What Is a Mortgage?

Written by Denny Ceizyk | Edited by Kurt Adams | Updated January 31, 2023

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Definition: What is a mortgage?

A mortgage is a written agreement that gives a lender the right to take your home if you don’t repay the money they lend you at the terms you agreed on. Your mortgage payment is paid over a set number of years based on how much you borrow and the interest rate you’re approved for. 

Here’s how a mortgage works:

Each month you pay principal and interest. The principal is the portion that’s paid down each month. The interest is the rate charged monthly by your lender. At first you pay more principal than interest. As time goes on, you pay more principal than interest until the balance is paid off.

Consumers often prefer 30-year fixed-rate mortgages because they offer the lowest stable payment for the life of the loan. Borrowers may also choose an adjustable-rate mortgage (ARM) for temporary savings over a three- to 10-year period, but after that, the rate typically changes each year. 

You’re not stuck with your mortgage — you can pay it off and replace it with a mortgage refinance.

What is a mortgage refinance?

A mortgage refinance is the process of getting a new home loan to replace an existing one. Homeowners typically refinance for three reasons:

1. To get a lower interest rate.  When mortgage rates fall, you can save on your monthly payment by refinancing to the lowest refinance rates available. 
2. To pay your loan off faster.  Switching from a 30-year to a 15-year term can save you thousands of dollars in interest, if you can afford the higher payment. 
3. To put extra money in the bank. You can convert home equity into cash with a cash-out refinance, and put the extra funds toward financial goals or home improvements.

 

You can find mortgage lenders online, by referral from a friend or family member or ask your real estate agent for a recommendation.  To get the best rates for your mortgage, shop current mortgage rates with at least three different lenders. 

Make sure you get quotes from mortgage brokers, mortgage bankers and your local bank. Rates change daily, so gather the quotes on the same day to ensure you’re comparing apples to apples figures. Get a mortgage rate lock once you find a home and keep track of the expiration date to avoid costly extension or relock fees.

• The higher your credit score, the lower your interest rate will be

  A lower interest rate means a lower monthly payment, which makes homeownership more affordable.

• The higher your down payment, the lower your monthly payment

  A down payment of 20% will help you avoid mortgage insurance if you’re taking out a conventional loan. Mortgage insurance covers the lender’s foreclosure costs if you default on your loan.

• The longer the term, the lower your monthly payment

  First-time homebuyers typically choose 30-year terms to get the lowest monthly payment.

• The less monthly debt you have, the more you can borrow

  Clear out those car loans, student loans and credit card balances if you want the most mortgage borrowing power.

• The more you shop, the more likely you are to get a lower rate

  A recent LendingTree study showed borrowers who shop multiple lenders can save thousands of dollars in interest charges over the life of their loans.

1. Check your finances. Request a credit report with scores from all three major credit reporting bureaus: Equifax, Experian and TransUnion. Use a home affordability calculator to understand how much you might qualify for.
2. Choose the right type of mortgage. Do you need to focus on a low down payment mortgage program? Do you want to put 20% down to avoid mortgage insurance? Knowing your real estate and financial goals can help you choose the best mortgage for your needs.
3. Decide on your mortgage term. A 30-year, fixed-rate loan is the most popular choice for the lowest monthly payment. However, a shorter, 15-year fixed loan may save you thousands of dollars in interest charges, as long as your budget can handle the higher monthly payments.
4. Save, save, save. Besides saving for a down payment, you’ll need cash to cover your closing costs, which could range from 2% to 6%, depending on your loan amount. Boost your emergency savings to cover unexpected repair costs and maintenance expenses. Lenders may require you to have cash reserves that could allow you to continue paying your mortgage in case you lose your job or have a medical emergency.
5. Shop, shop, shop. LendingTree studies show that borrowers save money when they compare rates from at least three to five mortgage lenders. Give the same information to each lender so you’re comparing apples to apples when reviewing rate and fee quotes.
6. Get a mortgage preapproval before you house hunt. A preapproval letter confirms you can get a mortgage loan to shop for homes within a set price range. Home sellers are more likely to take you seriously as a buyer if you’ve been preapproved.
7. Make an offer on your dream home. Once you’ve found the perfect place, submit your best offer along with a copy of your preapproval letter. If your offer is accepted, you’ll also pay the required earnest money deposit to show your commitment to the transaction.
8. Get a home inspection. Once your offer is accepted, schedule a home inspection to identify any needed repairs or major issues. Once you negotiate repairs with the seller, your lender will typically order a home appraisal to verify the home’s market value.
9. Cooperate with the underwriter. Your lender’s underwriting team will ask for paperwork to verify all the information on your loan application. Be prompt in your responses to prevent delays. Once you receive final loan approval, a closing disclosure (CD) will be given to you at least three business days before your closing date. It will reflect the final costs of the transaction, including how much money you need to bring to the closing table.
10. Complete your final walk-through and closing. Before you head to the mortgage closing, walk through the property to double-check that all necessary repairs were completed and that the home is ready for you. At the closing, you’ll cut a check for your down payment and closing costs, sign the closing paperwork and receive the keys to your new home.

1. Request price quotes on the same day.
2. Ask the same questions of each lender, including: How long is the rate quote good for? What fees are charged upfront? Is the rate fixed or adjustable? What is the annual percentage rate (APR)?
3. Expect loan estimates from each lender within three business days of submitting your mortgage application.
4. Keep the estimates to compare rates and fees as you make your final choice.