Who Owns the US National Debt?

As of June 2021, the US government is the largest single owner of US debt, owning around $6 trillion. The remaining debt is owned by individuals, businesses, governments, and foreign countries - with Japan owning the largest chunk of US debt hovering around $1.26 trillion.

MoneyLL Archives | Page 86 of 117

Q: How Much Debt Does the US Have?

As of June 2021, the United States is $28.3 trillion in debt and continues to climb.

Jul

2023

How Much Debt Does the U.S. Have and Who Owns It?

How Much Debt Does the United States Have and Who Owns It?

By Ashley Kilroy | Financial Independence, Growing Wealth, invest, Investing | Comments Off

When consumers spend more than they make, they often find themselves in debt. The same is true for countries, and the United States is no exception. When the United States spends more than it earned through taxes and other revenue sources, it creates a deficit.

The United States borrows money, typically by issuing Treasury securities, such as treasury bills (T-Bills), notes (T-Notes) and bonds (T-Bonds), to cover that difference. Every year the United States cannot pay the deficit between revenue and expenses, the national debt grows.

Here’s everything you need to know about the national debt, how it impacts the American economy, and who owns US debt.

How Much Debt Does the US Have?

As of July 2023, the United States is $32.47 trillion in debt and that number continues to climb. Some economists prefer to look at national debt as a percentage of gross domestic product (GDP). At 118.5%, the current US debt level is higher than the country’s GDP.

Who Is the US in Debt to?

There are generally two categories of debt: intragovernmental holdings and debt from the public. The debt that the government owes itself is known as intragovernmental debt. In general, this debt is owed to other government agencies such as the Social Security Trust Fund.

Because the Social Security Trust Fund doesn’t use all its generated capital, it invests the excess funds into U.S. Treasuries. If the Social Security Trust Fund needs money, it can redeem the Treasuries. As of June 2023, intergovernmental debt hovers around $6.87 trillion, making the US government the largest single owner of US debt.

The public debt consists of debt owned by individuals, businesses, governments, and foreign countries. Foreign countries own roughly one-third of U.S. public debt, with Japan owning the largest chunk of American debt hovering around $1.1 trillion. US debt to China ranks second, with that country owning roughly $859 billion of American debt.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

What is The History of the National Debt?

Since the founding of the United States and the American revolution, debt has been a grim reality in America. When America needed funding for the Revolutionary War in 1776, it appointed a committee, which would later become the Treasury, to borrow capital from other countries such as France and the Netherlands. Thus, after the Revolutionary War in 1783, the United States had already accumulated roughly $43 million in debt.

To cover some of this debt obligation Alexander Hamilton, the first Secretary of the Treasury, rolled out federal bonds. The bonds were seemingly profitable and helped the government create credit. This bond system established an efficient way to make interest payments when the bonds matured and secure the government’s good faith state-side and internationally.

The debt load steadily grew for the next 45 years until President Andrew Jackson took office. He paid off the country’s entire $58 million debt in 1835. After his reign, however, debt began to accumulate again into the millions once again.

Flash forward to the American Civil war, which ended up costing about $5.2 billion. Because the war dragged on, the U.S. was strained to revamp the financial systems in place. To manage some of the debt at hand, the government instituted the Legal Tender Act of 1862 and the National Bank Act of 1863. Both initiatives helped lower the debt to $2.1 billion.

The government borrowed money again to fuel World War I, and then substantially more money to pay for public works projects and attempt to stem deflation during the Great Depression, and even more to pay for World War II, reaching $258 billion in 1945.

Since 1939, the United States has had a “debt ceiling,” which limits the total amount of debt that the federal government can accumulate. The Treasury can continue to borrow money to fund government operations, but the total debt cannot exceed the prescribed limit. However, Congress regularly raises the ceiling. The latest change came in June 2023, when President Biden signed a bill that suspended the limit until January 2025 in exchange for imposing some cuts on federal spending.

Since the debt ceiling was first introduced, American debt’s growth continued growing, with the pace accelerating in the 1980s. US debt tripled between 1980 and 1990. In 2008, quantitative easing during the Great Recession more than doubled the national debt from $2.1 trillion to $4.4 trillion.

More recently, the national debt has increased substantially, with Covid-related stimulus and relief programs adding nearly $2 trillion to the national debt over the next decade.

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

Why The National Debt Matters to Americans

As the national debt continues to skyrocket, some policymakers worry about the sustainability of rising debt, and how it will impact the future of the nation. That’s because the higher the US debt, the more of the country’s overall budget must go toward debt payments, rather than on other expenses, such as infrastructure or social services.

Those worried about the increase in debt also believe that it could lead to lower private investments, since private borrowers may compete with the federal government to borrow funds, leading to potentially higher interest rates that can affect investments and lower confidence.

In addition, research shows that countries confronted with crises while in great debt have fewer options available to them to respond. Thus, the country takes more time to recover. The increased debt could put the United States in a difficult position to handle unexpected problems, such as a recession, and could change the amount of time it moves through business cycles.

Additionally, some worry that continued borrowing by the country could eventually cause lenders to begin to question the country’s credit standing. If investors could lose confidence in the US government’s ability to pay back its debt, interest rates could rise, increasing inflation or other investment risks. While such a shift may not take place in the immediate future, it could impact future generations.

The Takeaway

The national debt is the amount of money that the US government owes to creditors. It’s a number that’s been steadily increasing, which some investors and policymakers worry could have a negative impact on the country’s economic standing going forward.

Some economists believe that the growing national debt could lead to higher interest rates and lower stock returns, so it’s a trend that investors may want to factor into their portfolio-building strategy, especially over the long-term.

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Photo credit: iStock/Dan Comaniciu
SoFi Invest®

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

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

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

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

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Jul

2023

Understanding Parent PLUS Loan Repayment Options

By Becca Stanek | Family Finances, Fresh Out of School, Student Loans, student_loan | No Comments

If you took out a Direct PLUS Loan for Parents to help fund your child’s education, you’re going to eventually have to start paying the money back. Parent PLUS loans generally can’t be transferred to your child — even once they graduate and get a steady job — so you’re the one who’s on the hook for paying them off in full. That prospect can be daunting, since this may be your largest chunk of debt outside of a mortgage.

Fortunately, there are a number of ways to delay payments on parent PLUS Loans, or make them more affordable. Unfortunately, sorting through — and trying to understand — all the various deferment and repayment plans can be overwhelming. Not to worry. What follows is a simple guide to repayment options for Parent Plus loans.

Key Points

• Parent PLUS loans lack a grace period, meaning repayments start immediately after the loan is fully disbursed, often creating a financial burden for parents.

• Deferment and forbearance options exist to temporarily pause payments, but interest continues to accrue, potentially increasing the total debt owed.

• Three primary repayment plans are available: Standard, Graduated, and Extended, each varying in payment structure and loan duration, impacting overall interest paid.

• Forgiveness options for Parent PLUS loans are limited, but income-driven repayment plans and Public Service Loan Forgiveness may provide relief under specific conditions.

• Refinancing with a private lender can lower interest rates and monthly payments but will result in the loss of federal loan benefits, such as forgiveness and forbearance.

Starting Repayments — and Pausing Them if You Need To

Unlike some other federal student loans, Parent PLUS Loans do not have a grace period — a six-month break after the student graduates, or drops below half-time enrollment, before payments are due. Instead, their repayment period typically begins once the loan is fully disbursed.

The idea behind the delay with other student loans is that it gives your child a chance to get settled financially. The federal government assumes you, as a parent, don’t need the same accommodation.

If you’re not ready to start paying, you have a couple of options for pausing repayment on your Parent PLUS Loan:

1. Apply for deferment. Your first payment on a parent PLUS loan is typically due once the loan is fully paid out, often after the spring semester. However, you can opt to defer Parent PLUS loan payments while your child is enrolled at least half-time and up to six months after they graduate or drop below half-time enrollment. To do this, you simply need to apply for a deferment with your loan servicer. Just keep in mind that interest will still be piling up, even if you’re not making payments. If you don’t pay the interest during this period, it will be capitalized (i.e., added to the loan principal) when the deferment is over, which can increase how much you owe over the life of the loan.

2. Request a forbearance. If your child is already more than six-months post graduation, you may still be able to temporarily stop or reduce what you owe by requesting a forbearance . To be eligible for forbearance, however, you must be unable to pay because of financial hardship, medical bills, or a change in your employment situation. The amount of forbearance you can receive for your payments depends on your situation. Interest will still accrue during this period, but if you’re going through a temporary financial difficulty, it may be worth approaching your loan servicer for a forbearance rather than risking missed payments.

💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.

Parent PLUS Loan Repayment Options

You typically can’t put off payments forever. Depending on the repayment plan you choose, you will have between 10 and 25 years to pay off the loan in full. However, you have three different repayment options to choose from. Here’s a closer look at each plan.

Standard Repayment Plan

One of the most straightforward options is the standard repayment plan. In this scenario, you will pay the same fixed amount each month and pay the loan in full within 10 years. The benefit is that you always know how much you owe and you’ll accrue less interest than with most other plans, since you’ll be repaying the loan in a faster time frame.

The difficulty is that this results in monthly payments that may be too high for some people. It’s a good option if you can afford the payments and you don’t expect your situation to change in the next ten years.

Graduated Repayment Plan

With the graduated repayment plan, you will also pay off your loan within 10 years. However, the payments will start out smaller and then gradually increase, usually every two years. You’ll pay more overall than under the previous plan because you’ll accrue more interest, but less than if you were to sign on for a longer repayment term. This plan can be a good option if you expect to earn more in the relatively near future.

Extended Repayment Plan

A third choice is the extended repayment plan, which spreads payments out over 25 years. You can either pay the same amount every month, or have payments start out lower and ramp up over time. You’ll end up paying more over the life of the loan because you’ll be racking up interest over a longer time period. However, this payment plan can be a good way to make monthly payments more affordable while knowing you are on track to pay off the loan in full.

💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.

Loan Forgiveness for Parent PLUS Loans

Parent PLUS borrowers don’t have as many opportunities for loan forgiveness as students do. And, the newly introduced changes to income-driven repayment (IDR) plans, called SAVE, won’t help you. However, there are other options to get debt relief for parent PLUS loans. Here are two to consider.

Income-Contingent Repayment Plan

You do have one option for tying payments to your income, but you have to jump through one hoop first — you’ll need to consolidate your Direct PLUS loans into a Direct Consolidation Loan . You can (and will need to) do this even if you only have one Parent Plus loan.

A Direct Consolidation Loan combines any existing federal Parent loans into one and may change your monthly payment, interest rate, or the amount of time in which you have to repay the loan. You can’t, however, consolidate Direct PLUS Loans received by parents to help pay for a dependent student’s education with federal student loans that the student received.

Once you consolidate, you may be eligible for the Income-Contingent Repayment (ICR) Plan. Under this plan, your monthly payment would be no more than 20% of your discretionary income for 25 years. After that time, any remaining debt is forgiven.

The ICR plan can potentially lower the required monthly payment to an affordable level. Depending on your income, you can potentially get a payment as low as $0.

Public Service Loan Forgiveness

Another way you might be able to get your loans forgiven is by signing up for Public Service Loan Forgiveness (PSLF). You might qualify if you work in a public service job, including for a government organization, nonprofit, police department, library, or early childhood education center. Note that you are the one who has to work in this field, and not the student.

To be eligible for PSLF, you’ll need to first consolidate your Parent PLUS loans (or loan) into a Direct Consolidation Loan and start repayment under the ICR Plan. Once you make 120 qualifying payments on the new Direct Consolidation Loan, your loan may be forgiven (prior Parent Plus Loan payments do not count towards 120 payments required for PSLF).

Considering Student Loan Refinancing

If you’re looking for another way to tackle your Parent PLUS loan, you may want to consider refinancing your Parent Plus loan with a private lender. This involves taking out a new loan and using it to repay your current Parent PLUS Loan.

Refinancing your PLUS loan can potentially reduce the total interest you pay over time, lower your monthly payment, and/or help you get out of debt faster. Note: You may pay more interest over the life of the loan if you refinance with an extended term. Depending on the lender, you may also have the option to transfer the debt into your student’s name.

When you apply for a parent PLUS loan refinance, the lender will conduct a credit check and look at your income and other debts to determine if you qualify for a refinance and at what rate. Generally, the better your credit, the cheaper the loan will be. In fact, if you have exceptional credit, your interest rate could be substantially lower than what the federal government originally offered you. Keep in mind, however, that when you refinance a federal student loan with a private lender, you are no longer eligible for federal student loan benefits, such as forgiveness or forbearance.

The Takeaway

By taking out a Parent PLUS loan, you are generously supporting your child’s dream of getting a college education and launching a successful career. But that doesn’t mean that loan payments need to become a burden for you. If you learn about your options for reducing or managing payments, you’ll be on track to paying off your loan with peace of mind.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

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

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

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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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Jul

2023

How to Open a Brokerage Account

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

When you open a brokerage account with a brokerage firm, you transfer money into the account that you can use to start investing. While some brokerage accounts may set an account minimum, there is typically no limit to how much you can deposit or when you can withdraw your money.

With a brokerage account, investors can invest in a variety of securities, including stocks, bonds, ETFs, and more. There are many brokerages, but the steps to open a brokerage account are similar among most of them.

How Do I Open a Brokerage Account?

There are a few simple steps to opening a brokerage account. We’ll dive deep into each one below.

1. Choose a brokerage provider.

2. Sign up for an account.

3. Transfer money.

4. Start trading.

Step 1: Choose a Brokerage Provider

There are several types of brokerage accounts, and the type you choose will depend on what you’re trying to accomplish.

• Full-service brokerage firms not only allow clients to trade securities, they may also offer financial consulting and other services—though the price may be steep, compared to the other options here.

• Discount brokerage firms typically charge lower fees than full-service, but as a result clients don’t have access to additional financial consulting or planning services.

• Online brokerage firms are typically online-only, allowing clients to sign up, transfer money, and make trades through their website. These firms typically offer the lowest fees.

The accounts above are known as cash accounts: You must buy securities with funds you put in your account ahead of time. You may also encounter other more complicated types of brokerage accounts known as margin accounts, which allow you to borrow money from your brokerage to make investments, using your case account as collateral. These accounts tend to be for sophisticated investors willing to shoulder the risk that investments bought with borrowed funds will lose value.

Before working with an individual investment advisor or a firm and opening a cash or margin account, it can be a good idea to run a check on their background. The Financial Industry Regulatory Authority (FINRA) offers online broker checks where you can enter a broker’s name, or the name of a firm, to learn whether a broker is registered to sell securities, offer investment advice, or both. And you can learn about a broker’s employment history, regulatory actions, and whether there are past or current arbitrations and complaints.

Step 2: Sign Up for a Brokerage Account

Most brokers of all kinds allow you to open and access your brokerage account online. When you open the account, you will likely be asked to provide your Social Security number or taxpayer identification number, your address, date of birth, driver’s license or passport information, employment status, annual income and net worth. You may also be asked about your investment goals and risk tolerance.

For the most part, they should not charge you a fee for opening an account. While some may require account minimums, others allow you to open an account with no minimum deposit.

There is no limit on the number of brokerage accounts you can open, and you may be able to hold multiple accounts with multiple brokerage firms.

Step 3: Transfer Money

You will need to fund your new brokerage account before you can purchase any types of securities. You can deposit money in a brokerage account like you would in a traditional bank account.

Step 4: Start Trading

Many brokerage firms will offer a way for you to earn interest on uninvested funds so that your money continues to work for you even when not invested in the market.

💡 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.

How Do Brokerage Accounts Work?

The brokerage firm with which you hold your account maintains the account and acts as the custodian for the assets you hold. In other words, the custodian provides a space for investors to use their account in the way that it was intended.

However, you own the investments in the account and can buy and sell them as you wish. The brokerage firm acts as a middleman between you and the markets, matching you with buyers and sellers, and executing trades based on your instructions.

For example, if you place an order with your brokerage to buy a certain number of shares of stock, the brokerage will match you with a seller looking to sell those shares and make the trade for you.

What’s the Difference Between Brokerage Accounts and Retirement Accounts?

Brokerage accounts are also known as taxable accounts, because profits on sales of securities inside the account are potentially subject to capital gains taxes. Generally speaking, these accounts offer no tax advantages for investors.

Retirement accounts, on the other hand, offer a number of tax advantages that may make them preferable to taxable accounts if you’re planning to save for retirement. Retirement accounts place limits on how much money you can contribute and when you can withdraw funds.

If retirement planning is your main concern, you may consider saving as much as you can in both a 401(k) if your employer offers one, and a traditional or Roth IRA. If you have funds left over, you may choose to invest those in your taxable brokerage account.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Is My Money Safe in a Brokerage Account?

The money and securities held in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC) . The SIPC protects against the loss of cash and securities held at failing brokerage firms. If your brokerage firm goes bankrupt, the SIPC covers $500,000 worth of losses, including $250,000 in cash losses.

The SIPC only provides protection for the custody function of a brokerage firm. In other words, they work to restore the cash and securities that were in a customer’s account when the brokerage started its liquidation proceedings. The organization does not protect against declines in value of the securities you hold, nor does it protect against receiving and acting upon bad investment advice.

It is important that any investor realizes and accepts that investment comes with a certain amount of risk. While security prices may gain in value, it is also possible that you could lose some or all of your investment.

The Takeaway

Opening a brokerage account is a simple process that allows you to invest in securities. Effectively, you’re depositing money at a brokerage, which will allow you to buy investments such as stocks, bonds, or ETFs. There are numerous brokerages out there, and different types of brokerage accounts.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

SoFi Invest®

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

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

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jul

2023

How Do Valuations of Property Work?

By Austin Kilham | Home Ownership, mortgage | Comments Off

Whether you’re a first-time homebuyer or you’re thinking about putting your home on the market, it’s critical to know the value of the property. Property valuation also comes into play in home financing, property taxes, real estate investing, and home insurance. But who does the valuation, and how do they determine the value of a home?

The answers to both questions will depend on the situation. Read on to learn more about property valuations, including what they are and why they matter.

What Is a Property Valuation?

Broadly defined, a property valuation is a method of determining how much a property is worth for purposes of pricing it for sale, qualifying for a mortgage, or determining a property tax bill.

Someone selling their home, for example, may use a property valuation to determine how much their house is worth and how much they can charge on the open market.

If you are applying for a mortgage, the lender will typically do a home appraisal to determine if the price you are paying for the house reflects its actual fair market value. Insurance companies and local tax authorities also do property valuations.

Typically, property valuations are done by an independent third party, such as a licensed appraiser. The lender, buyer, seller, tax authority, or insurer generally cannot have any relationship with the appraiser so that the valuation is unbiased.

The value of a property is determined by many factors, including its location, its size, the condition of the inside and outside of the building, and the current real estate market.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Types of Property Valuations

There are several different types of property valuations. Here are some of the most common you may encounter.

Appraised Value

When you are looking to qualify for a mortgage to buy a home, your lender will usually need to know the appraised value of the house you want to buy. The appraised value of a home is determined by a licensed appraiser who thoroughly evaluates the property’s size and features, market conditions, and comparable sales data. Typically, a lender will offer a loan for no more than 80% of the home’s appraised value (though some lenders and loan programs will allow you to borrow more).

💡 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.

Assessed Value

The assessed value of your home is used in determining your property taxes. Depending on where you live, a municipal or county tax assessor will perform a property value assessment based on a number of factors, which may include sales of similar homes, square footage, current market conditions, and findings on a home inspection.

Local tax officials will use your home’s assessed value to calculate your property taxes. The higher your home’s tax-assessed value, generally the higher your property taxes will be. It is important to note that assessed values may not always accurately reflect the property’s market value, as they can vary depending on the jurisdiction’s assessment practices.

Fair Market Value

Fair market value of a property refers to the price at which a property would change hands in the open market between a willing buyer and a willing seller in an open market, not under any pressure to buy or sell. Put another way, it’s the amount you could expect to buy or sell a property based on the current real estate market. This value is considered the most objective and widely used in real estate transactions.

Actual Cash Value and Replacement Cost Value

Actual cash value and replacement cost value are methods used by home insurance companies to determine how they will pay out when you file a claim. Actual cash value takes into account depreciation and wear and tear when determining a property’s value. Replacement cost value estimates the cost of rebuilding or replacing a property with a similar one, considering current construction costs.

What If You Get a Low Appraisal?

If you’re buying a home and the lender’s appraised value is as much as the agreed-upon price or more, the lender will likely move forward with the home loan, assuming that the other aspects of the property and your application are in order.

If the appraisal comes in under the agreed-upon price, the lender may reduce the amount of the loan it’s willing to offer.

At that point, you or the sellers can dispute the appraisal with the lender or ask for a second look. If the value is still too low, there are a few different routes:

• You can try to get the seller to reduce the price.

• You can agree to contribute the difference in cash.

• You and the seller may agree to split the difference.

If the purchase agreement contains an appraisal contingency, you are protected in the case of a low appraisal. This means that If you can’t get the seller to adjust the price or come up with the difference in cash, you can walk away from the sale and get your earnest money deposit returned to you.

Property Valuation Methods

There are different ways to assess the value of a property. Which method will be used will depend on the situation.

Sales Comparison Approach

The sales comparison approach determines a property’s value by comparing it to recently sold properties with similar characteristics in the same area, also known as “comps.” Appraisers make adjustments for differences in size, condition, and amenities to arrive at an estimated value. The sales comparison approach is the one most often used by realtors in determining the value of a property for sale.

Income Approach

The income approach is primarily used for investment properties that result in a stream of income, such as rental apartments or commercial buildings. It estimates the property’s value based on its income potential, taking into consideration factors such as expense statements, rental rates, vacancy rates, and market conditions.

Cost Approach

The cost approach evaluates a property’s value by estimating the cost required to rebuild or replace it on its current plot of land. This appraiser determines the replacement cost by considering the cost of materials and labor, then subtracts depreciation and adds in the value of the land to determine the property’s worth. This method is often used by insurance companies.

💡 Quick Tip: A appraisal waiver, which saves the borrower the cost of the appraisal and uses an AVM instead.

There are commercial AVM providers, including Freddie Mac and Equifax®, as well as free AVMs available online, such as Zillow’s “Zestimate.”

Because AVMs are based on existing data, the property valuations they produce are only as good as the information available. An AVM may be inaccurate if the data is outdated or incorrect.

The Takeaway

Understanding property valuations is essential for navigating any kind of real estate transaction, whether you are on the buying, selling, investing, or financing side of the deal. There are many different types of home valuations, including appraised value, assessed value, fair market value, actual cash value, and replacement cost value. There are also different ways of doing property valuations, such as the sales comparison approach, income approach, and cost approach. For a quick valuation, you can even use an online computer-generated valuation tool or AVM.

Whatever approach you take, a property valuation can help you confidently make informed decisions and negotiate effectively in the real estate market.

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.

FAQs

How do you determine the value of a property?

The value of a property is typically determined by an independent licensed appraiser who considers factors such as the property’s location, size, condition, amenities, and recent comparable sales data in the area.

What are the 4 ways to value a property?

The four primary ways to value a property are:

• Market comparison approach This approach compares the property to similar recently sold properties in the same area.

• Income approach With this method, an appraiser estimates the value based on the property’s income potential.

• Cost approach This valuation strategy involves evaluating the cost to replace or rebuild the property on the same land.

• Appraised value With this method, the value of a property is determined by a qualified appraiser through a comprehensive evaluation.

How does valuation work?

Valuation of a home typically involves inspecting the property, analyzing relevant data, and applying appropriate valuation methods (such as the market comparison approach or cost approach).

Appraisers will generally assess factors such as location, condition, amenities, recent sales, and market trends to determine the property’s value. A comprehensive report is then prepared, detailing the value, data, and reasoning behind the valuation. Valuation serves as a crucial step in real estate transactions, providing objective estimates of property worth.

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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.

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

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

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Jul

2023

What Student Loan Repayment Plan Should You Choose? Take the Quiz

By Kelly Boyer Sagert | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

Federal student loans offer a specific selection of repayment plans that borrowers can choose from. Federal student loan borrowers may be assigned a repayment plan when they begin loan repayment, but they can change their repayment plan at any time without fees.

Choosing the right repayment plan may feel overwhelming, but understanding the repayment plans available to federal student loan borrowers can help.

The student loan repayment options for federal loans covered in this article are:

• Standard Repayment Plan

• Extended Repayment Plan

• Graduated Repayment Plan

• Income-Driven Repayment Plans

The Standard Repayment Plan is 10 years (10 to 30 years for those with Consolidation Loans) and usually has the highest monthly payments, but it allows borrowers to repay their loans in the shortest period of time. That may help a borrower pay less in accrued interest over the life of the loan.

The Extended Repayment plan stretches out the repayment period so that you’re putting money toward student loans for up to 25 years. Payments can be fixed or they may increase gradually over time. This repayment plan may be worth considering for borrowers who have more than $30,000 in federal Direct Loans and cannot meet the monthly payments on the Standard Repayment Plan.

On the Graduated Repayment Plan, the repayment period is typically 10 (10 to 30 years for those with Consolidation Loans). The monthly payments start out low and then increase every two years. This plan may be worth considering for borrowers who have a relatively low income now, but anticipate that their salary may increase substantially over time.

Income-Driven Repayment plans tie a borrower’s income to their monthly payments. These options may be worth considering for borrowers who are struggling to make payments under the other payment plans or who are pursuing Public Service Loan Forgiveness.

Choosing a repayment plan is one of the basics of student loans. For help determining which plan may be a good choice for your situation, you can take this quiz. Or, you can go directly to the overviews of the different repayment plans below to get a better understanding of them.

Quiz: What Student Loan Repayment Plan is Right for You?