What is a Mortgage and How Does One Work?

February 8, 2023


Brand new luxury residential house with big garage

Getting a mortgage is just one part of the home-buying process and, if you’re new to the world of real estate it can be a confusing one. With that in mind, we’ve brought you some basics on mortgages and how they work. Keep reading to learn the answers to some of the most fundamental mortgage questions that you’ve been afraid to ask.

What is a mortgage?

At its core, a mortgage is a loan agreement, specifically one that’s used to help people buy real estate. Since real estate is typically very expensive, mortgages allow you to finance the cost of buying a property or plot of land and pay it back over time through a series of regular payments.

The type of mortgage that you receive will vary based on your needs. For example, while many mortgage loans have fixed interest rates, others can adjust with current market rates. Similarly, some lenders also offer larger-than-normal mortgages known as “jumbo loans” for borrowers who live in areas with high costs of living.

However, regardless of your loan type, in order to be approved for a mortgage you’ll need to work with a lender and ensure that you meet the borrowing criteria for your loan program. These can include specific income, credit score, and down payment requirements. Mortgage applications usually go through a strict vetting process to ensure that you’re capable of paying back what you’ve borrowed.

How does a mortgage work?

At base, mortgages work similarly to any other type of loan. You’ll pay back what you’ve borrowed, plus interest, over a specified number of years. Mortgages typically last for either 15 or 30 years. Then, once you’ve made all of your payments, you’ll own the property outright.

That said, mortgage loans are often structured a little differently than some other loans. They are traditionally fully amortizing, which means that even though your monthly payment will stay the same, different portions of your payment will be applied to the principal and interest each time. You will generally pay more in interest at the beginning of your loan term and more towards the principal as you get closer to paying the loan off.

Notably, lenders also require that the property serves as collateral for the loan. This means that if you decide to stop making your mortgage payments, your lender can foreclose on the property. However, that right will cease once the property has been paid off in full.

What goes into a mortgage payment?


In lending, the principal amount is the same as the amount originally borrowed from the lender. In real estate transactions, this amount usually translates to the purchase price of the property minus any down payment that you make at closing.

For example, if you buy a home for $200,000 and make a 20% down payment worth $40,000, you would need to borrow an additional $160,000 to purchase the property. That $160,000 would be your principal loan amount.


In addition, the lender will also charge interest on your loan in exchange for the privilege of borrowing the money to pay for the home upfront. The amount of interest that you’ll be charged will vary. Interest charges are determined by current market rates and the strength of the borrower. Typically borrowers with the strongest financial profiles are given the best rates.

Taxes and insurance

Sometimes lenders will also collect money for your property taxes and any home or mortgage insurance payments. In this case, the money will be kept in an escrow account and the bills will be paid on your behalf when they are due.

Want to learn more about the mortgage approval process?

Now that you know more about mortgages and how they work, it’s time to learn about the process of getting approved for a loan. If you’re ready to take the next step, get in touch with one of our experienced lenders today.

Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.

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