What Is a Mortgage?

A mortgage is a loan used to buy real estate. The property itself serves as collateral: if you stop making payments, the lender has the legal right to take the property back through a process called foreclosure. Because the loan is secured by the home, mortgage interest rates are significantly lower than rates on unsecured debt such as credit cards or personal loans.

When you take out a mortgage, you borrow a lump sum called the principal from a lender — usually a bank, credit union, or mortgage company. You agree to repay that principal plus interest over a set number of years. Each monthly payment reduces your loan balance slightly and covers the interest the lender charges for the time value of the money you borrowed.

Most homeowners do not pay cash for a home. Instead, they make a down payment — a percentage of the purchase price paid upfront — and finance the rest with a mortgage. For example, on a $350,000 home with a 10% down payment of $35,000, you would borrow $315,000. That $315,000 is your loan principal, and it is the amount your monthly payments are calculated against.

The Four Parts of a Mortgage Payment (PITI)

When people talk about a monthly mortgage payment, they are usually referring to the full amount that leaves your bank account each month — not just the loan payment. The industry term for this is PITI, which stands for Principal, Interest, Taxes, and Insurance.

Fixed-Rate vs. Adjustable-Rate Mortgages

The two main categories of mortgage are fixed-rate and adjustable-rate. Each has different implications for your monthly payment and long-term cost.

A fixed-rate mortgage locks in your interest rate for the entire life of the loan. Your principal-and-interest payment never changes, which makes budgeting straightforward. If rates rise in the broader economy, your payment stays the same — a major advantage. The trade-off is that fixed rates are usually slightly higher than the initial rate on an adjustable loan, and if market rates fall, you would need to refinance to take advantage.

An adjustable-rate mortgage (ARM) has an interest rate that changes periodically after an initial fixed period. A common structure is a 5/1 ARM: the rate is fixed for the first five years, then adjusts every year after that based on a market index. ARMs often start with a lower rate than fixed loans, which can save money in the short term. But once the adjustment period begins, your rate and payment can rise — sometimes significantly. An ARM may be worth considering for borrowers who expect to sell or refinance before the initial fixed-rate period ends, but it carries the risk that rates and monthly payments could increase later.

Loan Terms: 15-Year vs. 30-Year

The term of a mortgage is how long you have to repay it. The two most common terms are 15 years and 30 years, though 20-year and 10-year options also exist.

A 30-year mortgage spreads payments over 360 months, resulting in a lower monthly payment. This makes homeownership accessible to more people, especially in higher-cost markets. The downside is that you pay interest for twice as long, so the total interest cost over the life of the loan is much higher.

A 15-year mortgage has higher monthly payments but a substantially lower total interest cost. Lenders also typically offer lower interest rates on 15-year loans because the shorter term reduces their risk. For a borrower who can comfortably afford the higher payment, a 15-year loan can save tens of thousands of dollars.

Here is a comparison on a $300,000 loan: at 6.5% over 30 years, the monthly principal-and-interest payment is about $1,896 and total interest is about $382,600. At 6.0% over 15 years, the payment is about $2,532 and total interest is about $155,800. The 15-year loan costs $636 more per month but saves roughly $226,800 in interest over the life of the loan.

You can use our Mortgage Calculator to model both terms side by side with your own numbers and see the full amortization schedule for each.

Down Payments and Private Mortgage Insurance

Your down payment is the cash you pay upfront toward the home's purchase price. The rest is financed by the mortgage. A larger down payment means a smaller loan, a lower monthly payment, and less total interest paid.

The traditional benchmark is 20% of the purchase price. On a $350,000 home, that is $70,000. Putting 20% down also lets you avoid private mortgage insurance on a conventional loan, which can save $100 to $300 per month depending on your loan size and credit profile.

However, 20% is not a requirement. Conventional loans often allow down payments as low as 3% to 5%. FHA loans — backed by the Federal Housing Administration — allow as little as 3.5% down for borrowers with a credit score of 580 or higher. VA loans for eligible military veterans and USDA loans for qualifying rural properties can allow 0% down.

When you put down less than 20% on a conventional loan, the lender requires PMI. For many conventional mortgages, federal rules provide circumstances in which borrowers may request PMI cancellation after reaching certain equity requirements, and circumstances in which PMI must terminate automatically. The exact requirements can depend on the loan, payment history, property value, and other conditions. If you have PMI, review your loan documents and contact your mortgage servicer to learn when you may qualify for cancellation.

Interest Rate vs. APR

The interest rate is the cost of borrowing the principal, expressed as a percentage. The annual percentage rate (APR) is a broader measure that includes the interest rate plus certain lender fees — origination charges, discount points, broker fees, and some closing costs — all expressed as a yearly rate.

APR gives you a more complete picture of the true cost of a loan and is the standard number to use when comparing offers from different lenders. A loan with a lower interest rate but high fees can have a higher APR than a loan with a slightly higher rate and low fees. Always ask your lender for both numbers.

How Lenders Evaluate Borrowers

Lenders assess several factors to decide whether to approve your mortgage and what rate to offer. The most important are your credit score, debt-to-income ratio, employment history, and the property's appraised value.

Your credit score reflects your history of borrowing and repaying debt. Conventional loans generally require a score of at least 620, though some lenders may set the bar higher. A higher score typically qualifies you for a lower interest rate.

Your debt-to-income (DTI) ratio compares your monthly debt obligations — including the new mortgage payment — to your gross monthly income. Most lenders prefer a DTI below 43%, though some loan programs are more flexible. If you earn $6,000 per month and your total monthly debts including the new mortgage are $2,400, your DTI is 40%.