Mortgage Basics
Everything you need to know before you borrow.
What is a Mortgage?
A mortgage is a loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property serves as collateral to secure the loan.
Fixed-Rate vs. Adjustable-Rate Mortgages
A fixed-rate mortgage has an interest rate that stays the same for the life of the loan, giving you predictable monthly payments. An adjustable-rate mortgage (ARM) starts with a fixed rate for an initial period, then adjusts periodically based on a market index. ARMs can offer lower initial rates but carry more risk if rates rise.
Understanding APR
The Annual Percentage Rate (APR) reflects the true cost of borrowing. It includes the interest rate plus other fees such as origination charges, mortgage insurance, and certain closing costs. Comparing APRs across lenders gives you a more accurate picture of the total loan cost than comparing interest rates alone.
Down Payment
The down payment is the portion of the home's purchase price you pay upfront. Conventional loans typically require 5–20% down. FHA loans allow as little as 3.5% down. VA and USDA loans may require no down payment at all. A larger down payment reduces your loan amount and may eliminate the need for private mortgage insurance (PMI).
Private Mortgage Insurance (PMI)
PMI is required on conventional loans when your down payment is less than 20% of the home's value. It protects the lender — not you — if you default. PMI is typically 0.5–1.5% of the loan amount per year and can be removed once you reach 20% equity in your home.
Closing Costs
Closing costs are fees paid at the end of the real estate transaction. They typically range from 2–5% of the loan amount and include appraisal fees, title insurance, attorney fees, origination fees, and prepaid items like homeowners insurance and property taxes.
Credit Score and Mortgage Rates
Your credit score is one of the most important factors in determining your mortgage rate. Higher scores generally qualify for lower interest rates. Most conventional loans require a minimum score of 620, while FHA loans may accept scores as low as 580. Improving your credit before applying can save you thousands over the life of the loan.
Debt-to-Income Ratio (DTI)
Your DTI ratio compares your monthly debt payments to your gross monthly income. Lenders use it to assess your ability to manage monthly payments. Most loan programs prefer a DTI of 43% or lower, though some programs allow higher ratios with compensating factors.
Have more questions?
Our loan experts are happy to walk you through any aspect of the mortgage process.