How Do Mortgages Work? A Beginner's Guide

Buying a house is likely the largest purchase you'll ever make. Demystify the mortgage process and learn exactly how your home loan works.

What is a Mortgage?

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

Principal vs. Interest

Your monthly payment is split into two main parts:

The Principal: This is the actual amount you borrowed. When you pay down the principal, you build equity in your home.
The Interest: This is the fee the lender charges you for borrowing the money. In the early years of a mortgage, the vast majority of your monthly payment goes toward interest, not the principal.

The Amortization Schedule

Amortization is the process of spreading out a loan into a series of fixed payments. An amortization schedule shows exactly how much of your payment goes to interest and how much goes to principal over the life of the loan (e.g., 30 years).

Estimate Your Payments

Before shopping for a home, you need to know what you can afford. Use our comprehensive Mortgage Calculator to estimate your monthly payments, view a full amortization schedule, and see how different interest rates affect your total cost.