Mortgage
Quick Definition
A loan secured by real property used to purchase a home, typically repaid over 15 to 30 years.
Key Takeaways
- A 20% down payment avoids private mortgage insurance (PMI)
- Total cost includes principal, interest, taxes, insurance, and PMI if applicable
- Shorter loan terms have higher payments but dramatically lower total interest
- Get pre-approved before house hunting to know your budget and strengthen offers
What Is Mortgage?
A mortgage is a secured loan in which a lender provides funds to purchase real estate, with the property itself serving as collateral. If the borrower fails to make payments, the lender can foreclose on the property. Mortgages are typically the largest financial obligation most people undertake, with common terms of 15 or 30 years. Key mortgage types include conventional (conforming to Fannie Mae/Freddie Mac guidelines), FHA (government-insured with low down payments), VA (for veterans with no down payment), and jumbo (exceeding conforming loan limits). Monthly payments consist of principal, interest, taxes, and insurance (PITI). The mortgage process involves pre-approval, house hunting, application, underwriting, and closing. Interest rates are influenced by credit scores, down payment size, loan type, and prevailing market conditions.
Mortgage Example
- 1A $400,000 home with 20% down ($80,000) requires a $320,000 mortgage; at 6.5% over 30 years, monthly P&I is $2,023.
- 2Choosing a 15-year mortgage at 5.8% over a 30-year at 6.5% saves $186,000 in total interest but increases monthly payments by $700.
- 3An FHA loan allows purchase of a $350,000 home with just 3.5% down ($12,250) but requires mortgage insurance premiums of $150-200/month.
Related Terms
Down Payment
An upfront cash payment made when purchasing a large asset, representing a percentage of the total purchase price.
Home Equity
The portion of a home's value that the owner actually owns, calculated as market value minus outstanding mortgage balance.
Escrow
A financial arrangement where a neutral third party holds funds or documents until specific conditions are met.
Refinancing
Replacing an existing loan with a new one, typically to obtain a lower interest rate, different term, or access equity.
HELOC (Home Equity Line of Credit)
A revolving credit line secured by home equity that allows borrowing as needed up to a set limit.
Closing Costs
Fees and expenses paid at the finalization of a real estate transaction, beyond the property's purchase price.
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