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What Is a Mortgage? Payments, Types and Terminology

A mortgage is a loan used to finance a home purchase. How you'll qualify depends on the lender and type of home loan you choose.

Kate Wood
Ashley Harrison
Chris Jennings
Michelle Blackford
Updated
A mortgage is a loan used to buy a home. You repay the loan, with interest, over a set number of years. The property serves as collateral — this means if you don't pay, the lender can take the home. While you’re a homeowner at this point, you’ll only own the home “free and clear” once the mortgage is fully paid off."
"Mortgage" can also refer to the legal document outlining the loan terms and permitting your lender to seize the home if you don't repay the loan as agreed. In some states, this document is called a deed of trust.
Getting a mortgage is the most common way to purchase a home. In fact, of buyers who purchased a home between July 2024 and June 2025, 74% had mortgages, according to data from the National Association of Realtors (NAR).
» MORE: How to get a mortgage

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How does a mortgage work?

A mortgage lets you buy a home without paying cash. Mortgages typically require you to make a down payment, then repay the rest over time. Each month, you pay back some of what you borrowed, along with interest. Inability to repay the mortgage can lead to foreclosure. Mortgages also last much longer than other types of loans; 30-year mortgages are the most common.
You can get a mortgage from a bank, credit union or nonbank lender like Rocket Mortgage or Rate. When deciding whether to give you a mortgage, a lender reviews all of your finances, including your credit score, debts and employment. Lenders use this information to decide:
  • Whether they'll lend you money
  • How much they're willing to lend
  • What the terms will be 
Each lender’s qualifications can vary depending on the kind of home loan you want and other factors.
If you are buying a home with another person, you'll be co-borrowers, and the lender will review both of your finances. A second borrower could help you qualify for a mortgage by increasing your total income or boosting your combined credit score.
» MORE: Compare top-rated mortgage lenders reviewed by NerdWallet's experts

What a mortgage payment includes

You’ll repay a mortgage on a monthly basis over a set number of years. Each month, you'll pay some of the amount owed, as well as interest and potentially other costs. Here’s what's included in a mortgage payment.

Principal

"Mortgage principal" means two things. It can refer to the original amount you borrowed. It also can refer to the amount you still owe after you have made payments.
For example, if you bought a $300,000 house and made a $30,000 down payment, you’d have originally borrowed $270,000. Each month, a portion of your mortgage payment is applied to your principal. This reduces the total amount owed over time.

Interest

The interest rate on your mortgage determines how much you’ll pay the lender in exchange for borrowing the money.
Some of each monthly payment goes toward interest. In the first years of the loan, most of each payment covers interest and little goes toward principal. In the final years, most of the payment reduces principal. This process is called amortization.
» MORE: Compare today’s mortgage rates

Property taxes

Your lender may collect a portion of your property tax bill along with your mortgage payment. This money is kept in an escrow account until the bill is due and is paid on your behalf at that time.

Homeowners insurance

Homeowners insurance — which can cover damage to your home from fires, storms, accidents and other catastrophes — is usually required by mortgage lenders. They may collect a portion of your premium as part of your mortgage payment. The insurance bill is then paid out of your escrow account when it’s due.

Mortgage insurance

When you make a down payment of less than 20%, lenders typically require you to pay for mortgage insurance. Mortgage insurance premiums may be billed in your monthly mortgage statement.
Mortgage insurance protects the lender against the risk that you’ll default on the loan. There are two types:
  • Private mortgage insurance (PMI): This is for conventional loans. It’s typically required if you put less than 20% down. PMI can be canceled once you’ve built 20% home equity.
  • Mortgage insurance premium (MIP): This is required for all FHA loans and is paid in two parts. First is an upfront premium when you close on the loan (you can also roll this into your loan principal). Second are annual premiums, which are added to your monthly payments. If you put less than 10% down, you’ll pay the annual MIP for the life of the loan. If you put 10% or more down, your annual premiums will end after 11 years.
» MORE: Calculate your mortgage payments, including PMI and taxes

Mortgage types

There are two main types of mortgages:
  • Fixed-rate mortgage: The interest rate stays the same over time. The vast majority of home loans are fixed-rate mortgages.
  • Adjustable-rate mortgage, or ARM: The interest rate can change at intervals specified in the loan paperwork. Your monthly payment might increase or decrease as the interest rate changes.
» MORE: Comparing fixed-rate mortgages and ARMs
There are several kinds of home loans, which may be either fixed-rate or adjustable. You'll also be able to choose the loan term, or how long you'll have to pay off the mortgage. While 30 years is the most common, you'll likely also see options for 15- and 20-year mortgages.
  • Conventional loans meet mortgage underwriting standards and conform to limits on loan amounts set by the U.S. government. These mortgages generally require a credit score of 620 or higher and a down payment of at least 3%. 
  • FHA loans are insured by the Federal Housing Administration. Borrowers with credit scores as low as 580 may qualify with a down payment of at least 3.5%. The FHA also accepts scores as low as 500 with a down payment of at least 10%.
  • VA loans are guaranteed by the Department of Veterans Affairs and don’t require a down payment. VA loans are available to qualified U.S. veterans, active-duty military personnel and some surviving spouses.
  • USDA loans don’t require a down payment. These loans are available to homebuyers who meet income requirements in designated rural and suburban areas. They are guaranteed by the U.S. Department of Agriculture.
  • Jumbo loans are mortgages that exceed the government's limits on loan amounts. The limits vary by county, and they’re higher where housing is more expensive.
» MORE: Summary of mortgage types and programs
Did you know...
Conventional loans are the most common type of home loan. Between July 2024 and June 2025, 66% of all home buyers opted for a conventional mortgage, according to data from NAR.

Mortgage terminology to know

There's a lot of vocab to learn when you're looking for a home loan. In many cases these are specialized uses of everyday words, which makes things even trickier. Here are some terms you might come across.
APR. APR is short for annual percentage rate. This number represents the total cost of borrowing money to buy a home. It combines your interest rate with fees, points and other lender charges. Comparing APRs from multiple lenders can help you find a good deal.
Appraisal. After you have applied for a mortgage, the lender will order an appraisal. During this process, an appraiser compares the details of the home you want to buy with similar ones recently sold nearby. This tells the lender what the property is worth. This is important as lenders won’t let you borrow more than the home’s appraised value.
Closing. Closing has two different but related meanings when it comes to buying a home. It can refer to the time between applying for a mortgage and actually signing the paperwork and receiving the keys, or it can refer to that last day when the loan "closes."
Loan Estimate. The Loan Estimate is a document that you'll receive within three business days of submitting a formal mortgage application. It shows all the costs related to getting a home loan, including rates and fees. The Loan Estimate also shows which costs are set in stone and which you can shop around for. All lenders have to use the same format, which makes Loan Estimates easy to compare.
Mortgage broker. A mortgage broker is an independent agent who can help you with the home loan process. Based on your needs, they'll present you with loan options and help you work with the lender that you choose. You don't have to work with a mortgage broker. With the amount of information readily available online, it's easier to do research and compare loans than it used to be.
Mortgage originator. A mortgage originator is the lender that initially provides your home loan. You'll work with the mortgage originator from your initial application through closing day.
Mortgage servicer. A mortgage servicer is the company that manages your loan after closing. You send the servicer your monthly payment, it manages your escrow account and you'll call it with any questions about your home loan. In some cases, your mortgage originator will also service the mortgage, but most of the time, originators resell mortgages to servicers.
Points. Points — also called mortgage points or discount points — are optional fees that you can pay when buying a home in order to reduce your interest rate. One point usually costs 1% of the total amount you're borrowing. For each point you buy, the lender reduces your interest rate by 0.25 percentage point. When you're comparing interest rates, check whether points are included. Lenders sometimes add them to their sample rate calculations to make their interest rates appear lower.
Preapproval. A mortgage preapproval is a letter from a lender stating how much they might be willing to lend you to buy a home. A preapproval doesn't mean that you'll definitely get the loan. However, because it’s based on a lender review of your finances — including a credit check — real estate agents and home sellers will likely take you more seriously as a buyer.
Prequalification. A mortgage prequalification is an informal estimate of how much you might be able to borrow. You provide a lender with basic information like your income and credit score range, and they'll tell you what loans you might be able to get. The lender doesn't independently verify any of your financial info, so a prequalification doesn't carry as much weight as a preapproval.
Second mortgage. A second mortgage is another loan on a home that already has a first, or primary, mortgage. Also called "junior liens," second mortgages are a way to access the equity in your home as spendable funds without selling or refinancing. Home equity loans and home equity lines of credit are two types of second mortgages.
Title. The title represents the home's ownership history. If a home has a "clear title," that means that the current owner has the right to sell the property and no one else can make a claim to it. Title issues can crop up if there are judgments against the property owner (for example, unpaid taxes). Getting a title search is part of the closing process.
Underwriting. Underwriting is the process lenders use to ensure borrowers are qualified. It happens after you apply for a mortgage, and it can last for weeks. During this time, an underwriter will look closely at your finances, plus examine the house's appraisal and the title search, to decide whether to approve your loan. Once the underwriter gives the go-ahead, you'll get the Closing Disclosure. (This is a finalized version of the Loan Estimate.) Then you can schedule the closing.
Frequently Asked Questions
Is a mortgage the same as a home loan?
Yes, a mortgage and a home loan are the same thing. You'll see both terms when you research home buying because some types of mortgages — for example, mortgages backed by the Federal Housing Administration — are always referred to as loans (in that case, FHA loans).
What happens if I miss a mortgage payment?
It depends on how long you’ve missed a payment. If you pay during the grace period — often 15 days, depending on the lender — you generally won’t face any consequences. If you pay after the grace period, you could be charged a late fee (depending on the lender) and have the late payment reported to the credit bureaus, which could negatively impact your credit score. If you miss four payments or more, you’ll likely face foreclosure proceedings.
How much mortgage can I qualify for?
This depends on several factors, including your income and debt. The mortgage rates you’re offered will also affect the total cost of your mortgage and how much house you can afford. One common guideline is the 28/36 rule, which states you shouldn’t put more than 28% of your gross (or pre-tax) income toward home-related costs and no more than 36% toward total debts (including your mortgage).
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