When you’re buying a home, one of the first terms you’ll hear is “mortgage.” Since most buyers don’t purchase homes with cash, mortgages make homeownership possible for millions. But what exactly is a mortgage, how does it work, and why does it matter?
At Redfin Real Estate, we help buyers navigate every step of the homebuying journey, from understanding financing to finding the right home. Whether you’re browsing homes for sale in Phoenix, AZ or searching homes for sale in Philadelphia, PA, knowing how mortgages work is the first step toward confident homeownership.
What is a mortgage?
A mortgage is a loan used to buy a home or property, with the home itself serving as collateral. If you stop making payments, the lender can foreclose to recover their money.
When you take out a mortgage, you agree to repay the borrowed money (the principal) plus interest over a set number of years, typically through monthly payments.
How does a mortgage work?
Mortgages are typically 15-, 20-, or 30-year loans, repaid in monthly installments that often include four parts (known as PITI):
- Principal: the portion that reduces your loan balance.
- Interest: the cost of borrowing money, based on your interest rate.
- Taxes: property taxes collected by your local government.
- Insurance: homeowners insurance, and sometimes private mortgage insurance (PMI).
Additionally, it’s important to remember that your true monthly housing costs may go beyond your mortgage payment. Homeowners association (HOA) fees, utilities, and ongoing maintenance can all add up. Factoring these expenses into your budget ensures you choose a mortgage payment that’s realistic and sustainable long-term.
Who are the parties involved in a mortgage?
A mortgage isn’t just between you and the bank — there are several key players involved in the process:
- Borrower: The individual (or individuals) taking out the loan to buy the property.
- Lender: The financial institution, bank, or…