Mortgages: Types, How They Work, and Examples

Definition

A mortgage is a loan used to purchase or maintain real estate, where the property serves as collateral.

Key Takeaways

Mortgages are loans used to buy homes and other types of real estate. The property itself serves as collateral for the loan.
Mortgages are available in a variety of types, including fixed- and adjustable-rate.
The cost of a mortgage will depend on the type of loan, the term (e.g., 30 years), and the interest rate that the lender charges.
Mortgage rates can vary widely depending on the type of product and the applicant's qualifications.

What Is a Mortgage?

A mortgage is a loan used to purchase or maintain a home, plot of land, or other real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments divided into principal and interest. The property then serves as collateral to secure the loan.

A borrower must apply for a mortgage through their preferred lender and meet several requirements, including minimum credit scores and down payments. Mortgage applications undergo a rigorous underwriting process before they reach the closing phase.

How Mortgages Work

Individuals and businesses use mortgages to buy real estate without paying the entire purchase price up front. The borrower repays the loan plus interest over a specified number of years until they own the property free and clear. Most traditional mortgages are fully amortized. This means that the regular payment amount will stay the same, but different proportions of principal vs. interest will be paid over the life of the loan with each payment. Typical mortgages last for 15 or 30 years, but some mortgage terms can be longer.

Mortgages are also known as liens against property or claims on property. If the borrower stops paying the mortgage, the lender can foreclose on the property.

For example, a residential homebuyer pledges their house to their lender, which then has a claim on the property. This ensures the lender’s interest in the property should the buyer default on their financial obligation. In the case of foreclosure, the lender may evict the residents, sell the property, and use the money from the sale to pay off the mortgage debt.

The Mortgage Process

Would-be borrowers begin the process by applying to one or more mortgage lenders. The lender will ask for evidence that the borrower can repay the loan. This may include bank and investment statements, recent tax returns, and proof of current employment. The lender will usually run a credit check as well.

If the application is approved, the lender will offer the borrower a loan up to a certain amount and at a particular interest rate. Thanks to a process known as pre-approval, homebuyers can apply for a mortgage after they've chosen a property to buy or even while they're still shopping for one. Being pre-approved for a mortgage can give buyers an edge in a tight housing market because sellers will know that they have the money to back up their offer.

Once a buyer and seller agree on the terms of their deal, they or their representatives will meet at what’s called a closing. This is when the borrower makes their down payment to the lender. The seller will transfer ownership of the property to the buyer and receive the agreed-upon sum of money, and the buyer will sign any remaining mortgage documents. The lender may charge fees for originating the loan (sometimes in the form of points) at the closing.

Options

There are hundreds of options for where you can get a mortgage. You can secure one through a credit union, bank, mortgage-specific lender, online-only lender, or mortgage broker. No matter which option you choose, compare rates across types to make sure that you’re getting the best deal.

Types of Mortgages

There are many types of mortgages. The most common ones are 30- and 15-year fixed-rate mortgages. Some terms are as short as five years, while others can run 40 years or longer. Extending your loan can lower your monthly payment, but it increases the total amount of interest you'll pay over time.

Other types of home loans, such as Federal Housing Administration (FHA) loans, United States Department of Agriculture (USDA) loans, and U.S. Department of Veterans Affairs (VA) loans, are only available for specific populations that may not have the income, credit scores, or down payments required to qualify for conventional mortgages.

The following are just a few examples of some of the most popular types of mortgages available to borrowers.

Fixed-Rate Mortgages

With a fixed-rate or traditional mortgage, the interest rate and the monthly payment remain the same during the entire loan term.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Adjustable-Rate Mortgage (ARM)

With an adjustable-rate mortgage (ARM), the interest rate is fixed for an initial term, after which it can change periodically based on prevailing interest rates. The initial interest rate is often below market, which can make the mortgage more affordable in the short term but possibly less affordable in the long run if the rate rises substantially.

ARMs typically have limits, or caps, on how much the interest rate can rise each time it adjusts and in total over the life of the loan.

Tip

A 5/1 adjustable-rate mortgage is an ARM that maintains a fixed interest rate for the first five years and then adjusts each year after that.

Interest-Only Loans

Other, less common types of mortgages, such as interest-only mortgages and payment-option ARMs, can involve complex repayment schedules and are best used by sophisticated borrowers. These loans may feature a large balloon payment at the end.

Many homeowners got into financial trouble with these types of mortgages during the housing bubble of the early 2000s.

Reverse Mortgages

Reverse mortgages are designed for homeowners 62 or older who want to convert part of the equity in their homes into cash. With a reverse mortgage, homeowners can borrow against the value of their home and receive the money as a lump sum, fixed monthly payment, or line of credit (LOC). The entire loan balance becomes due when the borrower dies, moves away permanently, or sells the home.

Tip

Within each type of mortgage, borrowers can buy discount points to lower their interest rate. Points are essentially a fee that borrowers pay upfront to lower the interest rate over the life of their loan. When comparing mortgage rates, compare rates with the same number of discount points for a true apples-to-apples comparison.

Average Mortgage Rates (So Far for 2025)

How much you’ll have to pay for a mortgage depends on the type (e.g., fixed or adjustable), its term (e.g., 20 or 30 years), any discount points paid, and the interest rates at the time. Interest rates can vary from week to week and from lender to lender, so it pays to shop around.

Mortgage rates sank to historic lows in 2020 and 2021, recording their cheapest levels in almost 50 years. From roughly the start of the pandemic in April 2020 to January 2022, the 30-year fixed-rate average hovered below 3.50%—including an ultimate low of 2.65%.

But 2022 and 2023 saw mortgage rates skyrocket, setting records in the opposite direction. The 30-year fixed-rate average breached the 7% threshold for the first time in 20 years in October 2022. Since then, the 30-year mortgage rate has fluctuated within the 6% to 8% range.

According to Freddie Mac, as of November 2025, the average interest rates are:

30-year fixed-rate mortgage: 6.22%
15-year fixed-rate mortgage: 5.5%

How to Compare Mortgages

In the past, banks, savings and loan associations, and credit unions were practically the only sources of mortgages. Today, however, a burgeoning share of the mortgage market includes nonbank lenders like Better, loanDepot, Rocket Mortgage, and SoFi.

If you’re shopping for a mortgage, an online mortgage calculator can help you compare estimated monthly payments based on the type of mortgage, the interest rate, and how large a down payment you plan to make. It can also help you determine how expensive a property you can reasonably afford.

In addition to the principal and interest you’ll be paying on the mortgage, the lender or mortgage servicer may set up an escrow account to pay local property taxes, homeowners' insurance premiums, and other expenses. Those costs will add to your monthly mortgage payment.

If you make less than a 20% down payment when you take out your mortgage, your lender may require that you purchase private mortgage insurance (PMI), which becomes another monthly cost.

Important

If you have a mortgage, you still own your home. Your bank may have loaned you money to purchase the house, but rather than owning the property, they imposed a lien on it. If you default and foreclose on your mortgage, however, the bank may become the new owner of your home.

Explain Like I'm 5

A secured loan is an option for borrowing money that's backed by a valuable asset. If a borrower is unable to repay their debt, then their lender can seize the asset to recoup its loss. A mortgage is a type of secured debt that's used to purchase a home or other kind of real estate, which acts as the collateral. As such, if a borrower defaults on a mortgage, the lender can take possession of the property.

Due to the price of a typical house, few people can afford to pay for one out of pocket. A mortgage allows a borrower to purchase a home by making only a relatively small down payment, such as 20% of the purchase price, while taking out a loan to cover the remaining costs. Once you've been approved for a mortgage, you'll begin making monthly payments in order to eventually repay that debt.

In addition to repaying the amount borrowed, interest is also regularly levied on the outstanding balance. The longer the loan term, the more chances for interest to accrue. As such, a longer loan term means paying more in interest over the life of the mortgage. Additional loan costs can also include insurance and fees.

Can Anybody Get a Mortgage?

Mortgage lenders must approve prospective borrowers through an application and underwriting process. Home loans are only provided to those with sufficient assets and income relative to their debts. Lenders look at an applicant's credit score before approving a mortgage. The interest rate also varies, with riskier borrowers receiving higher interest rates.

Mortgages are offered by a variety of sources. Banks and credit unions often provide home loans, in addition to specialized mortgage companies that deal only with home loans. You may also employ an unaffiliated mortgage broker to help you shop around for the best rate among different lenders.

How Many Mortgages Can I Have on My Home?

Lenders generally issue a first or primary mortgage before allowing a second one. This additional mortgage is commonly known as a home equity loan. There’s technically no limit to how many junior mortgages you can have on your home as long as you have the equity, debt-to-income (DTI) ratio, and credit score to get approved for them.

Why Is It Called a Mortgage?

The word "mortgage" comes from Old English and French, meaning "death vow." It gets that name since this type of loan "dies" when it is either fully repaid or if the borrower defaults.

The Bottom Line

Mortgages are an essential part of home buying for most borrowers, who aren’t sitting on hundreds of thousands of dollars of cash to buy a property outright. Different types of home loans are available for whatever your circumstances may be. Different government-backed programs allow more people to qualify for mortgages and make their dream of homeownership a reality, but comparing the best mortgage rates will make the homebuying process more affordable.