A mortgage is a legal agreement in which a bank or lender provides funds to purchase real estate while the property itself serves as collateral. If the borrower fails to repay, the lender can foreclose on the property.
Common Mortgage Types
- Fixed-rate — interest rate stays the same for the entire loan term
- Adjustable-rate (ARM) — rate changes periodically based on a benchmark index
- FHA loan — government-backed, lower down-payment requirements (3.5%)
- VA loan — available to veterans, often no down payment required
Key Mortgage Components (PITI)
A typical mortgage payment includes: Principal, Interest, property Taxes, and homeowner's Insurance.
How Lenders Decide What You Qualify For
Approval depends on four main factors: credit score (higher scores unlock lower rates), debt-to-income ratio (usually capped around 43%), down payment size, and stable, verifiable income. Getting pre-approved — not just pre-qualified — involves actual document verification and gives sellers confidence your financing is real.
Refinancing
Refinancing replaces your existing mortgage with a new one, typically to lower the rate, shorten the term, or tap equity (cash-out refinance). It makes sense when the new rate is meaningfully lower than your current one and you plan to stay in the home long enough to recoup closing costs (usually 2–5 years).