Mortgage Basics
A mortgage is a loan that helps you buy a home. You pay it back a little at a time, usually every month. This guide explains how it works in simple terms.
What is a Mortgage?
A mortgage is money you borrow to buy a house. You agree to pay the lender back over many years. The house is the “collateral,” which means the lender can take the home if you stop paying. Think of it like this: A mortgage helps you buy a home now and pay for it slowly over time.
What Your Monthly Payment Includes
Most mortgage payments have four parts:
Principal
The money you borrowed.
Interest
The extra money the lender charges you for the loan.
Taxes
Money for your city or county. It goes into a special account.
Insurance
Homeowner’s insurance, and sometimes mortgage insurance.
These four parts are often called PITI. That just means: Principal, Interest, Taxes, Insurance.
Interest Rates (Made Simple)
Your interest rate is a number that affects how much your loan costs.
There are two main kinds:
Fixed-Rate
The rate stays the same the whole time. Your payment doesn’t change.
Adjustable-Rate (ARM)
The rate can go up or down after a few years. Your payment can change too.
A lower rate usually means a lower monthly payment.
Loan Lengths: 15-Year vs. 30-Year
Most people pick one of these:
30-year loan
Lower monthly payments, but you pay more interest overall.
15-year loan
Higher monthly payments, but you finish faster and save money.
Choose the one that fits your budget.
What Affects Your Interest Rate
Your interest rate is based on things like:
Your credit score
How much debt you have
Your income
How much you put down
The type of loan
The current economy
Better credit and less debt can help you get a lower rate.
Helpful Words to Know
Amortization
How your loan is paid down over time.
Escrow
A special account for taxes and insurance.
PMI
Mortgage insurance if your down payment is under 20%.
Pre-Approval
A letter from a lender that says what you may be able to borrow.
Summary
A mortgage is a loan that helps you buy a home. Your payment includes principal, interest, taxes, and insurance. Your interest rate and loan length affect how much you pay over time. The more you understand these basics, the easier the homebuying process will feel.
Want to learn more? Visit the Learn Hub or try our Home Readiness Check™.