What Is A Mortgage? Your Definitive Home Loans Guide

David Papazian/ Getty Images; Illustration by Austin Courregé/Bankrate

Key takeaways

A mortgage is a loan that helps you purchase a home, with the home itself serving as collateral.
Mortgage payments typically consist of principal (the amount borrowed), interest, property taxes and homeowners insurance. They can also include mortgage insurance.
To qualify for a conventional mortgage — the most common type — you’ll typically need a credit score of 620 or higher and at least 3% of the home price for a down payment.

What is a mortgage?

A mortgage is a loan used to buy a house. Mortgages are available with a variety of terms — the length of time to repay the loan — but they usually range between eight and 30 years. You repay your mortgage in monthly installments, which typically include both interest and principal payments, as well as escrow payments to cover property taxes and homeowners insurance.

Shopping for a mortgage is one of the few instances when comparison-shopping can save you money every month. A few extra quotes can uncover a better rate, lower fees, or both, and that can make a real difference to your budget. Isn’t that worth putting in the work?

— Mark Hamrick, senior economic analyst, Bankrate

How does a mortgage work?

When you get a mortgage, you have a set loan term to repay the debt as well as a total loan amount to repay. The majority of each payment goes toward interest and principal, or your original loan balance.

Most mortgages are paid monthly and are fully amortized, meaning they’re repaid in regular, equal payments, with the last payment paying off the loan at the end of the term.

Mortgages are also secured loans, meaning that they’re backed by collateral — in this case, your home. If you default on your mortgage — fail to make payments — your home can enter into foreclosure and your lender can reclaim it.

Current mortgage interest rates

Current mortgage rates are averaging at the lowest they have since 2022: in the low-6% range. While this is higher than the historic lows seen during the COVID pandemic, it’s lower than the historical average of around 7%. Bankrate forecasts that rates should remain largely in this low-6% range for 2026.

Bankrate Insight

Keep in mind that the mortgage rate analysts are typically discussing is the 30-year fixed mortgage rate. While 15-year fixed mortgage rates respond to all the same market forces, they’re often somewhat lower than the rates for 30-year mortgages.

Mortgage requirements

There are many types of mortgages, but the requirements fall down to these major factors:

Down payment: Conventional loans can require as little as 3% down, FHA loans require a minimum of 3.5% down. For those who qualify, USDA and VA loans have no minimum down payment requirements.
Credit score: For a conventional loan, you need a minimum credit score of 620. FHA loans require a minimum score of 500 with 10% down, or 580 with less than 10% down.
Debt-to-income (DTI) ratio: Your DTI ratio is all of your regular, monthly debt payments as a percentage of your income. Typically, these must make up no more than 45% of your income, though there is some variability between lenders and loan types.

Keep in mind that these are just the minimum requirements. The stronger your financial picture going into the mortgage, the less interest and fees you’ll pay.

How to compare mortgage offers

Once you’ve done the prep work to apply for a mortgage, including working on your credit and saving up for a down payment, you can apply for preapproval. Ideally, you should seek preapproval with a handful of lenders — at least three — and compare their offers.

Different lenders have slightly different underwriting requirements, and even if you’re preapproved with every lender, you might find that the rate and terms you’re offered vary. As you compare offers, focus on the APR, as opposed to the interest rate, as it reflects the all-in cost of borrowing. One loan may have a higher interest rate than another, but lower fees, leading to a lower total APR.

Types of mortgages

There are several types of mortgages available to borrowers. Let’s break them down into a few categories:

Conventional vs. government-insured: A conventional mortgage is a mortgage originated through a private-sector lender. On the flip side, government-insured mortgages — VA loans, USDA loans and FHA loans — are backed by the government, and often have a lower barrier to entry than conventional mortgages.
Fixed-rate vs. adjustable-rate mortgages (ARM): These are the two primary ways interest is charged on mortgages, with a fixed-rate mortgage being the most common. Fixed-rate mortgages have the same interest rate throughout the loan. ARMs, on the other hand, typically have an initial low, fixed-rate period of three to 10 years, followed by a period where the interest rate changes on a regular basis for the remainder of the loan.
Conforming vs. jumbo loans: Most mortgages are conforming loans, meaning that they fit into the criteria set by government agencies, including how large a loan can be. Jumbo loans don’t conform to these loan limits and are used for more expensive properties.

What is included in a mortgage payment?

There are four core components of a mortgage payment: the principal, interest, taxes, and insurance. These are collectively referred to as “PITI.” There can be other costs included in the payment, as well.

Principal: The original amount of money you borrowed from a mortgage lender to purchase your home. If you made a $50,000 down payment on a $400,000 home, for instance, your loan principal is $350,000.
Interest: Interest is what the lender charges you to borrow that money; it’s the “cost” of the loan.
Property taxes: Your lender typically collects the property taxes associated with the home as part of your monthly mortgage payment. It then holds the money in an escrow account and uses it to pay your tax bill when it comes due.
Homeowners insurance: Homeowners insurance is required to get a mortgage. Like your property tax payments, your lender usually breaks your homeowners insurance premium into monthly installments, collects them in your escrow account, and then uses the money to pay your bill.
Mortgage insurance: Your monthly payment might also include mortgage insurance. For conventional loans, this is known as private mortgage insurance (PMI). It’s required with a down payment of less than 20% of the home’s purchase price. FHA loans also require a mortgage insurance premium (MIP), which you must pay for 11 years with 10% down, or for the life of the loan with less than 10% down.

Key mortgage terms

APR: An APR, or annual percentage rate, reflects the yearly cost of borrowing the money for a mortgage. APR includes the interest rate, discount points and other fees that come with the loan, meaning it better reflects the total cost of borrowing than the interest rate alone.
Escrow: An escrow account holds the portion of a borrower’s monthly mortgage payment that covers homeowners insurance premiums and property taxes. Escrow accounts also hold the earnest money the buyer deposits after their offer has been accepted.
Mortgage servicer: A mortgage servicer is the company that issues your mortgage statements, collects your payments, manages your escrow account and handles other day-to-day tasks related to your loan after it closes.
Underwriting: Mortgage underwriting is the process by which a bank or mortgage lender assesses the risk of lending to a particular individual. The underwriting process requires an application and takes into account factors like the prospective borrower’s credit report and score, income, debt and the value of the property they intend to buy. Many lenders follow standard underwriting guidelines from Fannie Mae and Freddie Mac.

FAQ

“Conforming” refers to a conforming loan, a mortgage eligible to be purchased by Fannie Mae or Freddie Mac, the government-sponsored enterprises (GSEs) that buy loans from lenders to create mortgage-backed securities (MBS) for the secondary mortgage market. A loan that “conforms” meets certain standards set by the Federal Housing Finance Agency (FHFA). These standards set limits and guidelines for borrower credit profiles, down payments, loan amount and property types.
A “non-conforming” loan or mortgage doesn’t meet (or “conform to”) the requirements that allow it to be purchased by Fannie Mae or Freddie Mac. One example of a non-conforming loan is a jumbo loan. Government-backed loans, like those insured by the FHA or VA, are another example.