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Homeownership can be both rewarding and a great financial decision for your future. But as anyone who has dipped their toes into the home-buying process knows, the pressure to find and secure the “right” mortgage loan can feel overwhelming, especially if you’re a first-time home buyer.

During the early stages of the home-buying process—perhaps while you’re researching neighborhoods and schools, shopping around for properties, and nailing down the details of your budget—it would serve you well to do some research into the types of mortgages available. That way, you’ll feel prepared when the time comes to put down an offer on the perfect home.

As you’ve likely noticed, there are quite a few mortgage loan types available to borrowers. Brace yourself, because the process definitely requires you harness your best inner comparison shopper. You’ll need to consider the ins and outs of each option alongside your personal and financial needs. To help make the decision a bit easier, we’ve compared the advantages and disadvantages of each mortgage type below.

Fixed-Rate Versus Adjustable-Rate Home Loans

First, it’s helpful to know that most home loans come with a fixed or adjustable interest rate. A fixed-rate mortgage means that your interest rate will never change. In other words, your monthly mortgage payment is locked in. Fixed-rate mortgages generally come in 15 or 30-year loans.

A 30-year fixed-rate loan is the most common, though you can save a lot in interest if you opt for a 15-year loan. Monthly payments on a 15-year loan will be much higher than for a 30-year mortgage, so it’s best to commit only if you’re confident that it works in your budget—even in the event of a financial emergency.

An adjustable-rate mortgage, called an ARM, has a fixed, usually lower rate for an initial period and then increases to a more expensive, floating rate tied to the market interest rate index. ARMs are often expressed in two numbers (like 5/1 or 2/28), although those numbers don’t follow one particular formula (they could represent years, months, number of annual payments, etc.). For example, a 5/1 ARM has five years of fixed payments and one change to the interest rate in each year thereafter.

It’s easy to be drawn to the lower initial rate offered on an ARM, but it very well could end up costing more in interest than a fixed-rate loan over the lifespan of your mortgage. An ARM might work best for someone who plans to pay off their mortgage in five years or less, or is committed to refinancing prior to the ARM’s rate increase.

Rate increases in the future could be dramatic although there are limits to the annual and life-of-loan adjustments, often leaving adjustable-rate mortgage-holders with much higher monthly payments than if they had committed to a fixed-rate mortgage.

Types of Government Home Loans

The government does not actually lend money to home buyers. Instead, “government home loans” is a catchall for loans that are insured or guaranteed by various government agencies in the event the borrower defaults. This makes the loan less risky for lenders, and allows them to provide mortgages at reasonable rates.

Federal Housing Authority (FHA) Loans:

FHA loans are one of the most popular government loan types for first-time home buyers, because they have the more lenient credit score requirements and down payment requirements. With a 580 credit score, you might qualify with a 3.5% down payment. For more, check out the FHA’s lending limits in your state.

Pros: Because FHA loans are ubiquitous and have lower down payment and credit score requirements, they are one of the most accessible loans. FHA loans give potential homeowners a chance to buy without a big down payment. Additionally, FHA loans allow a non-occupant co-signer (as long as they’re a relative) to help borrowers qualify.

Cons: Historically, the requirements for FHA mortgage insurance have varied over the years. Currently, an FHA loan requires both an up-front mortgage insurance premium (which can be financed into your loan amount) and monthly mortgage insurance. The monthly mortgage insurance has to stay in place until your loan-to-value ratio reaches 78%.

USDA loans:

The U.S. Department of Agriculture provides home loans in rural areas to borrowers who meet certain income requirements. USDA loans offer 100% financing—so no down payment is necessary—and require lower monthly mortgage insurance (MI) payments than an FHA loan. This type of mortgage loan is offered to “rural residents who have a steady, low or moderate income, and yet are unable to obtain adequate housing through conventional financing.” To find out if you qualify, visit the USDA income and property eligibility site .

Pros: USDA loans come with low monthly MI, and they are accessible loans for low-moderate income borrowers in rural areas.

Cons: You need a credit score of at least 640 to qualify. These loans, like an FHA loan, also require an upfront fee which can be financed into your loan. If you are obtaining a loan with no down payment, this could result in a loan balance higher than your loan amount.

VA loans:

The U.S. Department of Veteran Affairs provides loan services to members and veterans of the U.S. military and their families. If you are eligible , you could qualify for a loan that requires no down payment or monthly mortgage insurance.

Pros: You don’t have to put any money down or deal with monthly MI payments, which could save borrowers thousands per year.

Cons: These loans are great to get people in homes, but are only available to veterans.

FHA 203k rehab loans:

FHA 203k loans are home renovation loans for “fixer upper” properties, helping homeowners finance both the purchase of a house and the cost of its rehabilitation through a single mortgage. Current homeowners can also qualify for an FHA 203k loan to finance the rehabilitation of their existing home.

Many of the rules that make an FHA loan relatively convenient for lower-income borrowers apply here. An FHA 203k loan does not require the space to be currently livable, but it does generally have stricter credit score requirements. Many types of renovations can be covered under an FHA 203k loan: structural repairs or alterations, modernization, elimination of health and safety hazards, replacing roofs and floors, and making energy conservation improvements, to name a few.

Pros: They can be used to buy a home and fund renovations on a property that wouldn’t qualify for a regular FHA loan. And they only require a 3.5% down payment.

Cons: These loans require you to qualify for the price of the home plus the costs of any planned renovations.

Conforming Home Loans

Conforming home loans are a type of mortgage offered by private lenders. They are not insured by the government, but meet standards set by Fannie Mae and Freddie Mac (government sponsored agencies). As of 2018, the conforming loan limit is $453,100 in most of the U.S. and goes up to $679,650 in certain higher-cost areas.

Conventional Home Loans:

Conventional loans are the single most popular type of mortgage used today. These are slightly more difficult to qualify for a conventional loan than a government-backed loan. However, borrowers can obtain conventional loans for a second home or investment property.

Conventional loans typically require a minimum of a 620 credit score and a down payment between 5% and 20%. Private Mortgage Insurance (PMI) ) if you put 20% down. If you put less than 20% down, PMI is required but you have options. PMI can be paid monthly or can be an upfront premium that can be paid by you or the lender. Monthly PMI needs to stay in place until your loan-to-value ratio reaches 78%.

Pros: Pretty much any property type you’re considering would qualify for a conventional mortgage. And you have greater flexibility with mortgage insurance if you are putting down less than 20%.

Cons: Conventional loans tend to have stricter requirements for qualification and require a higher down payment that government loans.

Conventional 97 Mortgage:

Fannie Mae and Freddie Mac’s conventional 97 loan was made to compete with FHA loans. It requires a 3% down payment or 97% loan-to-value ratio, besting the FHA’s 3.5% down payment requirement. A conventional 97 loan also requires that at least one borrower be a first-time homeowner, which they define as someone who hasn’t owned a property in the past three years. Participants in this program will need to have good credit scores and the standard 43% debt-to-income ratio.

Pros: You only need to put down 3%.

Cons: Only single-unit properties qualify, and one of the borrowers must be a “first-time buyer.”

Non-Conforming Loans

If you need a loan that exceeds the limits of both a conforming loan and a government-backed loan, you’ll need a non-conforming loan. A non-conforming loan exceeds the limits set forth by Fannie Mae and Freddie Mac.

Jumbo Loans:

Because of their size, jumbo loans tend to have even stricter requirements than regular, conforming loans. Most jumbo loans require a minimum credit score above 700 and a down payment of at least 15%.

Super Jumbo Loans:

For financing of $1 million or more, you are going to need to take out what is called a super jumbo loan. These loans require excellent credit and can provide up to $3 million in financing.

Those looking to fund an expensive property purchase will likely have little choice but to use a jumbo or super jumbo loan. If that’s you, it might require taking some time to get your credit score in good shape.

The process of finding and securing the right mortgage loan requires a little bit of investigation and a whole lot of patience. Happy hunting!

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Mortgages not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com/eligibility-criteria#eligibility-mortgage for details.

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There are so many upsides to investing in your education—the personal enrichment and possibility of a bright and fruitful future being the most obvious. But, there are also some potential downsides that are hard to ignore, one of the main ones—if you’re like so many others—being the debt you may accrue.

Before you start losing sleep over your looming financial obligations, read on to gain a better understanding of how student loans work, starting with “the language of loans.”

Getting a grasp on certain student loan terms and concepts can benefit you in a few ways. For one thing, you’ll be able to better understand your student loan options, which means you can more easily compare features and fine print. That allows you to make confident decisions about your loans and, perhaps most importantly, save some money along the way.

So, what are the student loan terms every borrower should know? Here are a few of the big ones:

The Basics of Student Loans

Borrowing a loan can have long-term financial consequences so it’s important to fully understand the fees and interest rates that will affect the amount of money you owe. Here are a few of the most important terms to understand before you take out a student loan:

Principal

This is the original amount of money borrowed, plus any capitalized interest and fees. Capitalized interest is accrued interest that is added to the principal balance.

Term

The loan term is the amount of time the student loan will be in repayment. Loan terms vary by lender, and if you have a federal loan, you are usually able to select your repayment plan.

Annual Percentage Rate

Commonly referred to as APR—this is the cost of borrowing, expressed as an annual percentage. APR includes any fees associated with the loan, providing a more comprehensive view of what you are being charged. Depending on the fees associated with your loan, the APR could be a bit higher than the interest rate.

Accrued Interest

The amount of interest that has accumulated on a loan since your last payment.

The Potential Student Loan Pitfalls

Once you understand loan basics and have secured your student loans, there are a few more terms to know. Making sure you understand your repayment terms and options like deferment or forbearance will allow you to find the best strategy to pay off your student loans quickly.

Forbearance

The temporary postponement of student loan repayment during which time interest typically continues to accrue. If your student loan is in forbearance you can either pay off the interest as it accrues, or you can allow the interest to accrue and it will be capitalized at the end of your forbearance.

You will usually have to apply for forbearance with your loan holder and will sometimes be required to provide documentation proving you meet the criteria for forbearance. For a loan to be eligible for forbearance, there must be some unexpected temporary financial difficulty.

Deferment

Similar to forbearance, deferment is the temporary postponement of student loan repayment. During deferment, interest may or may not continue to accrue, depending on the type of student loan you have. In
the case of federal loans , the government may pay the interest on your Perkins, Direct Subsidized and/or Subsidized Stafford loans.

Capitalized Interest

This is when accrued interest is added to your loan’s principal balance. Most student loans begin accruing interest as soon as you borrow them. While you are often not responsible for repaying your student loans while you are in school or during a grace period or forbearance, interest will still accrue during these periods. At the end of said period, the interest is then capitalized, or added to the principal of the loan.

If you make your payments on time each month, you’ll keep accrued interest in check. However, after a period of missed or reduced payments (such as forbearance), accrued interest may be capitalized, which can cost you more money in the long run.

When interest is capitalized, it increases your loan’s principal. Since interest is charged as a percent of principal, the more often interest is capitalized, the more total interest you’ll pay. This is a good reason to use forbearance only in emergency situations, and end the forbearance period as quickly as possible.

Consolidation

The act of combining two or more loans into one single loan with a single interest rate and term. The resulting interest rate is a weighted average of the original loan rates.

Consolidating can make your life simpler with one monthly bill and payment, but it’s important to understand that it doesn’t actually save you any money. In fact, if you opt for lower payments when consolidating, this is typically accomplished by lengthening your loan term, which means you’ll pay more interest over the life of the loan.

The Potential Money-Savers

Building a repayment plan and sticking to it is one of the best ways to repay your student loans quickly, while spending the least amount of money on interest. Now that you understand what could cause your interest to skyrocket, here are a few terms that could help you reduce the money you spend over the life of your loans.

Automated Clearing House (ACH)

This is an automatic loan payment that transfers directly out of your bank account to your lender or loan servicer each month. The benefits of ACH are two-fold—not only can automatic payments keep you from forgetting to pay your bill, but many lenders also offer interest rate discounts for enrolling in an ACH program.

Refinancing Your Student Loans

Refinancing is the act of taking out a new loan at a lower interest rate and using it to pay off your original loan(s). Often times, refinancing your student loans allows you to lower your interest rate on your loans.

This is one of the fastest ways to slash your student loan burden. Not only does refinancing reduce the total amount of interest you’ll spend over time, but it can also decrease your monthly payments or allow you to pay off your loan sooner.

To see how refinancing your student loans could help alleviate some financial burden, take a look at SoFi’s student loan calculator. When you refinance with SoFi, there are no origination fees, application fees or prepayment penalties.

With good earning potential and credit history, you could qualify for a lower interest rate than the one you currently have. Refinancing your loans could help you manage your student loan payments.

Prepayment

Paying off a loan early or making more than the minimum payment. Both federal and private loans allow for penalty-free prepayment, which means you can pay more than the monthly minimum or make extra payments without incurring a fee.

The more you do it, the sooner you’re done with your loans—and the less interest you’ll spend over the life of your loan.

Whether you need help paying for school or help paying off the loans you already have, SoFi offers competitive interest rates and great member benefits as well.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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Finding helpful programs to help your student debt can be overwhelming, especially if you already feel pressure from high monthly payments or loans that never seem to shrink. But there are many student loan assistance programs to give you more time to pay back your student debt, or lower your monthly payments for greater student loan relief.

Keep in mind, while extending your payback period or reducing your payments will help ease the month-to-month burden of your student debt, you might end up paying more overall due to interest on the loans.

Whether switching to a plan based on your income, extending repayment with the hope of forgiveness, or even refinancing your student loans, it’s important to run the numbers and see which plans you qualify for, and which could save you the most money in the long term.

The great thing about the different repayment options offered for federal loans is that you can apply to change plans anytime. So whether you’ve just graduated and are still looking for work, recently changed jobs, or just want to see if you qualify for a lower payment, here are some of the top student loan debt relief options.

Getting More Time to Pay Off Your Student Loans

The Standard Repayment Plan is the default student loan option; if you don’t opt into any other plan, you’ll pay off all of your debt after 10 years, or 120 monthly payments of a consistent amount. However, for many people, especially if you are just starting out in the workforce, this fixed payment can be very high, since it’s entirely dependent on your total debt and interest.

The first alternative repayment plan to consider for student loan relief is the Graduated Repayment Plan, which still keeps your payment timeline to 10 years, but starts out with lower payments at first and then, yes, gradually, increases the amount over time. You will end up paying more than under the Standard Plan, but if you are in a career where you expect a raise every two years or so, this might be a good option for you.

The average undergraduate student debt at graduation was $30,301 in the 2015 to 2016 school year. If you have more than $30,000 in outstanding student debt, you could also consider an Extended Repayment Plan, which increases your loan payoff period to 25 years instead of 10.

Payments can be fixed and stay the same, or graduated and increase over time, and your monthly payments will be lower than under the Standard Plan—possibly by up to half—since you are giving yourself more than double the amount of time to pay your loans off. If you need to make lower monthly payments and are OK with paying out more over a longer period of time, an Extended Repayment Plan might be the place to start.

Reducing Your Student Loan Payments Every Month

There are a number of income-driven plans, and each has its own quirks and qualifications, so it’s important to understand which one you want to apply for when you contact your loan servicer. These plans will make your monthly payment more affordable based on your income and family size. Most federal student loans are eligible for at least one income-driven plan .

Income-Based

Through an Income Based Repayment Plan, payments will be 10% or 15% of your discretionary income, depending on when you first took out your student loans. Any outstanding balance is forgiven after 20 or 25 years, but you may have to pay income tax on that amount. You must have a high debt relative to your income to qualify.

Income-Contingent

Payments will be either 20% of your discretionary income, or the amount you would pay on a fixed 12-year repayment plan adjusted to your income, whichever is less. Most borrowers can qualify for this plan, including parents, and outstanding balances are forgiven after 25 years.

Revised Pay As You Earn (REPAYE)

Payments are 10% of discretionary income, and outstanding balances will be forgiven after 20 years for undergraduate loans.

Pay As You Earn (PAYE)

Also makes payments 10% of your discretionary income, and caps at 20 years for forgiveness, but your payments will never more be than what you’d pay on the Standard 10-year plan. You must be a new borrower on or after Oct. 1, 2007 to qualify.

Income-Sensitive

Monthly payments will be based on your income, but your loan will be totally paid off in 15 years.

The important thing to remember about all of these plans is that you must reapply every year, even if your circumstances don’t change. If you are employed by the government or a not-for-profit and are seeking Public Service Loan Forgiveness (PSLF), you should repay your student loans under one of these income-driven repayment plans.

To apply for any of these plans, you have to talk to your loan servicer, which is everyone’s favorite task. You can find all of your federal student loans, and your individual loan servicer, by logging into My Federal Student Aid .

Once logged in, you can also check which repayment plans you personally qualify for by using the Federal Student Aid Repayment Calculator . Remember, it’s always free to apply for these student loan assistance programs.

One thing to note, Perkins Loan repayment plans are not the same as those for Direct Loan or FFEL Program loans, which are some of the most common student loans. You should check with your school for more information about repayment plans for a Perkins Loan.

Perkins Loans can also qualify for cancellation , based on certain employment as a teacher, nurse, military personnel, or employee of a volunteer service like the Peace Corps.

Still Having Trouble Making Student Loan Payments?

If you are already on an income-driven plan or have extended your repayment period and are still looking for greater student debt relief, there are other options to consider. There’s always picking up a side hustle, but it can sometimes feel like those extra bucks from babysitting or dog walking don’t make a big enough dent—and it’s easy to pocket that money, rather than put it toward savings or your loans.

Unless you get cast on a TV game show that will pay off your student debt, consider instead looking into certain employers that help pay off student loans, or even cities that offer financial incentives for you to live there.

Also, most loan servicers will reduce your interest by .25% if you sign up for automatic payments. On the average student loan debt of $30,000, say with 6% APR, reducing to 5.75% equals about $450 in savings on a Standard 10-year plan. Plus, making auto payments on your loans will help you incorporate it into your budget as a fixed expense which must be accounted for every month.

Reducing Your Debt Burden through Refinancing

Refinancing is another student loan relief option that works best if you have high-interest, typically unsubsidized loans and/or private loans not from the federal government. But keep in mind that if you refinance, some benefits of federal loans such as forbearance or qualifying for PSLF will no longer be available to you.

Refinancing and consolidation are often used interchangeably, but it’s important to know the difference. Student loan consolidation is the act of combining multiple loans into one new, often federal, student loan.

Student loan refinancing will get you a new loan entirely, at a new interest rate and/or new term, so you use that new loan to pay off your student loans. Then you pay back the new loan, which is no longer a federal student loan. Refinancing can potentially get you a lower interest rate, thereby making it easier to pay off your student loan debt.

About SoFi

SoFi offers student loan refinancing which can help you lower your monthly payments or shorten your loan term. Discover the different student loan options to see if refinancing could be a good option for you.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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