Mortgages make it possible for people to buy homes without needing to pay the full price upfront. But what exactly are mortgages, and how do they work?
Let’s take a closer look at mortgages and the different types available to borrowers. We’ll also break down the steps to apply for a mortgage and answer other common mortgage questions.
What is a mortgage?
A mortgage is a type of loan used to buy a home or other real estate, such as land. The lender—usually a bank or financial institution—uses the property purchased as security for the loan. This means the property acts as collateral for the loan, or a guarantee that the loan will be repaid. If the borrower—the person who takes out the loan—is unable to make payments, the lender has the right to repossess (take it back) and sell the home to get its money back.
How does a mortgage work?
A mortgage works much like any other loan: A financial company lends you money, and you agree to pay it back—plus interest. The amount initially borrowed is known as the principal. Interest is a percentage of the principal that gets added to the monthly payment. Interest goes to the lender to compensate them for any opportunity they’re missing out on by not having access to the money they lent, as well as for the risk that you can’t pay them back.
As the borrower, you're responsible for making regular payments—usually every month—until the loan is paid off. Most mortgages have a set repayment period, often 15 or 30 years. This is known as the loan term. The amount of your payment is based on the loan balance, term, and interest rate.
When a payment is made, one portion goes toward paying down your principal, and another portion goes toward paying off any accrued interest. Typically, at the beginning of the loan, a larger portion of your monthly payment goes toward interest. Over time, as the principal amount is reduced, a larger amount of your payment will go toward the principal. The best part? Once the mortgage is paid off, the home is 100% yours.
Remember, the property itself acts as collateral for the mortgage. If you fall behind on payments or don’t meet the conditions of the mortgage (for example, fail to carry the required amount of homeowners insurance), the lender can take possession of the property and sell it.
Common mortgage types and key loan decisions
Before you start looking for a mortgage, it’s important to understand the different types of loans and decisions you’ll make when setting up your loan. Here’s more about considerations when picking a mortgage.
Fixed-rate vs. adjustable-rate mortgages
With a fixed-rate mortgage, the interest rate issued will stay the same over the life of the loan, no matter what happens with rates in the market. (Bonus: This means your monthly mortgage payments will be consistent too.) Meaning, if you have a fixed rate of 5.6%, you will have the same rate until you pay off the loan or enter a new loan agreement—say, if you refinance the loan.
An adjustable-rate mortgage (ARM) starts with a fixed interest rate for a set period (determined in your loan agreement) and can change up or down depending on how interest rates change in the market. Meaning, if you have a 10/1 ARM that means the interest rate is fixed for 10 years, and then the new interest rate adjusts once a year according to the loan agreement.
Fixed–rate mortgages often come with a higher interest rate than the initial rate offered by ARMs, but they also come with more stability because you know your interest rate and payments won’t increase.
Mortgage term
This refers to the length of the loan term. In other words, if you only make the required monthly payments (and don’t pay ahead of schedule), it tells you how long it will take to completely pay off the mortgage. Typical mortgage terms are 15 or 30 years, but lenders may offer other terms.
A shorter mortgage typically comes with a lower interest rate. This lower rate, paired with the accelerated payment schedule, means that you’ll pay less in total interest over the life of a shorter mortgage than a longer mortgage. That being said, a longer mortgage will usually have lower monthly payments than a shorter mortgage but you will pay more in interest over time.
Conventional vs. government–backed loans
Mortgage generally fall into 2 main categories: conventional loans and government–backed loans.
Conventional loans are traditional mortgages that aren’t insured by the government. They must meet certain requirements, such as meeting a minimum credit score and down payment thresholds. Depending on how much you are borrowing, a conventional loan can either be a conforming or a jumbo loan amount.
- A “conforming” loan meets specific guidelines set by Fannie Mae and Freddie Mac (large government organizations that guarantee most of the mortgages in the US), including not exceeding the maximum loan amount of $806,500 in most markets (or $1,209,750 in high-cost areas).
- Jumbo loans are conventional loans that exceed these limits. Because larger loans mean more risk for lenders, jumbo loans often come with higher interest rates, higher down payments, and higher minimum credit score requirements.
Government-backed loans are designed to help borrowers purchase a home when they don’t qualify for a conventional loan. These include programs like:
- Federal Housing Authority (FHA) loans, which allow the minimum credit score as low as 500 and the minimum down payment is 3.5% of the home’s value.
- VA loans, which are available to eligible veterans and often require no down payment.
These loans are insured by federal agencies, which helps reduce risk for lenders and makes homeownership more accessible for a wider range of borrowers.
How much mortgage should you get?
At the end of the day, the mortgage that’s right for you will be one that you can afford while still working toward other important financial goals like saving for retirement, maintaining an emergency fund, and more.
Not sure what that number is? While there’s no one answer that will be right for every person, there are tools like the how much house can I afford calculator and guidelines to help you:
3 to 5 times your annual salary
For most, the total house value should generally be no more than 3 to 5 times your total annual household income.
Whether to veer more toward the high or low end of that range will depend on a number of factors, including your current amount of debt, current mortgage rates, and expectations for future earnings growth.
Factor in the down payment
Once you figure out the total house value in your price range, the next step is to decide what you can afford to pay upfront as your down payment. A down payment is the first big payment you make when buying a house. It goes directly towards the cost of the home, and the rest is usually financed and covered by the mortgage. Let’s say the cost of the house is $400,000 and you make a 20% down payment—that is $80,000 upfront. The remaining $320,000 is what you’ll borrow through a mortgage.
Putting down at least 20% is a good way to save in the long run. It helps you avoid private mortgage insurance (PMI), which is typically required when the down payment is less than 20%. PMI adds a little extra to the monthly mortgage payment and helps to protect the lender. The good news? It usually drops off once 20% of the home’s value is paid.
You can think of a down payment as your first major step toward owning your home. Explore these ideas on how to save for a house down payment.
Consider debt-to-income ratio
Debt plays a role in figuring out how much house you can afford. When applying for a loan, lenders look at the buyer's debt-to-income ratio—which means how much of your monthly income goes toward paying off debts. Total debt can include things like credit cards, car loans, daycare, and student loan payments. Let’s look at an example. Say you make $4,000 gross (before tax) a month and spend $1,400 of that on paying off debt. That means your debt-to-income ratio is 35% of your monthly gross income.
Fidelity suggests keeping your debt-to-income ratio at or below 36% to keep your monthly budget manageable over time.
Advantages of mortgages
For most people, a mortgage makes the dream of owning a home possible by spreading the cost over time, since few have the full amount to pay upfront. Even if you do have the funds to buy a house, there are other advantages of having a mortgage to consider. Some other advantages include:
Tax benefits
If you’ve paid mortgage interest, the IRS allows you to deduct some or all of it when filing your income taxes. Exactly how much you can deduct will depend on when the mortgage originated, your tax filing status, and the size of your loan. For mortgages originated after December 15, 2017, married homeowners are allowed to deduct mortgage interest on the first $750,000 of the loan.1
Potential to build equity
As you pay down the mortgage slowly over time, you’ll be accruing equity in your home. Equity is the current appraised value of the home minus what you owe on the mortgage. That’s why many people consider a mortgage to be like a “forced savings account”—since a portion of monthly payments often comes back in the form of equity when the home is sold.
It can improve your credit score
As long as you do not miss any payments, having a mortgage can improve your credit score over time. That’s because it changes your credit mix to include an installment loan, which is a loan repaid in fixed monthly payments. It also lengthens your credit history, and allows you to demonstrate a track record of making timely payments.
Disadvantages of mortgages
For most borrowers, the main disadvantage of a mortgage is the fact that, at the end of the day, it’s still a loan. That means you’ll be paying interest on the principal until you pay it off, which can add up over time. Some other disadvantages to think about include:
There will be fees involved
When you take out a mortgage, the lender is likely going to charge closing costs to cover the costs of originating the loan—that is, all the steps involved in setting up the loan. These fees are generally 1–5% of the loan amount and account for things like an application fee, origination fee, appraisal, credit check, title search, and more.2
There’s always the risk of foreclosure
Your home is collateral for the mortgage. That means that there is always the risk of foreclosure—where the bank takes your home—if you’re unable to make your payments on time.
Your home may decrease in value
While many people think of their home as an investment, there’s no guarantee that your home will increase in value over time. In fact, it could decrease in value, potentially leaving you underwater on your mortgage—where you owe more than your home is worth.
How to get a mortgage
Think of getting a mortgage like preparing for a big trip—you need to make a plan and take it one step at a time. There are a lot of steps to follow, but here’s the general idea to help you get started. Start by checking your credit score to understand your loan options. Then figure out what you can afford and choose the type of mortgage that fits your needs. After that, pick a lender and gather documents like income and bank statements for the preapproval process—a key step that tells you how much you can borrow and helps when making an offer on a home. Once you find the right home, you’ll complete the full application and tackle the final paperwork.
Ready to learn more? Explore the steps on how to get a mortgage.
How to lower your mortgage payments
Did you know the average monthly mortgage payment as of July 2025 was $2,273 a month?3 Given how much that adds up to, it makes sense that you might want to find some ways to lower your bill. The good news is that there are several options that can help.
If you don’t have a mortgage yet
If you’re still in the process of applying for a mortgage, you can potentially lower your payments by:
- Increasing your down payment, which will reduce the size of your mortgage and result in lower monthly payments for the life of the loan, and which can remove the need for private mortgage insurance (PMI). PMI is usually required with down payments under 20%.
- Buying points from your lender, in exchange for a lower interest rate when you buy a home, can reduce monthly payments. Points are an upfront fee paid at closing to “buy down” the interest rate on the loan.
- Choosing a longer-term mortgage instead of a shorter mortgage, which will lower your monthly payments but increase how much interest you pay over the life of the loan.
If you already have a mortgage
If you already have a mortgage, you might have less flexibility to reduce your payments, but that doesn’t mean you still can’t lower them. Consider:
- Refinancing your mortgage to a longer term, which can reduce your monthly payments (but will include closing costs and likely increase the total amount of interest you pay over the life of the loan).
- Refinancing your mortgage to a lower interest rate, which can reduce your interest payments each month.
- Recasting your mortgage by making a large lump sum payment—your lender will likely have a minimum required payment—which will recalculate your loan and reduce monthly payments based on the new, lower principal. This could even make it so that you no longer need PMI insurance.
Getting a mortgage and owning a home is a big milestone. Take time to prepare—and enjoy the journey.