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

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

Ben Woolsey is a full-time Associate Editorial Director at Investopedia, concentrating on financial product or services. He has actually worked in marketing, operations, and content management roles for banks, charge card providers, and credit card market sites. Ben has two 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. Types of Lenders
9. Applying to Lenders: How Many?
10. Broker Advantages and Disadvantages
11. How Loan Offers Earn Money
    
    1. Quicken Loans
12. Lending Tree
    
    A mortgage is a loan used to acquire or maintain real estate, where the residential or commercial property works as collateral.
    
    What Is a Mortgage?
    
    A mortgage is a loan used to purchase or keep a home, plot of land, or other realty. The borrower consents to pay the loan provider with time, typically in a series of regular payments divided into principal and interest. The residential or commercial property then acts as security to secure the loan.
    
    A debtor should obtain a mortgage through their chosen lender and fulfill numerous requirements, including minimum credit history and down payments. Mortgage applications undergo an extensive underwriting procedure before they reach the closing phase. Mortgage types, such as traditional or fixed-rate loans, vary based upon the debtor's needs.
    
    - Mortgages are loans used to buy homes and other kinds of genuine estate.
13. The residential or commercial property itself acts as security for the loan.
14. Mortgages are available in a range of types, including fixed-rate and adjustable-rate.
15. The expense of a mortgage will depend upon the kind of loan, the term (such as 30 years), and the rates of interest that the lending institution charges. Mortgage rates can vary widely depending upon the type of product and the candidate's qualifications.
    
    Zoe Hansen/ Investopedia
    
    How Mortgages Work
    
    Individuals and companies utilize mortgages to buy property without paying the entire purchase cost upfront. The customer pays back the loan plus interest over a specified number of years till they own the residential or commercial property free and clear. Most conventional mortgages are totally amortized. This implies that the amount will stay the very same, however various proportions of principal 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 also understood as liens versus 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 residential homebuyer promises their house to their lender, which then has a claim on the residential or commercial property. This makes sure the lending institution's interest in the residential or commercial property should the purchaser default on their financial responsibility. When it comes to foreclosure, the lender might force out the residents, sell the residential or commercial property, and utilize the cash from the sale to pay off the mortgage debt.
    
    The Mortgage Process
    
    Would-be customers start the process by applying to several mortgage lending institutions. The loan provider will ask for proof that the borrower can pay back the loan. This might include bank and financial investment declarations, current income tax return, and evidence of current employment. The loan provider will usually run a credit check too.
    
    If the application is authorized, the lender will offer the customer a loan approximately a certain amount and at a particular rates of interest. Thanks to a procedure referred to as pre-approval, property buyers can look for a mortgage after they have actually selected a residential or commercial property to purchase or perhaps while they are still buying one. Being pre-approved for a mortgage can offer purchasers an edge in a tight housing market since sellers will understand that they have the money to back up their deal.
    
    Once a purchaser and seller settle on the terms of their deal, they or their representatives will satisfy at what's called a closing. This is when the borrower makes their down payment to the lender. The seller will transfer ownership of the residential or commercial property to the purchaser and get the agreed-upon amount of money, and the buyer will sign any staying mortgage documents. The lender might charge fees for originating the loan (in some cases in the type of points) at the closing.
    
    Options
    
    There are numerous choices for where you can get a mortgage. You can get a mortgage through a credit union, bank, mortgage-specific lender, online-only loan provider, or mortgage broker. No matter which option you select, compare rates throughout types to make certain that you're getting the very best offer.
    
    Kinds of Mortgages
    
    Mortgages can be found in various forms. The most common 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 minimize the monthly payment, but it likewise increases the overall quantity of interest that the borrower 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 particular populations that may not have the income, credit scores, or deposits required to qualify for traditional mortgages.
    
    The following are just a couple of examples of a few of the most popular kinds of mortgage loans offered to borrowers.
    
    Fixed-Rate Mortgages
    
    The basic kind of mortgage is fixed-rate. With a fixed-rate mortgage, the interest rate remains the exact same for the entire regard to the loan, as do the borrower's monthly payments toward the mortgage. A fixed-rate mortgage is also called a traditional mortgage.
    
    Mortgage financing discrimination is prohibited. If you believe you've been victimized based upon race, religion, sex, marital status, use of public assistance, nationwide origin, special needs, or age, there are steps 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 an initial term, after which it can alter regularly based on prevailing rates of interest. The initial interest rate is often listed below market, which can make the mortgage more budget friendly in the short-term however potentially less cost effective in the long term if the rate increases significantly.
    
    ARMs usually have limits, or caps, on how much the rates of interest can increase each time it adjusts and in total over the life of the loan.
    
    A 5/1 adjustable-rate mortgage is an ARM that keeps a set rate of interest 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 used by sophisticated customers. These loans may include a big balloon payment at the end.
    
    Many house owners entered monetary trouble with these types of mortgages throughout the housing bubble of the early 2000s.
    
    Reverse Mortgages
    
    As their name recommends, reverse mortgages are a very various monetary product. They are created for house owners age 62 or older who wish to transform part of the equity in their homes into money.
    
    These homeowners can borrow against the value of their home and receive the cash as a lump sum, repaired month-to-month payment, or credit line. The whole loan balance becomes due when the debtor passes away, moves away completely, or sells the home.
    
    Tip
    
    Within each type of mortgage, customers have the choice to buy discount rate indicate lower their rates of interest. Points are basically a fee that customers pay upfront to have a lower rates of interest over the life of their loan. When comparing mortgage rates, compare rates with the very same number of discount points for a real apples-to-apples comparison.
    
    Average Mortgage Rates (Up Until Now for 2025)
    
    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 30 years), any discount points paid, and the rate of interest at the time. Rates of interest can differ from week to week and from loan provider to lending institution, so it pays to look around.
    
    Mortgage rates sank to historic lows in 2020 and 2021, taping their cheapest 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 escalate, setting records in the opposite direction. The 30-year fixed-rate average breached the 7% limit for the 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 since then, the 30-year mortgage rate has fluctuated, 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., typical interest rates 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 credit unions were when essentially the only sources of mortgages. Today, nevertheless, a growing share of the mortgage market consists of nonbank lending institutions such as Better, loanDepot, Rocket Mortgage, and SoFi.
    
    If you're purchasing a home mortgage, an online home loan calculator can assist you compare approximated month-to-month payments based upon the type of home mortgage, the rates of interest, and how large a deposit you plan to make. It can also assist you identify how pricey a residential or commercial property you can fairly manage.
    
    In addition to the principal and interest you'll be paying on the home mortgage, the loan provider or home loan servicer might establish an escrow account to pay local residential or commercial property taxes, property owners insurance premiums, and other expenditures. Those expenses will include to your regular monthly mortgage payment.
    
    Also, note that if you make less than a 20% deposit when you take out your home loan, your lending institution may need that you purchase private home mortgage insurance coverage (PMI), which ends up being another month-to-month expense.
    
    Important
    
    If you have a home loan, you still own your home (rather of the bank). Your bank may have loaned you money to buy your house, however instead of owning the residential or commercial property, they impose a lien on it (your house is used as security, however only if the loan goes into default). If you default and foreclose on your mortgage, nevertheless, the bank may end up being the brand-new owner of your home.
    
    Why Do People Need Mortgages?
    
    The rate of a home is often far greater than the quantity of cash that the majority of homes save. As an outcome, home loans permit people and households to buy a home by putting down just a fairly small deposit, such as 20% of the purchase cost, and acquiring a loan for the balance. The loan is then secured by the worth of the residential or commercial property in case the debtor defaults.
    
    Can Anybody Get a Home Mortgage?
    
    Mortgage loan providers need to approve prospective debtors through an application and underwriting procedure. Home mortgage are just offered to those with enough assets and earnings relative to their financial obligations to almost carry the worth of a home in time. A person's credit history is also evaluated when deciding to extend a home mortgage. The rates of interest on the home loan also varies, with riskier borrowers receiving higher rates of interest.
    
    Mortgages are used by a range of sources. Banks and credit unions typically provide home loans. There are also specialized home mortgage business that deal only with home loans. You may also utilize an unaffiliated home loan broker to assist you search for the finest rate among various lenders.
    
    What Does Fixed vs. Variable Mean on a Home mortgage?
    
    Many home loans carry a fixed rates of interest. This means that the rate will not change for the whole term of the home loan, usually 15 or 30 years, even if rate of interest increase or fall in the future. A variable- or adjustable-rate home mortgage (ARM) has a rates of interest that changes 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 provide a first or primary home mortgage before permitting a 2nd one. This additional mortgage is commonly known as a home equity loan. Most lending institutions do not offer for a subsequent home mortgage backed by the same residential or commercial property. There's technically no limit to how many junior loans you can have on your home as long as you have the equity, debt-to-income ratio, and credit score to get authorized for them.
    
    Why Is It Called a Home loan?
    
    The word "home mortgage" comes from Old English and French, indicating "death vow." It gets that name because this kind of loan "passes away" when it is either totally paid back or if the debtor defaults.
    
    Mortgages are an important part of home purchasing for the majority of debtors who aren't resting on hundreds of thousands of dollars of cash to purchase a residential or commercial property outright. Different kinds of mortgage are readily available for whatever your situations might be. Different government-backed programs permit more people to receive mortgages and make their dream of homeownership a truth, but comparing the very best home loan rates will make the home-buying process 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 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
    
    2. Searching 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. How Much Do I Need to Put Down on a Home loan?
20. Understanding Different Rates
21. Fixed vs. Adjustable Rate 5.