Investopedia

Fact checked by Ryan Eichler

During homeownership, as you pay down your mortgage and the value of your home rises, you begin building equity in the property. Home equity is the difference between the market value of your property and what you owe on the mortgage. This can be used to borrow money against it in the form of a one-time home equity loan or an ongoing home equity line of credit (HELOC). Both options have pros and cons so it’s important to understand the key differences between the two so you can make the right choice for your financial goals.

Before pursuing either, it’s worth considering other financing options. Depending on your financial situation, personal loans, mortgage refinancing, or other lines of credit might offer better terms.

Key Takeaways

• Home equity loans and HELOCs use home equity as collateral to lend you money.
• Equity loans offer lump sum cash while HELOCs offer a line of credit for recurring borrowing.
• Home equity loans and HELOCs may not always be the best options for you, so consider alternatives like mortgage refinancing. 
• Both options come with the serious risk of losing your home if you miss payments. 

HELOCs and Home Equity Loans: The Basics

Home equity loans and HELOCs use the equity you own in your property as collateral to let you borrow money. However, there are some differences in how the two options work.

Home equity loans offer money as a lump sum, often at a fixed interest rate, so you get all the cash upfront. On the other hand, HELOCs operate similarly to credit cards, offering a line of credit with a variable interest rate depending on market conditions, allowing you to borrow and repay money as needed.

While both options can be useful for raising funds, they can pose serious risks as you use your home as collateral. This means if you fail to repay the money, the lenders can place a lien on your home, which is a legal claim against a property that lets them seize and sell the asset to recover the amount loaned to you.

Note

Home equity loans and HELOCs typically have lower financing fees compared to other unsecured options like credit cards. 

How Much Can You Borrow?

How much money you can borrow against home equity loans and HELOCs typically depends on factors like how much equity you own in the property and your personal credit history. It’s possible you won’t qualify for either option. 

Lending institutions use a combined loan-to-value (CLTV) ratio to make the decision. This ratio looks at the total value of all loans secured by your home so far, including both your primary mortgage and any additional mortgages, compared to the current market value of the property.

For example, say your home is worth $300,000 and the bank has a maximum CLTV ratio of 80%. This means the total loans secured by your home can’t exceed 80% of its appraised value. In this case, the bank would consider approving you if you have less than $240,000 in total debt.

If you still owe $150,000 on your primary mortgage, you could potentially qualify for a second mortgage (home equity loan or HELOC) for the difference, which would be $90,000 in this scenario. However, keep in mind that each lender can have different guidelines and your creditworthiness also plays a role in the decision. 

How Home Equity Loans Work

Home equity loans offer a lump sum of cash at once, which can be helpful for major one-time expenses like home renovations, buying a vehicle, weddings, emergency medical bills, etc. One of the key benefits they offer is that they typically have fixed interest rates so you know exactly what your monthly payments will be, which makes budgeting easier. 

Important

Different lenders each have their own procedures if you can’t pay back your loan. Generally, you may have to pay late fees or other penalties, your credit score will dip, and your home may be foreclosed to recover what’s owed. 

If you need a larger amount and want the predictability of a fixed-rate loan, a home equity loan may be a good choice. However, if you’re looking to borrow a smaller amount for nominal expenses like paying off a little credit card balance or buying a new phone, you might want to consider other financing options like Buy Now, Pay Later, personal loans, or even HELOCs that we’ll explore below. 

Some lenders may offer up to $100,000 in home equity loans, but they’re typically meant for expenses larger than $35,000. A major drawback is that you’ll pay closing costs similar to a primary mortgage, including appraisal fees, loan origination fees, and processing fees. These costs can range anywhere from a few hundred to a few thousand dollars, depending on the size of your loan.

If you are using “points” or prepaid interest, you’ll have to pay them at closing. Each point equals 1% of the loan amount, so for a $100,000 loan, one point would cost you an extra $1,000. Points are used to buy down your interest rate, lowering your monthly payments over time. This can be beneficial for long-term loans, but you may not get the full benefits if you plan to pay it off quickly. Negotiating for fewer or no points may be possible, depending on the lender. 

If you have a higher credit score, you may qualify to pay a lower interest rate.

How HELOCs Work

HELOCs offer an ongoing line of credit, letting you borrow and repay money as needed. Think of it like a credit card with a much larger limit, but the equity in your home secures it. This means HELOCs are often more flexible than home equity loans, making them suitable for larger and smaller expenses arising from different life situations. 

HELOCs are generally a good option for homeowners who want flexible access to funds over time without committing to a large, one-time loan with recurring payments lasting for years. Depending on the lender, HELOCs offer different ways to access the funds up to your assigned credit limit. You can transfer money online, write checks, or even use a credit card linked to the account.

One of the most appealing aspects of a HELOC is that it typically has low, or even no, closing costs. This makes it more affordable to set up compared to a home equity loan, which usually comes with various fees, sometimes making it more expensive than what you initially budgeted for. 

Moreover, you only pay interest on the amount you borrow while a much larger sum may be available in case you need extra help. Once you pay it off, the sum is added back to the available credit without requiring any extra interest until you borrow again. This can be ideal for people who prefer having money on standby rather than committing to a fixed loan amount up front.

While the benefits make it sound like one of the most flexible and convenient forms of borrowing money against your property, there are key downsides to consider. HELOCs often come with variable interest rates, meaning your rate and monthly payments could increase or decrease over time. 

Some lenders do offer fixed rates for the first few years of the loan, but after that, the rate will often fluctuate with market conditions. This can make it difficult to predict what your payments will look like, so HELOCs can be a bit tricky to budget for in the long term.

Home Equity Loan vs. Mortgage Refinance

If you want to use home equity to borrow money, equity loans aren’t the only options. You may also want to consider mortgage refinancing, which replaces your current loan with a new one, usually with better terms. The newer loan can offer a reduced interest rate or the option to switch from a variable interest rate to a fixed one or vice versa. 

Both have their benefits and drawbacks, so take some time to consider each option thoroughly and if needed, discuss with a financial advisor to find the best option for your needs. Here’s a comparison table to make the decision easier. 

Factors	Home Equity Loan	Mortgage Refinance
Interest rates	Typically carries higher interest rates.	Interest rates are usually lower than equity loans.
Payments	Fixed payments over a set term.	Fixed or variable payments, depending on your refinance terms.
Private Mortgage Insurance (PMI)	No PMI required.	PMI may be required if you have less than 20% equity in your home.
Fees	Generally lower fees than refinancing, but may include appraisals, origination fees, and other costs.	Higher closing costs due to a new mortgage, including appraisals, origination fees, title insurance, recording fees, etc.

Getting a Home Equity Loan or HELOC

If you’ve considered all possible options and feel ready to get a home equity loan or a HELOC, here are the steps to follow. 

1. Explore different options: Compare borrowing options from different institutions like traditional banks, mortgage companies, credit unions, etc.
2. Get multiple quotes: Set up consultations and receive multiple quotes from different providers to compare the terms. Don’t settle for the first offer you receive. If you have active accounts, enquire about special rates for existing customers. 
3. Consider working with mortgage brokers: Mortgage brokers can connect you with multiple lenders and receive their commission directly from the lender you choose so you don’t have to bear heavy consultation expenses. 
4. Look beyond interest rates: Choosing the offer with the lowest interest rate may not always be the best decision. Consider other fees like appraisals and closing costs that can add up quickly. 

Warning

Criminals are increasingly targeting HELOCs, either by applying in someone else’s name or hacking into existing accounts to steal funds. Regularly check your credit report for unfamiliar transactions and keep an eye on your HELOC statements for any unusual activity.

The Bottom Line

Both home equity loans and HELOCs can help you borrow money by using the equity you own in your house as collateral. However, they come with serious risks, especially when you can’t keep up with payments. Make sure you have a solid repayment plan in place to avoid losing your home. 

Reviewed by Lea D. Uradu
Fact checked by Kirsten Rohrs Schmitt

Applying to multiple mortgage lenders allows you to compare rates and fees to find the best deal. Having multiple offers in hand provides leverage when negotiating with individual lenders. However, applying with too many lenders over too broad a time period may result in score-lowering credit inquiries, and it can trigger a deluge of unwanted calls and solicitations.

Key Takeaways

• Applying to multiple lenders allows borrowers to pit one lender against another to get a better rate or deal. 
• Applying to multiple lenders lets you compare rates and fees, but it can impact your credit report and score due to multiple credit inquiries.
• If you’re going to keep a mortgage for many years, it’s best to opt for a lower rate and higher closing costs. If you plan to refinance or pay off the loan after a few years, it’s best to keep closing costs low.
• There is no optimal number of applications, though too few applications can result in missing out on the best deal, while too many might lower your credit score and besiege you with unwanted calls.

Reasons to Apply to Multiple Lenders

It’s difficult to know you are getting the best deal if you have not compared it with other offers. What looks like small interest rate savings now could translate to a large dollar amount over 15- or 30-year mortgages. Use a mortgage calculator to compare how different rates would impact your monthly payment.

Moreover, different lenders structure loans in different ways with regard to rates and closing costs, which carry an inverse relationship. Some lenders ramp up closing costs to buy down your interest rate, while others that advertise low or no closing costs offer higher interest rates in exchange.

Looking at multiple good faith estimates (GFEs) side by side lets you compare rate and closing-cost scenarios to pick the best one for your situation. It generally makes sense to pay higher closing costs for a lower interest rate when you plan to keep the mortgage for many years because your interest rate savings eventually surpass the higher closing costs.

If you plan to sell or refinance after a few years, it is better to keep closing costs as low as possible because you are not paying off the mortgage long enough for interest rate savings to add up.

You can even play one lender against another when you have multiple offers. Suppose lender A offers you a 4% interest rate with $2,000 in closing costs. Then lender B comes along and offers 3.875% with the same closing costs. You can present lender B’s offer to lender A and try to negotiate a better deal. Then, you can take lender A’s new offer back to lender B and do the same thing, and so on.

If you are comparing lenders with each other, try to get an official loan estimate from each one that details all the terms, rates, fees, and points for each loan. When possible, try to compare loans with the same points. Lenders have been known to mislead borrowers with where they place their fees and points to make their deal seem better than a competitor’s.

Important

There is no magic number of applications. Some borrowers opt for two to three, while others use five or six offers to make a decision.

Drawbacks of Applying to Multiple Lenders

For a lender to approve your mortgage application and make an offer, it has to review your credit report. To do so, the lender makes credit inquiries with the three major credit bureaus.

Credit analysts note that too many inquiries can lower your numerical credit score. Hard inquiries in particular stay on your report for two years. Most scoring models, such as FICO and VantageScore, make inquiries into your credit account. These models are closely guarded, so few people know the exact extent to which inquiries matter. Fair Isaac Corporation (FICO), the creator of the FICO model, states that multiple mortgage inquiries that occur within 30 days of one another do not affect your FICO score.

In a hot housing market, borrowers could have to go through multiple rounds of credit checks as buyers get pre-approved, submit offers, and close on homes over several months instead of 30 days. Though multiple checks from mortgage companies over several months may be excluded by your lender for your housing purchase, it may lower your credit score for the following two years.

Another thing many borrowers may not know is that credit bureaus make additional revenue by selling your information to mortgage lenders to which you have not applied. This is known in industry parlance as a trigger lead. Submitting a mortgage application triggers a credit pull, and mortgage companies pay the credit bureaus for lists of people whose credit was recently pulled by mortgage companies.

Credit Pulls

There is no real limit to how many times you can pull credit for a mortgage, but too many pulls over too much time can lower your credit score. Most borrowers have their credit pulled for pre-approval and again at closing to make sure it hasn’t dropped. On occasion, lenders may pull credit again during the underwriting process if a long period of time has elapsed since your pre-approval or if they are verifying that you completed something such as paying off a debt, or if a dispute was removed.

Having credit checked at the beginning of the process is important to obtain a pre-approval letter, which shows you are a serious buyer. You only need one mortgage pre-approval letter. If you’ve had a recent change in financial circumstances such as a raise or inheritance that changes your income, credit score, or down payment amount for the better, it may be worth getting a newer, stronger pre-approval letter.

Do Multiple Credit Inquiries From the Same Lender Count as One?

Generally, multiple inquiries made within 30 days are counted as one inquiry. If your lender pulls your credit multiple times outside of a 30-day period, it may count on your credit report as a hard inquiry.

Can I Lock Mortgage Rates With Multiple Lenders?

Technically, yes, but it is not a very courteous thing to do and you may be on the hook for costs such as credit-check and appraisal fees from each lender, depending on their policies. Originating and underwriting a loan takes a lot of time and care from several dedicated professionals. Locking rates with a lender implies that you are going through with the loan, which is how they get paid. If you cancel at the last minute, they have wasted their time and that company or lender may not be willing to work with you in the future.

Can I Shop for Rates Without a Hard Inquiry?

Yes. Many online lenders, local banks, and mortgage brokers list their rate charts transparently on their websites. If you prefer to call around, clarify in your phone call that you are only consenting to a soft credit check. Not everyone you speak with will be willing to give you rates over the phone, but there are many who will.

The Bottom Line

Too few applications can result in missing out on the best deal, while too many might lower your credit score and besiege you with unwanted calls. Unfortunately, there is no Goldilocks number that represents the right number of mortgage lenders to which you should apply. Some borrowers apply with only two, feeling certain that one or the other can provide the ideal loan, while others want to hear from five or six banks before making a decision.

Perhaps the best approach to getting a mortgage is to start by conducting market research to get an idea of what constitutes a great deal from the best providers in the current lending climate. Next, contact two or three lenders and challenge them to match or beat the terms you have established. If you review their offers and still believe a better deal exists, apply to additional lenders as necessary but understand the established drawbacks of doing so.

One is less expensive, while the other provides more legal protections. Here’s how to decide.

Fact checked by Vikki Velasquez
Reviewed by JeFreda R. Brown

Sole Proprietorship vs. LLC: An Overview

One of the first decisions that anyone going into business needs to make is how to structure their company.

The structure they choose can have a variety of important implications, including how they pay their taxes and the extent to which their personal assets can be shielded from legal liability if they’re sued.

For many small business owners, the choice will be between a sole proprietorship and a limited liability company (LLC).

Here is what you need to know about each one to decide which might be right for you.

Key Takeaways

• Sole proprietorships and LLCs can both work for single owners of a business.
• LLCs are more expensive to set up and maintain but provide liability protections that sole proprietorships do not.
• Sole proprietorships can only have a single owner, while LLCs can have one owner or multiple owners, known as members.
• LLCs can be established as single-member LLCs, partnerships, S corporations, or C corporations.
• Different types of LLCs are subject to different tax treatment by the IRS.

Sole Proprietorship

A sole proprietorship is the simplest type of business structure. Anyone can establish a sole proprietorship as long as they are the only owner.

If two or more people wish to start a business together, they must choose another structure, such as a limited liability company (LLC) or a partnership.

Advantages

Cost-effectiveness and simplicity of setup: Sole proprietorships are easy and inexpensive to establish.

In most states, you don’t need to register the business or take any other official steps if you plan to operate it under your own name. If you choose another name, you may have to file a doing-business-as (DBA) registration.

When it comes time to file your taxes, you don’t have to fill out a separate business tax return; you simply report the gains and losses of your business on a Schedule C and attach it to your Form 1040 individual tax return.

Full control and ownership of the business: As the sole owner of the business, you have complete autonomy. You are your own boss and don’t have to answer to partners, a board of directors, or anyone else.

Easy dissolution process: Just as starting a sole proprietorship requires no legal formalities, you can end one whenever you please.

The Internal Revenue Service (IRS) does require that you file a Schedule C for your final year in business, and you may also need to attach a Form 4797 if you sell any property or other assets associated with the business.

The process is a little more complicated if you have used an employer identification number (EIN) rather than your Social Security number (SSN) in filing your taxes, as is required if you have employees.

In that case, the IRS requires that you send a letter notifying it that you are canceling your EIN.

The U.S. Small Business Administration (SBA) also advises canceling any registrations, permits, licenses, and DBA names that you no longer need so as to “protect your finances and reputation.”

Disadvantages

Personal liability for business debts and obligations: As a sole proprietor of your business, you are solely responsible for its debts and other obligations.

Most other business structures provide protections that can insulate an owner’s personal wealth from that of the business to at least some extent.

However, if you’re a sole proprietor, you can mitigate some of the financial risk if you purchase liability insurance.

Difficulty in raising capital: Unless your sole proprietorship has been successfully up and running for some time, you may find it difficult to borrow money if you need to do so.

Many sole proprietorships are funded in the early years out of their owner’s personal bank accounts and with help from generous friends and relatives. Unlike C corporations, sole proprietorships can’t issue stock to raise capital.

Limited growth potential: Because of their lack of access to capital and generally limited resources, sole proprietorships tend to stay small.

That may be just fine for some owners, who prefer it that way. For owners with grander ambitions, there may come a time to switch to a different and more flexible structure, allowing for additional or faster growth.

Limited Liability Company (LLC)

A limited liability company (LLC) is a step up from a sole proprietorship in terms of complexity.

An LLC can have a single owner or multiple owners, and it affords them legal protections that a sole proprietorship does not (hence “limited liability”).

LLCs with just one owner are sometimes referred to as single-member LLCs.

An LLC filing service can handle all the formation details for you, for a fee. Here’s our rundown of the best LLC services.

Advantages

Limited personal liability for business debts: An LLC shields its owners’ personal property, such as a home, car, or personal savings, in the event of a lawsuit or bankruptcy.

Flexibility in management and ownership: Like a sole proprietorship, an LLC’s owners have relative autonomy in deciding how the business is run.

There is no limit to how many owners an LLC can have, and in addition to individuals, owners can be trusts, corporations, or partnerships.

Potential tax benefits: For tax purposes, LLCs can be set up as pass-through (or flow-through) entities.

This means that any profits or losses are simply passed on to the owners, who then report them on their individual tax returns.

This is also true for sole proprietorships, partnerships, and S corporations, but not for C corporations, which are subject to an additional layer of corporate taxes, sometimes referred to as double taxation.

Disadvantages

Formation and ongoing fees: LLCs typically must be registered in their home state and in any other state where they do business.

States vary in their filing requirements, but LLCs will generally need to submit a set of documents including an operating agreement that spells out how the business will be run.

States charge filing fees for establishing an LLC and require that the registration be renewed periodically at an additional cost.

In addition, an LLC may be subject to other fees, often including annual or biennial report fees, which are required to preserve its legal status.

If the owners wish to close the LLC, they will be required to pay a (generally small) dissolution fee.

Additional administrative requirements: As mentioned, LLCs are generally required to file a report, sometimes called a statement of information, annually or every two years with the states in which they’re registered.

These reports include such details as the LLC’s current owners and their addresses. If the LLC fails to file its report by the state’s deadline, the state can impose late fees or even dissolve the LLC.

Importantly, as the accounting firm Wolters Kluwer points out, an LLC without an up-to-date report on file “will not be in good standing with the state. This can jeopardize your business’ ability to secure a loan, close contracts, or expand operations.”

LLCs may also be required to obtain a state EIN and state or local sales tax identification number, depending on the type of business.

If an LLC has payroll, they will need a state EIN or withholding account number. Some states also require employers to have an employer account number with the state Department of Labor for unemployment tax collection.

Additional tax requirements: LLCs can be subject to additional tax filing requirements as well.

The IRS doesn’t consider LLCs to be a distinct type of entity for tax purposes. Instead, it subjects them to the rules for sole proprietorships (single-member LLCs), partnerships, or corporations, depending on which of those they have chosen.

LLCs with more than one member can be treated as either partnerships or corporations. In the case of a partnership, the LLC must file an informational tax return with the IRS each year, known as Form 1065, as well as prepare Schedule K-1 forms for each of its owners.

The partnership is not taxed on its income, but each owner must report the information that’s on their K-1 and pay any required taxes when they file their individual returns.

LLCs that are classified as corporations must file different forms, depending on whether they are set up as C corporations or S corporations.

Potential for involuntary dissolution: LLCs can dissolve of their own accord based on a decision by their owners, or they can be involuntarily dissolved by the state (administrative dissolution) or a court (judicial dissolution).

When an LLC is dissolved, it loses the liability protections previously afforded to its members. Reasons for involuntary dissolution can include failure to pay taxes or meet other state requirements.

LLCs can also be dissolved in the absence of members, such as if the owner or owners have died.

Sole Proprietorship vs. LLC: Similarities and Key Differences

Sole proprietorships and LLCs have much in common, but there are also some differences worth reinforcing.

Similarities

Tax reporting requirements: Both sole proprietors and LLC owners are required to file certain tax forms and pay taxes on any profits they make.

Sole proprietors report their business income and losses on their individual tax returns by attaching federal Schedule C.

LLCs are subject to different filing requirements, depending on whether they are classified as a single-member LLC, a partnership, or a corporation.

Business licenses and permits: Both sole proprietorships and LLCs can be required to obtain federal, state, or local business licenses and permits, depending on the nature of the business they are in.

For example, a restaurant or construction company may be required to obtain a business license regardless of its ownership structure.

Use of assumed business names/(DBA): Both sole proprietorships and LLCs can choose a name for the business (assuming it hasn’t already been taken by another business).

Sole proprietorships have the option of running the business under the owner’s name, while LLCs must choose and register a DBA name.

Differences

Liability protection: Sole proprietors bear the entire financial responsibility for any lawsuits or legal judgments against their business. LLCs can protect their owners’ personal assets in that situation.

Ability to raise capital: Obtaining a loan or attracting investors can be difficult for sole proprietorships, especially those without a long track record of profitability.

LLCs can raise capital in a number of ways. For example, they can take on additional members (as LLC owners are known). If the LLC is structured as a C corporation, it can also sell shares of stock or issue bonds to raise capital.

Regulatory requirements and costs: LLCs are more strictly regulated than sole proprietorships. This is not just in the state where they are based, but in any location where they do business.

That means that LLCs face additional and ongoing costs, making them more expensive to operate.

Note

Online marketplace eBay, with a market capitalization of $31.01 billion in March 2025, started as a sole proprietorship of Pierre Omidyar. He launched his business in 1995 to bring together buyers and sellers in an open marketplace.

Factors to Consider in Choosing the Right Business Structure

Business owners have a choice in how they wish to structure their companies. A single-owner operation, for example, can set up as either a sole proprietorship or a single-member LLC.

Multiple owners can form a partnership or corporation. Before deciding how you’ll set up your business, here are some things to consider.

The nature of the business and its risks: Because LLCs provide additional protections for their owners’ personal possessions and other assets, they can be more appropriate than sole proprietorships for businesses that run the risk of lawsuits.

As the U.S. Small Business Administration (SBA) puts it, “Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business,” while “LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want protected, and owners who want to pay a lower tax rate than they would with a corporation.”

Growth potential and funding needs: Sole proprietorships are limited in their growth potential because they can have no more than one owner and are likely to have a harder time obtaining capital for expansion.

However, as the SBA notes, a sole proprietorship can be a practical way to start a business. If it catches on, the owner can later restructure it as any of the several types of LLCs.

Personal liability concerns: Sole proprietorships provide no protection for their owner’s personal assets, although that can be mitigated to some extent through liability insurance and, if worse comes to worst, filing for bankruptcy.

So anyone with substantial assets to protect should weigh the benefits of forming an LLC. That is especially true if their business faces a serious likelihood of being sued at some point.

Tax implications: Sole proprietorships and certain types of LLCs all enjoy the tax benefits of being pass-through entities, where any profits are taxed only once.

The exception is if the LLC is established as a C corporation, in which case its income is taxed on both the corporate and individual levels.

Administrative requirements and costs: LLCs require considerably more paperwork to set up and maintain than sole proprietorships do.

They are also subject to additional costs. For prospective business owners, the question comes down to whether the extra work and expense is justified by the LLC’s greater liability protections.

Can You Convert a Sole Proprietorship to an LLC?

Yes, you can convert a sole proprietorship to an LLC by filing the same paperwork with the state as if you were starting an LLC from scratch. A business owner might want to do this if it has become more important for them to protect their personal assets.

Can You Convert an LLC to a Sole Proprietorship?

Yes, you can convert an LLC to a sole proprietorship. You will have to dissolve the LLC with the state and transfer its assets to yourself. A business owner might consider doing this if, for example, they are now the sole owner of a business that once had partners and they want to save on administrative costs. They will, however, lose the liability protections of their old LLC.

How Much Does It Cost to Form an LLC?

The costs of forming an LLC vary from state to state. According to Wolters Kluwer, the fee to establish an LLC varies from $50 in Colorado and Iowa to about $300 in Texas and Tennessee. Most states are in under $200. Bear in mind that if you plan to do business in more than one state, you will have to register in each of them. In addition, there may be other costs, such as business licenses.

How Much Does It Cost to Form a Sole Proprietorship?

It might not cost anything to form a sole proprietorship, since you normally aren’t required to register with your state. As with LLCs, however, you may incur costs if you need to obtain business licenses.

The Bottom Line

Sole proprietorships and LLCs both have advantages and disadvantages. Sole proprietorships are simpler and cheaper to set up and run, while LLCs provide liability protections that sole proprietorships do not.

For anyone about to launch a business, these tradeoffs are important to think through. However, whichever structure you choose, it is relatively easy to switch to the other one if you later decide that it would be a better fit.

Maintain a balanced portfolio to manage risk and reach your investing goals

Reviewed by Khadija Khartit
Fact checked by Yarilet Perez

What Is Rebalancing?

Rebalancing involves periodically buying and selling investments in an established portfolio to ensure that its asset allocation continues to fit an investor’s risk tolerance and investment objectives.

It’s recommended that investors rebalance their portfolios annually because the assets in them can shift in value during the year.

The goal in rebalancing your portfolio is not perfection, since as soon as your allocations regain their predetermined percentages, prices will shift, causing the allocations to deviate again.

The goal is simply to make sure that the balance of assets is working for you as effectively as possible.

This article provides the basics that every investor should know about rebalancing.

Key Takeaways

• Rebalancing your portfolio can fine-tune its diversification to minimize volatility and risk.
• To keep your portfolio balanced, start by measuring your actual allocations and compare them to your original or preferred allocations.
• You can choose from several rebalancing strategies based on triggers such as time spans and percentage changes.
• Rebalancing can conflict with tax loss harvesting strategies.
• Consider using a robo-advisor if you find that handling rebalancing yourself is too difficult.

How to Rebalance Your Portfolio 

When you rebalance your portfolio, consider these questions:

• How much has my portfolio deviated from my original asset allocation?
• Am I still comfortable with my original asset allocation, or has my situation shifted, suggesting that I amend the asset mix?
• Have my goals and/or risk tolerance changed, and if so, does my allocation reflect this?
• Does my current asset allocation still work for me, so that my portfolio’s balance needs no tweaking?

Ways to Rebalance Your Portfolio

There are several rebalancing strategies:

• Select a percent range for rebalancing, such as when each asset class deviates 5% from its asset weight. The window of drift tolerance can be as low as 1 or 2% or higher than 5%. It all depends on your tolerance and the time you’re willing to dedicate to keeping the portfolio compliant with the set allocation.
• Set a time to rebalance. Once a year is sufficient, although some investors prefer to rebalance quarterly or twice per year. There’s no wrong or right strategy, although less frequent rebalancing will potentially lead to greater stock allocations and higher overall returns, along with greater volatility.
• Add new money to the underweighted asset class to return the portfolio to its original allocation.
• Use withdrawals to decrease the weight of the overweight asset. If stocks have increased 1%, sell a portion of the overweight stocks and withdraw the proceeds. 

Important

It’s recommended that younger investors devote a greater percentage of their portfolios to stocks and a smaller percentage to fixed income securities. Although stocks are a higher risk investment, they offer a greater return over time due to capital appreciation and, potentially, dividend income. Those with years to build their savings can afford to invest aggressively because they have the time to recover from stock market losses that they may incur.

Steps to Rebalance Your Portfolio

Generally, you should track the asset allocation of your portfolio over time so that you can determine when it changes. You can maintain your records on a spreadsheet or use a free or paid investment monitor like Quicken or Mint.

Once you’ve listed your assets and the percentage devoted to each asset class is recorded, you can rebalance when needed.

Step 1: Compare 

Compare the current asset values and weight percentages of each asset class with your predetermined (or newly desired) asset allocation.

Step 2: Assess

Notice the difference between your actual and preferred asset allocation. If your 80% stock, 20% bond portfolio has drifted to 85% stocks and 15% bonds, then it’s time to rebalance, either by adding new money or selling stocks and buying bonds. 

Step 3: Sell

Assume your portfolio is worth $100,000. Given the drift above and a desired 80%/20% balance, to reduce your percentage of stocks by 5%, you’ll sell $5,000 worth of stock investments.

Step 4: Then Buy

With the $5,000 proceeds from the stock sale, you’ll buy $5,000 of bonds. This will return your portfolio to its preferred 80%/20% mix. 

Step 5: Add Funds

Let’s say that you decide to add $10,000 to your portfolio. Its value would then be $110,000 and the desired 80%/20% asset mix would now require $88,000 in stocks and $22,000 in bonds.

(Multiply $110,000 by 80% for the stock allocation and $110,000 by 20% for the bond allocation to arrive at these dollar goal amounts).

Step 6: Then Invest Those Funds

Recall that you currently have $85,000 in stocks and $15,000 in bonds. To achieve the 80%/20% balance desired (which requires $88,000 in stocks and $22,000 in bonds), invest $3,000 of your added cash in stocks and $7,000 in bonds.

Follow these steps every time you rebalance your portfolio. Don’t worry if the asset allocation drifts between your rebalancing periods. If your situation changes, and you become more conservative on the one hand or more comfortable with greater volatility or risk on the other, you can always adjust to a newly desired asset allocation.

How to Use a Robo-Advisor to Rebalance Your Portfolio

A robo-advisor might can be a great solution for those who prefer to outsource portfolio selection and rebalancing.

Robo-advisors such as Wealthfront and Schwab Intelligent Portfolios are designed to offer investors access to well-diversified investment portfolios, rebalancing, and other features, such as tax loss harvesting, with low or no management fees.

The most popular robo-advisors administer a quick survey to determine your investment goals, timeline, and risk. This survey drives the makeup of your investment portfolio.

After investing, robo-advisors will rebalance your holdings on an as-needed basis, to keep your it in line with the initial survey parameters.

Pros and Cons of Portfolio Rebalancing

Investment management, which involves rebalancing, requires a commitment. You’ll need to analyze your investments to make certain that they continue to meet your objectives.

You might choose to increase the stock allocation if you’re comfortable with greater risk. Or, you may want to increase the fixed income allocation to preserve capital if you’re nearing retirement or are uncomfortable with occasional double-digit declines in your portfolio’s value.

Pros

• Updates and improves a portfolio’s diversification

• Reduces a portfolio’s volatility and risk

• With planned rebalancing, you’re less likely to become spooked at a market drop and sell at the bottom

Cons

• Can reduce exposure to outperforming sectors and increase exposure to underperforming sectors

• May conflict with tax loss harvesting strategies

• Requires time and effort to understand, select, or alter your own investments

Additional Tips to Rebalance Your Portfolio 

Here are additional tips to aid in successful rebalancing:

• Avoid checking your investment values too frequently (such as daily or weekly). You might feel the need to act, which typically leads to overtrading and inferior investment returns. 
• If you didn’t when you originally built your portfolio, create a personal investment policy statement or investment plan, which includes your investment mix, asset allocation, and rebalancing parameters. Stick to it.
• Minimize tax events generated by taxable accounts. This involves tax loss harvesting (selling losing positions to offset capital gains). 
• Maintain a long-term focus to reach your long-term goals. Don’t be distracted by changes in the value of your investments.

Remember that investing is how you can turn today’s earnings into future financial security.

Investing and rebalancing are designed to increase your returns over time, such as five or more years. For shorter-term goals, consider a certificate of deposit or high-yield money market account. 

Why Should I Rebalance My Portfolio?

You should rebalance your portfolio periodically so that your holdings (e.g., equities and fixed income securities) continue to meet your financial goals and match your risk profile. Investment values change, which means that the percentages that investments represent of your overall portfolio can change. If you don’t rebalance and restore your assets to the appropriate balance of, say, a 80% vs. 20% stock/bond mix, then you might open yourself up to greater risk of financial loss than you’re comfortable with. Rebalancing helps your investments stay on track to meet your financial goals. 

How Much Does It Cost to Rebalance a Portfolio?

Most investment brokers don’t charge commissions or trading fees for stocks and ETFs. So buying and selling stocks and funds is typically fee-free. If you own individual bonds, you’re apt to pay a commission to buy or sell. Mutual funds might also levy a fee to trade.

As long as you’re buying and selling stocks or ETFs, the only cost you might incur is a tax on a capital gain, if it’s realized in a taxable brokerage account.

Can I Rebalance My Portfolio Without Selling?

Yes, you can rebalance your portfolio without selling. Add new money into the portfolio and buy the asset class that is underrepresented. If you need to withdraw funds from your account, sell a portion of the overrepresented asset. You can also reinvest cash dividend payments into an under-allocated asset class. 

Does Portfolio Rebalancing Reduce Returns?

Rebalancing reduces returns in most cases. Historically, stocks have provided a greater return than bonds, so they’ll become a greater percentage of the total portfolio over time without rebalancing. When you rebalance and sell some stocks, you’ll reduce your portfolio’s return. But bear in mind that stocks are riskier than bonds, so as the percentage of stocks in your portfolio grows, so does your risk. Rebalancing is usually a tradeoff between greater return and lower risk. 

How Often Should I Rebalance My Portfolio?

Rebalancing too frequently can sacrifice returns while rebalancing infrequently can increase portfolio risk. Vanguard recommends checking your portfolio annually. The key is to set up and stick with a rebalancing schedule that works for you. 

The Bottom Line

Rebalancing will maintain your preferred asset allocation and help to smooth out the volatility of your portfolio.

When stock prices soar, rebalancing will force you to take some profits. When prices are lower, and an asset class declines in value, you’ll buy at lower levels.

Less frequent rebalancing saves you time and might allow your winning assets to grow for a bit longer. 

Reviewed by Michael J Boyle

Tesla remains one of the hottest companies on the market, with a P/E ratio of 143.62. However, it is also one of the most volatile stocks, meaning investors who want a cost-effective way to gain exposure to Tesla should consider investing in one of these three exchange-traded funds (ETFs) that include the California-based electric car company as a major holding.

Key Takeaways

• Tesla (TSLA) is one of the Magnificent Seven, a group of the 7 most valuable stocks in the U.S.
• While Tesla stock is highly sought-after, it also has a history of high price volatility, making investing in ETFs with significant TSLA holdings more attractive for some investors.
• Popular ETFs that TSLA drives include VanEck Vectors Low Carbon Energy ETF (SMOG), ARK Industrial Innovation ETF (ARKQ), and First Trust NASDAQ Clean Edge Green Energy ETF (QCLN).

VanEck Vectors Low Carbon Energy ETF (SMOG)

Launched in 2007, the VanEck Vectors Low Carbon Energy ETF (SMOG) seeks to provide similar returns to the Ardour Global Index Extra Liquid (AGIXLT). The fund achieves this by investing a minimum of 80% of its assets in small- and mid-capitalization low carbon energy companies that operate primarily in the alternative energy space which includes power derived principally from biofuels (such as ethanol), wind, solar, hydro, and geothermal sources. Tesla accounts for 5.41% of its portfolio, giving investors ample exposure to the electric car maker. Other top holdings in the fund include BYD Co. Ltd. (BYDDY) at 8.9% and Nextera Energy Inc. (NEE) at 7.58%.

The VanEck Vectors Low Carbon Energy ETF has a net expense ratio of 0.61% and has $120.6 million in net assets. As of Jan. 31, 2025, it has a five-year annualized return of 6.19% and a one-year annualized return of 6.47%. The fund also has a 30-day SEC yield of 1.21%.

ARK Industrial Innovation ETF (ARKQ)

The ARK Industrial Innovation ETF (ARKQ), formed in September 2009, invests in companies that are likely to benefit from automation or other forms of technological innovation and advancements. Although the fund invests in both domestic and foreign securities, the bulk of its exposure (86.12%) targets U.S. companies. Tesla is the fund’s top allocation at 11.26%. Teradyne Inc. (TER) and Kratos Defense & Security Solutions Inc. (KTOS) round out the ETF’s top three holdings.

The ARK Industrial Innovation ETF has net assets of $1.01 billion. Its expense ratio of 0.75% is higher than the 0.55% category average, but the fund’s outstanding performance warrants its higher management fees. As of Feb. 28. 2025, ARKQ has five- and one-year annualized returns of 16.85% and 56.18%, respectively. 

First Trust NASDAQ Clean Edge Green Energy ETF (QCLN)

The First Trust NASDAQ Clean Edge Green Energy ETF‘s primary objective is to track the NASDAQ Clean Edge Green Energy Index. The fund, created in 2007, achieves this by investing the majority of its assets in securities that make up the underlying index. This includes U.S.-listed companies that manufacture, develop, and install clean-energy technologies. QCLN has 9.9% of its portfolio in Tesla. The ETF’s other significant holdings include Rivian Automotive Inc. (RIVN) with a 7.19% weighting, First Solar Inc. (FSLR) with a 7.17% weighting, and ON Semiconductor Corporation (ON) with a 6.39% weighting.

The First Trust NASDAQ Clean Edge Green Energy ETF has an expense ratio of 0.59% and $510.39 million in net assets. While the fund has a 5.46% return over the past five years, it has experienced negative returns (-2.47%) over the past year.

Does Tesla Have an ETF?

The Simplify Volt TSLA Revolution ETF (TESL) seeks to provide capital appreciation by investing primarily in TSLA stock. TSLA makes up approximately 78% of the fund’s weight, with the remaining 22% made up of options to manage downside risk.

Is There an Inverse ETF for Tesla?

The T-Rex 2x Inverse Tesla Daily Target ETF (TSLZ) seeks daily investment returns of 200% of the opposite of the performance of Tesla, before fees and expenses.

Why Should You Pick a Tesla ETF over Tesla Stock?

For some investors, the volatility risk of TSLA stock outweighs its potential upside. These investors may prefer investing in an ETF that offers exposure to TSLA as well as similar companies.

The Bottom Line

While Tesla stock is extremely valuable, it’s not suitable for every investor. Some investors may prefer to invest in an ETF that is heavily weighted toward TSLA, such as SMOG, ARKQ, or QCLN. These ETFs provide you exposure to TSLA without having to invest directly in the stock itself.

Apple, Microsoft, and Taiwan Semiconductor lead the list

Reviewed by Gordon Scott
Fact checked by Vikki Velasquez

Technology companies have become a dominant driver in recent years of economic growth, consumer tastes, and the financial markets. The biggest tech stocks as a group have dramatically outpaced the broader market in the past decade. That’s because technology has reshaped how people communicate, consume information, shop, socialize, and work.

Broadly speaking, companies in the technology sector engage in the research, development, and manufacture of technologically based goods and services. They create, design, and manufacture computers, mobile devices, and home appliances and provide products and services related to information technology.

Below we look at the 10 biggest companies in the technology field, as measured by market capitalization. The list is limited to publicly traded companies in the U.S. or Canada, either directly or through ADRs. Data is courtesy of Yahoo! Finance, as of March 1, 2025.

Important

Some of the stocks below are only traded over-the-counter (OTC) in the U.S., not on exchanges. OTC stocks often carry higher trading costs than trading stocks on exchanges. This can lower or even outweigh potential returns.

#1 Apple Inc. (AAPL)

• Market Cap: $3.633 trillion
• Earnings per share (TTM): 6.31
• Exchange: Nasdaq

Apple (AAPL) designs, manufactures, and markets a broad range of consumer technology products. These include smartphones, personal computers, tablets, wearable devices, home entertainment devices, and much more. Some of its most popular products include its iPhone smartphones and Mac computers. Apple has dramatically expanded its sales from services in recent years. It operates digital content stores and has several streaming services, including Apple+, a platform for on-demand entertainment content.

#2 Microsoft Corp. (MSFT)

• Market Cap: $2.95 trillion
• Earnings-per-share (TTM): 12.43
• Exchange: Nasdaq

Microsoft is a global developer and licensor of software, devices, solutions, and services. The company is known for its Windows and Office Suite software but nets a growing share of its profit and revenue from cloud computing and its cloud platform, Azure. Microsoft also owns and operates LinkedIn, the social networking site for job seekers.

#3 NVIDIA Corp. (NVDA)

• Market Cap: $2.94 trillion
• Earnings-per-share (TTM): 2.94
• Exchange: Nasdaq

NVIDIA is a newcomer to this list, having risen to the top as the dominant player in artificial intelligence. The Santa Clara, California, company specializes in graphics processing units (GPUs) and related products for specialized uses in scientific research as well as in industries including automotive, entertainment, and engineering.

#4 Taiwan Semiconductor Manufacturing Co LTD (TSM)

• Market Cap: $782.56 billion
• Earnings-per-share (TTM): 6.90
• Exchange: New York Stock Exchange

Taiwan Semiconductor Manufacturing manufactures microchips and semiconductors used in cell phones, medical equipment, video game consoles, computer hardware, and more. The company had 528 client companies as of 2023.

#5 Samsung Electronics Co. Ltd. (SSNLF)

• Market Cap: $301.846 billion
• Earnings-per-share (TTM): 4.81
• Exchange: OTC Markets

Samsung Electronics competes with Apple and other major tech companies worldwide in key product areas. It’s engaged in a broad range of industries, including consumer electronics, information technology, and communications. The South Korean company sells mobile phones, tablets, wearable devices, virtual reality products, TVs and home theaters, computers, printers, home appliances, and more. In the U.S., Samsung is best known for its Galaxy smartphones.

#6 Sony Corp. (SONY)

• Market Cap: $150.81 billion
• Earnings-per-share (TTM): 1.25
• Exchange: New York Stock Exchange

Sony is a Japanese technology company that designs and produces electronics products worldwide for consumer, professional, and industrial markets. The company sells a variety of products, including personal computers, mobile phones, video game consoles and software, and video cameras. It also produces and distributes recorded music and live-action and animated motion pictures. In addition, it makes and sells the PlayStation, a popular video game console.

#7 Intel Corp. (INTC)

• Market Cap: $102.35 billion
• Earnings-per-share (TTM): -4.38
• Exchange: Nasdaq

Intel is a global producer of computer chips and a provider of computing, networking, data storage, and communication solutions. The company offers platform products for the cloud, enterprise, and communication infrastructure markets. In addition, Intel provides flash memory, programmable semiconductors, and processors for notebooks, mobile devices, and desktop computers. The company is well known for its high-performance processors used in PCs worldwide.

#8 Hon Hai Precision Industry Co. Ltd. (HNHPF)

• Market Cap: $73.24 billion
• Earnings-per-share (TTM): 0.69
• Exchange: OTC Markets

Hon Hai Precision, also known as Foxconn, is a Taiwan-based multinational electronics manufacturer. The company produces electronics and electronic components for use in the information technology, communications, automotive equipment, automobile, precision molding, and consumer electronics industries. Foxconn is a key supplier in Apple’s supply chain, manufacturing a significant proportion of its iPhones. It also manufacturers Amazon’s Kindle and Sony’s PlayStation.

#9 Dell Technologies Inc. (DELL)

• Market Cap: $71.70 billion
• Earnings-per-share (TTM): 6.38
• Exchange: New York Stock Exchange

Dell Technologies makes and sells hardware, information technology products, and services worldwide. The company sells desktop and laptop computers, traditional and next-generation storage solutions, and networking products. Dell also sells a cloud-native platform and cloud management solutions. Dell’s best-known products are its personal computers.

#10 Panasonic Corp. (PCRFF)

• Market Cap: $29.009 billion
• Earnings-per-share (TTM): 0.96
• Exchange: OTC Markets

Panasonic is a Japan-based developer, manufacturer, and servicer of electronic products primarily for the consumer market. The company offers personal computers, tablets, projectors, and broadcast and professional AV systems. Panasonic also makes appliances such as air conditioners, TVs, refrigerators, and washing machines.

What Are the Sectors Within the Technology Industry?

The three main sectors within the technology industry are:

• Software and services
• Semiconductors and semiconductor equipment
• Technology hardware and equipment

Many companies cross those lines. Microsoft is certainly a software and services company but it also makes PCs and laptops and tried, unsuccessfully, to make phones.

Are Any Computer Products Made in the U.S.A.?

Yes. Apple’s Mac Pro is made in Austin, Texas. Samsung makes some of its microprocessors in Austin. Texas Instruments makes chips in Texas, Maine, and Utah.

Which Companies Have a Market Cap Above $1 Trillion?

They’re not all technology companies. As of this writing, companies that have a market capitalization above $1 trillion include Amazon, Tesla, Saudi Aramco, Berkshire Hathaway, and Meta, as well as Apple, Microsoft, and NVIDIA,

The Bottom Line

What is a technology company? It’s hard to define. Is Amazon a technology company or a retailer? How about Google or Facebook? In this selection, we narrowed the definition to include the key players in producing the hardware and software that make our modern world run.

Reviewed by Margaret James
Fact checked by Vikki Velasquez

Apple Inc. (AAPL) is the world’s largest company by market value. It designs, manufactures, and sells a wide range of consumer technology devices including smartphones, tablets, personal computers, and wearables. Some of its best-known products include the flagship iPhone brand, the iPad, and Mac lines. Apple has expanded its service revenue by dramatically growing its cloud services business and by selling streaming entertainment like Apple TV+, Apple Music, and other digital content.

The top shareholders of Apple are The Vanguard Group, BlackRock Inc. (BLK), Arthur Levinson, Tim Cook, and Jeff Williams.

Here’s a more detailed look at Apple’s five biggest shareholders.

Key Takeaways

• Apple Inc. is the world’s largest company by market value.
• The company’s market cap was about $3.63 trillion as of February 28, 2025.
• The Vanguard Group was Apple’s top shareholder as of December 29, 2023 with more than 1.3 billion shares representing 8.76% of total shares.
• Arthur Levinson was Apple’s top individual insider shareholder as of January 2, 2025 with more than 4.2 million shares.

Top 3 Individual Insider Shareholders

Arthur Levinson

Arthur Levinson owned 4,217,092 shares of Apple stock as of January 2, 2025. Levinson has been the chair of the board of Apple since 2011.

Levinson is a former chief executive officer (CEO) of biotech company Genentech Inc. and is the CEO of biotech company Calico.

Important

“Insider” refers to individuals in senior management positions and members of the board of directors, as well as people or entities that own more than 10% of the company’s stock.

Tim Cook

Tim Cook owned 3,280,180 shares of Apple stock as of January 2, 2025. Cook rose to CEO of Apple in 2011 after the death of founder and longtime CEO Steve Jobs. Cook arrived at Apple in 1998 and was the chief operating officer (COO) responsible for all worldwide sales and operations before being named CEO.

Cook also headed Apple’s Macintosh division and played a key role in the continued development of strategic reseller and supplier relationships. Cook was Vice President for Corporate Materials for Compaq and Director of North American fulfillment for IBM before joining Apple.

Jeff Williams

Jeff Williams, the COO at Apple, owned 389,944 shares of Apple stock as of January 2, 2025. Mr. Williams oversees Apple’s global operations and the development of Apple Watch and Apple’s health initiatives. Mr. Williams held previous positions after joining Apple in 1998 that included Head of Worldwide Procurement. Mr. Williams worked in several roles at IBM from 1985 to 1998 before joining Apple.

Note

Apple briefly became the world’s first $3 trillion company during intraday trading on January 3, 2022. The iPhone maker also holds the distinction of being the world’s first company to reach $1 trillion and $2 trillion.

Top 2 Institutional Shareholders

Vanguard Group Inc.

Vanguard Group owned more than 1.3 billion shares of Apple, representing 8.76% of total shares outstanding as of December 29, 2023. Vanguard is primarily a mutual fund and exchange traded fund (ETF) management company with about $9.3 trillion in global assets under management (AUM).

The Vanguard S&P 500 ETF (VOO) is one of the company’s largest ETFs with about $1.4 trillion in net assets as of January 31, 2025.

BlackRock Inc.

BlackRock owned 1.043 billion shares of Apple, representing 6.94% of total shares outstanding as of December 31, 2023. BlackRock is also a mutual fund and ETF management company with approximately $10.473 trillion in AUM as of March 31, 2024.

The iShares Core S&P 500 ETF (IVV) is among one of BlackRock’s largest ETFs with more than $594 billion in net assets as of February 28, 2025.

What Are Some of Arthur Levinson’s Other Achievements?

Levinson is the author or co-author of 80-plus scientific articles. He holds 11 U.S. patents and was inducted into the Biotech Hall of Fame in 2003.

What Is Apple’s Stock Price in 2025?

Apple Inc. shares closed at $241.84 on February 28, 2025. Its intraday market cap was $3.633 trillion on the same date.

What Are Some Other Services and Products Offered by Vanguard?

The Vanguard Group offers the Situational Advisor service that provides clients with a one-time consultation with a financial advisor. The topic doesn’t have to be stock-related. It can be the pros and cons of buying a home, a question about your retirement, or just about any other financial issue. The advisor can’t manage your money for you but can provide you with knowledgeable guidance.

The Bottom Line

Apple’s top shareholders are Vanguard, BlackRock, Arthur Levinson, Tim Cook, and Jeff Williams.

Apple’s 12-month trailing revenue and net income were $391.04 billion and $93.74 billion, respectively, as of February 28, 2025. The company’s market cap was about $3.63 trillion as of February 28, 2025.

For many people, a house is their largest and most important investment. A house is not just a place to live and raise a family but also an asset with a fairly stable growth rate. Homeownership can unlock financial security, especially as you reach milestones like starting a family or retirement.

However, housing has become increasingly expensive in recent years. The median sales price for a house in the U.S. was $419,200 in the fourth quarter of 2024, but it was almost double that in places like New York and nearly triple in San Francisco.

To make the goal of homeownership more attainable, you need to start saving money as soon as you can. That’s because there’s more to the cost of buying a home than the monthly mortgage payment—consider upfront costs like the down payment, which typically must be at least 20% of the purchase price if you want to avoid paying private mortgage insurance (PMI).

To save 20% for a $419,200 home, you will need $83,840. If you earn the median national income of $80,610 for households and set aside as much as $0.25 for every $1 you make, you must save for more than four years to afford the down payment.

Saving for a house may seem daunting, but with careful planning, you can make that dream more realistic. We’ve compiled a step-by-step guide of the most crucial steps you need to take to accelerate your home-buying goals.

Key Takeaways

• Do your housing research. It’s important to assess your housing needs and market housing prices before evaluating how much you need to save for a down payment.
• Set a clear savings goal based on the size and location house you decide meets your needs.
• Assess your financial situation, including credit score, income, expenses, and the value of any investments or current savings account balances.
• Develop a savings plan with automatic deposits and focus on trimming expenses until your goal is met.

1. Do Your Housing Research

 Before you even move $1 into your housing fund, the first step you need to take is to research properties. For one, if you’re just getting started on your home-buying quest, you might not even know what you want. Where can you afford to live? How many bedrooms do you need? Do you require a Whole Foods within driving distance or are you fine with shopping at your local farmer’s market for groceries?

 All of these factors can affect the price of housing–even the proximity to grocery stores. 

Once you’ve settled on your baseline needs for your home, you can plug ZIP codes into housing search apps like Zillow to see what it’ll cost you for a home that meets all or most of your needs. You can also contact a trusted local real estate agent who can help you understand market trends and potential ways to save money. They may have access to other pricing data than what you’re seeing online.

After you have a good idea of housing prices, it’s time to start saving.

2. Set a Clear Savings Goal

A savings goal can ensure you’re putting away enough money to afford a home within your desired moving time frame. To get a rough estimate, set a target purchase date and work backward over the months it’ll take you to afford a down payment at your current saving rate.

However, there are several points to consider when turning that rough estimate into something more exact.

What Size Down Payment Can You Make?

You don’t always need to make a 20% down payment. A lower down payment may be easier to afford in the immediate future and get you into a home sooner, which could help you build equity faster. But, unless you qualify for special down payment programs offered by your lender, you’ll need to pay private mortgage insurance, a separate fee assessed by your mortgage lender until your home equity is greater than 20% of the home value, which could take years.

You also could consider paying even more than 20%. Doing so could improve the long-term affordability of your home by taking out a larger chunk of your mortgage principal. You may be offered lower interest rates if you pay a higher down payment (i.e., you’ll start with a lower loan-to-value ratio, which lenders look upon favorably) and potentially save tens of thousands of dollars over the life of the loan. 

Where Are You Saving for Your Down Payment?

Different types of savings vehicles offer benefits and trade-offs. A savings account offers the most ready access to your cash and could pay interest as high as 4.75% APY or more as of February 2025. Your bank may allow you to create saving buckets for your account to categorize deposits as intended for the home purchase.

Another option is a certificate of deposit (CD). While CDs require you to commit your cash to a specific term to earn the full value of interest, you may find slightly higher rates of return on CDs than savings accounts. If you’re willing to wait out the term, that could get you closer to homeownership.

A third option is a taxable brokerage account. While investing in stocks and funds is riskier—in an economic downturn, your losses could be severe—your rate of return could outpace returns with savings accounts and CDs over a comparable length of time. Remember that you’ll need to pay capital gains tax on realized earnings.

3. Assess Your Current Financial Situation

Circumstances change, often dramatically. Economies go boom, and economies go bust. When deciding how much you need to save for a house, you need to plan for both good times and bad. Ask yourself whether you have enough savings to work towards homeownership and to cushion yourself and your family from job loss, an expensive medical bill, or other unexpected expenditures.

“Buying a home is emotional, but making decisions based on affordability—not excitement—is key,” said Thao Truong, CFP, CDFA, a wealth advisor at Morton Wealth. “Sit down and assess your income, expenses, and savings potential. Identify areas to cut back to accelerate savings. You will know how much time you have to save for your down payment once you have clarity of your numbers.”

Take stock of your household income, current investments, liquid cash funds, and any debt you owe. Lay out your current expenses in a budget, including day-to-day spending and long-term costs like loan payments, future vacations and leisure activities, and major purchases. Given those financial constraints, this will help you visualize how much of your income goes toward these spending categories and whether buying a house is realistic.

In addition, your budget will show you where you can reduce spending. Keep in mind, however, that saving a few hundred bucks here or there likely won’t speed up your housing savings by any material degree since smaller savings would represent only a fraction of the down payment amount and could be offset by the increase in housing prices over time. 

Finally, if you expect your parents or other family members to help, start having those conversations now. Factor in gift money that covers part of the mortgage or down payment.

Once you have done your high-level financial assessment, here is a list of how to financially prepare for homeownership:

• Credit score: Obtain your current credit report to determine your credit score. Most lenders require a minimum credit score of 620 or above for conventional mortgages. 
• Debt-to-income ratio: Ensure your debt-to-income ratio (DTI), i.e. what you owe to lenders divided by your household income, aligns with lender standards. DTI ratio measures the percentage of your gross income you pay out each month to satisfy debts. Banks generally set a DTI ratio maximum limit of 43% but prefer to lend to borrowers with a DTI ratio of less than 36%. 
• Documentation: Collect past pay stubs, tax returns, bank statements, and investment account statements to document your employment and revenue sources before applying for a mortgage or getting prequalified for a loan.

4. Explore Eligibility for Low Down Payment Mortgages

Many lenders offer home buyers more favorable down payment requirements. This means you can take out a mortgage with roughly the same interest rate as a comparable mortgage without paying a 20% down payment. In many cases, the down payment is just 3%. Other programs offer a grant toward paying your interest rate if you qualify, which could be worth thousands of dollars and save you money on your monthly mortgage payments.

You’ll need to meet the lender’s requirements to qualify for these loans. These may include limits on the price of the home, minimum income thresholds, and minimum credit scores.

You could also consider an FHA loan, said Christian Maldonado, co-founder of TaxAdvisor365, an accounting and bookkeeping services firm. “This is a very popular mortgage loan option for first-time homebuyers due to its lower cost, especially when it comes to the down payment of your first home,” he said. “The minimum down payment in most cases if you meet the minimum requirements such as a 570ish credit score is about 3.5%.”

Your state may also offer down payment assistance that could cover a significant portion of the down payment. Usually, this assistance comes in the form of a low-interest loan, but you may need to meet strict income requirements and home purchase price limits. The down payment assistance loan is forgivable in some states after a set period.

Down payment assistance can reduce the money you’ll need to save for your home purchase. There are many ways to purchase a home with little to no money down—from 0% down loans to government and bank-sponsored assistance. Depending on where you’re buying, funds could be available at the city, county, state, and federal levels. 

In the meantime, here are some options to explore:

• FHA loans
• VA loans 
• USDA loans
• HUD Good Neighbor Next Door Program
• NACA housing program
• Local homebuying programs (based on city, state, and county)

5. Develop a Savings Plan

Your savings plan comprises the actions you must take to achieve your savings goal. It’s a series of strategies, including increasing your income, reducing spending where needed, and forcing yourself to save money.

“Writing down your plan—including how much you need for a down payment, estimated closing costs, and a timeline—can help you understand how hard the path is and what might delay a successful outcome,” said Heather Winston, chief product officer, Principal Advised Services at Principal Financial Group.

Automate Your Savings

You may be able to set up your direct deposit to automatically split your earnings between your checking account and savings account. Your banking app may also allow you to set up automatic recurring transfers.

Setting Up a Separate Savings Account

Attempting to save money in the same transaction account you use for daily expenses can complicate things by mixing discretionary funds with non-discretionary home down payment savings. Also, most checking accounts typically offer little or no interest unless it is a high-yield checking account. It’s better to separate your down payment funds into a dedicated savings account. Make sure it pays a decent interest rate to boost your savings. 

Increase Your Income

You may have untapped sources of income you hadn’t considered. Some people take on a side hustle, which could mean everything from gig work to contacting your network about freelancing. You may also consider starting your own online business, which might be a store or a creative endeavor, like blogging, vlogging, podcasting, or selling arts and crafts on Etsy. Consider asking your boss for a raise, or even a promotion, at your next performance review.

Save Every Windfall

If you receive a lot of money unexpectedly, be sure to save as much as you can in your housing fund. You may get windfalls in the form of tax refunds, insurance payouts, inheritances, and so on, which could put you significantly closer to your goal.

Cut Back on Big Expenses

Rather than solely focusing on small expenses like your morning latte or an online news subscription, look for ways to cut back on expenses that could have a more material impact on your savings. If you like to travel, consider flying to more domestic destinations, and opt for the two-star hotel instead of the three- or four-star one. Or, if you enjoy dining out, you might save a few hundred bucks per month by learning to cook similar dishes at home. However, the cumulative effect of cutting streaming and subscription services can add up to substantial savings, even though each one is a relatively small expense.

Tap Your 401 (K)

While it is not an advisable way to save for a home down payment, there are IRS rules that allow employees to borrow money from their employer-sponsored 401(k) retirement account to purchase a primary residence. 

It’s important to note that you must repay the loan from a 401(k) within five years. If you quit or are fired from your job, you will have to repay the loan much quicker or face penalties and fees for what the IRS would consider an early withdrawal, which can make this move risky for some people.

Regularly Adjust Your Savings Plan

By closely monitoring the progress of your savings plan, you can make regular changes to it. Track how major life changes affect your finances, such as getting a new job, losing a job, starting a family, moving, or losing a loved one, and adjust your savings to make sure you’re still on target or that you have enough liquid cash to cover unexpected costs.

Additionally, broader economic shifts could impact your savings plans, such as if mortgage rates increase or if the housing market continues to be affected by low supply and high housing prices. You may need to save more than you had budgeted for.

How Long Does It Take To Save a Down Payment?

Although the median price for a newly built home in the U.S. was $419,200 in Q1 2024. average home prices vary depending on the region of the country you live in:

• Northeast: $798,800
• Midwest: $368,400
• South: $377,200
• West: $560,900

Regardless of housing prices in your city, you shouldn’t assume your only option is to save the full 20% of the cost of a home before buying. According to a National Association of Realtors (NAR) report, most first-time homeowners will put between 6% and 7% down on home purchases. In addition, you can expect to pay another 3%-6% of the home’s purchase price in closing costs. 

As an example, let’s assume you’re a first-time homebuyer. After getting some help from family, you’ll need an extra $40,000 to cover the down payment and closing costs on your home. If you could manage to save $1,000 a month, it would take 40 months (a bit over 3 years) to reach your goal. If you’re able to live with family or friends without paying rent, you might be able to save more aggressively and cut that time in half or more, however.

The Bottom Line

It can take years to pull together enough cash to buy a house, even with careful savings. You should start saving as early as possible and proactively review your financial plan regularly to ensure you’re maximizing your savings. A robust system for growing your housing fund can help ensure that you’re not buying more than you can afford. Educate yourself on what’s available in your local housing market and what it costs to buy the home that fits your needs.

Get the most passive income possible with these top dividend stocks

Dividend stocks are shares of companies that distribute a portion of their profits to shareholders on a regular basis in the form of dividends. Dividend payments, typically distributed quarterly, can be a source of passive income for investors and a sign of the continued financial well-being of the distributing company.

Key Takeaways

• Dividend stocks are companies that regularly pay out a portion of their profits to shareholders in the form of dividends. These may be distributed quarterly, semiannually, or yearly.
• Dividend yield measures the yearly dividend amount a company pays in comparison to its stock price and is expressed as a percentage.
• Dividend yield fluctuates constantly as a company’s share price moves.

Below, we look at 10 dividend stocks to watch for March 2025 as measured by forward dividend yield. We exclude companies with payout ratios that are either negative or higher than 100%. A detailed explanation of our methodology is below. Data throughout are current as of Feb. 28, 2025.

Best Dividend Stocks to Watch in March 2025
Ticker	Company	Sector	Market Cap ($B)	Dividend Yield (%)	Price ($)
CMBT	CMB.TECH NV	Transportation	1.74	65.07	8.91
TRMD	TORM PLC	Transportation	1.71	31.61	17.59
BWLP	BW LPG Limited	Transportation	1.71	23.71	11.34
PBR	Petróleo Brasileiro SA	Energy Minerals	82.23	19.98	13.35
ACP	abrdn Income Credit Strategies Fund	Miscellaneous	0.76	19.83	6.05
ZIM	ZIM Integrated Shipping Services Ltd.	Transportation	2.43	19.63	20.22
KSS	Kohl’s Corporation	Retail Trade	1.27	17.53	11.41
INSW	International Seaways, Inc.	Transportation	1.64	17.31	33.33
SBLK	Star Bulk Carriers Corp.	Transportation	1.86	15.99	15.63
EC	Ecopetrol S.A.	Energy Minerals	20.5	15.90	9.88

Why Are These the Best Dividend Stocks?

The dividend stocks included on our list represent companies trading on the Nasdaq or the New York Stock Exchange with share prices of $5 or more, a market capitalization of $300 million or more, and a daily trading volume of at least 100,000. Companies with payout ratios that are either negative or over 100% were also excluded from the list. From the pool of companies remaining, we selected those with the highest forward dividend yield for inclusion on our list. Because dividend yield changes all the time with the price of a company’s stock, this list is also likely to change quickly. Further, these are not the best dividend stocks of all time; they represent those that rose to the top of the list based on our methodology for this month.

Investors prioritize dividend stocks because they provide a steady passive income stream and enjoy the potential for share price growth in the future. Dividends are not necessarily a given, however, even among companies with a history of paying them for many years. Investors should remember that:

Market conditions impact dividends. The broader economic environment has a significant impact on dividend payments. When there is concern about the ability to maintain operations and top- and bottom-line performance due to external market factors, companies may move to reduce or even eliminate dividends as an early protective measure. This allows them to preserve capital in case of turbulent times to come. On the other hand, booming economies can sometimes prompt companies to increase their dividend payments.

Dividend yields may be misleading: Dividend-paying companies may increase a dividend yield to entice investors, but higher dividend payments can be unsustainable. Similarly, a dividend yield may appear higher because of falling stock prices. These are reasons why the payout ratio is an important metric to monitor for dividend stocks.

How to Pick Dividend Stocks

Strong dividend stocks tend to be those of companies with solid fundamentals, a strong profitability horizon, and a sustainable dividend yield that has maintained or, ideally, increased over a period of years.

How to Find Dividend Stocks

Not all sectors and industries are the same when it comes to dividend-paying companies. Finance and energy tend to be sectors with higher dividend payments than others, and real estate investment trusts (REITs) are required to pay out a substantial portion of their income in dividends to shareholders. But it’s also important for investors to look not just at a company’s sector, but also at its dividend performance relative to other companies in that sector.

What Should Investors Look For in Dividend Stocks?

Dividend Payout Ratio (DPR)

DPR is a measure of how much of a company’s earnings are paid to shareholders. The DPR is calculated by dividing total dividends by net income and is often included on brokerage platforms as well as financial news sites.

As an example, if Company X reported a net income of $50,000 and paid $10,000 in yearly dividends, its DPR would be 20% because $10,000 / $50,000 = 20%. In other words, Company X pays 20% of its earnings to shareholders each year. A DPR of under 50% is typically considered stable and sustainable and may be indicative of long-term growth potential. Higher percentages may mean that a company is overpaying on dividends.

Dividend Yield

Dividend yield is a measure of the annual value of dividends received by a shareholder relative to the security’s per-share market value. It can be calculated by dividing the annual dividend per share by the current stock price. Like DPR, this information is often easily found online.

If Company X pays $5 in dividends annually and has a current share price of $100, its dividend yield is 5% because $5 / $100 = 5%. Investors sometimes begin a search for dividend stocks by screening for companies with dividend yields above a certain percentage.

Dividend Coverage Ratio

The dividend coverage ratio measures the number of times a company is able to pay dividends to shareholders and is calculated by dividing annual income by annual dividend per share.

Company X generated $5 million in net income and pays $1 million annually in dividends, hypothetically. In this case, the company has a dividend coverage ratio of 5, or $5 million / $1 million. Higher dividend coverage ratios mean companies can pay dividends a greater number of times based on current income levels.

Besides these metrics, there are other fundamentals that investors should consider as well, including earnings per share (EPS) and total return.

The Bottom Line

For investors looking to generate income from their investments, dividend-paying companies may be a good option. However, before investing in a dividend stock, it is important to research the overall financial health of that company. Higher dividend yields are generally seen as attractive but may be misleading and even a sign of financial instability.

Investors pursuing dividend stocks may be able to reinvest dividends to buy more shares, therefore taking advantage of compounding returns.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info.

As of the date this article was written, the author does not own any of the above stocks.

Growth stocks can be a good way to build wealth. These are some of the best growth stocks for March 2025

Growth stocks are companies that investors expect to outperform industry peers or the broader market in earnings, revenue, and share price increases. Unlike more established firms, which may return these profits to shareholders in the form of dividends or use them to buy back stock, growth stocks tend to reinvest these gains in expansion, research, development, and similar areas. However, although growth stocks may generate sizable returns for investors, they also carry a higher degree of risk as a result of market volatility. Growth is one key factor investors consider, along with others such as value and momentum.

Below, we explore the best growth stocks to watch this month and offer a detailed explanation of our methodology for compiling this list. All data are current as of Feb. 28, 2025.

Best Growth Stocks to Watch in March 2025
Ticker	Company	Sector	Market Cap ($B)	Price ($)	30-Day Return (%)
GRRR	Gorilla Technology Group Inc.	Technology Services	0.56	30.28	116.29
ORGO	Organogenesis Holdings Inc.	Health Technology	0.79	6.21	74.44
CYD	China Yuchai International Limited	Producer Manufacturing	0.78	19.12	71.48
SLDB	Solid Biosciences Inc.	Health Technology	0.43	5.59	70.95
GDS	GDS Holdings Limited	Technology Services	6.93	38.05	70.02
PRCH	Porch Group, Inc.	Technology Services	0.71	6.99	63.70
ROOT	Root, Inc.	Finance	2.05	135.17	62.86
SWTX	SpringWorks Therapeutics, Inc.	Health Technology	4.33	57.76	61.75
VNET	VNET Group, Inc.	Technology Services	3.13	11.73	60.91
INOD	Innodata Inc.	Technology Services	1.65	52.72	54.74
RUA	Russell 3000	N/A	N/A	3,389.87	-2.32

Growth Stocks in the Current Market Environment

In general, growth stocks tend to perform better in periods of economic expansion when the cost of borrowing is low. Though inflation is lower than it has been in recent years, higher interest rates and slowing economic growth mean that the current environment may not be ideal for these firms.

That said, not all growth stocks benefit from the same market conditions. For example, companies that enjoy a particular competitive edge within their industries or a dominant position in the market may be more likely to grow regardless of the macroeconomic environment. Similarly, firms in a hot industry that is experiencing significant growth may also outperform independently of other factors. A recent example has been technology stocks focused on AI, although an industry sell-off following the unveiling of a competitive AI platform by Chinese firm DeepSeek in January 2025 is a reminder that these conditions may change suddenly.

Health technology and biotech firms are often present in lists of top growth stocks thanks to their potential for massive breakouts following strong data about a new product or launches of a blockbuster drug or piece of equipment. Despite turbulence due to inflation and a slowdown in product launches, this sector may still be poised for significant growth due to an aging population and increased health care spending, with national health expenditures climbing to $4.9 trillion in 2023.

How We Chose the Best Growth Stocks

In our growth stocks screen, we focused on companies listed on either the Nasdaq or the New York Stock Exchange. To ensure that the firms we screened are well-established, we excluded stocks trading under $5 per share, those with a market capitalization under $300 million, and any with a daily trading volume under 100,000. Additionally, companies with growth in excess of 1,000% were excluded as outliers.

From this list, we selected the stocks with the highest 30-day returns to complete our ranking. In many cases, companies with a strong recent history of outperformance relative to industry peers or the broader market have built momentum thanks to positive company or external news, favorable market sentiment, or appealing technicals. If these conditions remain the same, these companies may experience continued growth in the future, though past performance is not an indicator of future returns.

How to Invest Wisely in Growth Stocks

Besides 30-day return, there are many key financial ratios that are helpful to use to identify potential growth stock investments. Using multiple metrics provides a fuller picture of the benefits different candidates offer, their financial positions, and how the market views them with respect to potential future gains.

Earnings Per Share (EPS) Growth

Earnings per share (EPS) growth is a measure of the percentage increase in a company’s earnings per share over a given period, typically year-over-year. Positive or accelerating EPS growth indicates underlying financial health and suggests the potential for future returns.

Price-to-Earnings (P/E) Ratio

Price-to-earnings (P/E) ratio is a comparison of a company’s stock price and its EPS. Higher P/E ratios suggest that investors are bullish about a company but may also signal that it is overvalued. On the other hand, a low P/E ratio may mean that a stock is undervalued relative to the industry or the broader market, or that investors are not especially optimistic about its prospects.

Price-to-Book (P/B) Ratio

Price-to-book (P/B) ratio is a measure of a firm’s market value against its book value, or the net value of the assets on its balance sheet. Some contrarian investors believe that a low P/B ratio indicates an undervalued stock that may have growth potential. However, P/B ratios can vary significantly from industry to industry, so it’s important to take stock of how a particular company compares with its peers.

How to Find Growth Stocks

Investors don’t have one single method for identifying promising growth stocks. Factors such as financial health, management, returns, and market position relative to industry peers are all helpful to consider.

Looking at a prospective growth stock investment, you should consider the company’s revenue, EPS, and profit margin history. Companies with a consistent record of increasing earnings may be likely to continue to grow into the future. It’s best to avoid stocks paying a dividend if you’re interested in growth potential—companies paying a dividend are opting to not reinvest profits back toward investment in company growth.

Identifying firms with a relative industry advantage over their peers depends upon the specific sector and industry. For instance, some industries—like health care—may be quite opaque to investors without special expertise. In other cases, it may be easier to identify a sustainable competitive edge in the form of a unique product, technology, or service that a company offers. An example of a competitive edge is NVIDIA Corp.’s (NVDA) data center processors, widely viewed as advantageous over rival products thanks to their system-scale integration capabilities.

A company’s management and corporate governance can also be helpful clues to its growth potential. How have the firm’s leaders navigated challenges and taken advantage of opportunities in the past? Looking to historical earnings reports can show whether a firm has been able to meet its goals, including in the area of forecasted EPS and revenue performance.

Lastly, share price performance can be an indicator of future growth potential. Look for companies that have higher stock price gains than their industry or the broader market. When making a comparison, it’s helpful to benchmark a firm’s performance against the Russell 1000 Index. As of Feb. 28, 2025, the Russell 1000 had returned -2.27% in the last 30 days. The stocks in our screen above have all significantly outperformed this level, potentially suggesting the prospect of future growth as well. A metric like compound annual growth rate (CAGR) can also help to compare two companies more directly.

Are These the Best Growth Stocks?

It is difficult to assess which growth stocks are the “best.” In reality, growth stocks in general—and these companies in particular—may not be suitable for each type of investor. Growth stocks may exhibit a higher degree of volatility than some more established, larger peers. Because many growth stocks are companies making aggressive maneuvers to expand operations, and because these moves may or may not succeed, investing in growth stocks can carry certain risks. Further, it can be difficult to predict which stocks exhibiting growth characteristics, such as the metrics identified above, will successfully generate outsized returns.

Investors interested in growth stocks should keep in mind that recent performance history is not a guarantee of future returns.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info.

As of the date this article was written, the author does not own any of the above securities.