How a mortgage works

A mortgage is money you borrow to buy or refinance a home, with the property pledged as collateral. If the loan is not repaid under the contract, the lender can foreclose. That is why the rate and the rules are different from an unsecured personal loan.

You do not pay the lender the full price of the house on day one. You repay the amount you borrowed, called principal, plus interest, over a set term. Thirty years and fifteen years are the terms people compare most often.

The loan payment itself is principal and interest. Early in a fully amortizing loan, more of each payment is interest. Later, more of it reduces the balance.

Many monthly bills also include an escrow portion for property taxes and homeowners insurance. Those amounts are not interest. They are estimates of bills the lender collects and then pays on your behalf. HOA dues are usually paid separately.

A lender looks at income, debts, credit, the down payment, and the property before it agrees to fund a loan. Two people can look at the same house and be offered different rates, or no loan at all.

This site describes how those pieces usually work. It does not take an application, quote a rate, or decide who is approved.