WhatI

saMor
tgage?Ty
pes,

HowTheyWor
k,and

Exampl
es

ByJULI
AKAGANUpdat
edNov
ember06,
2023

Rev
iewedbyCHI
PSTAPLETON

FactcheckedbyPETERATHBURN

WhatI
saMor
tgage?

Amor
tgagei
sat
ypeofl
oanusedt
opur
chaseor

mai
ntai
nahome,
plotofl
and,
orot
hert
ypesof

r
eal
est
ate.Thebor
roweragr
eest
opayt
hel
ender

ov
ert
ime,
typi
cal
l
yinaser
iesofr
egul
arpay
ment
s

t
hatar
edi
vi
dedi
ntopr
inci
pal
andi
nter
est.The

pr
oper
tyt
henser
vesascol
l
ater
alt
osecur
ethe

l
oan.

Abor
rowermustappl
yforamor
tgaget
hrough

t
hei
rpr
efer
redl
enderandensur
ethatt
heymeet

sev
eral
requi
rement
s,i
ncl
udi
ngmi
nimum cr
edi
t

scor
esanddownpay
ment
s.Mor
tgageappl
i
cat
ions

got
hroughar
igor
ousunder
wri
ti
ngpr
ocessbef
ore

t
heyr
eacht
hecl
osi
ngphase.Mor
tgaget
ypes,
such

asconv
ent
ional
orf
ixed-
rat
eloans,
var
ybasedon

t
heneedsoft
hebor
rower
.

ZoeHansen/I
nvest
opedi
a

HowMor
tgagesWor
k

I
ndi
vi
dual
sandbusi
nessesusemor
tgagest
obuy

r
eal
est
atewi
thoutpay
ingt
heent
ir
epur
chasepr
ice
upf
ront
.Thebor
rowerr
epay
sthel
oanpl
usi
nter
est

ov
eraspeci
fi
ednumberofy
ear
sunt
ilt
heyownt
he

pr
oper
tyf
reeandcl
ear.Mostt
radi
ti
onal
mor
tgages

ar
eful
l
y-amor
ti
zi
ng.Thi
smeanst
hatt
her
egul
ar

pay
mentamountwi
l
lst
ayt
hesame,
butdi
ff
erent

pr
opor
ti
onsofpr
inci
pal
vs.i
nter
estwi
l
lbepai
d

ov
ert
hel
i
feoft
hel
oanwi
theachpay
ment
.Ty
pical

mor
tgaget
ermsar
efor15or30y
ear
s.

Mor
tgagesar
eal
soknownasl
i
ensagai
nstpr
oper
ty

orcl
aimsonpr
oper
ty.I
fthebor
rowerst
opspay
ing

t
hemor
tgage,
thel
endercanf
orecl
oseont
he

pr
oper
ty.

Forexampl
e,ar
esi
dent
ial
homebuy
erpl
edgest
hei
r

houset
othei
rlender
,whi
cht
henhasacl
aim on

t
hepr
oper
ty.Thi
sensur
est
hel
ender
’si
nter
esti
n

t
hepr
oper
tyshoul
dthebuy
erdef
aul
tont
hei
r

f
inanci
alobl
i
gat
ion.I
nthecaseofaf
orecl
osur
e,

t
hel
endermayev
ictt
her
esi
dent
s,sel
lthe

pr
oper
ty,
anduset
hemoneyf
rom t
hesal
etopay

of
fthemor
tgagedebt
.

TheMor
tgagePr
ocess

Woul
d-bebor
rower
sbegi
nthepr
ocessbyappl
yi
ng

t
ooneormor
emor
tgagel
ender
s.Thel
enderwi
l
l

askf
orev
idencet
hatt
hebor
roweri
scapabl
eof

r
epay
ingt
hel
oan.Thi
smayi
ncl
udebankand

i
nvest
mentst
atement
s,r
ecentt
axr
etur
ns,
and
pr
oofofcur
rentempl
oyment
.Thel
enderwi
l
l

gener
all
yrunacr
edi
tcheckaswel
l
.

I
ftheappl
i
cat
ioni
sappr
oved,
thel
enderwi
l
lof
fer

t
hebor
roweral
oanofupt
oacer
tai
namountand

atapar
ti
cul
ari
nter
estr
ate.Homebuy
erscanappl
y

f
oramor
tgageaf
tert
heyhav
echosenapr
oper
ty

t
obuyorev
enwhi
l
etheyar
est
il
lshoppi
ngf
orone,

t
hankst
oapr
ocessknownaspr
e-appr
oval
.Bei
ng

pr
e-appr
ovedf
oramor
tgagecangi
vebuy
ersan

edgei
nat
ighthousi
ngmar
ketbecausesel
l
erswi
l
l

knowt
hatt
heyhav
ethemoneyt
obackupt
hei
r

of
fer
.

Onceabuy
erandsel
l
eragr
eeont
het
ermsoft
hei
r

deal
,theyort
hei
rrepr
esent
ati
veswi
l
lmeetat

what
’scal
l
edacl
osi
ng.Thi
siswhent
hebor
rower

makest
hei
rdownpay
mentt
othel
ender
.Thesel
l
er

wi
l
ltr
ansf
erowner
shi
poft
hepr
oper
tyt
othebuy
er

andr
ecei
vet
heagr
eed-
uponsum ofmoney
,and

t
hebuy
erwi
l
lsi
gnanyr
emai
ningmor
tgage

document
s.Thel
endermaychar
gef
eesf
or

or
igi
nat
ingt
hel
oan(
somet
imesi
nthef
orm of

poi
nts)att
hecl
osi
ng.

Opt
ions

Ty
pesofMor
tgages

Mor
tgagescomei
nav
ari
etyoff
orms.Themost

commont
ypesar
e30-
yearand15-
yearf
ixed-
rat
e
mor
tgages.Somemor
tgaget
ermsar
easshor
tas

f
ivey
ear
s,whi
l
eot
her
scanr
un40y
ear
sorl
onger
.

St
ret
chi
ngpay
ment
sov
ermor
eyear
smayr
educe

t
hemont
hlypay
ment
,buti
tal
soi
ncr
easest
het
otal

amountofi
nter
estt
hatt
hebor
rowerpay
sov
ert
he

l
i
feoft
hel
oan.

Wi
thi
nthedi
ff
erentt
erml
engt
hsar
enumer
ous

t
ypesofhomel
oans,
incl
udi
ngFeder
alHousi
ng

Admi
nist
rat
ion(
FHA)l
oans,
U.S.Depar
tmentof

Agr
icul
tur
e(USDA)l
oans,
andU.
S.Depar
tmentof

Vet
eransAf
fai
rs(
VA)l
oansav
ail
abl
eforspeci
fi
c

popul
ati
onst
hatmaynothav
ethei
ncome,
credi
t

scor
es,
ordownpay
ment
srequi
redt
oqual
i
fyf
or

conv
ent
ional
mor
tgages.

Thef
oll
owi
ngar
ejustaf
ewexampl
esofsomeof

t
hemostpopul
art
ypesofmor
tgagel
oansav
ail
abl
e

t
obor
rower
s.

Fi
xed-
Rat
eMor
tgages

Thest
andar
dty
peofmor
tgagei
sfi
xed-
rat
e.Wi
tha

f
ixed-
rat
emor
tgage,
thei
nter
estr
atest
ayst
he

samef
ort
heent
ir
eter
m oft
hel
oan,
asdot
he

bor
rower
'smont
hlypay
ment
stowar
dthe

mor
tgage.Af
ixed-
rat
emor
tgagei
sal
socal
l
eda

t
radi
ti
onal
mor
tgage.

War
ning:
Mor
tgagel
endi
ng

di
scr
imi
nat
ioni
sil
l
egal
.Ify
out
hink
y
ou’
vebeendi
scr
imi
nat
ed

agai
nstbasedonr
ace,
rel
i
gion,
sex,

mar
it
alst
atus,
useofpubl
i
c

assi
stance,
nat
ional
ori
gin,
disabi
l
ity
,

orage,
ther
ear
est
epst
haty
oucan

t
ake.Onesuchst
epi
stof
il
ear
epor
t

wi
tht
heConsumerFi
nanci
al

Pr
otect
ionBur
eau(
CFPB)ort
heU.
S.

Depar
tmentofHousi
ngandUr
ban

Dev
elopment(
HUD).

Adj
ust
abl
e-Rat
eMor
tgage(
ARM)

Wi
thanadj
ust
abl
e-r
atemor
tgage(
ARM),
the

i
nter
estr
atei
sfi
xedf
orani
nit
ial
ter
m,af
terwhi
ch

i
tcanchangeper
iodi
cal
l
ybasedonpr
evai
l
ing

i
nter
estr
ates.Thei
nit
ial
int
erestr
atei
sof
tena

bel
ow-
mar
ketr
ate,
whi
chcanmaket
hemor
tgage

mor
eaf
for
dabl
eint
heshor
tter
m butpossi
blyl
ess

af
for
dabl
elong-
ter
mift
her
ater
isessubst
ant
ial
l
y.

ARMst
ypi
cal
l
yhav
eli
mit
s,orcaps,
onhowmuch

t
hei
nter
estr
atecanr
iseeacht
imei
tadj
ust
sandi
n

t
otal
overt
hel
i
feoft
hel
oan.

Ti
p:A5/
1adj
ust
abl
e-r
atemor
tgage

i
sanARM t
hatmai
ntai
nsaf
ixed

i
nter
estr
atef
ort
hef
ir
stf
ivey
ear
sand

t
henadj
ust
seachy
earaf
tert
hat
.

I
nter
est
-Onl
yLoans
Ot
her
,lesscommont
ypesofmor
tgages,
suchas

i
nter
est
-onl
ymor
tgagesandpay
ment
-opt
ionARMs,

cani
nvol
vecompl
exr
epay
mentschedul
esandar
e

bestusedbysophi
sti
cat
edbor
rower
s.Theset
ypes

ofl
oansmayf
eat
ureal
argebal
l
oonpay
mentati
ts

end.

Manyhomeowner
sgoti
ntof
inanci
alt
roubl
ewi
th

t
heset
ypesofmor
tgagesdur
ingt
hehousi
ng

bubbl
eoft
heear
ly2000s.

Rev
erseMor
tgages

Ast
hei
rnamesuggest
s,r
ever
semor
tgagesar
ea

v
erydi
ff
erentf
inanci
alpr
oduct
.Theyar
edesi
gned

f
orhomeowner
sage62orol
derwhowantt
o

conv
ertpar
toft
heequi
tyi
nthei
rhomesi
ntocash.

Thesehomeowner
scanbor
rowagai
nstt
hev
alue

oft
hei
rhomeandr
ecei
vet
hemoneyasal
ump

sum,
fixedmont
hlypay
ment
,orl
i
neofcr
edi
t.The

ent
ir
eloanbal
ancebecomesduewhent
he

bor
rowerdi
es,
mov
esawayper
manent
ly,
orsel
l
s

t
hehome.

Ti
p:Wi
thi
neacht
ypeofmor
tgage,

bor
rower
shav
etheopt
iont
obuy

di
scountpoi
ntst
obuyt
hei
rint
erest

r
atedown.Poi
ntsar
eessent
ial
l
yaf
ee

t
hatbor
rower
spayupf
rontt
ohav
ea

l
oweri
nter
estr
ateov
ert
hel
i
feoft
hei
r
l
oan.Whencompar
ingmor
tgage

r
ates,
makesur
eyouar
ecompar
ing

r
ateswi
tht
hesamenumberof

di
scountpoi
ntsf
orat
rueappl
es-
to-

appl
escompar
ison.

Av
erageMor
tgageRat
es(
SoFarf
or2023)

Howmuchy
ou’
l
lhav
etopayf
oramor
tgage

dependsont
het
ypeofmor
tgage(
suchasf
ixedor

adj
ust
abl
e),
itst
erm(
suchas20or30y
ear
s),
any

di
scountpoi
ntspai
d,andi
nter
estr
atesatt
het
ime.

I
nter
estr
atescanv
aryf
rom weekt
oweekand

f
rom l
endert
olender
,soi
tpay
stoshopar
ound.

Mor
tgager
atessankt
ohi
stor
icl
owsi
n2020and

2021,
recor
dingt
hei
rcheapestl
evel
sinal
most50

y
ear
s.Fr
om r
oughl
ythest
artoft
hepandemi
c(i
.e.
,

Apr
il2020)t
oJan.2022,
the30-
yearr
ateav
erage

wav
eredbel
ow3.
50%—i
ncl
udi
nganul
ti
mat
elowof

2.
65%.

But2022and2023hav
eseenmor
tgager
ates

sky
rocket
,set
ti
ngr
ecor
dsi
ntheopposi
tedi
rect
ion.

The30-
yearav
eragebr
eachedt
he7%t
hreshol
dfor

t
hef
ir
stt
imei
nOct
.2022,
andt
hispastOct
ober
,it

wascl
osert
o8%,
not
chi
nga23-
yearpeakr
eadi
ng

of7.
79%.

Accor
dingt
otheFeder
alHomeLoanMor
tgage

Cor
p.,
aver
agei
nter
estr
atesl
ookedl
i
ket
hisasof
Nov
.2023:

30-
yearf
ixed-
rat
emor
tgage:
7.76%

15-
yearf
ixed-
rat
emor
tgage:
7.03%

Howt
oCompar
eMor
tgages

Banks,
sav
ingsandl
oanassoci
ati
ons,
andcr
edi
t

uni
onswer
evi
rt
ual
l
ytheonl
ysour
cesof

mor
tgagesatonet
ime.Today
,abur
geoni
ngshar
e

oft
hemor
tgagemar
keti
ncl
udesnonbankl
ender
s,

suchasBet
ter
,loanDepot
,RocketMor
tgage,
and

SoFi
.

I
fyou’
reshoppi
ngf
oramor
tgage,
anonl
i
ne

mor
tgagecal
cul
atorcanhel
pyoucompar
e

est
imat
edmont
hlypay
ment
s,basedont
het
ypeof

mor
tgage,
thei
nter
estr
ate,
andhowl
argeadown

pay
menty
oupl
ant
omake.I
tal
socanhel
pyou

det
ermi
nehowexpensi
veapr
oper
tyy
oucan

r
easonabl
yaf
for
d.

I
naddi
ti
ont
othepr
inci
pal
andi
nter
estt
haty
ou’
l
l

bepay
ingont
hemor
tgage,
thel
enderormor
tgage

ser
vicermaysetupanescr
owaccountt
opayl
ocal

pr
oper
tyt
axes,
homeowner
sinsur
ancepr
emi
ums,

andcer
tai
not
herexpenses.Thosecost
swi
l
ladd

t
oyourmont
hlymor
tgagepay
ment
.

Al
so,
not
ethati
fyoumakel
esst
hana20%down

pay
mentwheny
out
akeouty
ourmor
tgage,
your

l
endermayr
equi
ret
haty
oupur
chasepr
ivat
e
mor
tgagei
nsur
ance(
PMI
),whi
chbecomesanot
her

addedmont
hlycost
.

I
mpor
tant
:Ify
ouhav
eamor
tgage,

y
oust
il
lowny
ourhome(
inst
eadof

t
hebank)
.Yourbankmayhav
eloaned

y
oumoneyt
opur
chaset
hehouse,
but

r
athert
hanowni
ngt
hepr
oper
ty,
they

i
mposeal
i
enoni
t(t
hehousei
sused

ascol
l
ater
al,
butonl
yift
hel
oangoes

i
ntodef
aul
t)
.Ify
oudef
aul
tand

f
orecl
oseony
ourmor
tgage,
howev
er,

t
hebankmaybecomet
henewowner

ofy
ourhome.

WhyDoPeopl
eNeedMor
tgages?

Thepr
iceofahomei
sof
tenf
argr
eat
ert
hant
he

amountofmoneyt
hatmosthousehol
dssav
e.Asa

r
esul
t,mor
tgagesal
l
owi
ndi
vi
dual
sandf
ami
l
iest
o

pur
chaseahomebyput
ti
ngdownonl
yar
elat
ivel
y

smal
ldownpay
ment
,suchas20%oft
hepur
chase

pr
ice,
andobt
aini
ngal
oanf
ort
hebal
ance.The

l
oani
sthensecur
edbyt
hev
alueoft
hepr
oper
tyi
n

caset
hebor
rowerdef
aul
ts.

CanAny
bodyGetaMor
tgage?

Mor
tgagel
ender
swi
l
lneedt
oappr
ovepr
ospect
ive

bor
rower
sthr
oughanappl
i
cat
ionandunder
wri
ti
ng

pr
ocess.Homel
oansar
eonl
ypr
ovi
dedt
othose
whohav
esuf
fi
cientasset
sandi
ncomer
elat
ivet
o

t
hei
rdebt
stopr
act
ical
l
ycar
ryt
hev
alueofahome

ov
ert
ime.Aper
son’
scr
edi
tscor
eisal
soev
aluat
ed

whenmaki
ngt
hedeci
siont
oext
endamor
tgage.

Thei
nter
estr
ateont
hemor
tgageal
sov
ari
es,
wit
h

r
iski
erbor
rower
srecei
vi
nghi
gheri
nter
estr
ates.

Mor
tgagesar
eof
fer
edbyav
ari
etyofsour
ces.

Banksandcr
edi
tuni
onsof
tenpr
ovi
dehomel
oans.

Ther
ear
eal
sospeci
ali
zedmor
tgagecompani
es

t
hatdeal
onl
ywi
thhomel
oans.Youmayal
so

empl
oyanunaf
fi
li
atedmor
tgagebr
okert
ohel
pyou

shopar
oundf
ort
hebestr
ateamongdi
ff
erent

l
ender
s.

WhatDoesFi
xedv
s.Var
iabl
eMeanona

Mor
tgage?

Manymor
tgagescar
ryaf
ixedi
nter
estr
ate.Thi
s

meanst
hatt
her
atewi
l
lnotchangef
ort
heent
ir
e

t
erm oft
hemor
tgage—t
ypi
cal
l
y15or30y
ear
s—

ev
eni
fint
erestr
atesr
iseorf
all
int
hef
utur
e.A

v
ari
abl
e-oradj
ust
abl
e-r
atemor
tgage(
ARM)hasan

i
nter
estr
atet
hatf
luct
uat
esov
ert
hel
oan’
sli
fe

basedonwhati
nter
estr
atesar
edoi
ng.

HowManyMor
tgagesCanIHav
eonMy

Home?

Lender
sgener
all
yissueaf
ir
storpr
imar
ymor
tgage

bef
oret
heyal
l
owf
orasecondmor
tgage.Thi
s
addi
ti
onal
mor
tgagei
scommonl
yknownasa

homeequi
tyl
oan.Mostl
ender
sdon’
tpr
ovi
def
ora

subsequentmor
tgagebackedbyt
hesame

pr
oper
ty.Ther
e’st
echni
cal
l
ynol
i
mitt
ohowmany

j
uni
orl
oansy
oucanhav
eony
ourhomeasl
ongas

y
ouhav
etheequi
ty,
debt
-t
o-i
ncomer
ati
o,and

cr
edi
tscor
etogetappr
ovedf
ort
hem.

WhyI
sItCal
l
edaMor
tgage?

Thewor
d"mor
tgage"comesf
rom Ol
dEngl
i
shand

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