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

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

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

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A mortgage is a loan utilized to buy or maintain property, where the residential or commercial property acts as security.

What Is a Mortgage?

A mortgage is a loan used to acquire or maintain a home, plot of land, or other property. The customer consents to pay the lender gradually, usually in a series of regular payments divided into principal and interest. The residential or commercial property then acts as security to protect the loan.

A debtor should make an application for a mortgage through their chosen lending institution and meet numerous requirements, including minimum credit rating and deposits. Mortgage applications undergo a rigorous underwriting procedure before they reach the closing phase. Mortgage types, such as traditional or fixed-rate loans, vary based on the debtor's requirements.

- Mortgages are loans utilized to purchase homes and other kinds of genuine estate.

The residential or commercial property itself works as collateral for the loan.
Mortgages are available in a range of types, consisting of fixed-rate and adjustable-rate.
The expense of a mortgage will depend upon the kind of loan, the term (such as thirty years), and the rate of interest that the lending institution charges. Mortgage rates can differ widely depending on the kind of item and the applicant's credentials.

Zoe Hansen/ Investopedia

How Mortgages Work

Individuals and businesses utilize mortgages to buy realty without paying the entire purchase cost upfront. The debtor pays back the loan plus interest over a defined number of years up until they own the residential or commercial property totally free and clear. Most conventional mortgages are completely amortized. This indicates that the regular payment quantity will remain the exact same, however various percentages of primary vs. interest will be paid over the life of the loan with each payment. Typical mortgage terms are for 15 or thirty years, but some mortgages can run for longer terms.

Mortgages are likewise understood as liens against residential or commercial property or claims on residential or commercial property. If the customer stops paying the mortgage, the loan provider can foreclose on the residential or commercial property.

For instance, a property property buyer pledges their house to their lender, which then has a claim on the residential or commercial property. This makes sure the lender's interest in the residential or commercial property need to the purchaser default on their financial commitment. In the case of foreclosure, the loan provider might force out the homeowners, offer the residential or commercial property, and utilize the cash from the sale to settle the mortgage financial obligation.

The Mortgage Process

Would-be borrowers start the procedure by using to one or more mortgage lending institutions. The lender will request evidence that the debtor can repay the loan. This might include bank and investment declarations, current tax returns, and evidence of present work. The loan provider will typically run a credit check also.

If the application is authorized, the lending institution will provide the borrower a loan approximately a specific amount and at a specific rates of interest. Thanks to a process referred to as pre-approval, homebuyers can make an application for a mortgage after they have actually selected a residential or commercial property to buy and even while they are still looking for one. Being pre-approved for a mortgage can give buyers an edge in a tight housing market since sellers will know that they have the money to back up their deal.

Once a purchaser and seller settle on the regards to their offer, they or their agents will satisfy at what's called a closing. This is when the borrower makes their down payment to the lending institution. The seller will transfer ownership of the residential or commercial property to the purchaser and receive the agreed-upon sum of cash, and the purchaser will sign any staying mortgage documents. The lender might charge costs for originating the loan (often in the type 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 cooperative credit union, bank, mortgage-specific lender, online-only loan provider, or mortgage broker. No matter which option you choose, compare rates throughout types to ensure that you're getting the best deal.

Kinds of Mortgages

Mortgages are available in various types. The most typical types are 30-year and 15-year fixed-rate mortgages. Some mortgage terms are as brief as 5 years, while others can run 40 years or longer. Stretching payments over more years might minimize the monthly payment, however it likewise increases the overall quantity of interest that the borrower pays over the life of the loan.

Various term lengths consist of many kinds of mortgage, including Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and U.S. Department of Veterans Affairs (VA) loans readily available for specific populations that might not have the income, credit report, or down payments required to qualify for traditional mortgages.

The following are simply a few examples of some of the most popular types of mortgage loans readily available to debtors.

Fixed-Rate Mortgages

The standard kind of mortgage is fixed-rate. With a fixed-rate mortgage, the rate of interest remains the exact same for the whole regard to the loan, as do the debtor's month-to-month payments toward the mortgage. A fixed-rate mortgage is likewise called a traditional mortgage.

Mortgage loaning discrimination is unlawful. If you believe you've been discriminated against based upon race, religion, sex, marital status, use of public support, nationwide origin, impairment, or age, there are actions that you can take. One such action is to submit 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 fixed for a preliminary term, after which it can alter regularly based on dominating interest rates. The preliminary interest rate is frequently below market, which can make the mortgage more economical in the short-term but possibly less affordable in the long term if the rate increases substantially.

ARMs typically have limitations, or caps, on how much the rates of interest can rise each time it changes and in total over the life of the loan.

A 5/1 adjustable-rate mortgage is an ARM that maintains a set interest rate for the first five years and after that changes each year after that.

Interest-Only Loans

Other, less typical types of mortgages, such as interest-only mortgages and payment-option ARMs, can involve complex repayment schedules and are best utilized by advanced customers. These loans may include a large balloon payment at the end.

Many property owners entered into financial problem with these kinds of mortgages throughout the housing bubble of the early 2000s.

Reverse Mortgages

As their name suggests, reverse mortgages are a very various financial item. They are created for homeowners age 62 or older who wish to convert part of the equity in their homes into money.

These homeowners can borrow against the value of their home and receive the money as a lump sum, repaired month-to-month payment, or line of credit. The whole loan balance ends up being due when the borrower dies, moves away completely, or sells the home.

Tip

Within each kind of mortgage, debtors have the option to buy discount rate points to reduce their interest rate. Points are essentially a fee that debtors 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 variety of discount rate points for a real apples-to-apples comparison.

Average Mortgage Rates (Up Until Now for 2025)

Just how much you'll need to pay for a mortgage depends on the type (such as fixed or adjustable), its term (such as 20 or thirty years), any discount points paid, and the rate of interest at the time. Rate of interest can vary from week to week and from loan provider to lending institution, so it pays to go shopping around.

Mortgage rates sank to historic lows in 2020 and 2021, tape-recording their cheapest levels in nearly 50 years. From approximately the start of the pandemic (April 2020) to Jan. 2022, the 30-year fixed-rate average hovered listed below 3.50%- including a supreme low of 2.65%.

But 2022 and 2023 saw mortgage rates escalate, setting records in the opposite direction. The 30-year fixed-rate average breached the 7% threshold for the very first time in 20 years in Oct. 2022. This past October, the rate was closer to 8%, notching a 24-year peak reading of 7.79%. In the months considering that then, the 30-year mortgage rate has fluctuated, coming by more than a portion point by the end of 2023 and exceeding 7% again in April and May 2024.

According to the Federal Mortgage Mortgage Corp., average rates of interest looked like this as of 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 cooperative credit union were when essentially the only sources of home loans. Today, nevertheless, a growing share of the home loan market includes nonbank loan providers such as Better, loanDepot, Rocket Mortgage, and SoFi.

If you're buying a mortgage, an online mortgage calculator can help you compare approximated monthly payments based upon the type of home mortgage, the rate of interest, and how big a deposit you prepare to make. It can likewise assist you figure out how expensive a residential or commercial property you can reasonably pay for.

In addition to the principal and interest you'll be paying on the home mortgage, the lending institution or home loan servicer may set up an escrow account to pay regional residential or commercial property taxes, house owners insurance premiums, and other expenditures. Those costs will add to your regular monthly home mortgage payment.

Also, note that if you make less than a 20% down payment when you secure your home loan, your lending institution may require that you buy personal home loan insurance (PMI), which becomes another regular monthly expense.

Important

If you have a mortgage, you still own your home (rather of the bank). Your bank might have loaned you cash to buy your house, but instead of owning the residential or commercial property, they enforce a lien on it (your house is utilized as security, however only if the loan goes into default). If you default and foreclose on your mortgage, nevertheless, the bank might become the new owner of your home.

Why Do People Need Mortgages?

The rate of a home is typically far greater than the amount of money that many families conserve. As an outcome, home loans enable people and households to buy a home by putting down only a reasonably little down payment, such as 20% of the purchase rate, and obtaining a loan for the balance. The loan is then protected by the worth of the residential or commercial property in case the borrower defaults.

Can Anybody Get a Home Mortgage?

Mortgage loan providers must approve prospective customers through an application and underwriting process. Home loans are only supplied to those with sufficient assets and earnings relative to their financial obligations to practically bring the value of a home with time. A person's credit report is likewise assessed when choosing to extend a home mortgage. The interest rate on the home mortgage likewise differs, with riskier customers receiving higher rates of interest.

Mortgages are offered by a range of sources. Banks and credit unions typically offer mortgage. There are likewise specialized mortgage companies that deal only with home mortgage. You may also use an unaffiliated mortgage broker to assist you search for the finest rate among different lenders.

What Does Fixed vs. Variable Mean on a Home loan?

Many home mortgages carry a set rate of interest. This suggests that the rate will not alter for the entire regard to the mortgage, typically 15 or 30 years, even if interest rates increase or fall in the future. A variable- or variable-rate mortgage (ARM) has a rates 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 usually issue a very first or primary home mortgage before allowing a 2nd one. This extra home mortgage is commonly known as a home equity loan. Most lending institutions don't provide for a subsequent home loan backed by the exact 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 rating to get approved for them.

Why Is It Called a Home loan?

The word "mortgage" comes from Old English and French, implying "death vow." It gets that name since this type of loan "passes away" when it is either totally repaid or if the customer defaults.

are a vital part of home buying for many customers who aren't resting on hundreds of thousands of dollars of money to purchase a residential or commercial property outright. Different kinds of mortgage are offered for whatever your circumstances might be. Different government-backed programs enable more individuals to certify for mortgages and make their dream of homeownership a reality, however comparing the very best home 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 Survey Archive: 2022."

The Federal Reserve Bank of St. Louis. "30-Year Fixed Rate Mortgage Average in the United States."

Freddie Mac. "Mortgage Market Survey 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. Searching For Mortgage Rates.

5 Things You Need to Get Pre-Approved for a Home loan
Mistakes to Avoid
Locking In the Rate

1. Points and Your Rate
How Much Do I Need to Put Down on a Home loan?
Understanding Different Rates
Fixed vs. Adjustable Rate 5.