How mortgages work
A mortgage is a loan secured by the home. You repay principal and interest over a set term, and the lender holds a lien until the loan is paid.
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Mortgage education, in plain language
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Prequalification versus preapproval
Prequalification is usually an informal estimate. Preapproval generally involves documentation and a credit review by a lender. Neither is a final loan approval.
Principal and interest
Principal reduces the balance you owe. Interest is the cost of borrowing. Early payments are typically weighted toward interest.
Taxes and homeowners insurance
Property taxes and insurance are often collected monthly and held in escrow. They change over time and are not fixed by your loan.
Private mortgage insurance
PMI protects the lender, not the borrower, and is commonly added when a down payment is under 20 percent. Removal rules vary by program.
Closing costs
Closing costs include lender fees, title and settlement charges, recording fees, and prepaid escrow items. They vary widely by state and transaction.
Down payments
Down payment size affects loan amount, mortgage insurance, and monthly payment. Assistance programs vary by state and change over time.
Credit considerations
Payment history, balances, credit age, and recent inquiries all contribute to credit scoring. Different lenders weigh credit differently.
Debt-to-income ratios
Lenders compare monthly debt obligations to gross monthly income. Guidelines differ by program and lender.
Fixed versus adjustable rates
A fixed rate stays the same. An adjustable rate is fixed for an initial period, then adjusts within defined caps.
Loan estimates
A Loan Estimate is a standardized disclosure describing terms, projected payments, and costs. Comparing them side by side is often the clearest way to shop.
Discount points
Points are an upfront cost paid to reduce the interest rate. Whether they help depends on how long you keep the loan.
Escrow accounts
An escrow account holds funds for taxes and insurance. Annual analysis can change your monthly payment.
Refinancing considerations
Refinancing has costs. Consider the break-even point, the remaining term, and total interest, not only the monthly payment.
Common mortgage terminology
Amortization, lien, LTV, escrow, underwriting, and appraisal are terms you will encounter. Ask any professional to define anything unclear.
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