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The U.S. mortgage market is massive, so it’s no surprise that it’s actually composed of a primary and a secondary market.

The primary market serves the home-buying public. The secondary serves investors, but it plays a big role in a borrower’s ability to get a mortgage and how much that home loan costs.

Primary vs. Secondary Mortgage Market

The primary mortgage market links borrowers to home mortgage lenders. The secondary mortgage market allows investors to invest in existing mortgage loans in hopes of earning a return.

What Is the Primary Mortgage Market?

Any time a homebuyer takes out a mortgage loan from a reputable lender, that’s the primary mortgage market in action. Homebuyers and mortgage refinancers can work with a mortgage broker or direct lender to find the right home loan.

Direct lenders include banks, credit unions, and online mortgage companies. They originate loans with their own money or borrowed funding. Many of them originate mortgages only to sell them to investors, though the lenders may retain the servicing rights.

What Is the Secondary Mortgage Market?

With the secondary mortgage market, investors such as pension funds, banks, and insurance companies buy mortgage-backed securities and try to earn a profit on them.

Why would lenders sell some of their home loans? Because they’re able to replenish their supply of mortgage funding and remove the risk they took on by making the loans.

The mortgages that Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.), the country’s biggest residential mortgage buyers, purchase are conforming loans. That means they conform to certain lending guidelines and loan limits. In 2025, the conforming loan limit for a single-family home was $806,500 in most housing markets. In 2026, it’s $832,750.

Then there’s Ginnie Mae (the Government National Mortgage Association), which buys government-backed FHA, VA, and USDA loans and bundles them into securities to be sold on the bond market.

Recommended: Try This Mortgage Calculator

Example of Both Markets in Action

Betty Borrower decides she wants to buy a home and needs help financing the purchase. She shops for a mortgage with an attractive interest rate and low costs. She finds a good fit, applies for the loan, and is approved.

She moves in, and her loan moves on. Then Betty gets a letter from her lender saying that her mortgage has been sold to another financial entity.

The mortgage buyer, which may be an investor or mortgage loan aggregator such as Fannie Mae or Freddie Mac, can repackage home loans as mortgage-backed securities or hold them and collect the interest from Betty.

Any investor who engages with the secondary mortgage market is buying Betty’s mortgage debt and counts on her to pay the debt, with the investor pocketing a percentage of the profit.

Recommended: Guide to Buying, Selling, and Updating a Home

Why Are There Two Mortgage Markets?

The primary and secondary markets work hand in hand. Congress created the secondary mortgage market in the 1930s to give lenders a larger, steadier stream of mortgage funding to stabilize the country’s residential mortgage markets and expand opportunities for homeownership.

Pros and Cons of the Primary Mortgage Market

The primary mortgage market has its upsides and downsides.

Advantages of the Primary Mortgage Market

Mortgage loans are plentiful: Homebuyers can choose from different types of mortgage loans, including banks, credit unions, savings and loans, mortgage brokers, and online financial institutions.

Borrowers have options: The most popular choice is a fixed-term loan of 30 years, but some borrowers may opt for an adjustable-rate mortgage (ARM), in which the introductory rate is fixed for a specified period of time. For example, the 5/1 ARM has a 5-year fixed rate.

Rates are reasonable: The demand for conforming loans helps rein in interest rates for borrowers who meet the lending criteria, which include down payment and credit requirements in addition to conforming loan limits. (Nonconforming loans — loans that Fannie Mae and Freddie Mac cannot buy — include government-backed loans and jumbo loans. The rates may be even lower than conforming loan rates.)

Down payments can be low: For first-time homebuyers, a 3% down payment for a conventional loan may suffice.

Disadvantages of the Primary Mortgage Loan Market

•   Borrowers have to pass a credit check: Mortgage lenders will review a potential borrower’s credit score in order to determine their eligibility for a loan. Applicants with a bad credit score may find it challenging to secure a mortgage other than an FHA loan.

•   Missed mortgage payments can have negative effects: Borrowers who miss payments may face a plummeting credit score or even foreclosure (but mortgage forbearance is an option).

Pros and Cons of the Secondary Mortgage Market

Here are two ways to view the secondary loan market.

Advantages of the Secondary Mortgage Market

•   Replenishes lender funding: The secondary market keeps money flowing through the mortgage system in good economic times and bad.

•   Fuels lower mortgage costs: The secondary market can lead to lower costs for borrowers.

•   May be good for investors: Most mortgage-backed securities are issued or guaranteed by a government agency such as Ginnie Mae or by government-sponsored enterprises such as Fannie Mae and Freddie Mac. The securities carry the guarantee of the issuing organization to pay the interest and principal payments on their mortgage-backed securities.

Disadvantages of the Secondary Mortgage Loan Market

•   Not for the average investor: Common buyers of mortgage-backed securities include deep-pocketed financial organizations, such as insurance companies, banks, and pension funds. Because of the complexity of mortgage-backed securities and the difficulty that can accompany assessing the creditworthiness of an issuer, individual investors should use caution.

•   Investors won’t see the properties attached to the mortgages: Secondary mortgage loan buyers usually won’t physically see and assess the properties attached to the mortgages they’re buying.

The Takeaway

The primary and secondary mortgage markets have a symbiotic relationship. Most mortgage seekers will only be interested in the primary market: getting a home loan that suits their needs.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What is the secondary market for mortgages?

When homebuyers take out a mortgage, lenders can bundle similar types of loans and sell shares in this bundle to investors, including banks, pension funds, and mutual funds. Investors are willing to buy these shares because as long as the mortgages are paid off, the investors receive a steady stream of income over the life of the mortgages in the bundle.

What is a second mortgage?

A second mortgage is a loan that uses your home as collateral that you take out while you’re still paying off the primary mortgage on your home. Home equity loans are often second mortgages.

What is mortgage forbearance?

A mortgage forbearance is an agreement between a lender and a borrower that temporarily allows the borrower to pause or reduce their monthly mortgage payments due to financial hardship. It’s an option that can help prevent foreclosure.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

SOHL-Q126-239

Signing on with a knowledgeable mortgage lender is one of the first steps you’ll take on your journey to homeownership. A good lender could help you make a sound decision about a major commitment.

If you want to know what questions to ask a mortgage lender, this list can help you feel more confident when choosing a lender to navigate the complex home-buying process with you.

1. How Much Can You Borrow?

How much you can borrow is the question most buyers have on their minds when they start dreaming about real estate listings online. You may have come across a mortgage calculator tool that estimates how much a mortgage is going to cost.

But that’s just a starting point. A mortgage lender will evaluate the entire spectrum of a homebuyer’s financial situation and find the true amount they’ll be able to borrow. The lender may also make recommendations for programs or loans for each buyer’s unique situation.

When you get a loan, you’ll receive a mortgage note, a legal contract between the lender and you that provides all the details about the loan, including the amount you were approved to borrow.

2. How Much of a Down Payment Do You Need?

Another key question your lender can help answer for you is how much are down payments? You’ve probably heard about the ideal 20% down, but a lender may be able to help homebuyers get into a home with a much lower down payment, such as 3% or 5%. The lowest down payment option is often available only to first-time homebuyers. But anyone who hasn’t owned a primary residence in the last three years is often considered a first-timer.

A 20% down payment will enable you to forgo mortgage insurance on a conventional loan (one not insured by the federal government). But lower down payment amounts can help homebuyers obtain housing sooner. There are plenty of options to explore with your lender.

3. What Is the Interest Rate and APR?

Your mortgage lender may explain the difference between the interest rate and the annual percentage rate:

•   Interest rate: The interest rate is the cost to borrow money each year. It doesn’t include any fees or mortgage insurance premiums.

•   APR: The APR is a more comprehensive reflection of what you’ll pay for the mortgage, which will include the interest rate, points paid, mortgage lender fees, and other fees needed to acquire the mortgage. It’s usually higher than the interest rate.

The interest rate and APR must be disclosed to you in your Loan Estimate with the other terms and conditions the lender is offering. Pay particular attention to how the APR changes from loan to loan. When you’re looking at APR vs. interest rates for an FHA loan and a conventional mortgage, for instance, you’ll notice that the numbers are very different. Here’s a snapshot of the difference between interest rates and APR for FHA and conventional mortgages in March 2026.

In this case, both the interest rate and the APR on a 30-year FHA loan are lower than on a conventional loan. However, when accounting for an upfront mortgage premium for the FHA loan and other fees, the APR can sometimes be higher on the FHA loan than on the conventional loan.

4. What Are the Differences Between Fixed- and Adjustable-Rate Mortgages?

The main difference between a fixed-rate mortgage and an ARM is whether or not the monthly payment will change over the life of the loan:

•   Fixed-rate mortgages start with a little higher monthly payment than an ARM, but the rate is secure for the term.

•   An adjustable-rate mortgage will start with a lower interest rate that may increase as the index of interest rates increases. This type of loan may be more appropriate for buyers who know they won’t be keeping the mortgage for long.

The key to an ARM is to know how it adjusts. How frequently will your rate adjust? How much could your interest and monthly payments increase with each adjustment? Is there a cap on how high your interest rate could go? A good mortgage lender will help you consider all these variables when selecting a fixed-rate or ARM.

5. How Many Points Does the Rate Include?

What are points on a mortgage? Mortgage points are fees paid to a lender for a lower interest rate. Asking your lender how many points are included in the rate can help you compare loan products accurately.

6. When Can the Interest Rate Be Locked In?

Rate lock policies differ from lender to lender. Check at the top of the first page of your Loan Estimate to see if your rate is locked, and for how long.

You’ll want to ensure that any rate lock agreement gives you enough time to close on your loan. Many lenders have fees for extending a rate lock.

7. How Much Are Estimated Closing Costs?

One of the most important documents you’ll receive from your lender is the Loan Estimate. The Loan Estimate gives a detailed breakdown of the interest rate, monthly payment, fees, and closing costs on the loan you’re applying for. When you ask about closing costs, your lender can provide this document to you.

Common closing costs include:

•   Appraisal fee

•   Loan origination fee

•   Title insurance

•   Prepaid expenses, such as homeowners insurance, property taxes, and interest until your first payment is due

Expect to see 2%-5% of the purchase price in closing costs.

8. Are There Any Other Fees?

Lenders are required to disclose all costs in the Loan Estimate. They’re also required to use the same standard form so you can compare costs and fees among different lenders accurately. Be sure to ask lenders about other fees and watch for them on your Loan Estimate.

9. When Will the Closing Happen?

The time to close on a house will depend on your individual circumstances, but the national average was 42 days as of June 2025.

An experienced lender with a digitized process may be able to close a loan more quickly. The time it takes a lender to approve and process the loan is also a factor to consider.

10. What Could Delay the Closing?

The March 2026 National Association of Realtors Confidence Index survey showed that within a three-month period, 13% of real estate transactions had a delayed settlement. Reasons for a delay may include appraisal issues, financing issues, home inspection or environmental issues, deed or title issues, or contingencies stated in the contract.
An experienced lender may know how to bring a home to the closing table despite the challenges with financing and appraisals. Be sure to ask upfront how these challenges would be addressed.

11. What Will Fees and Payments Be?

The neat part about obtaining a mortgage since 2015 is that the information must be included in the Loan Estimate. The form is used by all lenders and allows borrowers the opportunity to compare costs among lenders quickly and accurately. All fees and payments are required to be clearly outlined in this form.

Recommended: Guide to Mortgage Statements

12. How Good Does Your Credit Need to Be?

You’ll typically need a FICO® credit score of at least 620 to get a conventional mortgage, but lenders consider a credit score to be just one slice of the qualification pie.

With a lower credit score, a lender may steer you in the direction of an FHA loan, which requires a score of 580 or higher to qualify for a 3.5% down payment. Credit scores lower than 580 require a 10% down payment for an FHA loan.

Borrowers with credit scores above 740 may qualify for the best rates and terms a lender can offer.

13. Do You Need an Escrow Account?

Your lender can set up an escrow account to pay for expenses related to the property you’re purchasing. These may include homeowners insurance and taxes. An escrow account can take monthly deposits from the borrower, hold them, and then disburse them to the proper entities when yearly payments are due. In some locations and with certain lenders, escrow accounts are required.

14. Do You Offer Preapproval or Prequalification?

Lenders have different processes for qualifying mortgage applicants, so it’s important to understand prequalification vs. preapproval. Preapproval is a much more in-depth analysis of a buyer’s finances than prequalification.

A preapproval letter provided by the lender specifies how much financing the lender is willing to extend to you and helps to show sellers you’re a qualified buyer. Getting preapproved early in the home-buying process can also help you spot and remedy any potential problems in your credit report.

15. Is There a Prepayment Penalty?

A prepayment penalty is a fee for paying off all or part of your mortgage early. Avoiding prepayment penalties is easy if you choose a mortgage that doesn’t have any. Ask lenders if your desired loan carries a prepayment penalty. It will also be noted in the Loan Estimate.

16. When Is the First Payment Due?

A lender will be able to help you get your first payment in, which is typically on the first day of the month 30 days after you close. For example, if you closed on August 15, the first mortgage payment would be due on the first of the next month following a 30-day period (October 1).

Each mortgage statement sent every billing cycle includes current information about the loan, including the payment breakdown, payment amount due, and principal balance.

17. Do You Need Mortgage Insurance?

Your mortgage lender will guide you through the process of acquiring PMI if you need it. Mortgage insurance is required for most conventional mortgages made with a down payment of less than 20%, as well as for FHA and USDA loans.

It’s not insurance for the buyer. Instead, it protects the lender from risk. A good mortgage lender can also help advise borrowers on dropping PMI as soon as possible. A home loan help center can help you learn more about PMI and other mortgage questions.

Recommended: What Is PMI and How to Avoid It?

18. How Much Is the Lender Making Off of You?

Lenders are required to be clear and accurate when it comes to the costs of the loan. These should be fully disclosed on your Loan Estimate and closing documents. If you want to know how much the lender is charging for its services, you’ll find it under “origination fee.”

The Takeaway

If you’re shopping for a home loan or thinking about it, you might have mortgage questions — about down payments, APR, points, PMI, and more. Don’t worry about asking a lender too many questions, because many buyers need a guide throughout the home-buying journey. Asking questions is a great way to get to the lender and loan terms that make the most sense for your financial situation.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What should you not say to a mortgage lender?

The most important thing to remember when communicating with a prospective lender is that you should be truthful about your circumstances. This is especially important when discussing your finances.

How will I know what fees I will be responsible for in my loan?

You’ll receive an official Loan Estimate when you apply for a mortgage. It will include details such as estimated interest rates, closing costs, insurance rates, and penalties you need to be aware of, among other information.

What questions can a mortgage lender not ask?

Generally speaking, most of the topics that are off limits in a job interview are also off limits in a mortgage negotiation. A lender shouldn’t ask you about race, ethnicity, religion, or sexual orientation, for example. You also shouldn’t be asked about your age (unless you’re applying for an age-based loan), your family status (married vs. divorced, whether you’re planning to have kids, etc.), or your health.

Photo credit: iStock/Ridofranz

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

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOHL-Q126-232

Tenancy in common (TIC) is a way for two or more parties to buy a property or parcel of land. Buying real estate is expensive, and pooling your resources with others can be a great way to bring the price within reach and potentially lower your mortgage payment. Perhaps you’re buying a house with relatives that you’ll live in and that they’ll stay in when they’re in town. Or maybe you’re eyeing the purchase of several acres of land with some colleagues as an investment.

These are examples of why it may make sense for you to join forces with someone else (or multiple people) when acquiring a property. It can, however, open up a number of other questions and issues.

If you’re buying any kind of property with another person, even family, then you’ll need to consider how you want to co-own or take title to it. TIC is one way to take title to a property.

Taking title as tenants in common first became popular in the 1980s in cities where the price of real estate had increased steeply. Acquiring properties in this manner has grown in popularity, especially in expensive urban areas, where merging money from different individuals became a way to increase purchasing power.

Read on to learn more about TIC, including what it is, how it works, and its pros and cons.

What Is Tenancy In Common (TIC)?

TIC is a way for multiple people (two or more) to hold title to a property. Each person owns a percentage of the property, but they’re not limited to a certain space on the property.

In other words, you might be tenants in common with one or more persons, each holding a percentage of ownership share (which does not have to be equal), but you have a right to the entire property. There’s no limit to how many people can be tenants in common.

Worth noting: Despite the use of the word “tenant,” being tenants in common has nothing to do with renting.

Recommended: First-Time Homebuyer Guide

How Tenancy in Common (TIC) Works

TIC works by having people pool their resources and buy property together. Each tenant, or person who is part of this legal arrangement, may own a different percentage of the real estate, but that doesn’t limit you to, say, just one room of a house.

The TIC relationship can be updated, with new tenants added. What’s more, each tenant can sell or get a mortgage against their share of the property as they see fit. Each tenant may also name a beneficiary (or beneficiaries) to inherit their share upon their death.

If a group of tenants in common decides to dissolve the TIC agreement, one or more of the tenants can buy out the other tenants. Or the property can be sold and the proceeds split per the ownership percentages.

Property Taxes With Tenancy in Common

You may be wondering how tenants pay taxes on TIC properties. In most cases, a single tax bill will turn up, regardless of how many co-owners are involved or how they’ve divided up percentages of ownership. It’s then up to the tenants to determine who pays how much.

Another facet of TIC arrangements to consider: Tenants could deduct property taxes when filing with the IRS. A common tax strategy is for each member to pay property taxes equal to the percentage of their ownership and then to deduct what they pay. It’s important to consult with your tax advisor on individual situations.

Recommended: Understanding the Different Types of Mortgage Loans

Tenancy in Common vs Joint Tenancy

When it comes to shared ownership, TIC isn’t the only option. Another way to handle a shared purchase is joint tenancy. Here are some points of comparison for a tenant in common vs. joint tenant:

•   In TIC, the tenants can divide up ownership of property how they see fit. In a joint tenancy, the tenants hold equal shares of a single deed.

•   With a TIC arrangement, when an owner dies, their portion of the property passes to their estate. With joint tenancy, however, the property’s title would go to the surviving owner(s).

Recommended: How to Choose a Mortgage Term

Marriage and Property Ownership

TIC and joint tenancy are common ways that property is held in marriage. This will vary depending on the state you live in. Some states consider TIC the default way to own property in marriage. Elsewhere, it may be joint tenancy.

There is one other option possible, known as tenants by entirety (TBE). In this case, it’s as if the property is owned by one entity (the married couple) in the eyes of the law. Each spouse is a full owner of the real estate.

As with most things in life, there are pros and cons to TIC arrangements. First, the benefits:

•   With the high cost of real estate, especially in expensive markets, taking title as tenants in common can be one way to pool money and buy property you couldn’t otherwise own as an individual. It’s a way to bring home ownership into an affordable range.

•   Because TIC also allows for flexibility in terms of how you work out the specifics of living arrangements, it lends itself well to situations where friends decide to go in together on a vacation home or property where they won’t all be occupying the property at the same time.

•   You can transfer your share at any time without the consent or approval of the other tenants. You also have the right to mortgage, transfer, or assign your interest, and so do your partners.

Now, for the disadvantages:

•   Tenants can decide to sell or give away their ownership rights without the consent of the others, which means you might end up co-owning a property with someone you don’t know or even like.

•   In terms of real estate law, one of the main issues with a TIC is that if you all signed the mortgage loan in order to purchase the property, you could end up being liable for someone else not paying their portion of the mortgage or for creditors forcing a sale or foreclosure of the entire property.

Increasingly, though, some banks and lenders are offering fractional loans for tenants in common on real estate that is easier to divide into separate units. This then allows each tenant to sign their own loan tied just to their percentage of the property. A mortgage calculator can help you figure out what your payments might look like.

Example of Tenancy in Common

Here’s an example of how TIC might look in real life: Sam wants to buy a condo in Florida for $300,000 but can’t afford to do so, as his limit is $200,000. His sister Emma loves Florida and says she would like to go in on the condo if she can spend a couple of months there in the winter. She adds her $100,000, and together, they can afford the condo.

They pool their resources and make a down payment of 20% on the $300,000 property. After reading up on mortgage basics, they decide Sam will take out the mortgage.

The mortgage principal on the purchase is $240,000. Sam owns two-thirds and Emma owns one-third, and Emma pays Sam for one-third of the cost of the mortgage, property taxes, and homeowners association dues. They both have the right to occupy the property. If Emma decides that she wants to get her own place in Florida, she could sell her share in the condo while Sam retains his interest.

The Takeaway

Buying a house can seem overwhelming, but it doesn’t have to be. TIC presents one avenue to affordable home ownership by allowing you to purchase property with others. Another way to manage costs is to get the best possible mortgage to suit your needs and budget.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Can tenancy in common be dissolved?

A tenancy in common can be dissolved. A single tenant, or multiple tenants, may agree to end the arrangement by buying out the others in the shared ownership. If there is a situation in which the tenants can not agree on a path forward, the courts can be involved.

What are the responsibilities of tenants in common?

In a tenancy in common (TIC) relationship, each tenant must pay their share of the costs involved, which can involve the mortgage principal and interest, homeowners insurance, and property taxes. A tenant’s share of these costs will reflect how much of the property they own. In addition, you may need to manage a portion of the property (say, if you’ve divided a house up or own a plot of land with others). Lastly, a TIC agreement may involve rights of first refusal if any tenants want to sell their share.

What happens when a tenant dies?

When a tenant in a tenants in common agreement dies, their share of the property is passed along to their beneficiary or beneficiaries. Their share does not automatically go to the other tenants.

What are the disadvantages of tenants in common?

Typically, the most important disadvantages of a tenants in common agreement are: Each member can sell their share independently, meaning you could be stuck with a tenant you don’t know or like, the TIC could be dissolved by tenants buying out one another, and if the tenants cosigned a mortgage for the property and one or more don’t pay, the other tenant could be stuck with liability for additional costs.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

SOHL-Q126-268

If you’re dreaming of owning your own home, whether that means a cute Colonial or a loft-style condo, you’re likely contemplating financing, and that can mean a mortgage. A home loan can give you the funds required to purchase a property, but there can be a learning curve involved, especially if you’re a first-time homebuyer. For instance, what term should you select? How do mortgage interest rates work, and is a fixed rate typically best?

In this guide, you’ll get the scoop on how home loans work, what kind of options you have, and how to assess which loan could be right for you.

What Is a Mortgage?

A mortgage loan, also known simply as a mortgage, is issued to a borrower who is either buying or refinancing real estate.

The borrower signs a legal agreement that gives the lender the ability to take ownership of the property if the loan holder doesn’t make payments according to the agreed-upon terms.

Once a mortgage is issued, the homebuyer will pay monthly principal (that’s the lump sum of the loan) and interest payments for a specific term. The most common term for a fixed-rate mortgage is 30 years, but terms of 20, 15, and even 10 years are available.

A shorter term translates to a higher monthly payment but lower total interest costs. Put another way, you pay more every month, but the amount of interest over the life of the loan is lower.

💡 Quick Tip: You deserve a more zen mortgage loan. When you buy a home, SoFi offers a guarantee that your loan will close on time. Backed by a $5,000 credit.‡

A Buffet of Mortgage Choices

When homebuyers apply for a loan, they’ll need to choose whether they want a fixed interest rate or an adjustable rate, as well as the length of the loan.

Fixed-Rate Mortgage

The interest rate on the home loan doesn’t change, so the monthly principal and interest payment remains the same for the life of the loan. Whether mortgage rates increase or decrease, the loan holder is locked in for their monthly payment.

Adjustable-Rate Mortgage (ARM)

With an ARM, the interest rate is generally fixed for an initial period of time, such as three, five, seven, or 10 years, and then switches to a variable rate of interest. The rate fluctuates with the rate index that it’s tied to.

As the rate changes, monthly payments may increase or decrease. These loans generally have yearly and lifetime interest rate caps (or maximums) that limit how high the variable rate can adjust to.

Next, borrowers will need to decide what type of mortgage loan works best for them.

Conventional Loans

Conventional loans are loans that aren’t backed by a government agency and must adhere to the requirements of Fannie Mae, Freddie Mac, or other investors. Typically, conventional loans are issued with at least 3% down. However, it’s worth noting that private mortgage insurance (commonly known as PMI) is generally required on loans with a down payment of less than 20%.

The coverage protects the lender against the risk of default. Your mortgage servicer must cancel your PMI when the mortgage balance reaches 78% of the home’s value or when the mortgage hits the halfway point of the loan term, if you’re in good standing.

PMI typically costs 0.2% to 2% of the loan amount per year.

Down payment: Generally, between 3% and 20% of the purchase price or appraised value of the home, depending on the lender’s requirements.

FHA Loans

Loans insured by the Federal Housing Authority, or FHA loans, can be attractive to first-time homebuyers or those who struggle to meet the minimum requirements for a conventional loan. In a SoFi survey of 500 would-be homeowners conducted in April 2024, 28% of people who had filled out a loan application had applied for this type of loan, and 63% of those who filled out an application had applied for some type of government-backed financing.

These loans usually require a one-time upfront mortgage insurance premium (or MIP vs. PMI), which typically can be added to the mortgage, and an annual insurance premium, which is collected in monthly installments for the life of the loan in most cases.

Down payment: Starts at 3.5%.

Recommended: First-Time Homebuyer Guide

VA Loans

Loans guaranteed by the U.S. Department of Veterans Affairs are available to veterans, active-duty service members, and eligible surviving spouses. SoFi’s 2024 survey showed that 12% of potential homebuyers who applied for a loan had filled out a VA loan application.

VA-backed loans require a one-time VA funding fee, which can be rolled into the loan. The fee is based on a percentage of the loan amount and may be waived for certain disabled vets. The current range is from 1.5% to 3.3% of the loan amount.

Down payment: None for approximately 90% of VA-backed home loans

💡 Quick Tip: A VA loan can make home buying simple for qualified borrowers. Because the VA guarantees a portion of the loan, you could skip a down payment. Plus, you could qualify for lower interest rates, enjoy lower closing costs, and even bypass mortgage insurance.†

How Does a Mortgage Work?

There are several components to a monthly mortgage payment:

•   Principal: The principal is the value of the loan. The portion of the payment made toward the principal reduces how much a borrower owes on the loan.

•   Interest: Each month, interest will be factored into payments according to an amortization schedule. Even though a borrower’s fixed payment may stay the same over the course of the loan, the amount allocated toward interest generally decreases over time while the portion allocated to principal increases.

•   Taxes: To ensure that a borrower makes annual property tax payments, a lender may collect monthly property taxes with the monthly mortgage payment. This money can be kept in an escrow account until the property tax bill is due, and the lender can make the property tax payment at that time.

•   Homeowners insurance: Mortgage lenders usually require evidence of homeowners insurance, which can cover damage from catastrophes, such as fire and storms. As with property taxes, many lenders collect the insurance premiums as part of the monthly payment and pay for the annual insurance premium out of an escrow account. Depending on your property location, you may have to add flood, wind, or other additional insurance.

•   Mortgage insurance: When a borrower presents a down payment of less than 20% of the value of the home, mortgage lenders typically require private mortgage insurance. When developing a budget for owning a home, it’s important to know the difference between mortgage insurance and homeowners insurance and whether both are required.

💡 Recommended: What Is a Mortgagor?

Reverse Mortgage Loans: What Are They?

A reverse mortgage is available to homeowners 62 and older to supplement their income or pay for healthcare expenses by tapping into their home equity.

The loan can come in the form of a lump-sum payment, monthly payments, a line of credit, or a combination of these options, usually tax-free. Interest accrues on the loan balance, but no payments are required. When a borrower dies, sells the property, or moves out permanently, the loan must be repaid entirely.

The fees for an FHA-insured home equity conversion mortgage (HECM), typically the most common type of reverse mortgage, can add up:

•   An initial mortgage insurance premium of 2% and an annual MIP that equals 0.5% of the outstanding mortgage balance

•   Third-party charges for closing costs

•   Loan origination fee

•   Loan servicing fees

You can pay for most of the costs of the loan from the proceeds, which will reduce the net loan amount available to you.

You remain responsible for property taxes, homeowners insurance, utilities, maintenance, and other expenses.

A HUD site details all the criteria for borrowers, financial requirements, and eligible property types. It also explains how to find an HECM counselor, a mandatory step.

If you’re considering a reverse mortgage, the Federal Trade Commission advises you to learn as much as you can about this often complicated kind of mortgage before talking to a counselor or lender.

How to Get a Mortgage

For many people, it can be a good idea to shop around to find out what’s out there.

Not only will you need to choose the lender, but you’ll need to decide on the length of the loan, decide whether to go with a fixed or variable interest rate, and weigh the applicable loan fees.

The first step is to determine what you want and then seek out quotes from a few lenders. That way, you can do a side-by-side comparison of the loans.

Once you’ve selected a few lenders to get started with, the next step is to get prequalified or preapproved for a loan. Based on a limited amount of information, a lender will estimate how much it is willing to lend you.

When you’re serious about taking out a mortgage loan and putting in an offer on a house, the next step is to get preapproved with a lender.

During the preapproval process, the lender will take a closer look at your finances, including your credit, employment, income, and assets, to determine exactly what you qualify for. Once you’re preapproved, you’re likely to be considered a more serious buyer by home sellers.

When shopping around for a mortgage, it can be a good idea to consider the overall cost of the mortgage and any fees.

For example, some lenders may charge an origination fee for creating the loan or a prepayment penalty if you want to pay back the loan ahead of schedule. There may also be fees to third parties that provide information or services required to process, approve, and close your loan.

To compare the true cost of two or more mortgage loans, it’s best to look at the annual percentage rate, or APR, not just the interest rate. The interest rate is the rate used to calculate your monthly payment, but the APR is an approximation of all of the costs associated with a loan, including the interest rate and other fees, expressed as a percentage. The APR makes it easier to compare the total cost of a loan across different offerings so you can assess what is a good mortgage rate for your budget.

The Takeaway

If the world of mortgages feels like a mystery to you, you’re not alone. Before taking on this colossal commitment, it’s best to soak up as much as you can about how mortgage loans work, what kinds of mortgages are available, potential challenges, and steps to qualify. You’ll be better prepared to take on what can be a major step in your personal financial journey.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What is the first step to getting a mortgage?

The first step is deciding what you want from the loan and then getting quotes from a few lenders so you can compare your options. When shopping around, you’ll need to choose the lender, decide on the loan length, and determine whether to select a fixed or variable interest rate.

How much should I plan to save for a down payment?

Depending on the loan type, down payments generally range from 3% to 20% of the home’s price, with some government-backed loans requiring even less. For example, conventional loans typically require between 3% and 20% down, and FHA loans start at 3.5%. Approximately 90% of VA loans, meanwhile, require no down payment.

What’s the difference between getting prequalified and preapproved for a mortgage?

Prequalification gives you an estimate of how much a lender might offer based on limited information. Preapproval involves a deeper review of your finances and signals to sellers that you’re a serious buyer.

How can I compare mortgage offers to find the best deal?

Comparing the annual percentage rate (APR), not just the interest rate, helps you understand the true cost of each loan, including fees. The interest rate is used to calculate your monthly payment, but the APR approximates all the associated costs, such as the interest rate and other fees, expressed as a percentage.

^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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