If you’re not satisfied with the selection of mortgage programs offered by your bank or local lender, you might want to consider the new 15/15 Adjustable-Rate Mortgage now being offered by PenFed for a limited time.
Yes, you heard that right. The Pentagon Federal Credit Union just launched, or in their own words, “invented,” an adjustable-rate mortgage that doesn’t make its first adjustment for 15 years.
And once it does adjust for the very first time, it never adjusts again. Talk about a gamble, assuming you still have your mortgage in the year 2033.
PenFed’s new promotional loan program has a start rate (teaser rate) of 4.625%, which is fixed for the first 15 years of the 30-year loan.
Then the rate adjusts to whatever the weekly average yield on US Treasury securities (I believe the 10-year CMT index) is plus a margin of two percent, rounded to the nearest eighth.
So based on today’s CMT of 2.90%, you’d be looking at a rate of around 4.90% once it becomes adjustable.
Of course, in 15 years that could change significantly. Take a look at the chart of the 10-year yield above.
It fell as low as 1.40% in mid-2012, but has since risen to around 2.90%. Go back to before the mortgage crisis and it was closer to 5%, meaning the fully indexed rate could easily be around 7% or higher if we return to those levels.
So if yields on Treasuries do increase, which they most likely will over the next 15 years, you’ll be stuck with a higher rate at the time the 15/15 ARM adjusts.
And it won’t adjust again; you’ll be stuck with that rate for the remaining 15 years of the 30-year loan.
However, the yield could also fall or remain constant, seeing that 15 years is a very long time, so your rate could actually improve.
Just note that there is both a cap and a floor; the adjusted rate cannot be more than 6% above the initial rate (10.625%) and cannot be lower than the floor rate of 2%.
Before the housing crisis reared its ugly head, you could get your hands on all types of “innovative” loan products.
Of course, most of them just got homeowners into trouble because they highlighted the good and ignored the bad.
The 15/15 ARM certainly isn’t the highest risk adjustable-rate mortgage out there, but it could be a bad move if the 10-year yield surges over the next decade and change.
Still, with a reduced, fixed rate for 15 years, you could save a decent chunk of money before refinancing your mortgage or selling prior to that first adjustment.
But considering rates on the 30-year fixed mortgage are close to about 4.5% at the moment, you’d be getting a rate nearly identical to current 30-year fixed levels.
If you’re not saving any money each month, there’s not much of a reason to go with the 15/15 ARM over a standard 30-year fixed. After all, the whole point of an ARM is to pay less interest and own more of your home in a shorter period of time.
So make sure the interest rate is actually lower relative to other options to determine if it’s a worthwhile loan program.
Assuming the start rate is lower, and you’re willing to take a little risk, you could apply the payment savings to the principal balance each month to pay off the mortgage even faster.
Note that the 15/15 ARM is only available on primary residences and second homes, but works for both purchases and refinances. There is a 1% loan origination fee and loan amounts of up to $453,100 are available (higher in Alaska, Guam, and Hawaii).
It also comes in a jumbo variety with loan amounts up to $2 million.
For the record, the company also has a 5/5 ARM, which as the name suggests, is fixed for the first five years before adjusting every five years after that. The mortgage interest rate on that loan program starts at 3.875%.
All in all, PenFed mortgage rates seem pretty competitive, and their unique mix of loan programs might suit a homeowner looking for something a little different.
Also check out the HarmonyLoan, which is an adjustable-rate mortgage you can reset with the click of a mouse.
Source: thetruthaboutmortgage.com
Well, 2013 has officially come to a close, and 2014 is well underway.
For a moment there, it seemed as if each holiday was followed by a weekend, creating an endless vacation, but sadly it’s time to get back to work.
So without further ado, I present to you my top 10 predictions for the mortgage and housing market for 2014.
For the record, you can see my 2013 predictions here, which I’ll admit were a bit of a mixed bag.
1. Mortgage rates will inch higher
Last year, I expected mortgage rates to move somewhat sideways. I was wrong. They went up a lot more than I predicted.
This year, however, I see the movement a bit more muted, seeing that they’ve already risen so much (more than 1% in a year).
Most market pundits expect rates on the 30-year fixed mortgage to average close to 5% by year-end, which is less than half a point above current levels.
Yes, higher, but not that much higher. And still cheap.
2. Home price appreciation will ease, somewhat
Going hand in hand with that prediction is the expectation that home price appreciation will moderate after an explosive couple years.
Again, the idea here is that home prices have already chalked impressive gains, so the upside is more limited. Of course, that will depend on the region of the country in question. And our propensity to chase prices higher.
I’m not sure I agree with the really conservative views though – the housing market could surprise us yet again as eager buyers that missed out earlier try to get in late.
3. Housing inventory will remain tight
Yes, as home prices rise more homeowners will be able to list their homes (positive equity facilitates that).
But I don’t know how many of them will be quick to list, especially after waiting so long to get back in the black.
They might want to book a profit as well. Then there are the investors, who made it clear they plan to hold and rent for who knows how long.
4. Investor home purchases will decline
Speaking of investors, they should pump the brakes on home purchases this year seeing that home prices have risen so much.
Sure, they might still scoop up properties in certain hard-hit, non-fully recovered areas, but they’ll probably step aside and let everyday Joes get a piece of the action (at a premium).
5. ARMs will get more popular
Despite interest rates on the 30-year fixed slated to remain below 5%, more borrowers will turn to adjustable-rate mortgages to get their financing.
I think this will be a combination of lenders pitching more ARM products, along with the fact that fixed rates aren’t where they once were.
It’s an ego thing. Today’s home buyer won’t want a rate of 5% when their neighbor has a rate in the 3s.
Housing affordability, or a lack thereof, will also contribute to this trend.
6. Lenders will offer non-QM loans
Before the year ended, there was a lot of fear that the new Qualified Mortgage rule would neuter the mortgage market.
There’s already at least one major lender pledging to make interest-only loans, which happen to be explicitly banned under the QM rule.
My guess is more and more lenders will offer non-QM loans and hold onto them, which was kind of the point, right?
7. Conventional lending will stage a comeback
The last couple of years were dominated by FHA lending, which surged in popularity thanks to its soft underwriting requirements and low mortgage rates.
But now that the FHA is sticking it to new borrowers via ridiculously expensive premiums and insurance that stays in force to term, I doubt many borrowers will go the FHA route unless it’s a last resort.
At the same time, private mortgage insurers will help conventional lending reach more borrowers by easing guidelines.
8. Home equity lending will increase
With rising home prices comes opportunity. And one of those opportunities is tapping it.
I expect more and more borrowers to pull cash out via home equity lines thanks to much higher home prices. And they may actually use the money to improve upon their homes, instead of buying Hummers.
Speaking of home equity lines, a lot more are set to reset this year and the next, so expect more defaults related to HELOCs as well.
9. Foreclosures and short sales will fall to normal levels
Despite some reset-related foreclosure starts, I still see foreclosures and short sales falling closer in line with historical levels.
Both have already slowed tremendously, with foreclosure starts already at a 95-month low, per RealtyTrac. Short sales are also a dying breed because homeowners are able to sell at such a premium nowadays.
There’s no compelling reason to expect that trend to reverse course. I also think banks will spend more time on foreclosure alternatives than foreclosure itself.
10. Mel Watt will fight new fees
There have already been reports that new FHFA head honcho Mel Watt is more or less against the proposed mortgage pricing adjustments recently issued by Fannie Mae and Freddie Mac.
If enacted, they would make 780+ credit scores important, which one could argue is taking things a little too far.
I expect Watt to fight these fees tooth and nail on the basis that the housing market is far from fully recovered.
Hopefully he’s successful, seeing that new buyers will have to contend with both higher interest rates and home prices in 2014.
Stay tuned for 2015.
(photo: Rareclass)
Source: thetruthaboutmortgage.com
A 10,405-square-foot home Frank Lloyd Wright designed for his cousin, Richard Lloyd Jones, and completed in 1929, is in need of its next steward.
With a listing price of $7,995,000 and an incredible architectural pedigree, “this is a once-in-a-generation property for Tulsa,” says listing agent Rob Allen, of Sage Sotheby’s International Realty.
Known as Westhope, “this is a house that people in Tulsa feel belongs to the city, that it’s part of their history,” Allen adds.
Despite the steep asking price, this is not the Sooner State’s most expensive home for sale—although it’s the second-most expensive property in Tulsa. Westhope is a close runner-up to this new $8,500,000 listing.
This Wright property is significant for several reasons: Its square footage ranks it among the largest of his designs. It’s the only textile-block house outside of California.
It’s also one of only three Wright homes in Oklahoma. (Two others are in Bartlesville: Price Tower and the Harold Price Jr. House.)
Local developer Stuart Price snapped up the home in 2021 for $2,500,000. He then embarked on a restoration, inside and out.
“This has been a passion project of Stuart’s,” Allen says. “He’s loved owning this house. He’s held fundraisers here. And [actress] Sophia Bush hosted her pre-wedding dinner party here last year. Since we’ve listed it two days ago, it’s received significant exposure and inquiries.”
Lloyd Jones, publisher of the Tulsa Tribune and co-founder of All Souls Unitarian Universalist Church in Tulsa, owned the five-bedroom, 4.5-bath home until the 1960s.
The family who owned it next updated the kitchen and enclosed the patio to create a family room.
Allen estimates Stuart to be the sixth owner.
Stuart’s work on the home started with the outside, where “thousands of individual panels of glass, a lot of which were fogged,” needed replacing, Allen says. Concrete “textile blocks (also) needed to be repointed or replaced.”
Another major project was refinishing the stained-concrete floors. Price “brought in a company based out of Dallas to refurbish all the floors,” says Allen.
The kitchen got a much-needed refresh as well, he adds. “Price did his best to improve upon (the design) while still trying to maintain the look and feel of a Frank Lloyd Wright home. The cabinets are all original and stained. The countertops were a black granite, and he replaced those with lighter countertops.”
While not original to the home, the dining set was built according to a Wright design. Original to the home are built-in bookshelves and long, cushioned benches.
The 1.5-acre property includes an outdoor pool and a five-car garage.
(Sarah Strunk Photography/ Sage Sotheby’s International Realty)
(Sarah Strunk Photography/ Sage Sotheby’s International Realty)
(Sarah Strunk Photography/ Sage Sotheby’s International Realty)
(Sarah Strunk Photography/ Sage Sotheby’s International Realty)
(Sarah Strunk Photography/ Sage Sotheby’s International Realty)
(Sarah Strunk Photography/ Sage Sotheby’s International Realty)
(Sarah Strunk Photography/ Sage Sotheby’s International Realty)
(Sarah Strunk Photography/ Sage Sotheby’s International Realty)
In 1975, the residence was listed on the National Register of Historic Places. What sets this house apart—even among Wright’s storied designs—are alternating square glass windows and textile blocks.
Tulsa’s Midtown is considered “one of the most highly sought-after neighborhoods in Tulsa,” Allen says. “It garners the highest prices per square foot in the city. It’s got this great topography with winding roads. You can be in downtown Tulsa within minutes.”
Who will likely buy this?
“I’m looking for someone who wants a Frank Lloyd Wright house. I’m not just looking in Tulsa. I’m looking everywhere,” Allen says.
“Whoever takes on this property must have a passion for preserving this significant property and being a steward of something that’s so important, particularly to the people of Tulsa,” he adds.
“We’ve definitely thought about an institutional buyer, maybe a university or museum, or a foundation that wants their headquarters there,” he continues. “I don’t want to leave anybody off the table.”
Source: realtor.com
There are plenty of reasons active-duty service members and veterans prefer to use VA loans. With the benefit of the VA guaranty, home buyers are able to get a home without having to make a down payment. This is thanks to the VA’s commitment to 100% financing.
But what happens if the home is being sold for more than the VA is willing to commit? This can happen, specifically when the VA appraisal doesn’t come back the way the buyer and the seller expected.
This is where the VA’s little-known “mandatory escape clause” comes in.
Click to check today’s rates (Apr 26th, 2023)
The VA wants to protect its members, and one of the ways it does that is with the mandatory escape clause.
The mandatory escape clause states that a home buyer does not have to follow through with a purchase if the VA appraisal comes in lower than the asking price for the home.
What’s more, the escape clause even protects the home buyer from any fees or penalties.
According to the VA, “It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise or be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs. (Authority: 38 U.S.C. 501, 3703(c)(1))”
In other words, the home buyer is allowed to back out of the purchase without incurring any type of penalty, whatsoever.
With some loan products, backing out of a deal can mean penalties. For buyers looking to save as much money as possible, that’s a good thing.
In a hot market where homes are selling for way above market prices, low appraisals are more common. With other loan types, the buyer would have to include an appraisal contingency in their offer to ensure they can back out of the sale in the event that the house does not appraise for the purchase price. These contingencies can make an offer less attractive to a seller, especially in a competitive market. So, if you’re looking to buy a home, don’t worry about the clause; it’s there to protect you – and your earnest money – in the event that the house doesn’t appraise at the expected price.
Click to check today’s rates (Apr 26th, 2023)
Just because a home buyer signs the clause doesn’t mean they must back out if the appraisal comes in lower than the asking price.
The final part of the mandatory escape clause allows a home buyer to waive the clause and pay the additional money if they want. The only “mandatory” part of the clause is that home buyers must sign it – but that doesn’t mean they’re required to follow it.
There could be plenty of reasons why a home buyer might decide not to back out. For example, a VA appraisal that comes in barely lower than the asking price could mean just a few thousand out of the home buyer’s pocket. If that’s doable, then proceeding with the purchase might be the right move.
VA loans are largely designed to protect the buyer, but VA home buyers still have freedom in the process. The escape clause is there to protect you, but only if you want it to.
A VA escape clause allows a buyer to walk away from the deal if the home’s appraised value is less than the contract price. If the buyer walks away for this reason, they will get their earnest money deposit back.
Yes, the VA requires an escape clause. With this mandatory escape clause, the buyer can back out of the deal without losing their earnest money if the home appraises for less than the contract price.
The goal of the VA mandatory escape clause is to protect a VA home buyer if a home appraises for less than the contract price. If an appraisal determines that the value of the home is lower than the contract price, the VA buyer can back out without losing their earnest money.
Since the Department of Veterans Affairs backs the VA loan, it makes sense that the government agency wants to protect the interests of veteran buyers who meet specific eligibility requirements.
You cannot waive the appraisal contingency if you are a VA buyer. The Department of Veterans Affairs requires buyers to keep both the appraisal contingency and escape clause in the contract.
If the home appraises for less than the contract price, the VA will only back a loan for up to the appraised amount. But the buyer will have the opportunity to make up the difference out of their own pocket.
A VA escape clause is required for all VA home loan sale contracts. FHA loans have a requirement in the amendatory clause.
However, other loan types, such as conventional loans, are not subject to this requirement.
Both the buyer and the seller must sign the VA escape clause form. If you have questions about the VA amendatory escape clause for your home sale, discuss the details with your real estate agent. A qualified real estate professional can help you set the right sales price to avoid any underwriting issues due to this clause.
No, a seller doesn’t have to sign the VA escape clause. But by refusing to sign, the seller cannot accept the offer of the veteran buyer.
It is worth pointing out that many buyers with all kinds of loans will insist on an appraisal contingency. After all, buyers don’t want to be locked into a deal where the valuation of the property doesn’t match the sale price. With that, most sellers will decide to sign this clause even if it is not ideal.
The buyer doesn’t have to use the escape clause. However, the VA will only back the loan for up to the guaranteed amount. With that, borrowers who waive the escape clause will have to come up with the additional funds on their own.
Unfortunately, a hot real estate market may require more buyers to waive the escape clause.
Click to check today’s rates (Apr 26th, 2023)
Source: militaryvaloan.com
You’ve probably seen embedded insurance in the wild. Here’s an example: Let’s say you buy a new refrigerator. During checkout, you’re asked if you’d like to get insurance for the item. That insurance policy, or “protection plan,” gets embedded into your purchase as a single transaction.
Companies can offer insurance policies on everything from buying the latest iPhone to renting a U-Haul. But if getting insurance can be so easy, then why is it such a hassle when you buy or lease a new car?
In order to understand whether embedded car insurance is right for you, it helps to get context on how it all works. More importantly, that should also answer a bigger question: Can this actually save you money?
Getting a new car isn’t all that different from any other purchase. If you’ve ever bought a laptop, an espresso machine or even a high-end electric toothbrush, you know the feeling: That sense of excitement that comes with being a new owner, especially after weeks or months of research.
But when it comes to big purchases, the word “ownership” can also cause anxiety. According to a 2023 NerdWallet survey, 53% of Americans plan to buy or lease a vehicle in the next 12 months. However, 23% of Americans who own a personal vehicle consider the cost of vehicle ownership to be a source of stress.
Those numbers might seem contradictory, but the reality is that the total cost of owning a vehicle is hard to calculate. You can budget your car purchase to the dollar, but it can still be hard to predict gas prices and car insurance rates. In fact, the average car insurance price for 2023 is nearly 32% higher than the average rate for 2022, according to NerdWallet’s annual analysis.
The burden of financing, insuring and paying off a vehicle lasts years after the initial excitement wears off. So drivers are looking for ways to save wherever they can, including at the dealership.
One way to reduce the stress of buying a new car is to find ways to simplify the process. This is why bundling auto insurance into a car purchase (not unlike our example of buying a new fridge) appeals to drivers.
“There’s no need to call your agent, spend 20 minutes on the phone digging up and providing details then waiting for your proof of insurance. With embedded insurance, it’s instant and seamless,” said Cassi Conrad, chief insurance officer at Sure, in an email. Sure is a digital insurance platform that supports embedded insurance providers.
Almost every state requires drivers to have liability insurance, so you’ll need proof of coverage before you can purchase a vehicle at a dealership. But having the car dealership bundle an insurance policy into your financing package might save you time and effort, both during the “checkout” process as well as when it’s time to make payments.
Additionally, consumers are more likely to buy insurance at the time of a car purchase. 50% of Gen Z (ages 18-26) and 54% of millennials (ages 27-42) believe the best time to shop for auto insurance is when buying or leasing a vehicle, according to the NerdWallet survey.
The convenience of bundling insurance into a purchase — combined with a rise in digital insurance as a whole — has created a demand for embedding policies into the car buying experience, Conrad said.
All of this lines up with what drivers actually want when buying a car: 72% of recent car buyers would have liked to purchase insurance directly from the dealership, according to an online 2022 survey of recent car buyers by Polly, a company that sells embedded auto insurance. That same survey states that 42% of car buyers received no support from the dealership about actually getting insurance in their most recent car purchase.
Part of this disconnect is tied to availability. Embedded insurance is sort of an ongoing experiment for both insurers and car dealerships, and there just isn’t enough information available to predict whether it will save you money.
In fact, while embedded car insurance is definitely convenient, you could end up paying more for insurance over time. If you’re offered a single price for financing that includes a car loan and an insurance policy, you may end up paying interest on your insurance, which is unnecessary as well as expensive.
Choosing insurance is subjective. It’s largely dependent on how much coverage you want as well as what you feel comfortable paying, and the factors that determine pricing vary by person. But because there isn’t a standardized embedded auto insurance offering right now, the details could depend on the dealership, insurer and financing terms rather than what you want or need.
If you do get offered embedded insurance at a dealership, it’s probably in your best interests to decline at this time. But that doesn’t mean you can’t find other ways to save money on insurance for a new car.
Remember all those hours you spent selecting the perfect year, make and model? Apply that same process to finding car insurance. Spend one hour getting a few different quotes for the specific vehicle you want, then compare those rates to find the best fit for your situation. If you do this before you get to the dealership, you can compare their offers to the quotes you already have.
Embedded auto insurance is still an evolving thing. Until some sort of standard policy offer exists, we recommend prepping before you get to the dealership to decide if embedded insurance is a good fit. You may still decide to add insurance to your cart at checkout, but at least you’ll know whether its the best deal before you sign the paperwork.
Source: nerdwallet.com
It’s been an eventful three weeks or so since the U.S. presidential election took place, that is, if you keep an eye on mortgage rates.
They’ve moved in only one direction since November 8th – up. Way up. Though thanks to their pre-election starting point, they remain historically low and cheap to anyone old enough to remember where they stood a decade ago.
In case you forgot, the 30-year fixed averaged 6.24% in November 2006, per Freddie Mac data, about two percentage points above current levels. So yeah, things are still pretty darn good.
However, because most homeowners these days hold rates that are much lower, the benefits of refinancing have quickly diminished for millions thanks to the recent rate rise.
There are times when it makes sense to refinance your mortgage, and times when it does not, often dictated by prevailing interest rates.
Unfortunately, mortgage rates have risen about a half point since then, more than halving the number of potential refinance candidates, this according to the latest Mortgage Monitor Report from Black Knight Financial Services.
The company said the refinance population dwindled from 8.3 million borrowers pre-election to just 4 million today thanks to a 49 basis point (bps) rise in rates.
That matches the lowest refi population in 24 months, with the most recent low set back in July 2015.
In short, the mortgage rate increase means fewer borrowers can qualify for a refinance thanks to DTI constraints, and fewer will actually benefit from the lower payment, because as noted, many already enjoy ultra-low rates.
This is certainly bad news for mortgage lenders, many of which rely on refinances (as opposed to purchases) for the bulk of their loan origination volume.
It makes new startups like Motto Mortgage look really smart for partnering directly with real estate agents, which happen to focus primarily on home purchase financing.
Still, there are two million borrowers out there (somewhere) who could save roughly $200 per month by refinancing their mortgages, which represents a cumulative $1 billion per month in savings.
Unfortunately, that amount is less than half of the $2.1 billion per month in savings that was there for the taking just before the election.
Now let’s talk about home prices, which everyone assumes will just fall now that interest rates have increased.
Black Knight added that the 49 basis point rate rise was the equivalent of home prices increasing $16,400 overnight.
As a result, 21.6% of median monthly income is now needed to purchase the median-priced home in the United States, the highest share since June 2010, at a time when mortgage rates averaged 4.75%, but home prices were 20% cheaper.
The affordability ratio hit a similar point in 2013 when it increased to 21.4%, and annual home price appreciation slowed tremendously, from nine percent to below five percent.
But note that home prices continued to rise, just at a slower pace. Yet still a fast pace, just not the insane pace they were enjoying.
So, to assume home prices will fall because interest rates jumped might be a mistake in judgement. If anything, would-be buyers and fence-sitters could be spurred into action, fearing it could be the last time to get a super low mortgage rate.
That may increase home buying competition in the near-term and keep price appreciation on target. In other words, if you’re waiting for home prices to fall as a result of the rate rise, don’t hold your breath.
Once the recent rate increase is factored in, the national housing payment-to-income ratio is still 10% lower than the benchmark period of 1995-1999, per Black Knight.
Perhaps this hot housing market has a lot more room to run…
Source: thetruthaboutmortgage.com
A good return on investment is generally considered to be about 7% per year, based on the average historic return of the S&P 500 index, and adjusting for inflation. But of course what one investor considers a good return might not be ideal for someone else.
And while getting a “good” return on your investments is important, it’s equally important to know that the average return of the U.S. stock market is just that: an average of the market’s performance, typically going back to the 1920s. On a year-by-year basis, investors can expect returns that might be higher or lower — and they also have to face the potential for outright losses.
In addition, the S&P 500 is a barometer of the equity markets, and it only reflects the performance of the 500 biggest companies in the U.S. Most investors will hold other types of securities in addition to equities, which can affect their overall portfolio return.
Dating back to the late 1920s, the S&P 500 index has returned, on average, around 10% per year. Adjusted for inflation that’s roughly 7% per year.
Here’s how much a 7% return on investment can earn an individual after 10 years. If an individual starts out by putting in $1,000 into an investment with a 7% average annual return, they would see their money grow to $1,967 after a decade, assuming little or no volatility (which is unlikely in real life).
It’s important for investors to have realistic expectations about what type of return they’ll see.
For financial planning purposes however, investors interested in buying stocks should keep in mind that that doesn’t mean the stock market will consistently earn them 7% each year. In fact, S&P 500 share prices have swung violently throughout the years. For instance, the benchmark tumbled 38% in 2008, then completely reversed course the following March to end 2009 up 23%.
Factors such as economic growth, corporate performance, interest rates, and share valuations can affect stock returns. Thus, it can be difficult to say X% or Y% is a good return, as the investing climate varies from year to year.
A better approach is to think about your hoped-for portfolio return in light of a certain goal (e.g. retirement), and focus on the investment strategy that might help you achieve that return.
It’s helpful to consider what happens to the value of your money if you simply hang on to cash.
Keeping cash can feel like a safer alternative to investing, so it may seem like a good idea to deposit your money into a savings account — the modern day equivalent of stuffing cash under your mattress. But cash slowly loses value over time due to inflation; that is, the cost of goods and services increases with time, meaning that cash has less purchasing power. Inflation can also impact your investments.
Interest rates are important, too. Putting money in a savings account that earns interest at a rate that is lower than the inflation rate guarantees that money will lose value over time.
This is why, despite the risks, investing money is often considered a better alternative to simply saving it. The inflation risk is lower.
**Customer must fund their Active Invest account with at least $10 within 30 days of opening the account.
Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
As noted above, determining a good rate of return will also depend on the specific investments you hold, and your asset allocation. You can always calculate the expected rate of return for various securities.
Certificates of deposit (CDs) may be considered a relatively safe investment because they offer a fixed rate of return in return for keeping your money on deposit for a specific period of time. That means there’s relatively little risk — but because investors also agree to tie their money up for a predetermined period of time CDs are also considered illiquid. There is generally a penalty for withdrawing your money before the CD matures.
Generally, the longer money is invested in a CD, the higher the return. Many CDs require a minimum deposit amount, and larger deposits (i.e. for jumbo CDs) tend to be associated with higher interest rates.
It’s the low-risk nature of CDs that also means that they earn a lower rate of return than other investments, usually only a few percentage points per year. But they can be a good choice for investors with short-term goals who need a relatively low-risk investment vehicle while saving for a short-term goal.
Here are the weekly national rates compiled by the Federal Deposit Insurance Corporation (FDIC) as of April 17, 2023:
| Non-Jumbo Deposits | National Avg. Annual Percentage Yield |
|---|---|
| 1 month | 0.24% |
| 3 month | 0.78% |
| 6 month | 1.03% |
| 12 month | 1.54% |
| 24 month | 1.43% |
| 36 month | 1.34% |
| 48 month | 1.29% |
| 60 month | 1.37% |
Purchasing a bond is basically the same as loaning your money to the bond-issuer, like a government or business. Similar to a CD, a bond is a way of locking up a certain amount of money for a fixed period of time.
Here’s how it works: A bond is purchased for a fixed period of time (the duration), investors receive interest payments over that time, and when the bond matures, the investor receives their initial investment back.
Generally, investors earn higher interest payments when bond issuers are riskier. An example may be a company that’s struggling to stay in business. But interest payments may be lower when the borrower is trustworthy, like the U.S. government, which has never defaulted on its Treasuries.
Stocks can be purchased in a number of ways. But the important thing to know is that a stock’s potential return will depend on the specific stock, when it’s purchased, and the risk associated with it. Again, the general idea with stocks is that the riskier the stock, the higher the potential return.
This doesn’t necessarily mean you can put money into the market today and assume you’ll earn a large return on it in the next year. But based on historical precedent, your investment may bear fruit over the long-term. Because the market on average has gone up over time, bringing stock values up with it, but stock investors have to know how to handle a downturn.
As mentioned, the stock market averages a return of roughly 7% per year, adjusted for inflation.
Returns on real estate investing vary widely. It mostly depends on the type of real estate — if you’re purchasing a single house versus a real estate investment trust (REIT), for instance — and where the real estate is located.
As with other investments, it all comes down to risk. The riskier the investment, the higher the chance of greater returns and greater losses. Investors often debate the merit of investing in real estate versus investing in the market.
For investors who have a high risk tolerance (they’re willing to take big risks to potentially earn high returns), some investments are better than others. For example, investing in a CD isn’t going to reap a high return on investment. So for those who are looking for higher returns, riskier investments are the way to go.
Investors focused on seeing huge returns over the short-term may set themselves up for disappointment. Instead, remembering basic tenets of responsible investing can best prep an investor for long-term success.
First up: diversification. It can be a good idea to invest in a wide variety of assets — stocks, bonds, real estate, etc., and a wide variety of investments within those subgroups. That’s because each type of asset tends to react differently to world events and market forces. Due to that, a diverse portfolio can be a less risky portfolio.
Time is another important factor when investing. Investing early may result in larger returns in the long-term. That’s largely because of compound interest, which is when interest is earned on an initial investment, along with the returns already accumulated by that investment. Compound interest adds to your returns.
While every investor wants a “good return” on their investments, there isn’t one way to achieve a good return — and different investments have different rates of return, and different risk levels. Investing in CDs tends to deliver lower returns, while stocks (which are more volatile) may deliver higher returns but at much greater risk.
Your own investing strategy and asset allocation will have an influence on the potential returns of your portfolio over time.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, and other fees apply (full fee disclosure here). Members can access complimentary financial advice from a professional.
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Save more, spend smarter, and make your money go further
Personal finance and investing gurus are fond of an old Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” Chances are you’ve heard it before.
It’s a profound quote, and trees are a great metaphor for growing your investment portfolio. If you water the tree daily – and have patience – you can expect to reap the rewards in due time. Whether you start investing in college or after you turn 40, the important thing is planting the seed.
The problem is, this proverb actually undersells the importance of starting as soon as possible from an investing perspective.
While a tree grows to maturity at a sustained rate and only reaches a certain height, investments actually grow larger the earlier you start. If investments are trees, then the seed you planted today may grow as tall as a mighty redwood, while the one you plant in 20 years becomes a pine. In other words, the growth potential of your portfolio is directly tied to the amount of time you give it to grow.
This is thanks to something called compound interest, where the interest your account accrues is compounded on itself. Here’s everything you need to know about compound interest – how it can help you, how it can hurt you and how to maximize its benefits.
Keep reading for a comprehensive look at compounding interest, or skip to the section you’d like to learn more about using the navigation links below.
There are two ways to accrue interest: simple and compound. Simple interest is when you earn interest only on the principal. So, if you have $1,000 invested at 5% interest, you’ll earn $50 every year.
Compound interest is earned on the principal and the interest in your account. Let’s look at a hypothetical example. Pretend you have $5,000 in a retirement account, earning 7% interest each year. The first year that your account is open, you earn $350 in interest, which brings your total to $5,350. The following year, interest is calculated based on that $5,350 total, not the original $5,000. You earn $374 in interest and now have a total of $5,724.
Even if you never deposit anything but the original $5,000, you’ll have $38,061.28 in 30 years. That’s a $33,061.28 profit.
Compound interest rewards people who invest over long periods of time, not necessarily those who can afford to invest the most. It’s specifically helpful for young people who start investing early.
A 25-year-old who invests $200 a month with 7% interest will have $226,705.89 in 30 years. If they wait 10 years to start investing, they’ll have to more than double their savings rate to reach the same total.
Use our compound interest calculator to see how much of a difference it can make.
Compound interest is your best friend when you’re investing or saving for a long-term goal, but it’s your worst enemy if you have debt that’s not being paid off.
Here’s an example: A borrower with $30,000 in student loans defers their loans for a year while they look for a job. During that year, interest continues to accrue on those loans. Once they’re ready to resume making payments, they discover their $30,000 balance has grown to $45,000 because of compound interest.
To slow down the negative effects of compound interest, you should pay off your debt as quickly as possible. You can also refinance your loans to a lower interest rate. When you borrow money, compounding interest works against you and benefits the lenders. The interest rate a lender charges is the trade-off for taking on the risk of lending money and giving out loans. However, it makes it very important for you, the borrower, to pay off your loans on time and keep tabs on your interest rate.
If you have credit card debt, you may want to consider transferring your balance to a card with 0% APR to avoid interest while you pay off the balance. Otherwise, you’ll accrue interest that makes it more expensive for you to carry debt month to month.
To calculate compound interest, you’ll need to use the formula below:
Compound Interest = Amount of Principle and Interest in Future (or Future Value) less Present Value
= [P (1 + i)n] – P
= P [(1 + i)n – 1]
P = principal, i = nominal annual interest rate in percentage, and n = number of compounding terms.
Some banks only calculate interest on a monthly basis, while others do it every day. More frequent compounding is better when you’re trying to maximize interest, so find out how frequently your bank calculates interest. You might have to call or poke around the fine print to determine their compounding schedule.
Next, find the highest interest rates possible while also minimizing risk. If you have a savings account with $10,000, choose a high-yield savings account. Aim for 2% interest or higher. A $5,000 savings account with 2% interest will be worth $7,459.04 in 20 years, but only worth $5,204.05 in a savings account with .2% interest. Using an investment calculator can give you a better idea of how interest will impact your return.
Compounding interest investment accounts can help both grow your money and secure your future. But it’s important to start early. And before you start investing in stocks, it’s important not to get ahead of yourself. Do your research and familiarize yourself with different investment options. Make sure you’re only investing money after you’ve topped off your emergency fund. It’s also important to ensure that you’re current on all your loan payments. Otherwise, any investment gains might be negated by snowballing debts.
If you’re saving for retirement, invest in low-fee index funds. Fees of 1% or more will drag down your profit and cut into your compound interest. Index funds will follow the market’s course and provide a solid rate of return. Avoid investing in individual stocks, as their volatility can be problematic.
Compound interest works best if you start saving as soon as possible, even if it’s just $25 a month. A 22-year-old who saves $25 a month at 7% interest for five years will have $1,795.80. When she gets a raise after those five years and can afford to put away $100 a month, she’ll have $294,213.07 when she retires at age 67. If she hadn’t started investing until after her raise, she’d only have $264,689.70.
Even though she only contributed $1,500 during those first five years, her portfolio is worth nearly $30,000 more. For most people, that’s enough to retire a full year earlier, and all it cost her was a monthly contribution of $25. Even someone earning an entry-level salary can afford that.
The same principle applies to debt. Even if you defer your student loans, keep making payments on them as much as you can afford to. Taking time off will only delay your debt payoff and increase how much you pay in interest.
Always compare rates before taking out a loan and get at least three quotes. Each percentage point matters when you’re borrowing money, especially for long-term debt like a mortgage. You can also limit compound interest by borrowing money for as little time as possible.
A 30-year $200,000 mortgage at 4.85% interest will cost $379,940 in total. A borrower who takes out the same loan for 15 years will only pay $269,910. That’s a difference of $110,000, which is more than half the total mortgage principal.
Compound interest can help you grow your wealth and secure a more stable financial future. Even if you can’t afford a large principal or large ongoing additions to your investment, you can still extract value from small investments with compounding interest. The key is to start as early as possible and do adequate research to ensure that you’re making investment decisions that make sense with your overall financial goals and situation. With these tips, you’ll be on your way to stabilizing your financial foundation and making your money work for you.
For more information on compounding interest, you can check out dolv.gov for more resources.
Save more, spend smarter, and make your money go further
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MSM Team on November 14, 2014 | This post may contain affiliate links. Read my disclosure policy here.
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With a thriving oil industry and bustling tourist population, Alaska is a great place to live and work. As with most states, you’ll find a combination of banking options in Alaska, from national banks to local banks and credit unions.
But finding the right bank can take time. The list below combines local banks, online banks, national banks, and credit unions.
Alaska bank customers look for a variety of features in a bank. You’ll want to keep costs low while maximizing your earnings, but convenience is also a factor. Here are 10 of the best banks and credit unions in Alaska.
For more than a century, First National Bank Alaska has served the state’s consumers. The first branch was in Anchorage, but today there are branches and ATMs across the state, including Kodiak, Fairbanks, and Wasilla.
First National Bank Alaska has multiple checking options, including teen and military accounts. Direct Deposit Checking comes with a $7 monthly service fee that can be waived with qualifying direct deposits.
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Northrim Bank takes a unique approach to its checking setup. You’ll get one checking account that automatically adjusts as your balance changes. Northrim is a community-based bank with branches only in Alaska.
If your paycheck is automatically deposited to your account, you’ll qualify for a fee-free account that earns money. South Central Alaskan account holders can earn up to 0.11% APY on checking account funds, but check your own region for current rates.
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Formerly Alaska Federal Credit Union, Global Credit Union offers two tiers of checking: Core Checking and Latitude Checking. There are branches throughout North America, so if you regularly travel to the U.S., this might be the best option.
Like many credit unions, Global Credit Union offers competitive rates as a benefit to members. Unlike other credit unions, though, membership is fairly open. You’ll need to pay $5 and be a resident of Alaska, Washington, Idaho, California’s San Bernardino County, or Arizona’s Maricopa County to qualify.
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Fairbanks residents interested in a local bank should check out Denali State Bank. Most of Denali’s branches are in Fairbanks, but you’ll have online banking through the mobile app, as well as refunds on up to $25 monthly ATM withdrawals.
The best thing about Denali State Bank is its rates. Choose Free Kasasa Cash Checking and you’ll earn 2.00% APY on your money. Denali’s savings accounts earn up to 0.50% APY.
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While many local bank options offer online services, Chime is an online-only service. You’ll have everything you need in the app, from mobile check deposits to bill pay.
Chime uses two services for cash withdrawal: the AllPoint and MoneyPass networks, with more than 60,000 locations across the country. If you need to add cash to your account, you can do that at more than 8,500 participating Walgreens locations for free.
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Mobile banking customers may find Go2Bank provides a great Alaska banking experience. There are no branches, but you’ll get cash withdrawals at 55,000 AllPoint ATMs.
What makes Go2Bank stand out is its security features. You’ll get popular services like fraud alerts and a debit card lock feature. If you’re working to rebuild your credit, you may also be interested in GO2Bank’s secured Visa.
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With branches from Barrow to Anchorage, AK, Wells Fargo might be the best bank if you’re looking for a large, corporate financial institution. Currently, Wells Fargo is offering a $300 opening bonus.
One downside to Wells Fargo is the monthly maintenance costs. You can avoid those costs by maintaining a $500 balance or having $500 or more in qualifying income each month.
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If you can maintain a checking balance of at least $2,000, consider Matanuska Valley Federal Credit Union, a not-for-profit cooperative that welcomes members across Alaska and in Hawaii. Matanuska Valley offers checking and savings accounts, as well as life insurance and accounts for small businesses.
If you regularly deal with cash, though, MVFCU might not be the right fit. You’ll be limited to MVFCU ATMs, which are only in Alaska and Hawaii. But MVFCU does have a feature called Live ATMs, which enhances your customer service options.
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Small businesses might want to take a look at First Bank of Alaska as a great place to park their money. You’ll get 150 free monthly transactions, along with fee-free checking as long as you’re maintaining a $2,500 balance.
But First Bank isn’t just for business accounts. You can also get low-cost personal checking. There are three accounts to serve customers, along with a teen account. They come with maintenance costs, but they can be waived if you keep a minimum balance and set up direct deposit.
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All Alaska residents are eligible for membership in Northern Skies Federal Credit Union. You’ll get savings rates above the national average and flexible overdraft fees.
Northern Skies FCU offers two checking account options, each with its own benefits. You’ll also earn dividends, which can help you with your retirement planning.
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The best bank puts its residents first, providing convenient tools like online banking and mobile apps. But it’s also important to look into features that will help you save money. Compare offerings across multiple banks and find the right bank to fit your own needs.
Before you start searching for a bank account, there are some things to consider.
Source: crediful.com