A mortgage is simply a loan used to buy real estate, with the property itself as collateral. Here is everything you need to understand before taking one out.
How a mortgage works
You borrow money, agree to repay over 15 or 30 years with interest, and make fixed monthly payments. Early payments are mostly interest. Over time, more goes to principal (reducing what you owe).
Key terms
- Principal: The amount borrowed
- APR: Broader cost including fees — more accurate for comparing loans
- Term: 15 or 30 years typically
- Escrow: Portion held by lender to pay property taxes and insurance
Types of mortgages
- Conventional: 3% down minimum, best rates for 660+ credit
- FHA: 3.5% down with 580+ credit, mortgage insurance required
- VA: Zero down for eligible veterans, no PMI, excellent terms
- Fixed-rate: Same rate for life of loan — stable, predictable
- ARM: Fixed for 5–10 years then adjusts — lower initial rate, payment can rise
How to get the best rate
- Improve credit score before applying
- Save 20% down to eliminate PMI and get better rates
- Shop 3–5 lenders — rates vary significantly
- Lock your rate once you find a good one
30-year vs 15-year
On a $300,000 loan, the difference in total interest paid can exceed $150,000. The 15-year is the better financial decision if you can afford the higher payment. The 30-year makes sense if cash flow is a priority.