How do mortgages work?
A mortgage is a loan you use to buy a home or other real estate where you borrow money from a lender and agree to pay it back over time, usually in monthly payments. If you don’t make the payments, the lender can take the property.
A mortgage outlines items such as:
Loan amount
The loan amount is the amount of money you’re borrowing from a lender to pay for a home.
Loan term
The loan term refers to how many years it will take to pay off your loan if you only make the minimum payments. Mortgage terms typically range from 10 to 30 years, but the most common terms are 15 and 30 years. The longer the term you select, the lower your payments will be, but the more interest you will pay.
Interest rate
A fixed interest rate will stay the same over the life of the loan, while a variable rate will change according to market conditions. A higher interest rate will increase monthly payments over time.
Loan type
The type of loan you receive will impact the terms, including the down payment requirements, interest rate and term options. It’s best to compare offers from multiple mortgage lenders to find the most favorable option for your situation.
Closing costs
Closing costs include lender and agent fees, along with any other fees related to the home purchase. Closing costs are typically between 2% and 5% of the loan amount.
Types of mortgages
There are several types of mortgages, which are typically categorized as either conventional or government-backed loans. Loans can also have fixed or variable interest rates.
Conventional loans
Conventional loans aren’t backed by the government. They often have lower fees than FHA loans, but qualification requires stronger credit and a larger down payment. These loans are available with fixed or variable interest rates.
Government-backed loans
The main types of government-backed loans include:
- Federal Housing Administration (FHA) loans: FHA loans allow low down payments of 3.5% to 10% and credit scores as low as 500.
- U.S. Department of Veterans Affairs (VA) loans: VA loans are for eligible veterans, active-duty service members and surviving spouses. These loans require no down payment or private mortgage insurance (PMI), but they require a funding fee.
- U.S. Department of Agriculture (USDA) loans: USDA loans are designed for buyers in eligible rural areas and are available with no down payment. These loans are limited to 30-year fixed terms and have both upfront and annual fees.
Fixed-rate mortgages
Fixed-rate mortgages have the same interest rate for the life of the loan, providing stable and predictable payments. However, they typically have higher interest rates than variable-rate mortgages.
Adjustable-rate mortgages
Variable-rate mortgages, also known as adjustable-rate mortgages (ARMs), usually start with a fixed interest rate for a period of time, after which the rate adjusts periodically. Some variable rates have a cap on how much the rate can increase or decrease over time.
How to get a mortgage
Getting a mortgage generally involves a few main steps, including getting preapproved, applying for a mortgage and closing on the loan.
1. Get preapproved
Before you start shopping for a home, you’ll want to get preapproved. Preapproval typically lasts for 90 days. It shows sellers that you're a serious buyer with verified finances. This can make your offer more competitive, especially in a hot market. Preapproval also helps the lender determine how much you can borrow.
Getting preapproved is similar to applying for a mortgage, except it typically requires fewer documents and less verification. You’ll still need to submit income information and have your credit pulled. Most lenders perform a hard credit inquiry, which can slightly affect your credit score, though some may offer a soft pull instead.
Prequalification vs. preapproval
Prequalification is an estimate of what you may qualify for, and it’s based on self-reported information. With preapproval, a lender verifies your income and employment through pay stubs and W-2s to determine your approved loan amount. It's as close to applying for a mortgage as you can get without having a sales contract in place.
» MORE: Mortgage Prequalification vs. Preapproval
2. Apply for a mortgage
Once you’ve found a home, you’ll submit an offer. If your offer is accepted, you can officially apply for a mortgage. You can borrow up to the full value of the property, although you’ll typically be required to make a down payment. How much you'll need to put down will vary based on the lender and the type of loan you receive.
The application process requires submitting additional documents beyond what you provided for preapproval. You’ll likely need to submit the following documents when you apply for your mortgage:
- Photo ID
- Addresses for the past two years
- Social Security card
- Employer names and addresses for the past two years
- Pay stubs for the last two months
- W-2 forms for the past two years
- Tax returns for the past two years
- 1099 forms (for freelancers and independent contractors)
- Social Security award letter (if you receive Social Security)
- Checking and savings account statements
- Statements for other assets (such as certificates of deposit, bonds or investment accounts)
- Copy of ratified sales contract
- Gift letter (if you’re using gift funds)
You might need to provide additional documents, depending on your situation. Once you've submitted your documents, your application will be sent to underwriting for review.
“Once your mortgage documents are submitted to the lender, an underwriter reviews the file and makes a credit decision,” said Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage.
“You won’t have direct contact with the underwriter, but there is a good chance your lender will request additional information from you on behalf of the underwriter, such as updated bank statements or clarifications on credit dings,” DeFlorio said.
In the meantime, your lender will likely order an appraisal to determine the property's value. The appraisal results can affect your required down payment, interest rate and even whether you’ll be approved for the loan. If all goes well, your loan will move to closing, where you’ll sign the loan documents and take possession of the home.
» MORE: How To Apply for a Mortgage
3. Close on a home
Before closing, you’ll receive a closing disclosure that shows all the terms of the loan. Review this document carefully, and check for any errors. Ask your lender promptly if you have any questions.
On closing day, you’ll sign all of the loan documents and finalize the homebuying process. Depending on your state, you may receive the keys to your new home immediately, or you may need to wait until the transaction is recorded with the state before obtaining your keys.
What’s included in a mortgage payment?
Your monthly mortgage payment covers several costs, not just the loan itself. These include:
Loan principal
Your principal and interest make up the core of your payment. Larger loan balances and higher interest rates lead to higher monthly payments.
Accruing interest
This is the cost of borrowing money. Interest builds up each month based on your loan balance and rate, and it’s added to your payment.
Property taxes
Property taxes are charged by your city. The mortgage company collects your property taxes via your mortgage payment and remits the payment to the government on your behalf.
Homeowners insurance
Mortgage lenders will typically require you to have homeowners insurance. Your premium will typically be included in your monthly mortgage payment.
Private mortgage insurance
If you put down less than 20% on a home, you’ll generally need to pay private mortgage insurance. PMI protects the lender in case you default on payments. PMI automatically drops off when your loan balance reaches 78% of the home’s original value. You can request to remove it at 80%, but you may need to pay for an appraisal.
How much can you afford for a mortgage?
To figure out how much you can afford for a mortgage, consider the following:
Income
It’s often recommended to not spend more than two to three times your annual household income. So if your income is $90,000, you may be able to afford a mortgage between $180,000 and $270,000.
There’s also the 28/36 rule, which means that your mortgage payment shouldn’t exceed 28% of your gross income, and your total debt payments shouldn’t exceed 36%. Some other models use a 35/45 rule, meaning your total debt payments shouldn’t exceed 35% of your gross income or 45% of your after-tax income.
Budget
When you get preapproved, a lender will tell you how much you can borrow. But that doesn’t mean that’s what you can afford. You'll want to evaluate your own budget and decide what you are comfortable spending.
Total ownership costs
When estimating your total housing costs, remember that your mortgage payment includes more than just principal and interest. You'll also pay property taxes and homeowners insurance each month. On top of that, owning a home comes with other expenses, like maintenance, repairs and higher utility bills.
FAQ
How much is a $300,000 mortgage payment for 30 years?
The payment amount for a $300,000 loan for 30 years depends on the interest rate and down payment. For example, a 30-year loan with 20% down and a 6.15% annual percentage rate (APR) results in a monthly payment of about $1,462. However, there are additional costs to add in such as property taxes and homeowners insurance, which will vary depending on your location and loan. If you put less than 20% down, you’ll also need to pay private mortgage insurance.
Do I own my house if I have a mortgage?
Yes, you own your home if you have a mortgage, even if you’re still paying off the mortgage. However, if you don’t make timely mortgage payments, the bank has the right to foreclose on the house and sell it to recover its losses.
How does a mortgage refinance work?
When you refinance a mortgage, you take out a new mortgage and use the proceeds to pay off the existing loan.
Is it ever worth buying points?
Mortgage points are an upfront cost you’ll pay to lower your interest rate. Before buying points, calculate your breakeven point. If you sell or refinance before that, buying points may not be worth it.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Fannie Mae, “Documents You Need To Apply for a Mortgage.” Accessed Jan. 5, 2026.
