A mortgage is a loan used to buy a home, secured by the home itself. You make a down payment upfront, borrow the rest, and repay it in fixed monthly installments over 15 to 30 years. If you stop paying, the lender can foreclose, so the loan is considered lower-risk and comes with lower rates than most other borrowing.
The down payment and loan amount
Your down payment is the cash you put in at closing. The rest — the home price minus the down payment — is your loan amount, or principal. A larger down payment means a smaller loan, a lower monthly payment, and often no PMI.
Interest and amortization
Interest is the cost of borrowing, charged as an annual percentage rate. Your fixed monthly payment is calculated so the loan is fully paid off by the end of the term. In the early years most of each payment goes to interest; over time the balance shifts toward principal. This process is called amortization.
Escrow, taxes and insurance
Most lenders collect property taxes and homeowners insurance along with your payment and hold them in an escrow account, then pay those bills on your behalf. That is why your monthly payment is usually larger than principal and interest alone — see what's included in a mortgage payment.
Closing costs
On top of the down payment, buyers pay closing costs — typically 2% to 5% of the loan — covering the appraisal, title, lender fees and prepaid items. Budget for these separately from the down payment.