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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 therefore 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.

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

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate home loan is the most common type of mortgage and the longest term length available for mortgages.

Monthly payments are generally lower than shorter-term mortgages because the loan is stretched out over a longer term. However, the overall amount of interest you’ll pay is typically higher, since you’re paying interest for a longer period of time. 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 the 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.

Recommended: First-Time Home Buyer’s Guide

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 under 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 under 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), and 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% payment.

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)

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 Loans

Mortgages that conform to the guidelines set by government-backed agencies (such as Fannie Mae and Freddie Mac) 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 2023, the ceiling for a single-family, conforming home loan is $726,200 in most parts of the U.S. However, there is a higher limit — $1,089,300 — 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 41%, 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 Loans

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 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 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 $726,200), 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 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 ends, 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. Some of the most common types include:

•  Conventional mortgage This type of mortgage is not insured or guaranteed by a government agency.

•  FHA loan Insured by the Federal Housing Administration (FHA), FHA loans are popular among first-time homebuyers. They offer more lenient credit requirements and allow for a lower down payment (as low as 3.5%).

•  VA loan These loans are available to eligible veterans, active-duty service members, and eligible surviving spouses, and come with favorable rates and terms.

•  USDA Loan Issued by the U.S. Department of Agriculture, these loans are designed for low- and moderate-income homebuyers in rural areas. They offer low interest rates and may require no down payment.

•  Jumbo mortgage A jumbo mortgage is a loan that exceeds the loan limits set by Fannie Mae and Freddie Mac.

•  Fixed-rate mortgage The rate stays the same for the entire life of the mortgage.

•  Adjustable-rate mortgage (ARM) The interest rate is initially fixed for a specific period, then typically adjusts annually based on market conditions.

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 These mortgages adhere to basic criteria set by the CFPB.

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

•  Balloon payment qualified mortgages These 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, you might consider a conventional mortgage. If, on the other hand, you have limited funds for a down payment and lower credit scores, you might consider 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.

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.

*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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Buying a home can bring some changes to your financial situation and how you manage your budget. But how does buying a house affect taxes, specifically? The short answer is that owning a home can yield some tax breaks if you’re able to deduct mortgage points, mortgage interest, property taxes, and other expenses.

How much of a tax benefit you can get from owning a home can depend on a number of variables. If you’re gearing up to buy a home, it’s helpful to know what might change when it’s time to file your tax return.

What Are Home Tax Deductions?

Home tax deductions are amounts that you can write off when filing a tax return. The Internal Revenue Code defines the types of tax breaks for homeowners and what they’re worth.

Tax deductions reduce the amount of your income that’s subject to tax. They’re different from tax credits, which reduce what you owe in taxes on a dollar for dollar basis. Deductions can be standard or itemized.

•   Standard deductions allow you to write off a flat dollar amount, based on your filing status.

•   Itemized deductions allow you to write off individual expenses, based on their actual amount.

If you’re interested in deducting home-related expenses, then you’ll need to itemize them on Schedule A when filing Form 1040.


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

How Tax Deductions Work

Tax deductions work by reducing your taxable income, which can in turn reduce your tax liability. Your tax liability represents the amount you owe in federal taxes and in state taxes if you live in a state that assesses income tax.

When you claim a deduction, that amount is removed from the amount of income that is subject to tax. Deductions are valuable since reducing your taxable income could help you to move into a lower tax bracket. Your tax bracket determines which tax rate you’re subject to. There are seven tax brackets ranging from 10% at the lowest end to 37% at the highest.

Again, you can claim a standard deduction if you don’t have any expenses to itemize. The amount of the deduction depends on your filing status. Here are the standard deduction limits for 2023.

•   $13,850 for single filers and married couples who file separately

•   $20,800 for heads of household

•   $27,700 for married couples filing jointly

Whether it makes sense to itemize vs. claiming the standard deduction can depend on the amount of expenses you’re eligible to write off.

Pros and Cons of Home Tax Deductions

Claiming home tax deductions, or any type of deduction for that matter, can offer advantages and disadvantages. How does buying a house affect taxes in a positive way? The simplest answer is that it can help to reduce your overall tax liability.

Owing less in taxes or even getting a larger refund means that you have more money to put toward other financial goals. The drawback is that itemizing deductions can be a little more time-consuming as you have to list out individual expenses and amounts on your tax return.

It’s also possible that claiming home deductions won’t lead to a bigger tax break than taking the standard deduction. Comparing the numbers can help you to decide which option makes the most sense.

Types of Homeowner Tax Deductions and Credits

There are multiple tax breaks for homeowners that you could claim as a first-time homebuyer or repeat homeowner to put more cash back in your pocket. It may be helpful to talk to a financial advisor or tax professional to better understand which ones you might be able to claim.

It’s also important to note that some tax breaks, such as the first-time homebuyer credit, originally from 2008, have expired.

Property Tax

Property taxes and real estate taxes paid to state and local government entities are deductible for homeowners. The limit for state and local tax deductions is $10,000 as of 2023. If you’re married and file separate returns, the deduction is capped at $5,000.

How much value you get from this deduction can depend on where you live. If you look at the cost of living by state, it’s easy to see that property taxes are higher in some areas than others. When you compare the cost of living in California, for example, to the cost of living in New Jersey, residents of the Garden State pay substantially more in property taxes.

Are property taxes included in mortgage payments? They can be, if your lender requires you to escrow property taxes and homeowner’s insurance into your payments. If you escrow those amounts, part of the money you pay to the lender each month will go to separate accounts to cover those expenses once they come due each year.

Points

Mortgage points allow you to “buy down” your interest rate at the time your home loan originates. Paying points can help you get a lower rate and potentially lower your monthly payments. In exchange, you pay your mortgage lender an upfront fee.

Mortgage points are deductible but there are some rules to know:

•   You must live in the home that secures the loan.

•   Paying points must be an established business practice in your area.

•   Points paid can’t exceed an amount that’s commonly charged in your area.

•   You must use the cash method of accounting for reporting income.

•   Points paid must come out of your funds, not funds borrowed from your lender.

•   Any points paid cannot be applied toward other costs typically included at settlement, such as appraisal fees or attorney’s fees.

•   Points must be computed as a percentage of the mortgage principal.

You can deduct points in full in the year you paid them if those conditions are met. Otherwise, you can deduct points over the life of the loan.

Mortgage Interest

Interest on home mortgage loans is also tax-deductible. You can claim the mortgage interest deduction if you paid interest on a home loan at some point during the year. The IRS determines how much mortgage interest you can deduct.

•   Homeowners can deduct up to $1 million in mortgage interest (or $500,000 if married filing separately) for homes purchased before December 16, 2017.

•   Mortgage interest is deductible up to $750,000 (or $375,000 if married filing separately) for homes purchased after December 16, 2017.

The new, lower limit was imposed under the 2017 Tax Cuts and Jobs Act (TCJA). Beginning in 2026, the higher limit will resume, barring any changes to the federal tax code.

Private Mortgage Insurance

Lenders may require you to pay private mortgage insurance (PMI) when purchasing a home with less than 20% down. Mortgage insurance premiums (MIPs) are required for FHA loans.

As of 2022, the IRS does not allow you to claim a deduction for PMI or MIPs.

Mortgage Credit Certificate

If you’re issued a Mortgage Credit Certificate (MCC) by a state or local government program, you may be able to use it to get a tax break. This is a tax credit, not a deduction, that’s offered to lower-income homebuyers in order to help make home ownership more affordable. If you have an MCC, you can use IRS Form 8396 to figure out how much credit you can claim for the current tax year and what you might be able to carry forward for future tax years.

Renewable Energy

The IRS offers tax credits for homeowners who make energy-efficient improvements to their homes. For 2023, homeowners may qualify for a credit of up to $3,200 for eligible expenditures, including:

•   Energy-efficient doors or windows

•   Insulation and sealing material

•   Natural gas, propane, or oil water heaters, boilers, and furnaces

•   Heat pumps

•   Biomass stoves

•   Home energy audits

Residential clean energy credits are also available for homeowners who install solar panels, solar water heaters, wind turbines, geothermal heat pumps, and fuel cells.

Home Office

If you use part of your home for business purposes, you may be able to claim another homeowner tax deduction in the form of the home office deduction. There are two ways to claim a deduction for home office expenses:

•   Simplified option. This method allows you to deduct $5 per square foot, up to 300 feet, for the part of your home that you use as an office.

•   Regular method. The regular method figures your deduction based on your actual costs.

If you’re claiming this deduction along with other business deductions, you’d include them on Schedule C with your tax return.

Home Equity Debt

Home equity loan interest is tax deductible if the loan is used exclusively to buy, build, or substantially improve the home that secures the loan. If you use a home equity loan for any other purpose, such as debt consolidation or paying college expenses, the interest is not deductible. That rule remains in effect through 2025, whereupon the previous rules will revert.


💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.

Tips on Home Tax Deductions

If you’re considering claiming deductions for home expenses or any other expenses, it’s wise to keep good records. While the odds of being audited by the IRS are rare, they’re not zero so it’s smart to have receipts, official tax forms, or other documentation to back up the deductions you’ve claimed.

Also, keep in mind that some expenses are not deductible for homeowners. The kinds of things you can’t deduct include:

•   Mortgage principal payments

•   Depreciation

•   Utilities

•   Down payments

•   Homeowner’s insurance premiums

•   HOA fees and condo fees

•   Maintenance and upkeep

There are exceptions for some of these expenses if you own a home that you rent out as an investment property. For instance, you can deduct depreciation and HOA fees, maintenance, and repair costs. However, if you’re deducting expenses for a home you use as a primary residence, you can’t write those costs off.

Those are all things to budget for after buying a home, since some home ownership costs are rolled into the mortgage while others are not. A high yield savings account is a secure place to keep money for home expenses while earning a competitive interest rate.

What happens if you’re buying a house from family? If you’re going through a lender to get a mortgage and complete the purchase, then the fact that you’re buying from people you know shouldn’t affect your ability to claim tax deductions or credits. However, you may want to talk to a tax professional about claiming tax breaks if you’re working out a private financing arrangement with a relative.

The Takeaway

Buying a home may be at the top of your financial goals list and the more prepared you are going in, the better. Understanding how buying a house can affect taxes is important when shaping your budget, both before and after the purchase.

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

Is your tax return bigger when you buy a house?

Whether you get a bigger tax return after buying a home can depend on your overall tax situation, including how much you earned, how much you deduct, and what credits you might be eligible to claim. Buying a home could help to increase your refund if you’re able to deduct expenses from your taxable income, though that’s not guaranteed.

How much money do you get back on taxes for mortgage interest?

The amount of money you get back on taxes when deducting mortgage interest can depend on your total income, deductions, and credits. You can use an online tax calculator to estimate your refund based on how much interest you’re able to deduct, any other deductions you might be eligible for, and what tax credits you claim.

Does having a mortgage help with taxes?

Having a mortgage can help with taxes. Some of the tax benefits you might be able to unlock as a homeowner include deductions for mortgage interest and property taxes, as well as credits for making energy-efficient improvements. You may also be able to deduct home-related expenses or claim tax credits for homeowners.

Photo credit: iStock/Hispanolistic

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

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

*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.

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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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Real estate agents — both on the seller’s side and the buyer’s side — typically get paid at closing from the seller’s proceeds. The majority of real estate agents are paid via a commission vs. a set fee, which means the higher the sales price, the more money the agent gets paid.

Commissions are split evenly between the buyer’s and seller’s agents. The brokerage each real estate agent or Realtor® works for snags a portion of the commission as well. (Realtors are real estate agents who belong to the National Association of Realtors, requiring them to adhere to a certain code of ethics; we’ll use the terms interchangeably here.) Here’s an example of how a Realtor gets paid.

Real Estate Commission: An Example

Let’s say a home sells for $500,000 with a typical commission of 6%:

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

The commission is split evenly between the two sides:

•   Listing agent side = $15,000

•   Buyer’s agent side = $15,000

Real estate agents share their commissions with the brokers representing them. (A broker is an agent who also has an additional license to supervise other agents.) Let’s assume that the broker fee is 1% of the sales price (the broker’s split can go up to 50%, but we’ll use an easy 1% split here).

•   $500,000 sale price X 1% broker’s fee = $5,000

Subtract the broker fee from the total commission and the agent ends up with the rest.

•   $15,000 total commission – $5,000 broker’s fee = $10,000 agent commission

Typically, four people get paid from the seller-paid real estate commission. It may look something like this:

•   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)

A Real Estate Agent’s Responsibilities

To earn their commission, real estate agents often have a lot of 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, a listings database

•   Scheduling showings

•   Placing lock boxes

•   Guiding first-time home buyers

•   Smoothing over difficult relationships

•   Navigating offers and counter offers

•   Negotiating home contracts

Making a living through commissions can be challenging for real estate agents, but it can also be very rewarding.

Recommended: How to Find a Real Estate Agent

Who Pays the Realtor Commission?

It is expected that the seller pays the real estate agent commission fee for both the buyer’s and seller’s agents. At settlement (also called the “closing”), the money for the commission comes out of the seller’s proceeds. 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.

How Much Are Realtor Fees?

It is common to see real estate agent commission fees between 5% and 6%. This includes both the seller’s and the buyer’s real estate agents’ fees. The money is usually split evenly between the two sides. If the commission is 6%, for example, 3% would go to each side.

Can You Negotiate Who Pays the Real Estate Agent?

The Realtor fee is negotiable, though it is extremely rare for a buyer to pay it. Some ideas to help 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. When you’re buying a home, look for an agent with a strong network. (These agents may be the first to hear about so-called “whisper listings.”) Be sure the commission outlined in the listing agreement you sign matches what you agreed on.

How Is an Agent’s Commission Determined?

An agent’s commission is determined by the compensation agreement they have with their brokerage. As noted above, after the commission is split between the buyer’s and the seller’s agents, it’s then split again between the agent and the broker.

When Do Agents Receive Their Commission?

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.

How Do the Agents Share Their Commission?

It is customary for agents to share the commission 50/50. If the listing has a 6% commission on it, 3% would go to the buyer’s agent and 3% would go to the seller’s agent.

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.

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

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 like 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 who earns a commission isn’t painful when you’re a buyer because the fee is almost always covered by the seller, and you will have an agent on your side to help you negotiate.

Another way to be money-smart when you’re buying is to get a good rate on a home loan. SoFi Mortgages offer competitive interest rates, low down payment options, and a guaranteed on-time close* (which you and your Realtor will love).

See your home loan rate in minutes.

FAQ

Do sellers pay realtor fees?

Yes, sellers pay realtor fees for both the buyer and the seller.

Do buyers pay Realtor fees in Texas?

No, the seller pays the realtor fees in Texas, with very few exceptions.

Do buyers pay Realtor fees in Washington state?

No, the seller usually pays realtor fees in Washington state, but it is negotiable.

How much does a new Realtor make in Illinois?

According to ZipRecruiter.com, the average pay for a first-year real estate agent in Illinois is $82,481. The range for first-year salaries is between $18,866 and $153,998.

Photo credit: iStock/RyanJLane
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*^‡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.