A mortgage is a type of loan that people use to help them buy a house or piece of property.
Not many people can afford a house out of pocket. That’s where mortgages come in. Like other loans, they let you borrow a large sum of money to buy the house and then pay back what you owe in regular installments (usually monthly).
The process generally looks something like this:
Figure out what you can afford
(and get your finances in order)
Get preapproved for a mortgage
(so you know how much you qualify for)
Find the perfect house
and make an offer
Finish the underwriting process
(the lender’s final approval of your loan)
Sign the paperwork and get the keys
Make monthly payments to your lender
A typical mortgage spreads your payments out over 30 years, though 15-year terms are also common. By making equal monthly payments over that period, the borrower gradually pays off the principal amount of the loan.
When you apply for a mortgage, the bank or other lender will take a close look at your finances before approving your application. In particular, they’ll typically look at your:
How you stack up on those considerations may affect the size of the loan the lender is willing to make, what interest rate you qualify for, and even whether your application is approved in the first place.
Although you should never take on a mortgage lightly, using a mortgage to buy a home can come with some important advantages, including:
Within these (and other) loan types, you’ll come across two main variations:
Fixed-rate mortgages are often best for buyers who expect to stay in the home a long time, who are worried interest rates may rise, or who prefer more certainty over their payments.
Adjustable-rate mortgages are typically offered with lower initial interest rates than fixed-rate mortgages and so may be better for buyers who plan to move before their rate changes or who think rates might go down in the future.
There are many mortgage options out there, each with their own pros and cons and some that are only available to certain borrowers. The most common ones you’ll encounter include:
|Type||Who’s it for?||Down payment||Good to know|
|Conventional||Most homebuyers||5%–20%||You may need to buy mortgage insurance if your down payment is less than 20%|
|Jumbo||Those borrowing large amounts (such as more than $500,000)||10%–20% or more||Lenders may want to see a near-perfect credit score|
|FHA||Buyers who can’t qualify for a conventional mortgage||As little as 3.5%||May be able to qualify even with poor credit|
|VA||Current and former military members (and their spouses)||None||Often come with favorable terms, like low interest rates and limited closing costs|
|USDA||People in rural areas who can’t qualify for a conventional mortgage||None||Interest rates can be as low as 1%; your income must fall below a certain limit to qualify|
A house is probably the most expensive thing you’ll ever buy. Before you take the mortgage plunge:
A mortgage is a loan that lets you buy a house and pay back the cost in regular installments over time. These loans can come in two variations: fixed, where the interest rate stays the same, or adjustable, where the interest rate can change over time. Before signing on the dotted line, you’ll want to know exactly how much you’re borrowing, at what rate, and when the loan comes due.