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If you’re in the market for a mortgage, you may be overwhelmed by all the different options — conventional vs. government-backed, fixed vs. adjustable rate, 15-year vs 30-year. Which one is best?

The answer will depend on how much you have to put down on a home, the price of the home you want to buy, your income and credit history, and how long you plan to live in the home. Below, we break down some of the most common types of home mortgages, including how each one works and their pros and cons.

Fixed-Rate vs. Adjustable-Rate Loans

When choosing the best type of mortgage for your needs, it helps to understand the difference between adjustable-rate mortgages and fixed-rate mortgages. Each option has advantages and disadvantages. Here’s a closer look.

Fixed-Rate Mortgage

With a fixed-rate mortgage loan, the interest is exactly that — fixed. No matter what happens to benchmark interest rates or the overall economy, the interest rate will remain the same for the life of the loan. Fixed loans typically come in terms of 15 years or 30 years, though some lenders allow more options.

This type of mortgage can be a good choice if you think rates are going to go up, or if you plan on staying in your home for at least five to seven years and want to avoid any potential for changes to your monthly payments.

Pro: The monthly payment is fixed and predictable.

Con: If interest rates drop after you take out your loan, you won’t get the lower rate unless you’re able to refinance.

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate home loan is the most common type of mortgage.

Monthly payments are generally lower than they are with shorter-term mortgages because the loan is stretched out over a longer period of time. However, the overall amount of interest you’ll pay is typically higher, since you’re paying interest for longer. Also, interest rates tend to be higher for 30-year home loans than shorter-term mortgages, since the longer term poses more risk to the lender.

15-Year Fixed-Rate Mortgage

A 15-year loan allows you to build equity more quickly and pay less total interest. Loans with shorter terms also tend to come with lower interest rates, since they pose less risk to the lender.

On the flipside, the shorter term means monthly payments may be much higher than a 30-year mortgage. This type of loan can be a good choice for borrowers who can handle an aggressive repayment schedule and want to save on interest.

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) has an interest rate that fluctuates according to market conditions.

Many ARMs have a fixed-rate period to start and are expressed in two numbers, such as 7/1, 5/1, or 7/6. A 7/1 ARM loan has a fixed rate for seven years; after that, the fixed rate converts to a variable rate. It stays variable for the remaining life of the loan, adjusting every year in line with an index rate. A 7/6 ARM, on the other hand, means that your rate will remain the same for the first seven years and will adjust every six months after that initial period. A 5/1 ARM has a rate that’s fixed for five years and then adjusts every year.

Many ARMs have rate caps, meaning the rate will never exceed a certain number over the life of the loan. If you consider an ARM, you’ll want to be sure you understand exactly how much your rate can increase and how much you could wind up paying after the introductory period expires.

Pro: The initial interest rate of an ARM is usually lower than the rate on a fixed-rate loan. This can make it a good deal for borrowers who expect to sell their property before the rate adjusts.

Con: Even if the loan starts out with a low rate, subsequent rate increases could make this loan more expensive than a fixed-rate loan.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

Conventional vs. Government-Insured Loans

Mortgages can also be broken down into two other categories: conventional loans, which are offered by banks or other private lenders, and government-backed loans, which are guaranteed by a government agency. Here’s a breakdown of conventional vs. government-insured loans, including how each works, and their pros and cons.

Conventional Loan

This is the most common type of home loan. Conventional mortgages must meet standards that allow lenders to resell them to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. This is advantageous to lenders (who can make money by selling their loans to GSEs) but means stiffer qualifications for borrowers.

Pro: Down payments can be as low as 3%, though borrowers with down payments less than 20% have to pay for private mortgage insurance (PMI).

Con: Conventional loans tend to have stricter requirements for qualification than government-backed loans. You typically need a credit score of at least 620 and a debt-to-income ratio less than 36%.

Government-Insured Loan

If you have trouble qualifying for a conventional loan, you may want to look into a government-insured loan. This type of mortgage is insured by a government agency, such as the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), or the U.S. Department of Veterans Affairs (VA).

FHA Loan

FHA loans are not directly issued from the government but, rather, insured by the FHA. This protects mortgage lenders, since if the borrower becomes unable to repay the loan, the agency has to handle the default. Having that guarantee significantly lowers risk for the lender.

As a result, qualifying for an FHA loan is often less difficult than qualifying for a conventional mortgage. This makes an FHA mortgage a good choice if you have less-than-stellar credit scores or a high debt-to-income (DTI) ratio.

Pro: With a FICO® credit score of 500 to 579, you may be able to put just 10% down on a home; with a score of 580 or higher, you may qualify to put just 3.5% down.

Con: FHA mortgages require you to purchase FHA mortgage insurance, which is called a mortgage insurance premium (MIP). Depending on the size of your down payment, the insurance lasts for 11 years or the life of the loan.

💡 Quick Tip: Check out our Mortgage Calculator to get a basic estimate of your monthly payment.

VA Loan

The U.S. Department of Veterans Affairs backs home loans for members and veterans of the U.S. military and eligible surviving spouses. Similar to FHA loans, the government doesn’t directly issue these loans; instead, they are processed by private lenders and guaranteed by the VA.

Most VA loans require no down payment. However, you’ll need to pay a VA funding fee unless you are exempt. Although there’s no minimum credit score requirement on the VA side, private lenders may have a minimum in the low to mid 600s.

Pro: You don’t have to put any money down or purchase mortgage insurance.

Con: Only available to veterans, current service members, and eligible spouses.

FHA 203(k) Loan

Got your eye on a fixer-upper? An FHA 203(k) loan allows you to roll the cost of the home as well as the rehab into one loan. Current homeowners can also qualify for an FHA 203(k) loan to refinance their property and fund the costs of an upcoming renovation through a single mortgage.

The generous credit score and down payment rules that make FHA loans appealing for borrowers often apply here, too, though some lenders might require a minimum credit score of 500.

With a standard 203(k), typically used for renovations exceeding $35,000, a U.S. Department of Housing and Urban Development (HUD) consultant must be hired to oversee the project. A streamlined 203(k) loan, on the other hand, allows you to fund a less costly renovation with anyone overseeing the project.

Pro: If you have a credit score of 580 or above, you only need to put down 3.5% on an FHA 203(k) loan.

Con: These loans require you to qualify for the value of the property, plus the costs of planned renovations.

USDA Loan

A USDA loan is a type of mortgage designed to help borrowers who meet certain income limits buy homes in rural areas. The loans are issued through the USDA loan program by the United States Department of Agriculture as part of its rural development program.

Pro: There’s no down payment required, and interest rates tend to be low due to the USDA guarantee.

Con: These loans are limited to areas designated as rural and borrowers who meet certain income requirements.

Conforming vs. Nonconforming Loans

Conventional loans, which are not backed by the federal government, come in two forms: conforming and non-conforming.

Conforming Loan

Mortgages that conform to the guidelines set by the Federal Housing Finance Agency (FHFA) are called conforming loans. There are a number of criteria that borrowers must meet to qualify for a conforming loan, including the loan amount.

For 2025, the ceiling for a single-family, conforming home loan is $806,500 in most parts of the U.S. However, there is a higher limit — $1,209,750 — for areas that are considered “high-cost,” a designation based on an area’s median home values.

Typically, conforming loans also require a minimum credit score of 630­ to 650, a DTI ratio no higher than 45%, and a minimum down payment of 3%.

Pro: Conforming loans tend to have lower interest rates and fees than nonconforming loans.

Con: You must meet the qualification criteria, and borrowing amounts may not be sufficient in high-priced areas.

Nonconforming Loan

Nonconforming mortgage loans are loans that don’t meet the requirements for a conforming loan. For example, jumbo loans are nonconforming loans that exceed the maximum loan limit for a conforming loan.

Nonconforming loans aren’t as standardized as conforming loans, so there is more variety of loan types and features to choose from. They also tend to have a faster, more streamlined application process.

Pro: Nonconforming loans are available in higher amounts and can widen your housing options by allowing you to buy in a more expensive area or purchase a type of home that isn’t eligible for a conforming loan.

Con: These loans tend to have higher interest rates than nonconforming loans.

Reverse Mortgage

A reverse mortgage allows homeowners 62 or older (typically those who have paid off their mortgage) to borrow part of their home equity as income. Unlike a regular mortgage, the homeowner doesn’t make payments to the lender — the lender makes payments to the homeowner. Homeowners who take out a reverse mortgage can still live in their homes. However, the loan must be repaid when the borrower dies, moves out, or sells the home.

Pro: A reverse mortgage can provide additional income during your retirement years and/or help cover the cost of medical expenses or home improvements.

Con: If the loan balance exceeds the home’s value at the time of your death or departure from the home, your heirs may need to hand ownership of the home back to the lender.

Jumbo Mortgage

A jumbo loan is a mortgage used to finance a property that is too expensive for a conventional conforming loan. If you need a loan that exceeds the conforming loan limit (typically $806,500), you’ll likely need a jumbo loan.

Jumbo loans are considered riskier for lenders because of their larger amounts and the fact that these loans aren’t guaranteed by any government agency. As a result, qualification criteria tends to be stricter than with other types of mortgages. Also, in some cases, rates may be higher.

You can typically find jumbo loans with either a fixed or adjustable rate and with a range of terms.

Pro: Jumbo loans make it possible for buyers to purchase a more expensive property.

Con: You generally need excellent credit to qualify for a jumbo loan.

💡 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.

Interest-Only Mortgage

With an interest-only mortgage, you only make interest payments for a set period, which may be five or seven years. Your principal stays the same during this time. After that initial period is over, you can end the loan by selling or refinancing, or begin to make monthly payments that cover principal and interest.

Pro: The initial monthly payments are usually lower than other mortgages, which may allow you to afford a pricier home.

Con: You won’t build equity as quickly with this loan, since you’re initially only paying back interest.

Recommended: What’s Mortgage Amortization and How Do You Calculate It?

The Takeaway

There are many different types of mortgages, including fixed-rate, variable rate, conforming, nonconforming, conventional, government-backed, jumbo, and reverse mortgages. It’s a good idea to research and compare different loan programs, consult with lenders, and, if needed, seek advice from a mortgage professional to determine the best type of home loan for your specific circumstances.

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 are the different types of mortgages?

There are several types of mortgages available to homebuyers, each with its own characteristics and requirements. One of the most common types is the conventional mortgage, which isn’t insured or guaranteed by a government agency. Loans that are government-backed include FHA loans, VA loans, and USDA loans. A jumbo loan is for an amount that’s larger than the loan limits Fannie Mae and Freddie Mac use.

What are the 4 types of qualified mortgages?

Qualified mortgages are mortgages that meet certain criteria set by the Consumer Financial Protection Bureau (CFPB) to ensure borrowers can afford the loans they obtain. The four main types of qualified mortgages are:

•  General qualified mortgages adhere to basic criteria set by the CFPB.

•  Small creditor qualified mortgages have more flexible requirements for small lenders.

•   Balloon payment qualified mortgages allow for a balloon payment at the end of the term.

•  Temporary qualified mortgages This type of qualified mortgage provides a transition period for loans that were eligible for purchase or guarantee by Fannie Mae or Freddie Mac but no longer meet those standards.

Which type of home loan is best?

The best type of home loan depends on your financial situation, goals, and preferences. If you have a significant down payment and strong credit, a conventional mortgage might work well. If, on the other hand, you have limited down payment funds and lower credit scores, you might prefer a Federal Housing Administration (FHA) home loan. VA loans benefit eligible veterans and service members, while USDA loans are for homebuyers in rural areas. Whether to choose a fixed-rate or adjustable-rate mortgage will depend on your long-term plans and tolerance for risk.

^†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 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-Q225-066

Buying a house can be a fraught process, and when the market is hot, the days between offer and closing can feel endless, especially if the mortgage underwriter asks you to write a letter of explanation.

But there’s no need to panic or assume that your mortgage application will fail. The lender is simply seeking clarification about any potential red flags in your financial documents or credit history.

What’s a Letter of Explanation?

A letter of explanation for a mortgage explains details of your financial situation that may need further clarification. Because a mortgage is a large loan, lenders need to know that the borrower is capable of shouldering the mortgage.

Lenders also know that life can’t be boiled down to a spreadsheet, and that it’s not unusual for a mortgage application to include things like a late credit payment or a period of job loss.

To do due diligence, the mortgage underwriter will ask you to explain the situation in a brief letter, which will be added to your mortgage application. Additional documentation and paperwork may be required.


💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.

Why Do I Need to Provide a Letter of Explanation?

Common issues that could trigger a request for a letter of explanation include:

• Questions about your income if you don’t have W-2s or are self-employed

• Negative items on your credit report

• Employment gaps

• Your living situation if you don’t pay any rent or mortgage

• A property income or loss you claim

• Credit lines opened after you’ve put in your mortgage application

• Large deposits to, and sometimes withdrawals from, your bank account

Must I Explain a Large Deposit?

If there’s a big or unexplained deposit to your bank account, your lender may want to know where the money came from — and whether that money needs to be paid back.

A lender may also question any uneven income streams, or ask about any deposits that don’t line up with your W-2s or your tax returns.

If you received cash from, say, a parent to help with a down payment or closing costs, you may also need a gift letter signed by the giver and recipient stating that the money was a gift, not a loan. Your lender may have a template for a gift letter.

Keep in mind that your lender may be more likely to scrutinize any large deposits or withdrawals that were made within the last 60 days.

Letter of Explanation Template

A letter of explanation is not an autobiography or an admission that you did anything wrong. It’s simply a statement of the reason for any discrepancy or issue, along with any documentation, to back up your current financial picture.

You can keep a letter of explanation brief. It should include:

• Your name and address

• Your lender’s name and address

• A subject line that includes your application number and name

• A brief paragraph explaining the situation

• A polite closing

• Your signed full name

It might look like this:

The tone of the letter should be polite and factual. Remember: Your goal is not to pull on the lender’s heartstrings; it’s to reassure them that your application is solid and you would responsibly pay back your mortgage on time.


💡 Quick Tip: Jumbo mortgage loans are the answer for borrowers who need to borrow more than the conforming loan limit values set by the Federal Housing Finance Agency ($806,500 in most places, or $1,209,750 in many high-cost areas). If you have your eye on a pricier property, a jumbo loan could be a good solution.

4 Tips for an Effective Letter of Explanation

Although being asked to write a letter of explanation may sound like being assigned homework, it’s actually a great opportunity: It means you might be able to qualify for the mortgage you want, even with an imperfect application. Here are some tips to help ensure you get an A+ on this particularly important homework assignment.

1. Keep It Simple

When you’re asked to explain yourself, it can be easy to jump into a broad-reaching narrative starting from childhood, but the best letters of explanation tend to be short and simple: They clarify the situation being asked about and reassure the lender that the “red flag” situation won’t affect the borrower’s ability to repay the loan.

2. Provide Clear Details

Generally speaking, you’ll want to specifically name whatever item you’re being asked about (late payments on a credit card account ending in 0101; an employment gap between 2/20/2020 and 9/07/2020; etc.).

Then explain. For instance, if you’re being asked about an employment gap, you might let the lender know that you were let go as a result of corporate downsizing and that you freelanced while searching for a new job.

If you’re being asked about late credit card payments, you might let the lender know that you were in the hospital at that time and thus unable to make your credit card payments, or whatever the case may be.

The key is to take responsibility for the issue and provide clear, pertinent details without being too wordy.

3. Be Honest

This may go without saying, but you definitely don’t want to lie in your letter of explanation. For one thing, doing so is likely to keep you from being approved for the mortgage — and for another, it can be considered mortgage fraud, a serious crime that can come with prison time and fines.

4. Acknowledge Responsibility, but Don’t Get Emotional

When writing a letter of explanation, you may be justifying negative items in your credit history that resulted from poor decisions — or just poor circumstances. Nobody’s perfect, and a lender simply wants to make sure you won’t default on your loan.

It can be helpful to acknowledge the ways you’ve adjusted your financial habits in response to a negative item. This helps to reassure the lender that the issue won’t have an impact on your ability to pay your mortgage.

For example, if you’re writing a letter of explanation to address late rent payments after a layoff, you might add that you’ve since saved up an emergency fund of three months of living expenses in order to avoid being financially blindsided in the future.

However, writing an emotional sob story won’t help. Remember: It’s a good idea to keep it simple, clear, honest, and as short as possible while still covering all those bases.

Getting Your Mortgage Application in Shape

Knowing what documents you need and what a mortgage lender will look at can help get your application in good shape before you file it. Your lender will scrutinize your credit history and any late payments, especially ones within the last 12 months. But there are ways to proactively tackle any issues on your credit reports.

• Check your credit reports. Knowing what your mortgage lender may see can help you assess where any weak points may be, and what information they may ask for.

• Call the creditor if you have a recent late payment. Creditors know that accidents happen and bills may be misplaced. If your account is otherwise in good standing, it’s possible that a creditor may erase the late payment.

• Focus on additional aspects of your credit. Making sure to pay bills on time and keeping your credit utilization below 30% can help build credit.

• Think twice about opening accounts. Before and after applying for a mortgage, it can be a good idea to be mindful about opening new lines of credit or charging an extensive amount on current cards. Suddenly taking on more debt on credit cards can raise a red flag to lenders, which may result in being asked to write a letter of explanation.

Understanding how a lender will see your mortgage application can give you confidence and may help you head off any potential problems.

Recommended: Preapproved vs. Prequalified: What’s the Difference?

The Takeaway

A letter of explanation may be needed when a mortgage lender needs clarity about a red flag or discrepancy that arises on your application. Knowing what to expect, having documentation ready, and answering any questions the lender may have can all be helpful in getting your home loan approved.

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 a letter of explanation?

When you’re applying for a mortgage, if your lender has questions about something on your financial record – like a series of late payments or a period of unemployment – they may ask for more information. The letter of explanation is meant to clarify your situation and will become part of your mortgage file.

What should I write in a letter of explanation?

A letter of explanation clarifies an item in your financial history for a mortgage lender. Include a brief, factual explanation of how and why the issue occurred and any extenuating circumstances. For instance, you might explain an employment gap by explaining that you lost your job in a corporate reorganization and freelanced for several months while you looked for a new job. Briefly mention any steps you’ve taken in response to this issue. For instance, you might say you’ve built up a three-month emergency fund to draw on if you become unemployed again. Be clear, concise, and polite, and include your name and application number.

How long should a letter of explanation be?

There’s no set length for a letter of explanation. In general, it’s best to address the lender’s question thoroughly, but as clearly and briefly as you can. This may take only a few sentences.

Photo credit: iStock/scyther5

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-Q225-063

When you bought your home, you probably got a mortgage to pay for it. That loan is your first mortgage; any other loans you take out against your home while you’re still paying off your first mortgage are second mortgages. Is a HELOC a second mortgage? What about a home equity loan? Yes, and yes. A home equity line of credit (HELOC) and a home equity loan both take a backseat to your primary mortgage. Read on to learn more about how second mortgages and home equity loans work.

What Is a Second Mortgage?

A second mortgage is a loan that’s secured by a home on which you already have an existing mortgage. Second mortgages are also referred to as junior liens or subordinate liens. A lien is a legal claim a creditor can make against a property to satisfy a debt.

Why do you need to distinguish a second mortgage from a first mortgage loan? The difference matters because of what happens to mortgage debt if a borrower ends up in foreclosure.

Say that a homeowner loses their job or can’t work because of a serious illness. They fall behind on payments to their primary mortgage, as well as on their home equity loan. If the home is eventually sold through foreclosure, any proceeds would go to the primary mortgage lender first. Anything left over would go to cover the second mortgage.

What Is a Home Equity Loan?

A home equity loan is a loan that’s secured by your home. In other words, your home is the collateral for the loan. Home equity loans are a way to tap into your home equity without selling the property. Equity is the difference between what you owe to your primary mortgage balance and your home’s fair market value.

Here’s how to calculate home equity:

•   Find your current mortgage balance (check your most recent statement).

•   Estimate your home’s fair market value using a free online valuation tool such as Zillow or Redfin.

•   Subtract your mortgage balance from your home’s value.

A home equity loan gives you a lump sum of money that you can use for virtually anything. Some of the most popular ways to use home equity include debt consolidation, home repairs and improvements, medical bills, and other large expenses.

Types of Second Mortgages

There are two primary types of second mortgages: home equity loans and home equity lines of credit (HELOCs). There is no difference between them in terms of how they rank as second mortgages, and most people who have a second mortgage have one or the other.

There are, however, a few other differences between a home equity loan and a HELOC.

•   A home equity loan lets you borrow a lump sum, which you pay back with interest, typically at a fixed rate. You begin paying back the loan as soon as you receive the funds.

•   A HELOC is a revolving line of credit that you can draw against as needed, only paying interest on the amount of your credit line you use. HELOCs often have variable interest rates, rather than fixed rates. You can borrow against the credit line for a period of time — say, 10 or 15 years — and in most cases you are only required to pay back the principal after that initial “draw” period.

Another type of second mortgage is a piggyback mortgage. When you “piggyback” loans, you take out a primary mortgage and a second mortgage (either a home equity loan or a HELOC) at the same time. Lenders may allow borrowers to piggyback mortgages to buy a home without having to pay private mortgage insurance (PMI).5 (SoFi offers first mortgages, home equity loans, and HELOCs, but it does not offer piggyback mortgages.)

Second Mortgage Example

Here’s an example of how a second mortgage — in the form of a home equity loan — works. Let’s say that you have a primary mortgage that you owe $320,000 on. Your monthly payments are $2,100, and you have 20 years left in your loan term.

You want to get a home equity loan to replace your roof and make some other improvements. You’re approved for a $50,000 home equity loan at 8.00%, with a 30-year repayment term. You’ll now have two mortgage payments to make:

•   $2,100 to your first mortgage

•   $367 to your home equity loan

Your home equity loan repayment term and interest rate determine your total cost to borrow. Choosing a shorter term can save money on interest but increase monthly payments, while a longer term can mean more interest paid but a lower monthly payment.

Difference Between a Second Mortgage and a Home Equity Loan

There’s no real difference between a second mortgage vs. a HELOC, or a home equity loan. Home equity loans and HELOCs create debt obligations, both of which are subordinate to any primary mortgage loan you owe. The only difference lies in how they’re structured.

If you’re pondering a second mortgage, consider whether you can afford the additional payments required and what type of loan to get. You might lean toward a home equity loan if you’d like to get a lump sum and you want the predictability of a fixed interest rate. HELOCs may offer lower rates and greater flexibility, but you run the risk of ending up with a higher payment if the rate increases.

Also, think about your purpose. If you need money to pay for a large expense like a wedding, for example, you might choose a personal loan or line of credit instead so that you don’t have to create second mortgage debt. If something were to happen and you fall behind on payments, your house wouldn’t be at risk for a personal loan.

Pros and Cons of Home Equity Loans

Home equity loans and HELOCs have advantages and disadvantages. Looking at both sides can help you decide whether to use your home as collateral for an equity loan.

Home Equity Loans Tips

Home equity loans can help you achieve your financial goals if you’re taking the right approach to use them. Here are a few tips for making the most of your home equity loan or HELOC.

•   Only borrow what you need. You might apply for a home equity loan and get approved for a substantial sum, but remember that you’ll have to pay that amount back with interest. Only borrow what you need to keep your loan payments and total costs as low as possible.

•   Compare lenders. Shop around to check out what different lenders have to offer for home equity loans. Look at the interest rates, repayment terms, fees, and loan amounts available to find the lender that aligns with your needs.

•   Get preapproved. Home equity loan or HELOC preapproval can give you an idea of what terms you’re likely to qualify for. Getting preapproved means a lender performs an initial assessment of your credit and finances; you’ll still need to follow up with a full loan application.

The Takeaway

Home equity loans and HELOCs can put cash in your hands, though they don’t work the same way. Before getting either type of second mortgage, consider the potential risks if you’re unable to keep up with the loan payments, and take time to research lenders.

SoFi now offers home equity loans. We also partner with Spring EQ to offer flexible HELOCs. Enjoy lower interest rates than most other types of loans. Cover big purchases, fund home renovations, or consolidate high-interest debt.

FAQ

Is a home equity loan considered a second mortgage?

A home equity loan is a type of second mortgage because it is a loan that is secured by your home. Second mortgage loans are subordinate to primary mortgage loans if your home falls into foreclosure, meaning the lender on the primary mortgage gets repaid first if the home is sold.

How is a HELOC different than a second mortgage?

A HELOC is one type of second mortgage, but it comes in the form of a line of credit. You can borrow against your home equity line of credit as needed, and you only pay interest on the amount of your credit line you use.

How are the interest rates different for a home equity loan vs. a second mortgage?

Home equity loans tend to have fixed interest rates, which means the rate doesn’t change over time. Home equity lines of credit, another type of second mortgage, can have variable rates that go up or down following changes in an underlying benchmark rate. As a rule, second mortgage loan rates tend to be higher than primary mortgage loan rates.

Is a home equity loan better than a second mortgage?

A home equity loan is a type of second mortgage, so there’s no question of whether it’s better or worse. Getting a second mortgage, whether it’s a home equity loan or HELOC, could give you access to cash, but it also means pledging your home as collateral and adding a second payment to your monthly budget.

Can I qualify for both a second mortgage and a home equity loan at the same time?

A home equity loan is a type of second mortgage, so you really wouldn’t be applying for two separate things at the same time.

Photo credit: iStock/Rawpixel

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-Q225-039

That’s a good question. And the short answer, for now, is that a 2024 legal settlement created sweeping change to the real estate industry, putting the protocol for paying agents in flux. Planning to buy or sell a home in the near future? You’ll want to read up so you don’t overpay.

How Do Real Estate Agents Get Paid?

For agents — on the seller’s or buyer’s side — it’s long been business as usual to receive compensation via commission, as opposed to a set fee. Sellers typically paid commissions of 5% to 6% of a house’s price after what is known as the “closing” of a home they sold, and that money was split between the seller’s and buyer’s agents, plus other pros involved in the transaction. The higher the sales price, the more agents got paid.

But in 2024, the National Association of Realtors® (NAR), a trade association, and a number of real estate brokerages, settled a group of lawsuits. The settlements totaled nearly $2 billion. NAR paid $418 million in damages. The payout resulted from a legal filing contending that the real estate commission structure violated antitrust laws. NAR agents, it claimed, were receiving inflated commissions.

The lawsuits brought changes to the way homebuyers and sellers work with real estate agents on home purchases — and the way those agents are compensated.

Agents and Buyers or Sellers

In the lawsuit, homesellers from Missouri alleged that commission rates had been shared secretly and inappropriately among those who stood to profit. The sellers stated that the exchange of information had resulted in a lack of transparency about who homesellers were responsible for paying, and how much. They also said that this led to agents’ fees being inflated.

The lawsuits sparked NAR to revise protocols for the way homebuyers and -sellers work with real estate agents when a home goes up for sale. NAR Realtors® handle a huge percentage of U.S. home sales, so the reboot may significantly impact their transactions, and agent commissions, going forward. The changes could even save buyers and sellers money — but the details are still shaking out.

How will a Realtor you hire get paid in this new world? If you plan to buy or sell a home, it’s important to ask them, and to understand the details of compensation before entering into an agreement. Most likely, sellers will continue to pay their agents a commission for selling their house. Buyers who want to work with a buyer’s agent may have to pay for that expert’s assistance themselves, but only if the agent won’t receive any other commission.

Let’s take a closer look at how the changes affect costs for both homebuyers and sellers, beginning with examples of Realtors getting paid.

Real Estate Commission: Before the Settlement

We’ll start with how it used to work. Say a home sold for $500,000, with the commission being the formerly typical 6%:

Total commission fee: $500,000 X 6% = $30,000

The commission was generally split evenly between the two sides:

•   Listing agent side = $15,000

•   Buyer’s agent side = $15,000

Real estate agents also shared commissions with brokers who represented them. (A broker is an agent who has an additional license to supervise other agents.) The broker’s fee might have been 1% of the sales price, or $5,000, subtracted from the total to leave the seller’s agent with a commission of $10,000.

•   Listing agent = $10,000 (2% of sales price)

•   Listing agent broker = $5,000 (1% of sales price)

•   Buyer agent = $10,000 (2% of sales price)

•   Buyer agent broker = $5,000 (1% of sales price)

Real Estate Commission: A Changing Approach

For a long time, agent commissions were more or less built into a home’s asking price. The seller’s agent would offer a percentage of the total commission amount to the buyer’s agent, normally mentioning it in the home listing’s fine print on the multiple listing systems (MLS). After closing, the seller’s agent would disperse the fee. That changed a little in 2024, when the court prohibited sellers’ agents from stating the buyers’ agent’s percentage share on the MLS.

The MLS comprises databases of homes for sale that only Realtors, agents, brokers, and other real estate industry people can access — and that is what caused concerns about transparency.

Now, conversations about commissions must take place outside the MLS. Sellers may offer to pay commissions to buyer’s agents, but an agent for the homebuyer may also request a percentage of the home price or a flat fee from their own client. A buyer using an agent is required to have a representation agreement with the agent, defining compensation, before touring homes.

Listing agreements now must specify the amount the seller will pay to the listing agent, as well as what the seller will pay to a buyer’s agent. With these revisions, sellers have some newfound control. They can offer equal commissions to both sides, or different amounts. A seller may decide not to offer a buyer’s agent a commission, leaving the buyer responsible for paying for their services.

An Agent’s Responsibilities

To earn a commission, real estate agents often take on a lot of tasks and responsibilities. Their duties include:

•   Providing market data and helping to set a listing price

•   Placing ads and putting up yard signs

•   Photographing the property

•   Listing the property in the MLS listings database

•   Scheduling showings

•   Placing lock boxes

•   Guiding first-time homebuyers

•   Smoothing over difficult relationships

•   Navigating offers and counter offers

•   Negotiating home contracts

Recommended: How to Find a Real Estate Agent

The State of Agent Commissions

Making a living through commissions can be challenging for real estate agents. But it can also be unmistakably rewarding.

With the changes, average rates of commission among Realtors and agents decreased somewhat, dropping from 5.64 percent to 4.96 percent in early 2025. This might mean a decrease in commission of a few thousand dollars for a median-priced home, according to a RISMedia survey of 1,300 agents.

Sellers’ agents may continue to receive their commissions, negotiated with the seller, who pays the real estate agent commission fee out of the payment they receive when the home sale closes. Since buyers’ agents are no longer entitled to payment from this money, homebuyers may need to negotiate with and pay their agents. This could in some cases make buying a home even more costly.

How Does It All Affect the Bottom Line?

If the sales price of a home is $500,000 and the sellers owe $250,000 on their mortgage, then the commission and other fees would be subtracted from the $250,000 that remains after the sellers pay off their mortgage.

To keep it simple, let’s say the total commission negotiated is 5%:

Total commission fee: $500,000 X 5% = $25,000

•   Listing agent side = $25,000

•   Buyer’s agent side = $?

Buyer’s agent commissions are simply in flux — both how much they should be and where they will come from. This agent’s commission might need to come out of the buyer’s pocket — although word on the street is that some brokers on the seller side have found workarounds.

Can a buyer come out ahead in this changed compensation structure? Maybe. A buyer’s extra costs could be compensated by lower listing prices on homes for sale. But that remains to be seen.

Can You Negotiate Who Pays the Real Estate Agent?

Yes. Realtor fees on both sides are negotiable. These ideas may help you reduce your fee if you are selling your home:

•   Barter. Do you have a photographer friend who can take photos of your home? Offer up skills in exchange for a lower commission.

•   Hire a newer agent. A newer agent may accept a lower commission to gain experience.

•   Pay attention to market conditions. If homes aren’t moving in your market, you may be able to negotiate a lower commission.

Take time to interview potential Realtors using these suggested questions. Be sure the commission stated in the listing agreement matches what you’ve agreed on before you sign.

How Should a Buyer Agent’s Commission Be Set?

If you are in the market for a new home, you may still decide to seek a buyer’s agent to guide you through the process and represent you in closing. Their efforts may be well worth their fee.

Look for an agent with a strong network — they may hear about quiet “whisper listings” before anyone else. Once you’ve chosen someone, be sure to discuss a fee structure and payment process with them before you sign on.

Whether these real estate agents will charge for their time by the hour or bill customers a flat rate — or if some will keep working on commission that is perhaps paid by the buyer — is a developing story under the new rules. But they are quite likely to want to be paid.

In lieu of a commission, buyers’ real estate agents might charge fees for showing homes, shepherding clients through making offers, signing contracts, negotiating inspections, and more. For buyers, this would add to a home’s cost.

Of course, if agent commission fees have all along been a component of a property’s price, then buyers were already paying them. But in that scenario, buyers could cover those baked-in costs with their home mortgage loan. New fees paid by a buyer to the agent would come from the buyer’s pocket.

This switcheroo may lead some homebuyers to think about shopping for a home without an agent’s help. If you go this route, be aware that you’ll need to spend significant time researching potential properties, scheduling viewings, and self-advocating, especially if you are attempting to buy in a seller’s market.

When Do Sellers’ Agents Receive Their Commission?

Sellers’ agents usually receive their commission after the home mortgage loan has been funded and the sale closes. Their brokerage receives a wire with the funds, and the agent’s portion of the commission is released to them shortly thereafter.

What Is Dual Agency?

Dual agency is when a real estate agent represents both the seller and the buyer in a transaction. It must be disclosed to both parties because real estate agents are bound by a fiduciary duty to serve their clients. An agent who represents both seller and buyer will earn more commission.

Buyers faced with having to pay a buyer’s agent out of pocket might choose to look at properties on their own. When they find a home they would like to buy, they may decide to make an offer directly with the listing agent. In this scenario, the listing agent becomes a dual agent. They may accept a lower fee, since they are also getting a commission paid by the seller. It might appear to everyone to streamline the process. It also creates a possible conflict of interest.

Many experts discourage buyers and sellers from entering a dual-agency sale with an agent. It’s also worth noting that the practice is illegal in several states.

Is Paying a Real Estate Commission Worth It for the Seller?

Hiring an agent is not required. And for many sellers, it’s painful to look at the closing documents and see how much of the sales price goes to different agents, title insurance companies, concessions, and so forth. But a lot of sellers find it worthwhile having someone to guide them through the complexities of real estate law, and sensitive issues that the sale of a home creates.

Recommended: How to Buy a House Without a Realtor

Alternatives to a Percentage-Based Commission

There are real estate brokerages that advertise services for a flat fee. Usually, the flat fee is very low and may only include a listing on the MLS with photos. They usually don’t offer to schedule showings or manage the listing in any other way.

The Takeaway

Working with a real estate agent when you’re a buyer requires asking a lot of questions and understanding the terms of compensation before you sign on for representation. You might be tempted to go it alone, and it can be done. But having an agent on your side to help you negotiate can give you peace of mind and, in many cases, help you land a better deal.

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

Do sellers pay Realtor fees?

Yes, sellers pay Realtor fees to the seller’s agent.

How long have the new rules been in place?

The post-settlement NAR rule change became official in August 2024. While aspects of it were immediately implemented, it also left some room for interpretation. New agent practices are slowly rolling out.

How much does a new Realtor make in Illinois?

According to ZipRecruiter.com, the average pay for a real estate agent in Illinois is $83,135. Salaries can range from as low as $58,100 up to $124,519 per year.

Photo credit: iStock/RyanJLane

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-Q225-018

Buying a home is a major life moment. It’s exciting, but also potentially stressful and confusing. Luckily, there are real estate agents to guide you through the process.

Finding a real estate agent who is well connected, hard working, and trustworthy can save consumers time and offer some much-needed peace of mind.

Benefits of Hiring a Good Real Estate Agent

A skilled real estate agent can help a buyer locate their dream home, navigate negotiations, and wrap up all that tedious paperwork. An agent with a strong professional network and familiarity with the housing inventory where you’re hoping to buy may even get early word of so-called “whisper listings” — properties that are about to come on the market.

First-time homebuyers may find an agent’s guidance to be especially helpful. But even seasoned buyers can benefit from expert advice. (If you do feel confident you have the skills to go it alone, buying a house without a real estate agent is possible.)

But you also should know that a 2024 legal settlement created sweeping change to the real estate industry, and the protocol for agents getting paid is still in flux. Revisions by the National Association of Realtors® to the way homebuyers and sellers work with agents on home purchases — and the way those agents are compensated — affect homebuyers and -sellers as well.

If you plan to buy (or sell) a home, it’s important to ask any agent you’re considering hiring how they will be compensated for their work, and to understand the details of an agent’s commission before entering into an agreement.

How to Find a Good Real Estate Agent

In many housing markets, a dizzying number of professionals are standing by to help with your home purchase. Take these steps to choose smartly.

Learn the Terms

Before launching a search for the perfect real estate agent, it can be helpful to brush up on the job titles you may encounter.

Most commonly, consumers will come across real estate agents, Realtors®, and brokers, all of whom can act as agents, but who can have varying levels of experience, education, and certifications.

•   Real estate agent: Holds a license to practice real estate.

•   Realtor®: To have this designation, an agent must be a member of the National Association of Realtors®, which is a trade association.

•   Broker: A real estate agent must complete a certain amount of working hours, have additional education, and may have demonstrated leadership abilities among other agents in order to qualify as a broker.

Keep It Personal

A little networking can go a long way when looking for a good real estate agent.

Asking trusted friends, family members, or neighbors which real estate agent they worked with is a great place to start. Additional avenues that can lead to finding a good real estate agent may include:

•   Checking out local magazines and area “best of” lists featuring real estate agents.

•   Reviewing local real estate association websites.

•   Considering agents who are listed often on for-sale signs in the area.

How to Choose a Real Estate Agent

Once you’ve made a list of possible agents, you’ll want to do your homework.

Leave No Stone Unturned

Just as “location, location, location” is an important factor in buying property, research, research, and more research will help in the search to find a good real estate agent. This is also the time to think seriously about your finances and to start the process of lining up a home mortgage loan, as your real estate agent will ask about your price range.

Recommended: How to Get a Mortgage in 2025

Looking up reviews on websites like Zillow (click on “Find an Agent”) or Realtor.com (“Find Realtors”) can be a good place to find a good real estate agent.

When reading reviews or considering references, it can be helpful to seek answers to the following questions:

•   Does the agent have good communication skills?

•   Is the agent easy to touch base with, and do they have ample availability?

•   Did they show interest in the process even after a deal was under contract?

•   Are they known to regularly have disagreements with other agents?

If you find a real estate agent online or as a result of the agent’s marketing efforts, ask for references before making a decision.

Following a Hiring Process

Narrow the field to a handful of possible agents, then interview them before making a decision.

This process can feel similar to hiring an employee. The interview can give you an idea of what it will be like to work with an agent. Here are some sample questions to ask when interviewing agents:

•   How long have you worked as a real estate agent? Experience is key, especially for first-time buyers or sellers who need extra guidance in a hot market.

•   How many clients do you usually have at once? Their answer will help determine how much time they have to devote to each client and how accessible they will be.

•   Do you work with a team? For busier agents, having team members who can provide assistance can be helpful.

•   What areas do you cover? Finding an agent who is familiar with the area you’re looking in can give you a leg up in your search.

•   How do you prefer to communicate? Make sure your communication styles mesh well together, whether that be over text, phone, or email.

(Selling a home? The interview questions are different. You’d want to ask how the agent would market the home, what fees might be included, and how they would price the home based on recent sales in the area.)

Recommended: 15 Questions to Ask When Interviewing Realtors

When It’s Time to Buy

Some real estate agents may request that homebuyers sign a contract known as an agency agreement. Before making any real estate working relationship official, take a close look at the contract to ensure there are no unpleasant surprises down the road.

The agreement may obligate you to only work with the agent for a set period of time. These contracts are not always required, but they provide the real estate agent with more assurance that they will be paid for their services.

Those selling a home also sign a contract, known as a listing agent contract, with the real estate agent who is listing their home. Typically, these agreements include the commission (usually as a percentage of the sale price), listing duration, cancellation clause, responsibilities, disputes, ownership, expiration date, and details regarding dual-agency restrictions in the states where it is allowed.

Good Real Estate Agents’ Tips

You think you’ve found a qualified real estate agent to assist you in buying a house. What now? A good agent will accompany you on home tours, advise you when you are ready to make an offer, and recommend other professionals to assist you in the process, such as a home inspector.

The home-buying process can be complicated and a good real estate agent should hold your hand every step of the way. Your agent will submit your offer on your behalf and provide you with a list of the documents you need to buy a house, including mortgage documents, that you will need for the closing.

The Takeaway

Finding a good real estate agent can be key to closing the best deal as a buyer. A thorough research and interview process can help you land an agent you feel, well, at home with — and who will work hard for you.

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 do buyers want most from real estate agents?

Buyers most want an agent who will help them find the right home, so a well-connected agent familiar with the community and its housing inventory is a top priority.

What is an offer to purchase a home called?

An offer to purchase contract, also called a real estate purchase agreement, contains the address and description of the property, as well as the purchase price, down payment information, other deal terms, and an expiration date. It helps ensure that the buyer and seller are in agreement about the deal.

How do I get the best out of my real estate agent?

Knowing what you are looking for in a home, knowing your budget, and communicating openly about what you like and dislike can help ensure best results. Keep in mind that your real estate agent works on commission: Be organized, only visit properties you are truly interested in, and come to appointments on time.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

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-Q225-022