As you build your investing portfolio, you might wonder: Is gold a good investment? While some investors may be interested in it as a hedge against inflation or market downturns, or to further diversify their portfolio, it’s important to know that investing in gold isn’t simple, especially for first-time investors. One reason is that there are so many ways to invest in gold, each with their own pros and cons.
Why Investors Like Gold
Historically, investors have turned to gold as a way to hedge against the possibility of inflation or events that could negatively impact the equity markets. And while it can be just as volatile as stocks in the short term, gold has historically held its value well over the long term. Even investors who are not particularly concerned about inflation or about calamities affecting the broader market, may turn to gold as a way to diversify a portfolio.
5 Ways to Invest in Gold
For anyone considering investing in this precious metal, it can be helpful to familiarize yourself with the different ways one can invest in gold.
Buy Physical Gold
When thinking of ways to invest in gold, the first image that may come to mind is piles of gold bars in a place like Fort Knox. Those bars are also known as bullion, and it comes in bars that can be as small as a few grams, or as large as 400 ounces. The most common denominations of gold bullion are one- and 10-ounce bars.
For many investors, even the one-ounce bars can be too expensive — roughly $2,200 per ounce in mid 2023. And because the bullion is a physical item, there’s no easy way to own a fraction of a bar. But if you do want to own bullion directly, the first order of business is to find a reputable dealer to buy from, and then look into the costs of delivery and insurance for the asset. Another option if you buy bullion is to pay for storage, either in a large vault or in a safety deposit box at a bank.
Buy Gold Coins
Gold coins offer another way to directly own the shiny yellow metal, in a variety of denominations including half-ounce and quarter-ounce. Well-known gold coins include South African Krugerrands, Canadian Maple Leafs, and American Gold Eagles, which have been known to sell at a premium to their actual gold content among collectors.
While you may be able to buy gold coins at a discount from local collectors or pawn shops, most investors will likely opt for a reputable dealer. As with bullion, it is important to protect this hard asset, either through insurance, or with a vault or safe deposit box.
Buy Gold Jewelry
If you don’t want your gold investment to just sit in a vault, then gold jewelry may be appealing. But it comes with its own considerations. The first is that gold jewelry may not have as much actual gold content as the jeweler claims. Verifying the authenticity of a piece not only protects you, but it will also help when it comes time to sell the piece. One way to do this is to only buy jewelry from reputable dealers, who can also deliver documentation about the piece.
Another point to remember is that a piece of jewelry will also come with a markup from the company that made it, which can make the piece cost as much as three times the value of its metal. And jewelry typically isn’t 100% pure gold — or 24 karats — so it’s important to know the purity and melt value of the jewelry before you buy.
Buy the Stocks of Gold Mining Companies
One way to take advantage of growth in the value of gold with your existing brokerage account that you might want to consider is to buy the stocks of companies in the gold business, including miners and refiners.
While gold stocks tend to go up and down with the price of gold, they may also experience price changes based on the company’s own prospects.
💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
Buy Gold ETFs and Mutual Funds
If the risks or individual mining and refining companies are too much, you may want to consider a gold exchange-traded fund (ETF) or mutual fund. These vehicles — which are available through one’s brokerage account — invest in gold in different ways.
Buy Gold Futures and Options
Experienced investors with some familiarity trading derivatives may consider investing in the gold market through futures and options. These contracts allow the investor to buy or sell gold for an agreed-upon price by a fixed date. To trade these contracts, an investor needs a brokerage account that offers the ability to trade them.
An investment in gold options or futures contracts, however, requires active monitoring. These contracts expire on a regular basis, so investors have to be ready to sell, roll over, or exercise them as gold prices change, and as the contracts reach their expiration dates.
💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
What Will Gold Be Worth in 2030?
Predicting the future price of an idiosyncratic and volatile commodity like gold is all but impossible. For instance, back in 2020, gold increased in value by 24.6% in U.S. dollars, and reached all-time highs in a number of currencies, in anticipation of a coming wave of inflation.
In its 2023 In Gold We Trust report, asset manager Incrementum predicted a “showdown in gold prices” and increased demand due to inflation and a possible recession, stating that “investment demand from gold ETFs could tip the gold prices scales.”
One reason why gold investors believe the precious metal may have strong prospects is that the broader economy has been in an inflationary period. One measure of this is the consumer price index (CPI). The latest CPI data in mid-2023 showed that inflation is slowing, but it’s still a concern for consumers and for investors.
The Takeaway
Investors interested in gold typically gravitate toward it as a hedge against inflation or as a means of diversifying their portfolios. Those who want access to this precious metal have some choices: They can buy bullion, coins, jewelry, mining stocks, ETFs, mutual funds, futures, and options.
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No one wants to see their hard-earned cash sitting in the bank and earning a miniscule amount of interest. Instead, most people want their money to work hard and churn out even more moolah at a healthy rate.
Achieving that may be as simple as switching banks or even just swapping account types. Or trying a couple of other smart financial moves that can help your wealth grow.
Read on to learn smart strategies that can help you earn more interest than you are currently.
What Is Interest?
Interest is the percentage paid when money is borrowed or loaned out. Here are a couple of examples.
• When you deposit your money into an account at a financial institution, the bank may pay you interest. This is your reward for keeping your cash there, where they can lend some of it out or otherwise use it as part of their operations.
• When you borrow money (like a mortgage or car loan) or open a line of credit (say, for a credit card), you pay interest to your lender. You are paying for the privilege of using their money.
💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.
How Do You Earn Interest?
When you deposit money into a bank account, you are in effect loaning them the money. They pay you interest in return.
The financial institution can use that money in any number of ways, including lending it out to others. Say you deposit $10,000 in a savings account that earns a 3% interest rate. The bank could then use some of your money and that of other depositors to make a $100,000 mortgage loan at 7% to a borrower.
The difference between the 7% they are charging the person with the home loan and the 3% they are paying you and other savings account holders is one of the ways banks make money. And it’s also a good example of how and why you earn interest on your deposit.
How Does Interest Work?
Interest can work in a couple of different ways.
• With simple interest, interest is earned only on the principal, or the amount of money you deposited.
• With compound interest, interest is generated on the principal and the interest as it accrues. This makes your money grow more quickly. Interest can be compounded at different intervals, such as quarterly, monthly, or daily.
Here’s an example of what a $10,000 savings account would look like at the end of a year if you earned 3% simple interest:
$10,000 principal +$300 interest = $10,300 at the end of the year.
However, if that interest was compounded daily, by the end of the year, you would have:
$10,000 principal + $304.53 interest = $10,304.53 at the end of the year.
While it doesn’t sound like much, over time, the difference is amplified. If you’re wondering how to make money with interest, consider what the numbers would look like after 10 years:
It can be wise to check with financial institutions and see how often interest is compounded. The more frequent the compounding, the more your money will grow.
Now that you understand what interest is, consider these seven ways you might help your money grow faster thanks to the power of interest.
1. High-Interest Savings Accounts
Want to earn more interest on savings? Some banks offer high-interest or high-yield savings accounts that can pay higher rates than traditional savings accounts, while still providing fairly easy access to your money.
How big a difference can this make? In mid 2023, regular savings accounts were paying as little as .01% to .15% annual percentage yield (APY) while high-yield accounts were in the 4.25% to 4.75% zone. When looking for a good interest rate for a savings account, most people would rather snag the latter.
Typically, these high-interest accounts limit you to six withdrawals or transfers per month per Federal Reserve requirements. While this Regulation D rule has been suspended since the coronavirus pandemic, some banks will still charge fees or have other penalties for more than six withdrawals, so be sure to check.
You are more likely to find high-interest savings accounts at online-only banks. Because these institutions tend to have lower operating costs than brick-and-mortar banks, they often offer higher rates than traditional banks. They may also be less likely to charge monthly fees.
A high-yield savings account can be a great place to build an emergency fund or save for a vacation or home repair while providing safety and liquidity.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 4.20% APY on savings balances.
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2. Rewards Checking Accounts
Checking accounts are traditionally used for storing money that you use frequently, and they typically don’t pay interest. However, some banks offer rewards checking accounts. These may pay higher interest rates than traditional checking and savings accounts. For instance, as of mid 2023, while some standard checking accounts paid zero interest, rewards accounts offered up to 3.30% APY.
However, there may be some restrictions. For instance, the balance that earns the elevated rate may be limited. In addition, you may have to meet certain direct deposit or debit card transaction requirements each month to earn the higher rate.
Like other checking accounts, rewards checking accounts are highly liquid and typically come with check-writing privileges, ATM access, and debit cards. Plus, deposits can be withdrawn at any time.
If you’re considering a rewards checking account, however, you may want to first make sure you can meet any requirements.
💡 Quick Tip: Your money deserves a higher rate. You earned it! Consider opening a high-yield checking account online and earn 0.50% APY.
3. Credit Unions
Another of the best ways to earn interest on your money is to consider joining a credit union.
Unlike banks, credit unions are owned by the people (or members) who hold accounts at the credit union. Because of this, these financial institutions work for the benefit of account holders instead of shareholders.
In some cases, that can translate into lower fees, better account perks, and higher interest rates. To join a credit union, you typically need to live or work in a certain geographic area or work for a certain employer.
If you have a credit union near you, you may want to check the rates it offers and see if you can get a good deal.
4. Money Market Accounts
A money market account is a type of deposit account that usually combines the features of both checking and savings accounts. This kind of account often requires a higher minimum balance to open than a standard savings account and typically earns a higher interest rate.
Some money market accounts also come with a debit card or checks (which you generally won’t find with savings accounts), but financial institutions may require that they not be used more than six times per month. Some will charge a fee if you go over that number.
It can also be a good idea to ask about other fees, such as monthly account fees and penalties, before opening one of these accounts.
Certificates of deposit (CDs), which are a kind of time deposit, typically offer higher interest rates than traditional savings accounts in exchange for reduced withdrawal flexibility.
One benefit of CDs is that you lock in the interest rate when you open the CD.
When you put money in a CD, you agree to leave the money in the account for a set period of time, known as the term. If you withdraw your deposit before the term expires, you’ll usually have to pay an early withdrawal penalty.
One benefit of CDs is that you lock in the interest rate when you open the CD. Even if market rates drop, you’ll keep earning the same rate. On the other hand, if rates rise, you’ll be stuck earning the lower rate until the CD matures.
One way to work around this is to open several CDs that mature at different times, a technique known as CD laddering. Having a mix of short- and long-term CDs allows you to take advantage of higher interest rates, if they bump up, but still have the flexibility to take advantage of higher rates in the future.
A CD ladder also helps with the lack of liquidity that comes with CDs. Because of the staggered terms of the certificates, one is likely to be coming due (or available) if you need to use the cash.
6. Bank Bonuses
Many banks offer special bonuses from time to time; these can be a way to boost the earnings on your money. You may want to keep your eyes open for high-yield savings accounts that offer a sign-up bonus or an interest rate bonus. These incentives can boost your earnings, though you may have to maintain a high minimum balance in the account to earn the higher rate.
You may want to keep your eyes open for high-yield savings accounts that offer a sign-up bonus.
Some banks also offer cash bonuses to customers who open new checking accounts. While this may also come with some requirements, such as setting up direct deposit and/or keeping your account open for a certain number of months to earn the bonus, it can be another good way to increase the income you earn on your bank deposits.
7. Bonds or Bond Funds
Another way to gain interest on your money could be with bonds, which are loans that the government or companies issue. These pay investors interest on a regular basis until the bond hits its maturity date.
These investments, however, aren’t insured the way an account is at a bank or credit union by the FDIC or NCUA. U.S. Savings Bonds are backed by the government, but other bonds may carry risk.
Type of Account
Pros
Cons
High-Interest Savings
Higher interest
May have withdrawal limits
Rewards Checking
Higher interest, unlimited withdrawals, checks, and a debit card
May have requirements such as certain number of debit card or ATM transactions
Credit Union
Higher interest
May need to live in a certain area or work in a certain profession to open an account
Money Market
Higher interest; checking account privileges such as a debit card and checks
May charge fees and/or limit number of transactions
Certificates of Deposit
Higher interest, guaranteed interest rate
Money must be kept on deposit for a specific time period or else penalties can be assessed
Bank Bonuses
Higher interest and/or cash to add to your account
Not offered by all banks; may be minimum deposit requirements or rate may decrease after introductory period
Bonds
Pay interest to grow your investment
May not be insured
Other Ways to Make Your Money Work For You
If you’re planning to park your cash for at least five years or so and you are willing to take some risk, you may want to consider investing your money in the market.
While an investment might generate a higher return, all investments come with the risk that you could lose some or all of your money.
You can better weather this risk by investing for the long term, which essentially means only investing savings that you would not likely need to touch when the market is down.
There are a variety of ways to start investing. If your employer offers a 401(k), that can be one of the easiest ways to start investing. Another option for retirement is an individual retirement account (IRA).
You could also open a brokerage account for financial goals outside of retirement. This is a taxed account, typically opened with a brokerage firm, that allows you to buy and sell investments like stocks, bonds, and mutual funds.
If you’re ready to start investing, you may want to speak with a qualified financial advisor who can help you establish your savings goals and risk tolerance and help you develop a personalized investment strategy.
💡 Quick Tip: When you feel the urge to buy something that isn’t in your budget, try the 30-day rule. Make a note of the item in your calendar for 30 days into the future. When the date rolls around, there’s a good chance the “gotta have it” feeling will have subsided.
Creating a SoFi Savings Account Today
If you’re looking to make more interest on your money, you may be able to increase returns by opening a high-yield account at SoFi.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.
FAQ
What does it mean to “gain interest”?
Gaining interest is similar to earning interest. It means that your money (the principal) is growing over time thanks to the interest rate being paid. The exact amount it grows will be determined by the interest rate, how long it sits, and how frequently (if at all) the interest is compounded.
Where can you get 7% interest on your money?
As of mid 2023, only one financial institution offered an account with 7% interest: Landmark Credit Union. It was paying 7.50% annual percentage yield (APY) on its Premium Checking Account, which had requirements for e-statements and direct deposits in order to earn that amount of interest.
How much interest does $10,000 earn in a year?
How much interest $10,000 will earn in one year will depend on the interest rate and how often the interest is compounded, if at all. If the interest rate is 3%, without compounding, it would earn $300. With daily compounding, it would earn $304.53. If the interest rate were 7%, the account holder would have $700 in interest at the end of the year with simple interest, and $725.01 with daily compounding.
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% 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 4.20% 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 10/31/2024. 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.
An interest-only mortgage lets you pay just interest for a set period of time, typically between seven and 10 years, as opposed to paying interest plus principal from the beginning of the loan term.
While interest-only mortgages can mean lower payments for a while, they also mean you aren’t building up equity (ownership) in your home. Plus, you will likely have a big jump in payments when the interest-only period ends and you are repaying both interest and principal.
Read on to learn how interest-only mortgages work, their pros and cons, and who might consider getting one.
How Do Interest-Only Mortgages Work?
With an interest-only mortgage, you solely make interest payments for the first several years of the loan. During this time, your payments won’t reduce the principal and you won’t build equity in your home.
When the interest-only period ends, you generally have a few options: You can continue to pay off the loan, making higher payments that include interest and principal; look to refinance the loan (which can provide for new terms and potentially lower interest payments with the principal); or choose to sell the home (or use saved up cash) to fully pay off the loan.
Usually, interest-only loans are structured as a type of adjustable-rate mortgage (ARM). The interest rate is fixed at first then, after a specified number of years, the interest rate increases or decreases periodically based on market rates. ARMs usually have lower starting interest rates than fixed-rate loans, but their rates can be higher during the adjustable period. Fixed-rate interest-only mortgages are uncommon.
An interest-only mortgage typically starts out with a lower initial payment than other types of mortgages, and you can stick with those payments as long as 10 years before making any payments toward the principal. However, you typically end up paying more in overall interest than you would with a traditional mortgage.
💡 Quick Tip: When house hunting, don’t forget to lock in your mortgage loan rate so there are no surprises if your offer is accepted.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Interest-Only Loan Pros and Cons
Before you choose to take out an interest-only mortgage, it’s a good idea to carefully weigh both the benefits and drawbacks.
Pros
• Lower initial payments The initial monthly payments on interest-only loans tend to be significantly lower than payments on regular mortgages, since they don’t include any principal.
• Lower interest rate Because interest-only mortgages are usually structured as ARMs, initial rates are often lower than those for 30-year fixed-rate mortgages.
• Frees up cash flow With a lower monthly payment, you may be able to set aside some extra money for other goals and investments.
• Delays higher payments An interest-only mortgage allows you to defer large payments into future years when your income may be higher.
• Tax benefits Since you can deduct mortgage interest on your tax return, an interest-only mortgage could result in significant tax savings during the interest-only payment phase.
Cons
• Cost more overall Though your initial payments will be smaller, the total amount of interest you will pay over the life of the loan will likely be higher than with a principal-and-interest mortgage.
• Interest-only payments don’t build equity You won’t build equity in your home unless you make extra payments toward the principal during the interest-only period. That means you won’t be able to borrow against the equity in your home with a home equity loan or home equity line of credit.
• Payments will increase down the road When payments start to include principal, they will get significantly higher. Depending on market rates, the interest rate may also go up after the initial fixed-rate period.
• You can’t count on refinance If your home loses value, it could deplete the equity you had from your down payment, making refinancing a challenge.
• Strict qualification requirements Lenders often have higher down payment requirements and stricter qualification criteria for interest-only mortgages.
You may want to consider an interest-only mortgage loan if:
• You want short-term cash flow A very low payment during the interest-only period could help free up cash. If you can use that cash for another investment opportunity, it might more than cover the added expense of this type of mortgage.
• You plan to own the home for a short time If you’re planning to sell before the interest-only period is up, an interest-only mortgage might make sense, especially if home values are appreciating in your area.
• You’re buying a retirement home If you’re nearing retirement, you might use an interest-only loan to buy a vacation home that will become your primary home after you stop working. When you sell off your first home, you can use the money to pay off the interest-only loan.
• You expect an income increase or windfall If you expect to have a significant bump up in income or access to a large lump sum by the time the interest period ends, you might be able to buy more house with an interest-only loan.
Interest-only loans aren’t qualified mortgages, which means they don’t meet the backing criteria for Fannie Mae, Freddie Mac, or the other government entities that insure mortgages. As a result, these loans pose more risk to a lender and, therefore, can be more difficult to qualify for.
In general, you may need the following to get approved for an interest-only loan:
• A minimum credit score of 700 or higher
• A debt-to-income (DTI) ratio of 43% or lower
• A down payment of at least 20% to 30% percent
• Sufficient income and assets to repay the loan
The Takeaway
An interest-only mortgage generally isn’t ideal for most home-buyers, including first-time home-buyers. However, this type of mortgage can be a useful tool for some borrowers with strong credit who fully understand the risks involved and are looking at short-term ownership or have a plan for how they will cover the step-up in payment amounts that will come down the road.
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 Mortgages
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
A 401(k) loan allows you to borrow money from your retirement savings and pay it back to yourself over time, with interest. While this type of loan can provide quick access to cash at a relatively low cost, it comes with some downsides. Read on to learn how 401(k) loans work, when it may be appropriate to borrow from your 401(k), and when you might want to consider an alternative source of funding.
What Is a 401(k) Loan & How Does It Work?
A 401(k) loan is a provision that allows participants in a 401(k) plan to borrow money from their own retirement savings. Here are some key points to understand about 401(k) loans.
Limits on How Much You Can Borrow
The Internal Revenue Service (IRS) sets limits on the maximum amount that can be borrowed from a 401(k) plan. Typically, you can borrow up to 50% of your account balance or $50,000, whichever is less, within a 12-month period.
Spousal Permission
Some plans require borrowers to get the signed consent of their spouse before a 401(k) loan can be approved.
You Repay the Loan With Interest
Unlike a withdrawal, a 401(k) loan requires repayment. Typically, you repay the loan (plus interest) via regular payroll deductions, over a specified period, usually five years. These payments go into your own 401(k) account.
Should You Borrow from Your 401(k)?
It depends. In some cases, getting a 401(k) can make sense, while in others, it may not. Here’s a closer look.
When to Consider a 401(k) Loan
• In an emergency If you’re facing a genuine financial emergency, such as medical expenses or imminent foreclosure, a 401(k) loan may provide a timely solution. It can help you address immediate needs without relying on more expensive forms of borrowing.
• You have expensive debt If you have high-interest credit card debt, borrowing from your 401(k) at a lower interest rate can potentially save you money and help you pay off your debt more efficiently.
When to Avoid a 401(k) Loan
• You want to preserve your long-term financial health Depending on the plan, you may not be able to contribute to your 401(k) for the duration of your loan. This can take away from your future financial security (you may also miss out on employee matches). In addition, money removed from your 401(k) will not be able to grow and will not benefit from the effects of compound interest.
• You may change jobs in the next several years If you anticipate leaving your current employer in the near future, taking a 401(k) loan can have adverse consequences. Unpaid loan balances may become due upon separation, leading to potential tax implications and penalties.
How Is a 401(k) Loan Different From an Early Withdrawal?
When you withdraw money from your 401(k), these distributions typically count as taxable income. And, if you’re under the age of 59½, you typically also have to pay a 10% penalty on the amount withdrawn.
• Medical care expenses for you, your spouse, or children
• Costs directly related to the purchase of your principal residence (excluding mortgage payments).
• College tuition and related educational fees for the next 12 months for you, your spouse, or children.
• Payments necessary to prevent eviction from your home or foreclosure
• Funeral expenses
• Certain expenses to repair damage to your principal residence
While the above scenarios can help you avoid a penalty, income taxes will still be due on the withdrawal. Also keep in mind that an early withdrawal involves permanently taking funds out of your retirement account, depleting your nest egg.
With a 401(k) loan, on the other hand, you borrow money from your retirement account and are obligated to repay it over a specified period. The loan, plus interest, is returned to your 401(k) account. During the term of the loan, however, the money you borrow won’t enjoy any growth.
Given the potential long-term cost of borrowing money from a bank — or taking out a high-interest payday loan or credit card advance — borrowing from your 401(k) can offer some real advantages. Just be sure to weigh the pros against the cons.
Pros
• Efficiency You can often obtain the funds you need more quickly when you borrow from your 401(k) versus other types of loans.
• No credit check There is no credit check or other underwriting process to qualify you as a borrower because you’re withdrawing your own money. Also, the loan is not listed on your credit report, so your credit won’t take a hit if you default.
• Low fees Typically, the cost to borrow money from your 401(k) is limited to a small loan origination fee. There are no early repayment penalties if you pay off the loan early.
• You pay interest to yourself With a 401(k) loan, you repay yourself, so interest is not lost to a lender.
Cons
• Borrowing limits Typically, you are only able to borrow up to 50% of your vested account balance or $50,000 — whichever is less.
• Loss of growth When you borrow from your 401(k), you specify the investment account(s) from which you want to borrow money, and those investments are liquidated for the duration of the loan. Therefore, you lose any positive earnings that would have been produced by those investments for the duration of the loan.
• Default penalties If you don’t or can’t repay the money you borrowed on time, the remaining balance would be treated as a 401(k) disbursement under IRS rules. This means you’ll owe taxes on the balance and, if you’re younger than 59 1 ⁄ 2, you will likely also have to pay a 10% penalty.
• Leaving your job If you leave your current job, you may have to repay your loan in full in a very short time frame. If you’re unable to do that, you will face the default penalties outlined above.
Alternatives to Borrowing From Your 401(k)
Because withdrawing or borrowing from your 401(k) comes with some drawbacks, here’s a look at some other ways to access cash for a large or emergency expense.
Emergency fund Establishing and maintaining an emergency fund (ideally, with at least three to six months’ worth of living expenses) can provide a financial safety net for unexpected expenses. Having a dedicated fund can reduce the need to tap into your retirement savings.
Home equity loans or lines of credit If you own a home, leveraging the equity through a home equity loan or line of credit can provide a cost-effective method of accessing extra cash. Just keep in mind that these loans are secured by your home — should you run into trouble repaying the loan, you could potentially lose your home.
Negotiating with creditors In cases of financial hardship, it can be worth reaching out to your creditors and explaining your situation. They might be willing to reduce your interest rates, offer a payment plan, or find another way to make your debt more manageable.
Personal Loans Personal loans are available from online lenders, local banks and credit unions and can be used for virtually any purpose. These loans are typically unsecured (meaning no collateral is required) and come with fixed interest rates and set terms. Depending on your lender, you may be able to get funding within a day or so.
The Takeaway
Borrowing from your 401(k) can provide short-term financial relief but there are some downsides to consider, such as borrowing limits, loss of growth, and penalties for defaulting. It’s a good idea to carefully weigh the pros and cons before you take out a 401(k) loan. You may also want to consider alternatives, such as using non-retirement savings, taking out a home equity loan or line of credit, or getting a personal loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
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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.
Most people consider a “good” mortgage rate to be the lowest average current rate available. But here’s what they may not realize: Not everyone will qualify for the best rates out there.
So what is a good mortgage rate? It can be different for every borrower, depending on their financial situation and credit score.
Many factors go into determining the mortgage rate you can get. Once you understand what these variables are, the better equipped you’ll be to navigate the mortgage market and find the best loan for your situation.
This guide will get you on your way.
What Is a Mortgage Interest Rate?
If you’re a first-time home buyer, you may have a lot of questions about mortgage interest rates. The interest rate on a loan is the cost you pay to borrow money. You pay the interest each month as part of your regular payments for your loan.
There are different types of mortgage rates. With a fixed rate mortgage, your interest stays the same over the life of the loan. This means your monthly payment will always be the same.
An adjustable-rate mortgage (ARM) changes with the prime interest rate, which is influenced by the federal funds benchmark set by the Federal Reserve (the Fed). An ARM typically starts with a fixed rate for the first five to seven years, and then might fluctuate, based on the prime rate. This could potentially make your payments much higher, depending on the state of the economy.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
How Do Mortgage Interest Rates Work?
So what is a good mortgage interest rate? Interest rates are always changing. A variety of factors determine mortgage rate changes. Some you have control over, and others you don’t.
One of the critical factors that’s outside your control is what’s happening in the economy. Major economic events have a significant effect on interest rate fluctuations. For instance, if employment rates are high, the interest rate typically rises as well.
Inflation, which limits consumers’ purchasing power, also plays a role. Since 2022, inflation has been on the rise, and the Fed has raised interest rates numerous times to try to tame it.
Your personal financial situation also affects the interest rate you get, as outlined below.
How Lenders Determine Your Mortgage Rate
In addition to the economic factors and the influence of the Fed, your unique financial situation will help determine the mortgage rate you qualify for.
Here are a few key factors lenders typically consider when determining your rate.
Credit Score
Most lenders review your credit history to determine if you’re eligible for a mortgage.
With this in mind, you want to make sure you check your score regularly and that you’re doing everything you can to keep your score as high as possible, like paying your bills on time and keeping your credit balances low.
Credit report agencies will assign you a credit score by evaluating these factors. The most common model is the FICO® credit score, which ranges from 300 to 850.
Usually, if you have a credit score of 800 or higher, it’s considered exceptional, whereas a credit score between 740 and 799 is considered very good.
A credit score of 739 to 670 is good, and a score between 669 and 580 is fair. A score of 579 and lower is considered poor. A low credit score indicates that a borrower represents a higher risk. Borrowers with these credit scores may have trouble getting approved for a loan.
It’s important to note that specific credit score requirements may depend on the loan you apply for.
Income and Assets
Your income is another important factor lenders use to determine if you’re eligible for a mortgage. Lenders prefer borrowers with a steady income. To determine if you qualify, lenders evaluate your income and other assets, such as investments.
Also, your debt-to-income ratio (DTI) is essential information. Your DTI indicates what percentage of your monthly income is used for debt payments. This number gives lenders an idea of how well you’re doing financially.
If your DTI ratio is high, it may show that you’re not in a position to take on more debt. A lender might give you a higher interest rate or deny your mortgage application altogether.
Down Payment Amount
Sometimes your down payment amount can lower your interest rate or even determine what loans you’re eligible for. Lenders may see you as less of a risk if you put more money down.
A good standard tends to be a 20% down payment. A 20% down payment may help you get the most favorable interest rates.
However, if you’re applying for a government-backed loan, you may not need such a big down payment. For example, a Veterans Affairs mortgage requires no money down, and a Federal Housing Administration (FHA) loan only requires 3.5% down.
The loan term you select, such as 15 or 30 years, can also make a difference in the interest rate you receive. In general, a shorter-term loan will have a lower interest rate than a longer-term loan. However, your monthly payments will be higher with a shorter-term mortgage.
There are also several types of mortgage loan categories, including conventional, FHA, USDA, and VA loans. Each loan product may have very different rates.
Finally, as discussed, with a fixed-rate mortgage, your interest rate will remain the same for the life of the loan. But if you choose an adjustable-rate mortgage, your interest rate will vary after an initial fixed rate.
Before you take out any loan, it’s important to compare all of your options to make sure you find the best rate available.
Location
Where your property is located can also play a role in the interest rate you receive. Some real estate markets are simply more costly than others. For instance the cost of living in California is higher than it is in some other locations.
In addition to your financial situation and location, and the type of loan you’re applying for, there are some other things that may influence the mortgage rate you get. They include:
The lender you choose
Different lenders offer different mortgage rates and terms. Shop around to find the best rate you can qualify for.
Housing market conditions
This factor is out of your control, but it’s good to understand how it works. If demand for houses is strong, mortgage rates tend to rise. And the opposite is true: When demand slows, rates tend to decrease. Knowing what the housing market is doing when you’re shopping for a home loan can help prepare you for what to expect.
What Is Considered a Good Mortgage Rate
Currently, in mid-June 2023, the average rate on a 30-year fixed-rate mortgage is 6.67%, according to Freddie Mac. Anything below or close to that number might be considered good.
But again, what’s a good mortgage rate for you depends on your financial situation and many other factors. A good rate is what you can qualify for. Be sure to compare rates from different lenders to get the best deal and the lowest rate you can.
As you’re comparing your options, be sure to look at the loan’s APR (annual percentage rate). An APR gives borrowers a more comprehensive measure of the cost to borrow money than the interest rate alone does.
The APR includes the interest rate, any points, mortgage broker fees, and other charges you pay to borrow money. So when you’re comparing options, you’ll want to review each lender’s APR to indicate the true cost of borrowing.
To get an idea of what your mortgage payments might be, you can use a mortgage calculator.
How to Get a Good Mortgage Rate
Now that you know the answer to the question, what is a good interest rate for a mortgage?, you’ll want to make sure you get the best rate for you. Making sure your finances are in order before you apply for a mortgage will likely help you obtain a better interest rate and loan terms. Here are some ways to do that.
• Pay off higher-interest debt. If you have debt like credit card debt, you’re likely paying a lot of money in interest. That money could be going toward other things like a mortgage payment. Second, carrying a large amount of debt means you lower your chances of approval for a home loan. Pay off as much of your debt as you reasonably can.
• Save more for a large down payment. Buyers who put down less than 20% may end up paying for private mortgage insurance (PMI), which typically costs between 0.5% and 1.5% of the loan amount annually.
• Review your credit history and check for errors. You can get a free copy of your credit report from the three major credit bureaus or from AnnualCreditReport.com. If you spot any errors, be sure to alert the credit bureaus right away. Correcting any mistakes may help improve your ability to get a home loan.
The Takeaway
What is a good interest rate on a mortgage? Your financial health, the health of the economy, the loan type and term, and other factors help determine the actual rates you’re offered. What you can do is work to strengthen your credit and financial situation and pay down debt you have, such as credit card debt.
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.
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FAQ
What is the 30 year mortgage rate right now?
Right now, as of mid-June 2023, the average rate for a 30-year mortgage is 6.67%, according to Freddie Mac.
What is a good interest rate for a mortgage now?
A good rate for a mortgage now is anything below the average rate for a 30-year mortgage, which is 6.67% in mid-June 2023. But a good mortgage rate can be different for every borrower, depending on their financial situation and credit score, as well as the type of home loan they’re applying for, among other factors.
Is 4% a good rate for a mortgage?
Currently, in 2023, 4% is considered a good rate for a mortgage, compared to the average rate for a 30-year fixed-rate mortgage, which is 6.67%.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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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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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.
