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All About Mortgages

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Emma Diehl

Emma Diehl

Updated May 14, 2021
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All About Mortgages; Want to buy a home? Chances are you’ll need a mortgage.
Want to buy a home? Chances are you’ll need a mortgage. The world of home loans may have its own language, but once you understand the terms, you’re that much closer to securing your dream home. A mortgage is a loan specifically used in real estate. Most homebuyers don’t have the upfront cash to purchase a property outright, so they work with lenders to secure financing. The mortgage, a legal agreement between the lender and borrower, allows the borrower to live at the property and make payments over time, with the loan secured by the property. Below, we’ll break down the different types of mortgage loans, what mortgage payments are “made of,” and how homebuyers can start the search for a mortgage. 

Types of Mortgages

The type of mortgage a buyer applies for will depend on the individual’s finances and preferences. When it comes to interest rate, they have choices:
  • With a fixed-rate mortgage, the interest rate remains the same for the life of the loan. 
  • An adjustable-rate mortgage (ARM) typically begins with a fixed-rate period, and then the interest rate can vary based on the economy and other factors. (A 7/1 ARM, for example, has a fixed interest rate for the first seven years. After that, the rate can adjust once every year for the remaining life of the loan. The Federal Reserve cautions that “If lenders or brokers quote the initial rate and payment on a loan, ask them for the annual percentage rate (APR). If the APR is significantly higher than the initial rate, then it is likely that your rate and payments will be a lot higher when the loan adjusts, even if general interest rates remain the same.”)
  • With an interest-only mortgage, the borrower pays just the interest for a certain period of the loan term, and then starts paying the principal and interest back. Monthly payments usually start low and end up significantly higher.
In addition to interest rate, borrowers can choose between:
  • Conventional loans. The government does not insure conventional loans. That might sound scary, but in fact, conventional loans are the most common kind of mortgage. Because conventional loans are not insured by a government agency, they carry more risk for lenders and tend to have stricter eligibility requirements.
  • Government-insured loans. Even if the borrower defaults, the lender won’t lose any money. Government home loans can come directly from the government or private lenders, though not all lenders offer each type of loan. Because of the government backing, these loans can be easier to qualify for and sometimes have lower interest rates or more lenient terms than conventional loans. 
On top of where buyers get the mortgage, they’ll have to decide how quickly they want to pay off the loan. Mortgages have different “terms,” or lengths: 
  • A 30-year fixed-rate mortgage is the most popular choice because a longer term equates to lower monthly payments. In the long run, the borrower often pays more interest than with a shorter-term loan, but lower monthly payments make housing more affordable and typically easier to qualify for.
  • A 15-year mortgage can be paid off in half the time of a 30-year mortgage. This means less interest paid over the life of the loan and ultimately owning a home faster, but the shorter term will mean higher monthly payments, which can be challenging for some buyers. 
  • Many lenders offer 10-year and 20-year home loans, and even some customized loan terms.
As buyers begin the mortgage process, they have a variety of choices regarding paying back their loan. No one mortgage is the best fit for all borrowers. 

Getting a Mortgage

For many homebuyers, securing a mortgage comes before finding their perfect home. Borrowers can take steps before making an offer to find the right home loan and lender for them. Getting a loan can involve: 
  • Prequalification. Early in the home shopping process, many buyers elect to get prequalified from a lender. Prequalification is considered a “soft credit” inquiry, when the borrower shares some financial information. Then the lender provides a general idea of how much applicants could borrow and on what terms.
  • Preapproval. Mortgage preapproval means a lender has approved borrowers for a loan up to a certain amount at a specific interest rate based on their financial history. Applicants have to provide more personal information and financial documentation than with prequalification, but it can give them more concrete terms for a mortgage. And a preapproval letter can signal that a buyer is serious about purchasing a home shortly.
As homebuyers shop around for the best mortgage fit, they can approach the process by working with a mortgage broker or directly with a lender.Working with a mortgage broker grants buyers access to a variety of loans from several lenders. The buyer provides the broker with their financial documentation, then receives multiple mortgage options from which to choose. Mortgage brokers are paid either by the borrower or the lender but not both. Going directly to a lender is a more in-house experience. The borrower applies to the bank, online lender, or credit union.A borrower’s route when shopping for a home loan will vary based on preferences and experience. No matter what direction a buyer takes, they should work with experienced mortgage professionals who can answer their questions and walk them through the process. 

Elements of a Mortgage

Mortgages break down into a monthly payment due to the lender at the start of the month. However, monthly mortgage payments often have several components:
  • Principal. The principal is the outstanding total of the loan. A portion of the mortgage will go toward the balance owed in the loan each month. The position that goes to principal each month will vary.
  • Interest. The amount of interest paid on a mortgage each month will vary based on the loan’s amortization schedule. Generally, the amount of the monthly mortgage payment that goes toward interest will decrease over the life of the loan, as more of the payment goes toward the principal. 
  • Taxes. If the terms of a borrower’s mortgage include escrow, the lender will break down estimated annual property taxes into monthly payments. The lender disburses the payment when taxes are due.  
  • Insurance. Most lenders require the borrower to have insurance on their property. Like taxes, the lender collects the property insurance premium monthly and pays the homeowner’s policy annually through the escrow account. 
  • Private mortgage insurance. If buyers make a down payment of less than 20%, they may also need private mortgage insurance, commonly called PMI. 
As buyers budget, they should keep in mind that their monthly mortgage payments are likely to be more than just the estimated cost of the loan’s principal and interest. 

The Takeaway

While it’s not as much fun as browsing through homes, learning about mortgages is an important first step in the homebuying process. Which type, length, and rate is best for you? Do you have an idea how much home you can really afford? Getting preapproved for a mortgage means searching for the home of your dreams within your means. Ready to learn more about the mortgage process? Lantern by SoFi makes it easy to compare lenders and mortgage ratesGet started on your homebuying journey with confidence today.   
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0421077

About the Author

Emma Diehl

Emma Diehl

Emma Diehl is a nationally-published journalist with expertise in finance, real estate, and technology. Her work has appeared on NPR, The Huffington Post, Technical.ly, and numerous local publications. When she's not covering the world of personal finance with SoFi, she's probably rollerblading or planning her next meal.
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