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What Is a Mortgage? Types, How They Work, and Examples

Julia Kagan is a financial/consumer journalist and former senior editor, individual finance, of Investopedia.

Ben Woolsey is a full-time Associate Editorial Director at Investopedia, concentrating on monetary services and products. He has worked in marketing, operations, and content management functions for banks, credit card providers, and credit card marketplace websites. Ben has 2 degrees-MBA/BSBA-from the University of Arkansas.

1. Points and Your Rate

1. How Much Do I Need to Put Down on a Mortgage?
2. Understanding Different Rates
3. Fixed vs. Adjustable Rate
4. When Adjustable Rate Rises
5. Commercial Property Loans
   
   1. Closing Costs
6. Avoiding "Junk" Fees
7. Negotiating Closing Costs
8. Lowering Refinance Closing Costs
   
   1. Kinds of Lenders
9. Applying to Lenders: The Number Of?
10. Broker Benefits And Drawbacks
11. How Loan Offers Make Money
    
    1. Quicken Loans
12. Lending Tree
    
    A mortgage is a loan used to purchase or maintain property, where the residential or commercial property acts as collateral.
    
    What Is a Mortgage?
    
    A mortgage is a loan used to purchase or keep a home, plot of land, or other genuine estate. The borrower consents to pay the lender with time, typically in a series of regular payments divided into principal and interest. The residential or commercial property then functions as security to secure the loan.
    
    A debtor needs to use for a mortgage through their preferred lending institution and satisfy a number of requirements, including minimum credit history and deposits. Mortgage applications undergo a rigorous underwriting process before they reach the closing phase. Mortgage types, such as standard or fixed-rate loans, vary based on the debtor's requirements.
    
    - Mortgages are loans used to purchase homes and other types of real estate.
13. The residential or commercial property itself acts as collateral for the loan.
14. Mortgages are offered in a range of types, consisting of fixed-rate and adjustable-rate.
15. The cost of a mortgage will depend upon the type of loan, the term (such as thirty years), and the interest rate that the lending institution charges. Mortgage rates can differ widely depending upon the type of product and the applicant's certifications.
    
    Zoe Hansen/ Investopedia
    
    How Mortgages Work
    
    Individuals and companies use mortgages to purchase property without paying the whole purchase rate upfront. The customer pays back the loan plus interest over a specified number of years up until they own the residential or commercial property totally free and clear. Most conventional mortgages are totally amortized. This indicates that the regular payment quantity will remain the same, however different proportions of primary vs. interest will be paid over the life of the loan with each payment. Typical mortgage terms are for 15 or 30 years, but some mortgages can run for longer terms.
    
    Mortgages are also called liens versus residential or commercial property or claims on residential or commercial property. If the borrower stops paying the mortgage, the lender can foreclose on the residential or commercial property.
    
    For example, a domestic property buyer pledges their house to their loan provider, which then has a claim on the residential or commercial property. This ensures the lender's interest in the residential or commercial property need to the purchaser default on their financial commitment. When it comes to foreclosure, the loan provider might force out the residents, sell the residential or commercial property, and use the cash from the sale to settle the mortgage financial obligation.
    
    The Mortgage Process
    
    Would-be customers start the process by using to one or more mortgage loan providers. The lending institution will request proof that the customer can repay the loan. This may consist of bank and financial investment statements, current income tax return, and evidence of current work. The loan provider will generally run a credit check also.
    
    If the application is approved, the loan provider will offer the borrower a loan up to a certain quantity and at a specific rates of interest. Thanks to a procedure referred to as pre-approval, homebuyers can make an application for a mortgage after they have actually picked a residential or commercial property to purchase and even while they are still looking for one. Being pre-approved for a mortgage can provide purchasers an edge in a tight housing market because sellers will know that they have the cash to support their offer.
    
    Once a buyer and seller agree on the regards to their offer, they or their representatives will fulfill at what's called a closing. This is when the borrower makes their down payment to the lender. The seller will move ownership of the residential or commercial property to the buyer and get the agreed-upon amount of money, and the purchaser will sign any staying mortgage files. The lender may charge fees for stemming the loan (sometimes in the form of points) at the closing.
    
    Options
    
    There are hundreds of options for where you can get a mortgage. You can get a mortgage through a credit union, bank, mortgage-specific lending institution, online-only lender, or mortgage broker. No matter which alternative you select, compare rates throughout types to make sure that you're getting the best deal.
    
    Types of Mortgages
    
    Mortgages can be found in different kinds. The most typical types are 30-year and 15-year fixed-rate mortgages. Some mortgage terms are as short as 5 years, while others can run 40 years or longer. Stretching payments over more years may decrease the month-to-month payment, but it likewise increases the total quantity of interest that the customer pays over the life of the loan.
    
    Various term lengths consist of numerous types of mortgage, including Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and U.S. Department of Veterans Affairs (VA) loans available for specific populations that might not have the income, credit rating, or deposits needed to receive standard mortgages.
    
    The following are simply a few examples of some of the most popular kinds of mortgage loans available to borrowers.
    
    Mortgages
    
    The standard kind of mortgage is fixed-rate. With a fixed-rate mortgage, the rate of interest remains the very same for the whole regard to the loan, as do the customer's regular monthly payments towards the mortgage. A fixed-rate mortgage is also called a traditional mortgage.
    
    Mortgage lending discrimination is illegal. If you think you have actually been victimized based upon race, religious beliefs, sex, marital status, usage of public help, national origin, disability, or age, there are actions that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).
    
    Adjustable-Rate Mortgage (ARM)
    
    With an adjustable-rate mortgage (ARM), the rate of interest is repaired for an initial term, after which it can change periodically based on dominating interest rates. The preliminary rates of interest is frequently listed below market, which can make the mortgage more inexpensive in the brief term but possibly less inexpensive in the long term if the rate increases significantly.
    
    ARMs normally have limitations, or caps, on just how much the rates of interest can increase each time it adjusts and in overall over the life of the loan.
    
    A 5/1 adjustable-rate mortgage is an ARM that preserves a set rates of interest for the very first five years and after that adjusts each year after that.
    
    Interest-Only Loans
    
    Other, less common kinds of mortgages, such as interest-only mortgages and payment-option ARMs, can include complicated repayment schedules and are best utilized by sophisticated debtors. These loans may include a large balloon payment at the end.
    
    Many property owners entered monetary difficulty with these types of mortgages throughout the housing bubble of the early 2000s.
    
    Reverse Mortgages
    
    As their name recommends, reverse mortgages are an extremely various financial item. They are developed for property owners age 62 or older who desire to convert part of the equity in their homes into money.
    
    These property owners can borrow versus the worth of their home and receive the cash as a lump amount, fixed regular monthly payment, or credit line. The whole loan balance ends up being due when the debtor passes away, moves away permanently, or sells the home.
    
    Tip
    
    Within each kind of mortgage, debtors have the alternative to buy discount rate points to decrease their interest rate. Points are basically a fee that borrowers pay in advance to have a lower rates of interest over the life of their loan. When comparing mortgage rates, compare rates with the same number of discount points for a true apples-to-apples contrast.
    
    Average Mortgage Rates (Up Until Now for 2025)
    
    Just how much you'll need to pay for a mortgage depends upon the type (such as fixed or adjustable), its term (such as 20 or 30 years), any discount points paid, and the rate of interest at the time. Rate of interest can vary from week to week and from lender to lender, so it pays to look around.
    
    Mortgage rates sank to historical lows in 2020 and 2021, recording their most inexpensive levels in nearly 50 years. From approximately the start of the pandemic (April 2020) to Jan. 2022, the 30-year fixed-rate average hovered below 3.50%- consisting of an ultimate low of 2.65%.
    
    But 2022 and 2023 saw mortgage rates skyrocket, setting records in the opposite direction. The 30-year fixed-rate average breached the 7% threshold for the first time in twenty years in Oct. 2022. This previous October, the rate was closer to 8%, notching a 24-year peak reading of 7.79%. In the months given that then, the 30-year mortgage rate has actually changed, coming by more than a percentage point by the end of 2023 and going beyond 7% once again in April and May 2024.
    
    According to the Federal Mortgage Mortgage Corp., average interest rates appeared like this since April 2025:
    
    30-year fixed-rate mortgage: 6.83%.
    15-year fixed-rate mortgage: 6. 03%
    
    How to Compare Mortgages
    
    Banks, cost savings and loan associations, and credit unions were once virtually the only sources of mortgages. Today, nevertheless, a blossoming share of the home loan market consists of nonbank loan providers such as Better, loanDepot, Rocket Mortgage, and SoFi.
    
    If you're buying a home loan, an online mortgage calculator can assist you compare approximated regular monthly payments based upon the kind of home mortgage, the interest rate, and how big a deposit you plan to make. It can also assist you identify how expensive a residential or commercial property you can reasonably manage.
    
    In addition to the principal and interest you'll be paying on the mortgage, the lending institution or home mortgage servicer might establish an escrow account to pay local residential or commercial property taxes, homeowners insurance coverage premiums, and other expenditures. Those costs will include to your monthly mortgage payment.
    
    Also, note that if you earn less than a 20% deposit when you secure your home mortgage, your lending institution may need that you purchase personal home mortgage insurance coverage (PMI), which ends up being another regular monthly expense.
    
    Important
    
    If you have a mortgage, you still own your home (rather of the bank). Your bank might have lent you cash to buy your house, however instead of owning the residential or commercial property, they impose a lien on it (your home is utilized as collateral, but just if the loan goes into default). If you default and foreclose on your mortgage, nevertheless, the bank may become the brand-new owner of your home.
    
    Why Do People Need Mortgages?
    
    The rate of a home is often far higher than the quantity of cash that most families save. As an outcome, mortgages allow individuals and households to purchase a home by putting down only a reasonably little down payment, such as 20% of the purchase price, and obtaining a loan for the balance. The loan is then secured by the value of the residential or commercial property in case the customer defaults.
    
    Can Anybody Get a Home Loan?
    
    Mortgage lenders should authorize potential borrowers through an application and underwriting process. Mortgage are just offered to those with sufficient assets and income relative to their financial obligations to practically carry the worth of a home gradually. An individual's credit history is likewise evaluated when deciding to extend a home mortgage. The interest rate on the mortgage likewise varies, with riskier borrowers receiving greater interest rates.
    
    Mortgages are provided by a variety of sources. Banks and cooperative credit union frequently supply mortgage. There are also specialized home loan business that deal only with home mortgage. You may likewise use an unaffiliated mortgage broker to assist you search for the best rate amongst different loan providers.
    
    What Does Fixed vs. Variable Mean on a Home loan?
    
    Many mortgages bring a fixed rate of interest. This indicates that the rate will not change for the whole term of the mortgage, typically 15 or thirty years, even if rate of interest increase or fall in the future. A variable- or variable-rate mortgage (ARM) has a rate of interest that varies over the loan's life based on what rates of interest are doing.
    
    The Number Of Mortgages Can I Have on My Home?
    
    Lenders typically release a very first or main home loan before permitting a 2nd one. This extra home mortgage is frequently understood as a home equity loan. Most loan providers do not offer for a subsequent mortgage backed by the same residential or commercial property. There's technically no limit to the number of junior loans you can have on your home as long as you have the equity, debt-to-income ratio, and credit history to get authorized for them.
    
    Why Is It Called a Home mortgage?
    
    The word "mortgage" comes from Old English and French, indicating "death vow." It gets that name since this kind of loan "passes away" when it is either completely paid back or if the debtor defaults.
    
    Mortgages are a vital part of home purchasing for a lot of customers who aren't sitting on numerous countless dollars of cash to purchase a residential or commercial property outright. Different kinds of mortgage are readily available for whatever your circumstances might be. Different government-backed programs allow more individuals to get approved for mortgages and make their imagine homeownership a reality, however comparing the very best mortgage rates will make the home-buying procedure more budget-friendly.
    
    Federal Housing Finance Agency, Office of Inspector General. "Fannie Mae and Freddie Mac Purchases of Adjustable-Rate Mortgages," Pages 7-8.
    
    U.S. Department of Housing and Urban Development. "How the HECM Program Works."
    
    Freddie Mac. "Mortgage Market Survey Archive: 2020."
    
    Freddie Mac. "Mortgage Market Research Archive: 2021."
    
    Freddie Mac. "Mortgage Market Research Archive: 2022."
    
    The Federal Reserve Bank of St. Louis. "30-Year Fixed Rate Mortgage Average in the United States."
    
    Freddie Mac. "Mortgage Market Research Archive: 2023."
    
    Freddie Mac. "Mortgage Rates"
    
    Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?"
    
    Federal Reserve Bank of St. Louis." Primer on the Mortgage Market and Mortgage Finance," Page 1 of PDF.
    
    1. Overview CURRENT ARTICLE
    
    2. Shopping for Mortgage Rates.
16. 5 Things You Need to Get Pre-Approved for a Home loan
17. Mistakes to Avoid
18. Securing the Rate
    
    1. Points and Your Rate
19. Just how much Do I Need to Put Down on a Home mortgage?
20. Understanding Different Rates
21. Fixed vs. Adjustable Rate 5.