Mortgage

A mortgage is a long-term loan secured by real estate. You borrow money to buy a home and repay the lender (principal plus interest) monthly over 15–30 years. The home itself is the collateral — if you default, the lender can foreclose and sell the property.

How a mortgage works

You identify a property to buy (say, $300,000). You make a down payment (e.g., $60,000 = 20%) and borrow $240,000 from a lender. You agree to repay the loan over 30 years at a fixed interest rate (e.g., 6%).

Your monthly payment covers:

• Principal. Portion going toward paying off the loan.
• Interest. Fee to the lender for lending money.
• Often also: property tax, homeowners insurance, and PMI (if applicable).

Over 30 years, you pay back the $240,000 principal plus roughly $260,000 in interest (total ~$500,000 on a $240,000 loan at 6%).

Down payment

Conventional mortgages typically require 20% down. With less down (10%, 5%, even 3%), you can buy with less cash upfront, but:

• You owe more principal.
• You pay mortgage insurance (PMI) until you reach 20% equity, typically 5–10 years.
• Your interest rate may be slightly higher.

FHA loans allow 3.5% down but have mandatory mortgage insurance for the life of the loan.

Fixed vs. adjustable rates

Fixed rate. Interest rate stays the same for the entire loan term (15, 20, 30 years). Predictability is valuable; most borrowers prefer this.

Adjustable rate (ARM). Interest rate is fixed for a few years (e.g., 5 years), then adjusts annually. Often starts lower than fixed but can rise significantly.

ARMs can be risky if rates rise sharply; most people should choose fixed.

Amortization

Early mortgage payments are mostly interest; later payments are mostly principal.

Year 1 of a 30-year mortgage at 6%: you pay ~$1,400/month principal but ~$1,200/month interest. Year 20: you pay ~$1,600/month principal and ~$600/month interest.

This is why paying extra principal early (or refinancing) can save substantial interest.

Refinancing

You can refinance your mortgage if interest rates drop (say, from 6% to 4%). You pay off the old loan and take a new one at the better rate.

Refinancing has costs (~$2,000–$5,000 in fees). You break even when monthly savings exceed these costs. Typically takes 2–3 years to break even; if you plan to stay longer, refinancing makes sense.

See refinance for details.

PMI and reaching 20% equity

If you put down less than 20%, you pay mortgage insurance (PMI), typically 0.5–1% of the loan amount annually.

Example: $240,000 loan with 10% down = PMI of ~$1,200/year until you reach 20% equity ($60,000 paid off).

Once you reach 20% equity, you can request PMI removal. Some loans cancel automatically at 22% equity.

Properties as investments

Owner-occupied homes:

• Build equity over time (as you pay principal).
• Provide shelter (avoiding rent).
• Typically appreciate over decades (though not guaranteed).
• Have maintenance costs, property tax, and insurance.

Most financial advice: do not expect home appreciation; treat the house as shelter, not an investment. Rent and invest the difference if you believe real estate is not a good investment for you.

See also