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An adjustable-rate mortgage (also called an ARM) is a mortgage where the interest rate changes. Monthly payments may go up or down.

Borrowers may be looking to save money with this type of mortgage because there’s usually an introductory period where the interest rate is lower than what they could get with a fixed-rate loan. The monthly payment is lower as a result.

Adjustable-rate mortgages can make sense in certain situations, such as when buyers only plan to own a home for a few years or for those looking to buy a home in a high-interest-rate environment. However, they’re not your only option if you’re looking at getting a mortgage in a high-interest-rate environment.

In this article, we’ll cover

•   What exactly is an adjustable-rate mortgage and how do they work?

•   What are the different types of ARMs you can apply for?

•   Pros and cons of an ARM

•   How the variable rate on an ARM is determined

•   How an ARM compares with a fixed-rate mortgage

•   Examples of when it does and doesn’t make sense to get an ARM

What Is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage is a type of mortgage loan where the interest rate can change periodically throughout the life of the loan. This means your monthly payment might increase or decrease over time.

They typically come in shorter terms, such as five, seven, or ten years and adjustment periods (how often the interest rate is evaluated and changed) of six months or one year. They may be useful as a financing tool for short-term situations, but there are some things to consider before taking on a mortgage like this.

How Adjustable-Rate Mortgages Work

The terms of an adjustable-rate mortgage are determined at the outset of the loan. You’ll decide on a type of ARM, apply with the lender of your choice, and start making payments once the loan closes.

What’s different about an ARM from other home mortgage loans is the interest rate will adjust periodically and your monthly payment will change. It’s typical to see an introductory period (a number of years) where your interest rate doesn’t change, however.

Types of Adjustable-Rate Mortgages

If you’ve started to look into financing a home purchase, then you’ve probably seen loans labeled with different numerals. Maybe you’re wondering, what is a 5/1 ARM? When you’re choosing mortgage terms, the different types of ARMs you can get correspond to the different terms (with 5, 7, and 10 year ARMs being the most common) and adjustment periods (typically 1 year or six months). An ARM is labeled with two numbers, first with the number of years in the introductory period, followed by the period when the interest rate will reset. A 5/1 ARM, for example, has a 5-year introductory period followed by one adjustment per year to the interest rate.

Here are some other examples:

•   5/6: A five-year term with an adjustment period of six months.

•   7/1: A seven-year term with an adjustment period of one year.

•   7/6: A seven-year term with an adjustment period of six months.

•   10/1: A ten-year term with an adjustment period of one year.

•   10/6: A ten-year term with an adjustment period of six months.

Recommended: Is a 10-Year Mortgage A Good Option?

Pros and Cons of Adjustable-Rate Mortgages

If you’re considering an ARM, you’re probably weighing the lower payment against future financial positions you’ll need to take. There are some other pros and cons to consider.

Pros

•   Many different term lengths to choose from

•   Low annual percentage rate

•   May start with a lower monthly payment than a fixed-rate mortgage

•   May be slightly easier to qualify for

Cons

•   Interest rate can change

•   You could end up with a higher monthly payment

•   If you’re unable to afford the higher monthly payment, your home could be in danger of foreclosure

Recommended: Cost of Living by State

How the Variable Rate on ARMs Is Determined

To fully understand how does an adjustable-rate mortgage work, it helps to see what’s going on behind the scenes of an ARM and how the rate is determined. You’ll be looking at these four components:

   1. Index

   2. Margin

   3. Interest rate cap structure

   4. Initial interest rate period

Index

The cost of an ARM is tied to a market index, generally the secured overnight financing rate (SOFR). These can increase when the federal funds rate rises.

Margin

The margin is the percentage points added to the cost of the index. It is disclosed when you apply for the loan and can vary from lender to lender, so be sure to shop around!

The interest rate on your ARM is equal to the index plus the margin.

Interest rate cap structure

There are three types of rate caps: initial, periodic and lifetime. For the initial period, the cap is on how much interest you’ll be charged in the first period of your loan. For example, in a 5/1 ARM, you’ll have an interest rate that stays the same for the initial period of 5 years.

When your initial period is over, you’ll have periodic adjustments. These will have a separate cap for how much your interest rate can increase over the defined period (usually six months or a year).

You’ll also have a cap on how much your interest rate can increase over the life of the loan.

Initial interest rate period

The cost of an ARM is also determined by how long the interest remains constant for the initial period. ARMs with longer initial periods generally have higher rates. A 7/1 ARM will have a higher APR than a 5/1 ARM, for example.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Adjustable-Rate Mortgage vs. Fixed-Interest Mortgage

When it comes to fixed-rate vs adjustable-rate mortgages, the mortgages are structured very differently. Here’s a quick breakdown of the major differences:

Adjustable-Rate Mortgage	Fixed-Rate Mortgage
Interest rate adjusts	Interest rate stays the same
Terms are usually shorter, such as 5 to 7 years	Terms are usually longer, such as 15 or 30 years
Loans are often refinanced at a later date	Loan can be paid off
May have lower interest rate initially	Interest rate does not change
Monthly payment changes	Predictable monthly payment
Interest rate you pay is tied to economic conditions	Interest rate determined at the origination of the mortgage

The main difference between fixed-rate and adjustable mortgages is in how you pay interest on the loan. With a fixed loan, the interest is paid with regular monthly payments, which are fairly set (except for fluctuations with escrow items). With an adjustable-rate mortgage, the interest you pay can change.

The other major difference between the two types of mortgages is the term length. Fixed mortgages are often financed at 15- or 30-year terms. ARMs are usually held for shorter periods of time.

💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

Example of When Adjustable-Rate Mortgages Makes Sense

There are a few scenarios where an ARM makes sense.

•   If you’re only planning to keep the home (or keep the mortgage) for a few years.

•   Interest rates are very high.

In each of these situations, borrowers — including first-time homebuyers — don’t plan to hold onto the mortgage long-term. They’re looking to sell the property or refinance at a future date.

However, there are times where an ARM doesn’t make a lot of sense.

Example of When Adjustable-Rate Mortgages Doesn’t Make Sense

An ARM may not make sense when the interest rate for a fixed-rate mortgage is low. This was common just a few years ago, and buyers who have these low-interest, fixed-rate mortgages don’t need to worry about getting another mortgage.

If you’re considering purchasing a home with an ARM, you may also want to look at buying down the interest rate on a fixed-rate mortgage with points, especially if you plan on staying in the home long-term.

Can You Refinance an ARM?

Many borrowers get an ARM with the expectation that they will be able to refinance into a different mortgage at a later date. Refinancing any mortgage, including an ARM, will depend on your ability to qualify for it. If your credit score or income take a serious hit, for example, you may not be able to refinance an ARM to get a more attractive rate. It’s also possible market conditions may change and the property could decline in value to the point that it isn’t a good candidate for a refinance.

Adjustable-Rate Mortgage Tips

To keep your ARM manageable, you may want to consider some of the following tips:

•   Look at the rate cap structure. Make sure you can handle the monthly payment all the way to the cap rate, which is the limit on how much your interest rate will increase.

•   Watch for fees or penalties. If you pay off the ARM early, you may be subject to several thousand dollars in penalties or fees. Be aware of what you could be on the hook for.

•   Shop around for mortgage rates. The interest rate caps and margins will be different from lender to lender. Get a loan estimate to ensure you’re comparing apples to apples.

•   Work with someone you trust. It’s incredibly valuable to work with a lender you trust to give you good advice.

The Takeaway

Many borrowers may be considering an ARM at the moment, but you still need to make sure it’s the right financial tool for you. Adjustable-rate mortgages can increase when interest rates increase and make your monthly mortgage payments unmanageable. However, it is possible that an ARM could be the right solution for buyers who don’t plan on keeping the home long-term, or for those who believe they’ll be able to refinance into a less expensive mortgage in a few years.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is it ever a good idea to get an adjustable-rate mortgage?

You should get in contact with a lender if you’re wondering about whether or not an adjustable-rate mortgage is right for you. Some borrowers find it makes sense if they’re looking for financing that’s geared toward short-term situations.

What is the main downside of an adjustable-rate mortgage?

Adjustable-rate mortgages have interest rates that can rise periodically, either at 6 months or a year. You could end up with a higher mortgage payment.

What is the major risk of an ARM mortgage?

The major risk of an ARM is when it becomes unaffordable after an adjustment period. If a payment can’t be made, the risk is going down the path to foreclosure. This can happen after the introductory period ends or if an adjustment significantly raises the monthly payment.

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Photo credit: iStock/Andrii Yalanskyi

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 for more information.

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

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

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If you’re thinking about buying a property, you may wonder how much you should pay for a new home. After all, that can impact the size (and type) of mortgage you apply for.

The truth is, though, your mortgage is just one piece of the puzzle when deciding how much to spend on a home. To figure out what you can realistically afford, you need to understand all of your potential housing costs, including what may seem like unexpected costs that crop up when you own a property. That way, you can truly prepare for how much money it will take to cover your expenses as a homeowner.

So, are you in the club of those who are wondering, “How much home can I afford?” Then read on for four important tips to help determine whether a home will suit your budget. Given how big an expense homeownership can be, you will likely want to be well armed with information before you start hitting the open houses and making bids.

1. Calculate Potential Housing Costs

If you’re calculating how much you should pay for a new home, it can be an important step to write down all potential costs connected with buying a house and then paying the monthly expenses. This list can include:

•   Down payment

•   Mortgage payment

•   Property taxes

•   Homeowners’ insurance

•   Mortgage insurance, if applicable

•   Closing costs.

Since the mortgage payment is typically a big-ticket budget item, it can be a good move to check out a few different options (say, fixed-rate vs. adjustable-rate; 15-year vs. 30-year terms) from a few lenders and at a couple of different amounts to get a handle on what that cost is likely to be.

Also, you may want to also make a list of:

•   Expected repairs

•   Planned updates/renovations.

Don’t forget about ongoing costs. It may be tempting to leave this out of your initial budget, but it’s unlikely you’ll find a place that won’t require some changes. These estimates could be a factor in your budget and your decision about what to buy. For instance, you’ll want to prepare for such expenses as:

•   Utilities. If you’re moving to a house from a small apartment, you could be paying considerably more in, say, heating and cooling costs.

•   Landscaping or other maintenance of your property beyond the house.

You’ll also likely want to make your new house a home, and there is nothing wrong with that as long as you’ve budgeted for the estimated expense. In other words, include the following in your calculations:

•   Moving costs

•   The cost of new furniture and furnishings (curtains, hardware, the works).

Although these latter expenses aren’t part of your required monthly housing payments, they’re worthwhile to keep in mind.


💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.

Estimate Your Future Housing Costs

Need help figuring out these costs in more detail? The home affordability calculator below provides additional insight into how much it costs to purchase a home and the expected monthly payment associated with being a homeowner, including insurance costs, property taxes, and closing costs.

2. Determining What Is Paid Up Front

Now that you have an all-encompassing list of what you think a potential property might cost, both for a monthly payment and possible expenses, you can divvy up those costs into two categories: upfront costs and monthly costs.

Upfront costs include things like the down payment on the home and other fees such as closing costs and paying for home inspections. Monthly costs are your recurring mortgage payment, property taxes, and insurance(s), which may be rolled into the mortgage payment or paid separately. There are also other possible expenses you may pay down the line for furniture, repairs, renovations, etc.

This will help you get a handle on how much cash you will need to spend when getting a mortgage and becoming a homeowner. And it will also tell you what it will look like to keep your home up and running, month after month.

As you consider how much you should pay for a new home, know that it may be wise to have a cash buffer as you go into homeownership. In other words, don’t clean yourself out when buying a home. You don’t want to risk overdrafting your bank account, and you need to be prepared for how inflation could cause your expenses to tick up.

Recommended: What to Know About Getting Preapproved for a Home Loan

3. Look at Monthly Costs in Terms of Your Budget

Now that you have an idea of what your monthly housing costs could be, you can begin to fit those into your overall budget.

There are different budgeting methods, but most involve knowing and balancing your take-home pay, the cost of your “needs” and “wants” each month, and how much you are putting towards savings.

As you evaluate your projected homeowner figures, you want to ask yourself:

•   Do the numbers work, leaving you with some room to breathe?

•   Are you able to save for other financial goals, such as retirement?

•   Will you be able to maintain your current quality of life, or will you have to make cuts to accommodate your new housing expenses?

•   What do the numbers look like if you were to buy a somewhat more or less expensive home? (This can help you, especially if you are interested in a house that winds up in a bidding war and potentially selling for over the asking price.)

Overextending yourself in order to purchase a home is not recommended. Living paycheck to paycheck and worrying about money after you buy a property could take some joy out of your new nest.

💡 Quick Tip: You never know when you might need funds for an unexpected repair or other big bill. So apply for a HELOC (a home equity line of credit) brokered by SoFi today: You’ll help ensure the money will be there when you need it, and at lower interest rates than with most credit cards.2

4. Considering Unexpected Costs

Being a homeowner can be wonderful and rewarding, but it can also be expensive and, at times, exhausting. Roofs leak. Hot water heaters fizzle out. Gutters need cleaning.

You may want to set proper expectations regarding not only how much homeownership will cost in terms of the typical expenses, but also in terms of the full universe of maintenance and potential costs. Budget accordingly.

Next, you might want to consider what could happen in the event of a job layoff. Even great employees can lose their jobs, so have a plan in the event that this happens. And how would you keep up with costs in the unfortunate event of illness?

If you have no plan for how to make a mortgage payment in the event that you or your spouse loses work, you might not be quite ready for homeownership. You may want to build up your cash reserve before diving in.

For instance, most financial experts recommend that you save three to six months’ worth of expenses in an emergency fund in case of a job loss, health emergency, or other financially difficult events.

Those funds can be vital to see you through a tough financial moment. And if you do have this amount of money set aside (good job!), don’t be tempted to raid it for, say, your down payment or other costs related to buying a home. It’s a very important bundle of cash to have on reserve.

Recommended: How to Shop Around for a Mortgage Lender

The Takeaway

Buying a house can be a huge rite of passage and a big part of adulting. As you contemplate owning your own home, it’s important to be sure you understand both the upfront and ongoing costs of homeownership and know how they fit into your budget. In addition, understanding the unexpected expenses that may crop up can be a wise move.

A key part of your calculations will be checking your mortgage options and how much that will cost you every month. This can be one of the big recurring costs to budget for.

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

SoFi Mortgages: simple, smart, and so affordable.

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

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 for more information.

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

^²

To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).

All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.

You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and loan amount. Minimum loan amount is $75,000. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria.

SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.

In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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If you’re dreaming of owning your own home, whether that means a cute Colonial or a loft-style condo, you are 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 are 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 issued a mortgage, 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 and 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 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 are not 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.

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.

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 80% 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.

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, 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, 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, eligible property types, and how to find an HECM counselor, a mandatory step.

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

How to Get A Mortgage

For many people, it can be a good idea to shop around to get an idea of what is out there.

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

The first step is to have an idea of 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 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 are not alone. Before taking on this colossal commitment, it can be 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.

SoFi Mortgages: simple, smart, and so affordable.

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^†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.
^‡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.

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

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

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

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