Mortgages

What Is a Mortgage?

A mortgage is a loan used to buy real estate—most commonly a home—where the property itself serves as collateral. If the borrower stops making payments, the lender can take possession of the property through foreclosure. Mortgages make homeownership possible for people who can’t pay the full purchase price in cash.

How Mortgages Work

When you buy a home you typically pay a down payment (a percentage of the purchase price) and borrow the rest as a mortgage from a bank, credit union or other lender. The loan is repaid in monthly installments over a set term—commonly 15 or 30 years. Each monthly payment usually includes:

• Principal — the portion that reduces the loan balance.
• Interest — the cost of borrowing.
• Taxes and insurance — often collected and held in escrow and paid by the lender on your behalf.

If you stop making payments, the lender may sell the property to recover what’s owed.

Common Types of Mortgages

Fixed-Rate Mortgage

The interest rate stays the same for the loan’s life, so principal-and-interest payments are predictable. Best for buyers who plan to stay long-term.

Example: Sarah buys a $300,000 home with a 30-year fixed-rate mortgage at 5%. Her principal-and-interest payment stays about $1,610 for the life of the loan, making budgeting easier.

Adjustable-Rate Mortgage (ARM)

An ARM has a fixed rate for an initial period (e.g., 5 years) then adjusts periodically with the market. Initial payments can be lower, but they may rise later.

Example: John takes a 5/1 ARM at 3.5% for five years. After that, his rate may change and his monthly payment could increase.

Conventional Mortgage

Loans not backed by the government. They usually require higher credit and a down payment (often 3%–20%). If the down payment is under 20%, borrowers generally pay private mortgage insurance (PMI).

Example: Lisa puts 10% down on a $250,000 home and pays PMI until she builds enough equity.

Government-Backed Mortgages

Insured by agencies like the FHA, VA, or USDA. These loans often allow lower down payments and looser credit rules.

Example: Mike, a veteran, qualifies for a VA loan with no down payment and favorable terms.

Jumbo Mortgage

Used when the loan exceeds conforming limits set by Fannie Mae and Freddie Mac. Jumbo loans require larger down payments and stronger credit.

Example: Emma buys a $1 million luxury home and needs a jumbo mortgage because the loan amount exceeds standard limits.

Real-World Applications

• First-time buyers: Often use mortgages to enter homeownership—FHA and conventional loans are common choices.
• Refinancing: Homeowners refinance to lower interest rates, change loan terms, or extract equity.
• Investment properties: Investors use mortgages to buy rentals, relying on rental income to cover payments and build equity.
• House hacking: Buying a multi-unit property, living in one unit and renting others to offset costs (can be done with FHA and other loan types).

Key Takeaways

• A mortgage is a secured loan where the property is collateral, enabling most people to buy homes without full cash payment.
• Payments include principal, interest, and often taxes and insurance via escrow.
• Choose the mortgage type that matches your plans—fixed-rate for stability, an ARM for lower short-term payments, government-backed loans for lower down payments, or a jumbo loan for high-priced homes.
• Mortgages are also tools for refinancing, investing, and creative strategies like house hacking.