What Is a Mortgage?
A mortgage is a loan used to purchase or refinance real estate, where the property itself serves as collateral. If the borrower fails to make payments, the lender has the legal right to take possession of the property through foreclosure. Mortgages are the primary mechanism by which most Americans purchase homes.
How a Mortgage Works
When you take out a mortgage, you borrow a specific amount (the principal) and agree to repay it over a set term with interest. The lender records a lien on the property title. Each monthly payment reduces the principal balance and covers the interest that accrued since the last payment. At the end of the term, the loan is fully repaid and the lien is released.
Types of Mortgages
Conventional mortgages conform to Fannie Mae and Freddie Mac guidelines. Government-backed mortgages include FHA loans (insured by the Federal Housing Administration), VA loans (guaranteed by the U.S. Department of Veterans Affairs), and USDA loans (for eligible rural properties). Fixed-rate mortgages maintain the same interest rate throughout the term. Adjustable-rate mortgages (ARMs) start with a fixed rate for an initial period, then adjust periodically based on a market index.
15-Year vs. 30-Year: A $300,000 Mortgage
A 30-year loan at 6.75% costs $1,945.79/mo with roughly $400,500 total interest. A 15-year loan at 6.0% costs $2,531.57/mo with roughly $155,700 total interest -- $586/mo more, but about $244,800 less interest over the life of the loan.
What Lenders Evaluate
Mortgage lenders evaluate borrowers primarily on: credit score (which determines rate and qualification), debt-to-income ratio (total monthly debt payments as a percentage of gross monthly income), and assets (down payment, closing cost funds, and post-closing reserves).
Common Mortgage Mistakes
Choosing a 15-year term without stress-testing the payment. The $586/mo jump above can strain a budget without a cash buffer for emergencies.
Forgetting the payment usually includes more than principal and interest. Property taxes, insurance, and often PMI are typically bundled in through escrow.