What Is a Mortgage?
A mortgage is a loan used to buy or refinance a home. Understanding how mortgages work is the first step toward confident homeownership.
A mortgage is a type of loan specifically used to purchase real estate. When you take out a mortgage, a lender provides the funds to buy a home, and you agree to repay the loan over a set period of time, typically 15 or 30 years. The home itself serves as collateral, meaning the lender can foreclose on the property if the borrower fails to make payments.
Key Components of a Mortgage
Principal
The principal is the amount of money you borrow from the lender. As you make monthly payments, a portion goes toward reducing this balance. Over the life of the loan, you gradually pay down the principal until the mortgage is fully repaid.
Interest
Interest is the cost of borrowing money, expressed as a percentage rate. Your interest rate determines how much you pay the lender in addition to repaying the principal. Even small differences in rate can significantly affect total cost over the loan term.
Amortization
Amortization is the process of spreading loan payments over time. In the early years, a larger share of each payment goes toward interest. As the loan matures, more of each payment is applied to the principal balance.
Escrow
Many lenders require an escrow account to collect and pay property taxes and homeowners insurance on your behalf. This is often included in your monthly mortgage payment, commonly referred to as PITI (principal, interest, taxes, insurance).
Fixed-Rate vs. Adjustable-Rate Mortgages
The two most common mortgage types are fixed-rate and adjustable-rate mortgages (ARMs). Each has distinct advantages depending on your financial situation and how long you plan to stay in the home.
Fixed-Rate Mortgage
- The interest rate stays the same for the entire loan term
- Monthly principal and interest payments are predictable
- Most commonly available in 15-year and 30-year terms
- Ideal for borrowers who value payment stability and plan to stay long-term
Adjustable-Rate Mortgage (ARM)
- Starts with a lower introductory rate for a fixed period (commonly 5, 7, or 10 years)
- After the initial period, the rate adjusts periodically based on a market index
- Rate caps limit how much the rate can increase per adjustment and over the loan's life
- May be beneficial for buyers who plan to sell or refinance before the adjustment period begins
According to the Consumer Financial Protection Bureau, shopping around and comparing offers from multiple lenders is one of the most effective ways to get a better deal on your mortgage. Even a small reduction in interest rate can save thousands of dollars over the life of the loan.
The Mortgage Process at a Glance
- 1
Pre-Qualification / Pre-Approval
A lender reviews your financial information to estimate how much you can borrow.
- 2
Home Shopping & Offer
You find a home and make an offer with your pre-approval in hand.
- 3
Loan Processing & Underwriting
The lender verifies your documentation, orders an appraisal, and assesses risk.
- 4
Closing
You sign the final loan documents, pay closing costs, and receive the keys to your new home.
Sources
- Consumer Financial Protection Bureau. What Is a Mortgage?
- U.S. Department of Housing and Urban Development. Buying a Home