What Is A Mortgage? Your Definitive Home Loans Guide

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

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.

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.

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.

FAQ

• What does “conforming” mean?
  

  “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.

• How does a non-conforming loan differ from a conforming loan?
  

  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.