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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, focusing on financial services and products. He has operated in marketing, operations, and content management functions for banks, charge card companies, and charge card marketplace sites. Ben has 2 degrees-MBA/BSBA-from the University of Arkansas.

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A mortgage is a loan utilized to acquire or preserve genuine estate, where the residential or commercial property works as collateral.

What Is a Mortgage?

A mortgage is a loan used to acquire or maintain a home, plot of land, or other property. The customer agrees to pay the lender with time, typically in a series of regular payments divided into principal and interest. The residential or commercial property then works as collateral to protect the loan.

A borrower needs to get a mortgage through their chosen loan provider and meet numerous requirements, consisting of minimum credit ratings and down payments. Mortgage applications go through a strenuous underwriting process before they reach the closing stage. Mortgage types, such as traditional or fixed-rate loans, differ based on the debtor's needs.

- Mortgages are loans used to purchase homes and other kinds of realty.

The residential or commercial property itself serves as collateral for the loan.
Mortgages are offered in a variety of types, including fixed-rate and adjustable-rate.
The cost of a mortgage will depend on the kind of loan, the term (such as 30 years), and the rates of interest that the loan provider charges. Mortgage rates can vary commonly depending upon the type of product and the applicant's credentials.

Zoe Hansen/ Investopedia

How Mortgages Work

Individuals and organizations use mortgages to purchase realty without paying the entire purchase cost upfront. The borrower pays back the loan plus interest over a defined variety of years till they own the residential or commercial property free and clear. Most conventional mortgages are completely amortized. This means that the regular payment quantity will stay the very same, however different 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 referred to as liens against residential or commercial property or claims on residential or commercial property. If the borrower stops paying the mortgage, the loan provider can foreclose on the residential or commercial property.

For example, a property property buyer promises their home to their lender, which then has a claim on the residential or commercial property. This ensures the lender's interest in the residential or commercial property must the purchaser default on their financial obligation. When it comes to foreclosure, the lending institution might evict the residents, sell the residential or commercial property, and use the cash from the sale to pay off the mortgage financial obligation.

The Mortgage Process

Would-be borrowers begin the procedure by using to one or more mortgage loan providers. The lender will ask for evidence that the debtor can repay the loan. This might include bank and investment declarations, current income tax return, and proof of current work. The lender will usually run a credit check too.

If the application is authorized, the loan provider will offer the customer a loan approximately a particular amount and at a specific interest rate. Thanks to a process referred to as pre-approval, homebuyers can obtain a mortgage after they have actually selected a residential or commercial property to purchase and even while they are still shopping for one. Being pre-approved for a mortgage can provide purchasers an edge in a tight housing market since sellers will understand that they have the money to support their offer.

Once a buyer and seller settle on the terms of their offer, they or their representatives will fulfill at what's called a closing. This is when the debtor makes their down payment to the loan provider. The seller will transfer ownership of the residential or commercial property to the buyer and receive the agreed-upon sum of cash, and the purchaser will sign any remaining mortgage files. The lender may charge costs for coming from the loan (often in the form of points) at the closing.

Options

There are numerous choices for where you can get a mortgage. You can get a mortgage through a cooperative credit union, bank, mortgage-specific lender, online-only lender, or mortgage broker. No matter which choice you pick, compare rates across types to make certain that you're getting the very best deal.

Kinds of Mortgages

Mortgages can be found in numerous forms. The most typical types are 30-year and 15-year fixed-rate mortgages. Some mortgage terms are as brief as five years, while others can run 40 years or longer. Stretching payments over more years might decrease the regular monthly payment, but it also increases the overall quantity of interest that the customer pays over the life of the loan.

Various term lengths include 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 available for specific populations that may not have the income, credit history, or deposits needed to certify for standard mortgages.

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

Fixed-Rate Mortgages

The standard type of mortgage is fixed-rate. With a fixed-rate mortgage, the rate of interest stays the very same for the whole term of the loan, as do the borrower's month-to-month payments towards the mortgage. A fixed-rate mortgage is likewise called a standard mortgage.

Mortgage financing discrimination is illegal. If you think you've been victimized based upon race, faith, sex, marital status, use of public help, national origin, disability, 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 rates of interest is fixed for a preliminary term, after which it can alter occasionally based on prevailing interest rates. The preliminary interest rate is often listed below market, which can make the mortgage more budget friendly in the short-term however potentially less economical in the long term if the rate increases considerably.

ARMs usually have limits, or caps, on how much the interest rate can increase each time it changes and in overall over the life of the loan.

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

Interest-Only Loans

Other, less common kinds of mortgages, such as interest-only mortgages and payment-option ARMs, can include complex payment schedules and are best utilized by sophisticated debtors. These loans might feature a big balloon payment at the end.

Many house owners got into financial difficulty with these types of mortgages during the housing bubble of the early 2000s.

Reverse Mortgages

As their name suggests, reverse mortgages are a very different monetary item. They are developed for homeowners age 62 or older who wish to transform part of the equity in their homes into cash.

These house owners can borrow against the value of their home and get the cash as a lump amount, repaired regular monthly payment, or line of credit. The entire loan balance ends up being due when the debtor passes away, moves away permanently, or sells the home.

Tip

Within each kind of mortgage, borrowers have the choice to buy discount rate points to lower their rate of interest. Points are basically a fee that customers pay in advance to have a lower rate of interest over the life of their loan. When comparing mortgage rates, compare rates with the exact same number of discount rate points for a true apples-to-apples comparison.

Average Mortgage Rates (So Far for 2025)

Just how much you'll need to spend for a mortgage depends upon the type (such as repaired or adjustable), its term (such as 20 or thirty years), any discount rate points paid, and the rates of interest at the time. Rates of interest can vary from week to week and from lender to lender, so it pays to search.

Mortgage rates sank to historical lows in 2020 and 2021, recording their least expensive levels in practically 50 years. From roughly the start of the pandemic (April 2020) to Jan. 2022, the 30-year fixed-rate average hovered below 3.50%- consisting of a supreme low of 2.65%.

But 2022 and 2023 saw mortgage rates skyrocket, setting records in the opposite instructions. The 30-year fixed-rate average breached the 7% threshold for the first time in 20 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 ever since, the 30-year mortgage rate has fluctuated, stopping by more than a percentage point by the end of 2023 and surpassing 7% again in April and May 2024.

According to the Federal Mortgage Mortgage Corp., average rates of interest appeared 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 virtually the only sources of mortgages. Today, however, a growing share of the home loan market includes nonbank lending institutions such as Better, loanDepot, Rocket Mortgage, and SoFi.

If you're going shopping for a mortgage, an online mortgage calculator can help you compare approximated regular monthly payments based on the type of home loan, the interest rate, and how big a deposit you plan to make. It can also assist you figure out how costly a residential or commercial property you can reasonably manage.

In addition to the principal and interest you'll be paying on the home mortgage, the lending institution or home loan servicer might establish an escrow account to pay local residential or commercial property taxes, homeowners insurance coverage premiums, and other expenses. Those costs will include to your month-to-month home loan payment.

Also, note that if you make less than a 20% down payment when you secure your home loan, your loan provider may need that you buy private mortgage insurance (PMI), which becomes another regular monthly cost.

Important

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

Why Do People Need Mortgages?

The rate of a home is frequently far greater than the quantity of money that the majority of families save. As an outcome, home mortgages allow individuals and families to acquire a home by putting down only a relatively small down payment, such as 20% of the purchase cost, and obtaining a loan for the balance. The loan is then secured by the worth of the residential or commercial property in case the customer defaults.

Can Anybody Get a Home Mortgage?

Mortgage loan providers need to approve potential debtors through an application and underwriting process. Home loans are just offered to those with enough possessions and earnings relative to their debts to virtually bring the value of a home in time. A person's credit history is likewise assessed when deciding to extend a home loan. The interest rate on the home loan also differs, with riskier customers receiving higher interest rates.

Mortgages are provided by a variety of sources. Banks and credit unions often supply mortgage. There are likewise specialized mortgage companies that deal only with mortgage. You may likewise employ an unaffiliated mortgage broker to assist you search for the very best rate among various loan providers.

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

Many home loans carry a fixed rate of interest. This implies that the rate will not change for the whole term of the home mortgage, generally 15 or 30 years, even if interest rates rise or fall in the future. A variable- or adjustable-rate mortgage (ARM) has an interest rate that changes over the loan's life based upon what interest rates are doing.

How Many Mortgages Can I Have on My Home?

Lenders usually issue a first or main home mortgage before allowing a second one. This additional home loan is frequently referred to as a home equity loan. Most lending institutions don't offer a subsequent home loan backed by the very same residential or commercial property. There's technically no limitation 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 score to get approved for them.

Why Is It Called a Mortgage?

The word "home loan" originates from Old English and French, "death vow." It gets that name because this kind of loan "passes away" when it is either completely repaid or if the borrower defaults.

Mortgages are an important part of home buying for many borrowers who aren't resting on numerous countless dollars of cash to purchase a residential or commercial property outright. Different types of home mortgage are offered for whatever your scenarios might be. Different government-backed programs permit more people to certify for mortgages and make their imagine homeownership a truth, however comparing the best home mortgage rates will make the home-buying procedure more economical.

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 Survey 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
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2. Looking For Mortgage Rates.

5 Things You Need to Get Pre-Approved for a Mortgage
Mistakes to Avoid
Securing the Rate

1. Points and Your Rate
Just how much Do I Need to Put Down on a Mortgage?
Understanding Different Rates
Fixed vs. Adjustable Rate 5.