When you buy a home, one of the first conditions you hear is a “mortgage”. Mortgages allow millions of people to own homes, as most buyers don’t buy homes with cash. But what exactly is a mortgage, how does it work and why is it important?
Redfin Real Estate helps buyers navigate every step of their home building journey, from understanding their funds to finding the right home. Whether you’re browsing a home for sale in Phoenix, Arizona, or searching a home for sale in Philadelphia, PA, knowing how a mortgage works is the first step towards homeownership that’s confident.
What is a mortgage?
A home loan is a loan used to purchase a home or property in which the household itself functions as collateral. If you stop paying, the lender can seize the money recovery.
When you take out a mortgage, you agree to repay the money you borrowed (principal) and interest over the set years, typically through monthly payments.
How do mortgages work?
A mortgage is usually a 15-, 20-, or 30-year loan, often repaid in monthly installments that include four parts (known as PITI).
Principal: The part that reduces the balance of the loan. Interest: The cost of borrowing money based on interest rates. Tax: Property tax collected by local governments. Insurance: Homeowner Insurance and sometimes Private Mortgage Insurance (PMI).
Plus, it’s important to remember that your true monthly home expenses may exceed your mortgage payments. Homeowners Association (HOA) fees, utilities and ongoing maintenance can all be summed up. Considering these costs in your budget, you can choose to make a realistic, sustainable, long-term mortgage payment.
Who are the parties involved in the mortgage?
A mortgage is not just between you and the bank – there are several important players involved in the process.
Borrower: An individual (or individual) who issues a loan to purchase the property. Lender: A financial institution, bank or mortgage company that offers the loan. Mortgage Servicer: May be different from lenders. This is a company that sends monthly payments. Handle billing, escrow accounts, and customer service. Appraiser: A licensed expert who determines the fair market value of a home to ensure that the loan amount is appropriate. Title Company: Handles legal aspects of transferring ownership and ensures that the property title exempts claims or disputes. Closure Agent or Escrow Officer: Oversees document signing and distribution of funds at the time of closure.
Each of these parties will serve to ensure that the loan is valid, the assets are secure as collateral and the transfer of ownership is smooth.
Main mortgage terms are explained
Down payment: advance payment you pay, usually 3%-20% of the home price. Interest rate: The percentage of money that a lender charges to borrow money. Loan period: The time it takes to repay (such as 30 years). Amortization: A schedule that breaks down the way in which each payment applies to principal and interest. Escrow: A servicer management account used to collect monthly taxes and insurance and pay those invoices on time.
>>>Read: Down Payment Support Program
Types of mortgages
There are several loan options depending on your finances and goals:
Loan Program:
Traditional loans: Usually, a higher credit score is required because it is not supported by the government. FHA loans: Suitable for first-time buyers with government insurance and often low credit. VA Loan: For veterans and service members only. No down payment is required. USDA loan: For homes in designated rural areas, are they low or have no down payment?
Rate structure:
Adjustable Mortgage (Weapons): Start with a low fixed interest rate and adjust based on the market. Fixed-rate mortgages: Interest rates remain the same throughout the term.
Read more about mortgage types:
Mortgage Process Step-by-Step (Basic)
Pre-Accepted Acquisition: The lender reviews your income, credit, liabilities and assets to estimate how much you can borrow. This gives you a clear budget and strengthens your offer when you find a home. Find a Home: Work with real estate agents to offer and offer within approved price ranges. A signed purchase agreement triggers the next step in the loan process. Mortgage Application: Provide your lender with detailed financial statements (payment stubs, bank statements, tax returns) and select the loan program and tax that best suits your needs. Underwriting: The lender’s underwriter will verify your information, review your ratings and ensure that your home meets lending guidelines. At this stage, you may be asked for additional documentation. Closure: Review and sign the final loan document, pay the closure fee and receive the key. Once the loan is funded, the home is officially yours.
>>>More information: A 14-step guide to navigating the mortgage process
Why is mortgage important?
Mortgages allow people to buy a home without paying the full price upfront. They also allow you to build fairness that is part of the home you really own when you pay off the loan. Over time, equity will grow and become one of the biggest financial assets.
General questions about mortgages
1. Can I pay off my mortgage early?
yes. Many lenders allow additional payments to the principal. This saves thousands of people on interest, but some loans have prepayment penalties.
2. What happens if I don’t pay my mortgage?
If you are late in making a payment, the lender may begin the foreclosure process. This can damage your credit score and lead to your homelessness.
3. Do I need full credit to get a mortgage?
no. Higher scores unlock the lock on good interest rates, but government-backed loans and some lenders offer options for buyers with low or no credit history.
