses

How to calculate EBITDA

EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization

EBITDA = Operating income (EBIT) + Depreciation & Amortization

For example, if a company has $4,500,000 in revenue and $500,000 in expenses, their operating income (EBIT) is $4,000,000.

If the company’s assets have depreciated by $100,000 and they have an amortization amount of $75,000, the calculation would be as follows:

EBITDA = $4,000,000 (EBIT) + $100,000 (D) + $75,000 (A)

EBITDA = $4,175,000

It’s possible for EBITDA to be negative if a company has significant losses within a particular quarter or year.

A more specific EBITDA formula is LTM EBITDA, or Last Twelve Months EBITDA, also called Trailing Twelve Months EBITDA (TTM). This calculation finds EBITDA for only the past year.

💡 Recommended: Comparing Operating Income vs EBITDA

How Does EBITDA Differ From Other Measurements of Income?

There are a number of different ways to view an organization’s income, each with their pros and cons. Depending on which lens you use, or which formula, one metric can provide insights into a company’s performance that another won’t. Here are a few common measurements of company income:

• Cash Flow is an analysis of the amount of money coming into a business versus the amount of money going out. Because of timing issues with sales, you can be profitable without being cash flow positive and vice versa.

• EBIT is also known as operating income, as discussed above. EBIT adds back the expenses related to interest and taxes, but keeps deductions for depreciation and amortization to give a clearer picture of a company’s earnings inclusive of actual operating costs.

• EBT is another variation on EBIT. It allows for interest expenses, but eliminates the impact of taxes — since a company’s tax burden has nothing to do with its performance.

• Net Income appears at the bottom of an income statement, after subtracting all business expenses (including interest, taxes, depreciation, and amortization) from total revenue.

• Revenue is also called gross income. It specifically refers to the money a company earns from sales. As such, it’s really only a window into one aspect of the business’s performance.

Understanding company performance can be a complex endeavor, and it’s best to use a combination of metrics that are most meaningful for that company or industry.

Why Is EBITDA Important?

The EBITDA formula is useful because it provides a view of company profitability, without the impact of capital expenditures and financing. By using the EBITDA formula, analysts can compare companies within an industry and investors can quickly use a technical analysis to evaluate companies they might want to invest in.

In that way, EBITDA can also be a tool used by financial advisors to help their clients make investment decisions.

It’s also useful for business owners to calculate their EBITDA each year to see how their company is performing. This is especially important if they are looking to take out a loan or seek investment. Business owners can use the EBITDA formula to gain insight into operating performance, how their company stands in relation to others in the same industry, and the company’s ability to meet its obligations and grow.

What Makes a Good EBITDA?

EBITDA is a measure of a company’s performance, so higher EBITDA is better than lower EBITDA when comparing two or more organizations in the same sector. This is important, because companies that vary in size or operate in different sectors can, of course, also vary widely in their financial performance. So one way to determine whether a company has “good” EBIDTA is to compare it to others of a similar size in the same industry.

Here are two other ways to gauge whether a company’s EBIDTA is good or not.

The EBITDA Coverage Ratio

To add more helpful information to the EBITDA calculation, the EBITDA Coverage Ratio compares EBITDA to debt and lease payments.

The EBITDA coverage ratio calculates a company’s ability to pay off lease payments, debts, and other liabilities.

The calculation for the EBITDA coverage ratio is:

EBITDA Coverage Ratio = (EBITDA + Lease Payments) / (Interest Payments + Principal Payments + Lease Payments)

A ratio equal to or greater than 1 indicates that a company will have a better ability to pay off liabilities. If the ratio is lower, a company may not be able to pay off its debts. The higher the ratio, the more solvent a company is. The current average coverage ratio is 2.

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EBITDA Margins

Another EBITDA calculation investors can do to learn about a company’s performance is the EBITDA Margin calculation. This formula compares annual cash profits to sales. It’s a useful indicator to find out if a company’s EBITDA is ‘good’ or not. The EBITDA Margin calculation is:

EBITDA Margin = EBITDA / Total Revenue

The resulting number is a percentage that shows what portion of revenue was able to be converted into profit within a year. The higher this percentage is, the better a company is performing because it means their expenses aren’t eating into their profits. In general, an EBITDA margin of 60% or higher is considered a good number.

Downsides of the EBITDA Formula

Although the EBITDA formula is a useful tool for investors, it also has some drawbacks. For example: EBIDTA is considered a “non-GAAP” measure, meaning it doesn’t fall under generally accepted accounting principles (a set of rules issued by the Financial Accounting Standards Board and procedures commonly followed by many businesses). This also means that the way EBIDTA is calculated isn’t wholly standardized.

Thus, companies also may not include the same information in each report, and they aren’t required to record all information that may be relevant to the equation. For these reasons, it’s best to calculate EBITDA along with other types of evaluations, such as net income and debt payments.

Companies with a low net income may use the EBITDA formula to make themselves look better since the EBITDA number will likely be higher than their income.

Or, because EBITDA tends to obscure the impact of debt and capital investments, a company that’s spending heavily on development costs, or has incurred a lot of debt, may look more robust than it is.

Also, the formula doesn’t work well with certain types of companies, such as companies that have a need to constantly upgrade their equipment.

The Takeaway

Comparing companies you may want to invest in can take a lot of time and technical analysis. If you’re choosing your first stocks, the amount of information and choices can be overwhelming.

EBITDA is one measure of company performance that can be useful, because it takes net income and then removes certain factors that can be confounding: interest paid or earned; federal, state, and local taxes; the impact of capital depreciation and amortization.

For investors interested in learning more about specific companies and building a stock portfolio, opening an online brokerage account can be a good way to get started with investing.

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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.

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

Aug

2023

How Does the Iron Butterfly Spread Work?

What Is an Iron Butterfly Option Strategy?

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

An iron butterfly spread is a type of options trade involving four separate options contracts. It’s a complicated and advanced options trade, meaning that many beginner investors will likely never use it — they may not have even heard of it.

Iron butterfly spreads can be used as a part of a larger options trading strategy, however, so long as investors understand the ins and outs of how it works, and most importantly, the risks involved.

What Is an Iron Butterfly?

An iron butterfly spread, sometimes called an “Iron Fly” or a “Butterfly Spread” is a trade involving four separate options contracts.

As a strategy that earns investors money when stocks or futures prices make moves within a defined range, it’s especially popular with traders who expect a decrease in implied volatility. To succeed with an iron butterfly spread, traders will try to forecast when option prices will likely decline, usually when the broader markets are in a holding pattern, or gradually moving upwards.

How Does an Iron Butterfly Trade Work?

An Iron Butterfly is a four-legged options spread, since an investor buys four options contracts, two calls and two puts. The call options allow the investor to buy a stock at a given price, and the put options allow the investor to sell a stock at a given price.

In the trade, the calls and puts have three strike prices, but the same expiration date.

In a put or call option, the strike price is the price an investor can sell the underlying security when it is exercised. With a call option, the strike price is the price at which the investor can buy the security. With a put, the strike price is the value at which they can sell the security.

The three strike prices consist of one in the middle, called the options straddle, and two other strike prices, called the strangle, positioned above and below that price. As a trade, the Iron Butterfly has the propensity to deliver profits when the option’s underlying stock hits its expiration date at the middle strike price.

Example of an Iron Butterfly

For the strategy to work, the call and put options that sit on either side of the target stock price should be far enough apart that they can still make money regardless of the unexpected price movement of the stock between the time when the trade is executed, and the expiration of the options.

As an example, you’re an investor with a sense that a stock would reach $50 in the next month, and that it would be at least within a range of $10 above or below the target price. To make an Iron Butterfly trade, you’d buy a call and a put option with a strike price of $50. Then you’d buy a call option ten dollars higher, followed by a put option ten dollars lower than the target price, or saddle price, of $50.

The theory behind the Iron Butterfly strategy is that there’s a high likelihood that the eventual price of the stock targeted in the strategy will trade within a profitable range by the time the strike price of the options arrives.

Pros and Cons of Iron Butterfly Spreads

There is a limit to the maximum profit that an investor can earn by using the Iron Butterfly. That’s because of the cost of the options they have to buy to make money on their bet, as well as the cost of the options they purchase to protect themselves in the event that their hunch is wrong.

In the strategy, the most money the investor can make becomes possible when the underlying stock reaches the stock price at which they’ve purchased the saddle options. But even in this best-case scenario, at least half of the options expire worthless.

While this limited return may seem like a downside, it also comes with limited risk. As long as the stock rises or falls — at the time of the options’ expiration — between the target price and the strike prices of the outlying call and put options, then the trade will not lose money. But the closer it is to the target price, the more money it will make.

The biggest risk in an Iron Butterfly strategy is that the stock trades outside of the strangle, making all of the options worthless.

Recommended: What Is Your Risk Tolerance?

How to Sell out of an Iron Butterfly Spread

The investor will have at least one option that is in the money, and possibly two options that are in the money, when the options expire. They will exercise those options, and make money on the trade.

Traders realize that it’s unrealistic that any given trade will reach its expiration date exactly at the strike price, or straddle price, that they choose. But with a smart spread on the outer range of the call and put options in the trade, the strategy can deliver returns on the capital put at risk that are consistently in the 15-20% range.

What Is the Difference Between Iron Condor and Iron Butterfly?

An Iron Butterfly is similar to another option strategy known as an Iron Condor. The strategies differ in terms of their strike prices and premiums. In an Iron Condor the strike prices are different and in an Iron Butterfly they’re the same. The premiums are higher in an Iron Butterfly than an Iron Condor.

💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

The Takeaway

The Iron Butterfly is a trading strategy that investors use when they believe that a stock price will trade within a specific range. Rather than buying the stock itself, an Iron Butterfly involves purchasing four options based on the investor’s price prediction for a certain security.

Again, trading options is an advanced investment strategy that requires a good amount of background knowledge and market experience. It may not be a good idea for beginning investors to wade into options, or advanced moves like the Iron Butterfly. However, speaking with a financial professional may help get you prepared for trading options.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

Photo credit: iStock/ponla1975

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN0723046

Aug

2023

What Is a Death Cross Pattern in Stocks? How Do They Form?

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

A death cross is the X-shape created when a stock’s or index’s short-term moving average descends below the long-term moving average, possibly signaling a sell-off. The death cross typically shows up on a technical chart when the 50-day simple moving average (SMA) of a stock or index peaks, drops, and then crosses below the 200-day moving average.

Because the 50-day SMA is more of a short-term indicator, it’s considered to be a more accurate indicator of potential volatility ahead than the 200-day SMA, which has averaged in 200 days worth of prices. That said, both the 50-day moving average and the 200-day are, by definition, lagging indicators. Meaning: They only capture what has already happened. Still, some death crosses have appeared to forecast major recessions — although they can also send false signals.

What Is a Death Cross, Exactly?

A death cross is based on a technical analysis of a security’s price. The short-term average dropping below the long-term average to create an X-shape is the “cross”; the “death” part of the name refers to the ominous signal that such a crossing may send for individual securities or overall markets.

A death cross tends to form over the course of three separate phases. In the first phase, the rising value of a security reaches its peak as the momentum dies down, and sellers begin to outnumber buyers. That brings on the second phase, in which the price of the security begins to decline to the point where the actual death cross occurs.

That’s typically marked as being when the security’s 50-day moving average dips under the 200-day moving average.
That crossing alerts the broader market to a potential bearish, long-term trend, which brings about the third and final phase of the death cross. In this phase, the stock may continue to lose value over a longer period.

If the dip following the cross is short-lived, and the stock’s short-term moving average moves back up over its long-term moving average, then the death cross is usually considered to be a false signal.

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What Does the Death Cross Tell Investors?

The death cross has helped predict some of some of the worst bear markets of the past 100 years: e.g., in 1929, 1938, 1974, and 2008. Nonetheless, because it’s a lagging indicator, meaning that it only reveals a stock’s past performance, it’s not 100% reliable.

Another criticism of the death cross is that the pattern sometimes won’t show up until a security’s price has fallen well below its peak. In order to alter a death cross calculation to see the downtrend a little sooner, some investors say that a death cross occurs when the security’s trading price (not its short-term moving average), falls under its 200-day moving average.

For experienced traders, investors, and analysts, a death cross pattern for a stock is most meaningful when combined with, and confirmed by, other technical indicators.

When interpreting the seriousness of a death cross, experienced investors will often look at a stock’s trading volume. Higher trading volumes during a death cross tend to reveal that more investors are selling into the death cross, and thus buying into the downward trend of the stock.

Investors will also look to technical momentum indicators to see how seriously to take a death cross. One of the most popular of these is the moving average convergence divergence (MACD), which is based on the moving averages of 15, 20, 30, 50, 100, and 200 days, and is designed to give investors a clearer idea of where a stock is trading than one that’s updated second by second.

Death Cross vs Golden Cross: Main Differences

The opposite of a death cross is known as a golden cross. The golden cross indicator is when the 50-day moving average of a particular security moves higher than its 200-day moving average.

While the golden cross is broadly considered a signal of a bull market, it has some of the same characteristics as the death cross in that it’s essentially a lagging indicator. Experienced investors use the golden cross in conjunction with other technical indicators such as trading volume and MACD.

Is a Death Cross a Reliable Indicator?

Historically, the death cross indicator has an impressive track record as a barometer of the broader stock market, especially when it comes to severe downturns, as noted above.

The Dow Jones Industrial Average (DJIA) went through a death cross shortly before the crash of 1929. More recently, the S&P 500 Index underwent a death cross in May of 2008 – four months before the 2008 crash. In both instances, investors who stayed in the market faced extreme losses. But the Dow also experienced a death cross in March of 2020. And the markets quickly rebounded, and rose to new heights.

The fact is that broad-market death crosses happen frequently. Prior to 2020, the Dow has gone through five death crosses since 2010, and 46 death crosses since 1950. Yet the index has only entered a bear market 11 times since the 1950s. A death cross doesn’t necessarily bring significant losses, either.

Even more noteworthy is that the Dow continued falling after a death cross only 52% of the time since 1950. And when it did keep falling, its median decline after a month was only 0.9%.

For short-term traders, the death cross has less value than it does for investors with longer-term outlooks. As an indicator, the death cross – especially one that’s market-wide – can be especially valuable for long-term investors who hope to lock in their gains before a bear market begins.

How to Trade a Death Cross

The death cross is a significant indicator for some investors. But it’s important to remember that it only shows past trends. As an investor, it’s equally important to use the death cross in conjunction with other indicators such as the MACD and trading volume, as well as other news and information related to the security you’re investing in.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

The Takeaway

Although the ominous-sounding death cross stock pattern is valued by some analysts and investors as a way to foretell a downturn in a certain security or even the broader market, it’s really not that reliable. The main elements of the death cross — a stock’s short-term moving average and long-term moving average — are lagging indicators that may or may not predict a bearish turn of events.

The typical investor may not use or even look for death crosses as a part of their strategy. But knowing, on a basic level, what the term refers to, and why it may be important to the markets, is a good idea.

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

Photo credit: iStock/goir

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN0723070

Jul

2023

How to Stage a House: 8 Steps

By Kevin Brouillard | Growing Wealth, Home Ownership, mortgage | Comments Off

Selling your home? If so, you likely want to do everything in your power to make it look great and trigger solid offers ASAP. Staging your home can be one key contributing factor to achieving that.

When you stage your home, you optimize its look and design. This allows potential buyers to visualize the house as their own. It makes it look like a place they aspire to put down roots. (Yes, decluttering and removing some of your personal mementos may be involved.)

According to a National Association of Realtors® survey, 89% percent of buyers’ agents said staging a home made it easier for a buyer to visualize the property as a future home.

Want to learn more? Here’s a step-by-step guide to how you can stage your home.

8 Steps to Stage a House for Sellers

Follow these tips for staging your home and impressing prospective buyers.

1. Take Stock of Needed Fixes

If a house requires considerable repairs, a seller may face a lengthy negotiation process with buyers that results in concessions and contingencies. Any issues flagged by an inspection will also need to be addressed with prospective buyers.

Deciding whether to make these fixes beforehand will affect how a home is staged and perceived by buyers. Even relatively small issues like cracks in a ceiling and a dripping faucet can raise concerns and influence a buyer’s impression. That’s something to be wary of, especially in a hot housing market when many buyers want to snag a home quickly.

Taking care of these common home repairs before house staging can show buyers that you’ve maintained the property and keep their focus on its strengths.

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2. Enhance Curb Appeal

Before buyers walk through the door, they’ll have already formed an impression from the home’s curb appeal, the attractiveness of a property from the sidewalk or street.

Buyers may even do a drive-by before setting up a showing to narrow down their search. Thus, sprucing up a home’s exterior, lawn, and landscaping is essential to any plan for how to stage a house. Even in winter, curb appeal matters.

Any eyesores, such as chipped paint, cracked windows, or clogged gutters could discourage buyers from taking a closer look. Power-washing any siding and applying a fresh coat of paint where needed are some possible quick improvements.

Thinning out lawn decor, replacing burned-out lights, and tidying up gardens and landscaping are also low-cost ways to increase curb appeal.

For many prospective buyers, their first look into your home will be digital. High-quality photos can be helpful in attracting buyers.

Staying on top of things like lawn care while the home is listed could make a difference in getting more showings and securing a higher offer. In fact, 98% of NAR members say they believe curb appeal is important to potential buyers.

3. Remove Clutter

While working on house staging, you may also be encumbered with the home-buying process or figuring out what to do with all your stuff after it’s sold. In either case, staging is an opportunity to jumpstart the moving process and declutter the house.

Removing clutter is a popular staging tactic to make the interior of a home appear more spacious. A home’s square footage can’t be fabricated, but curating a more open layout can give the impression of a larger space.

Begin by packing away items that you don’t use daily, like seasonal clothes, knickknacks, sports equipment, and other odds and ends. This is also a chance to identify anything you want to sell, donate, or dispose of.

Storage space of a home can also be a major selling point. Instead of loading up the basement, garage, and closets, sellers may want to consider asking family members or friends to store their belongings, hosting a garage sale, or renting a storage unit.

Recommended: How to Refresh Your Home Room by Room

4. Depersonalize the Space

Cutting back on personal items is an important step in staging a house. While decluttering the home, stowing away family photos and clothing is a good place to start. Removing subtler items like personal toiletries can further neutralize the space.

That lavender paint in one room and turtle-themed wallpaper in another? It might be best to create a more basic canvas.

The point is to show that the home is move-in ready and an open book for buyers to add their personal touches. With just the integral furniture and furnishings remaining, it’s easier for buyers to imagine themselves moving in and living there.

5. Do a Deep Cleaning

Once the decor and furnishings have been minimized, it’s time to get the house squeaky clean. While this is one of the more cost-effective ways to stage a house, it can take significant time and energy.

To streamline the process, consider starting with the highest surfaces and working your way down. Overhead fixtures like lighting and ceiling fans are often overlooked in regular cleaning routines, and thus accumulate lots of dust and grime. It’s likely that cleaning these hard-to-reach places will bring debris down on countertops and floors.

Bathrooms and kitchens are key rooms to focus on. Water stains and mildew in sinks, tubs, and showers are obviously a no-no. Making sure appliances sparkle and that countertops are spotless can give the kitchen a fresh new look.

💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show proof of prequalification to the real estate agent. With SoFi’s online application, it can take just minutes to get prequalified.

6. Define Every Space

While the kitchen, bathroom, master bedroom, and garage are straightforward in their purpose, some spaces in a home may not have an obvious use to prospective buyers.

Thinking about how to stage spare rooms and unconventional spaces is important. For example, staging such a space as a home office or workout room could appeal to a larger segment of buyers.

7. Stage Where It Matters Most

Not every room holds equal weight from the homebuyer’s perspective. Prioritize the living room, primary bedroom, kitchen, dining room, and yard; real estate agents say these are of most interest to buyers.

The kids’ rooms and basement? Spend less time and energy there.

Recommended: Home Appraisals: What You Need to Know

8. Don’t Forget Outdoor Space

While the front of a house determines curb appeal, the yard, porch, or patio space can sell buyers on the lifestyle they could enjoy there.

The backyard is a popular place for entertaining and socializing, especially for families with kids. Tidying up the yard and addressing any safety issues like a wobbly porch railing or broken fence could be easy fixes.

Setting up a focal point, such as an outdoor seating area, fire pit, or grill, can make the space more inviting. Even if it’s a limited yard or patio space, brightening it up with flowers and comfy outdoor furniture can change the perception from confined to cozy.

The Takeaway

How to stage a house? It can take time and energy, but emphasizing a home’s strengths and creating an inviting atmosphere can be done with some thorough cleaning, decluttering, and rearranging.

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 Mortgages: simple, smart, and so affordable.

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.

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.

SOHL0623065

Jul

2023

A Guide to Lender-Paid Mortgage Insurance

By Pam O’Brien | Home Ownership, mortgage | Comments Off

When homebuyers take out a conventional mortgage but don’t have a 20% down payment, they will likely need to get private mortgage insurance. PMI is usually required when the down payment is less than 20% of the home’s value.

In some situations, a lender may arrange for PMI coverage. It then becomes known as lender-paid mortgage insurance. For some homebuyers, LPMI can work in their favor. But for others, having a lender secure private mortgage insurance can end up costing them.

Read on to learn more about LPMI and the pros and cons for homebuyers.

How Does Lender-Paid Mortgage Insurance Work?

Unless 20% or more of a home’s value is paid upon closing, homebuyers can typically expect to be required to purchase private mortgage insurance, or PMI.

While government-back loans tend to have their own insurance programs (for instance, most FHA loans require a mortgage insurance premium for 11 years or the life of the loan), most loans not provided by the government with a loan-to-value ratio higher than 80% require PMI to protect the lender in case of default.

PMI is typically purchased in one of four ways, and it’s a home-buying cost you’ll want to budget for. PMI can be paid:

• Along with monthly mortgage and insurance payments

• In one annual premium

• With one large payment and corresponding monthly payments

• By the mortgage lender in a LPMI policy

While it may seem that the last option, LPMI, eliminates a task on a homebuyer’s to-do list, there is some fine print to be aware of.

Having LPMI for a loan doesn’t mean the cost is absorbed by the lender. A homebuyer will still pay for the coverage in one of two ways:

• A one-time payment due at the beginning of a loan.

• A slightly higher interest rate — usually 0.25% — which increases the monthly mortgage payment. This is the more common arrangement of the two.

So while many homebuyers accept an LPMI arrangement in hopes of saving money, that isn’t automatically the case. Sometimes LPMI is more about convenience than savings.

In fact, unless they’re paying a one-time lump sum, homebuyers could end up spending more for LPMI over the life of their loan than if they had chosen a traditional PMI route. That’s a potential home-buying mistake you’ll want to avoid.

LPMI might be a good choice for a homebuyer planning to keep the mortgage for five to 10 years or stay in the home. It usually takes 11 years to build enough equity to cancel a borrower-paid PMI policy.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

A Pro of LPMI

Before a homeowner writes off lender-paid mortgage insurance altogether, it’s best to look at a potential benefit the arrangement offers over traditional monthly mortgage insurance.

More Affordable Monthly Payment

With LPMI, the monthly payment could be more affordable because the cost is spread out over the entire loan term rather than bunched into the first several years.

Here’s an example. If Sarah buys a home with a 10% down payment and it takes her 10 years to get the loan-to-value ratio down to 78% (a lender automatically drops PMI payments at this percentage if the borrower is in good standing), those 10 years of payments could all include several hundred dollars in addition to her premium and interest payments.

While LPMI may not save Sarah money overall, she may have smaller monthly payments because the additional payments for coverage are stretched out equally over the entire life of her loan rather than the start.

Recommended: How to Get a Mortgage in 2023

… and Potential Cons

In the right situation, LPMI can make sense. But there are potential downsides homebuyers should know about as well.

Rate Never Drops

While having mortgage insurance stretched out over the life of a loan can save some homebuyers money, it can cost others. The higher interest rate — as mentioned, a 0.25% rate increase is common — will never drop, even once the loan balance is less than 80% of a home’s purchase price.

LPMI can end up costing homebuyers more than if they had bought PMI on their own. Much depends on how long the borrower expects to hold the mortgage.

Refi Costs

Some homebuyers navigate toward LPMI because of the initial savings and hope they can refinance in the future.

While this may be a possibility, they must consider the sizable out-of-pocket costs that go along with refinancing, and that refi rates may be higher in the coming years.

No Itemizing

LPMI can’t be itemized if you deduct mortgage interest at tax time.

💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show proof of prequalification to the real estate agent. With SoFi’s online application, it can take just minutes to get prequalified.

PMI vs LPMI

There are several numbers to take into consideration when choosing between traditional PMI and LPMI, including:

• the down payment

• remaining mortgage

• interest rate (for LPMI, a 0.25% rate increase is common)

• average mortgage insurance rate (PMI is typically 0.5% to 1.5% of the loan amount per year)

• anticipated life of the mortgage loan

• monthly budget.

A borrower may want to not only consider the monthly payment but also the lifetime loan costs.

The difference between PMI and LPMI is different for every homeowner and situation. Taking the time to crunch the numbers is the only way to fully understand the pros and cons of each option.

LPMI Alternatives

LPMI isn’t always the clear winner when choosing between mortgage insurance options. There are alternatives to consider.

Put More Down

A down payment of at least 20% will eliminate the need for PMI entirely. There are several other benefits that go along with larger down payments as well, such as a better loan rate, making this a great option for those who can afford it.

Shop Around

One main disadvantage of LPMI is that the homeowner has little to no control over the price and provider. So when homeowners are responsible for their own PMI, shopping around for the best price becomes an option.

Piggyback Mortgage

A piggyback mortgage makes it possible to avoid PMI with a combination of loans.

It’s important to understand the pros and cons of a piggyback mortgage before deciding on one as an alternative to LPMI to avoid potential financial pitfalls.

The Takeaway

If mortgage insurance is necessary to secure a loan, understanding all the options is the first step any house hunter should take. This includes lender-paid mortgage insurance vs. PMI. While LPMI may serve as an overpriced convenience for some, it can be the financially smarter option for others.

SoFi Mortgages: simple, smart, and so affordable.

*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.

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.

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

SOHL0623048

What Is the Ebitda Formula?

What Is EBITDA, and How Is EBITDA calculated?

Earnings

Interest

Taxes

Depreciation & Amortization

EBITDA Formula and Calculation

How to calculate EBITDA

How Does EBITDA Differ From Other Measurements of Income?

Why Is EBITDA Important?

What Makes a Good EBITDA?

The EBITDA Coverage Ratio

EBITDA Margins

Downsides of the EBITDA Formula

The Takeaway

What Is an Iron Butterfly Option Strategy?

What Is an Iron Butterfly?

How Does an Iron Butterfly Trade Work?

Example of an Iron Butterfly

Pros and Cons of Iron Butterfly Spreads

How to Sell out of an Iron Butterfly Spread

What Is the Difference Between Iron Condor and Iron Butterfly?

The Takeaway

What Is a Death Cross Pattern in Stocks? How Do They Form?

What Is a Death Cross, Exactly?

What Does the Death Cross Tell Investors?

Death Cross vs Golden Cross: Main Differences

Is a Death Cross a Reliable Indicator?

How to Trade a Death Cross

The Takeaway

How to Stage a House: 8 Steps

8 Steps to Stage a House for Sellers

1. Take Stock of Needed Fixes

2. Enhance Curb Appeal

3. Remove Clutter

4. Depersonalize the Space

5. Do a Deep Cleaning

6. Define Every Space

7. Stage Where It Matters Most

8. Don’t Forget Outdoor Space

The Takeaway

A Guide to Lender-Paid Mortgage Insurance

How Does Lender-Paid Mortgage Insurance Work?

A Pro of LPMI

More Affordable Monthly Payment

… and Potential Cons

Rate Never Drops

Refi Costs

No Itemizing

PMI vs LPMI

LPMI Alternatives

Put More Down

Shop Around

Piggyback Mortgage

The Takeaway

JOIN THE COMMUNITY

Student Loan Refinancing

Personal Loans

Online Investments

Other

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Personal
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