How It Works

Average Mortgage Rates


What Is a Mortgage? Types, How They Work, and Examples

Julia Kagan is a financial/consumer reporter and former senior editor, personal financing, of Investopedia.

Ben Woolsey is a full-time Associate Editorial Director at Investopedia, focusing on financial product or services. He has worked in marketing, operations, and content management functions for banks, credit card companies, and charge card market sites. Ben has 2 degrees-MBA/BSBA-from the University of Arkansas.

1. Points and Your Rate

1. Just how much Do I Need to Put Down on a Mortgage?
2. Understanding Different Rates
3. Fixed vs. Adjustable Rate
4. When Adjustable Rate Rises
5. Commercial Real Estate Loans
   
   1. Closing Costs
6. Avoiding "Junk" Fees
7. Negotiating Closing Costs
8. Lowering Refinance Closing Costs
   
   1. Types of Lenders
9. Applying to Lenders: The Number Of?
10. Broker Advantages and Disadvantages
11. How Loan Offers Make Money
    
    1. Quicken Loans
12. Lending Tree
    
    A mortgage is a loan used to purchase or maintain property, where the residential or commercial property works as collateral.
    
    What Is a Mortgage?
    
    A mortgage is a loan used to acquire or preserve a home, plot of land, or other realty. The borrower concurs to pay the lending institution in time, generally in a series of routine payments divided into primary and interest. The residential or commercial property then works as security to protect the loan.
    
    A customer must apply for a mortgage through their preferred lender and satisfy numerous requirements, including minimum credit report and deposits. Mortgage applications undergo an extensive underwriting procedure before they reach the closing phase. Mortgage types, such as conventional or fixed-rate loans, vary based on the borrower's needs.
    
    - Mortgages are loans utilized to purchase homes and other types of property.
13. The residential or commercial property itself serves as collateral for the loan.
14. Mortgages are readily available in a variety of types, including fixed-rate and adjustable-rate.
15. The expense of a mortgage will depend upon the type of loan, the term (such as 30 years), and the rates of interest that the loan provider charges. Mortgage rates can vary commonly depending upon the kind of product and the applicant's certifications.
    
    Zoe Hansen/ Investopedia
    
    How Mortgages Work
    
    Individuals and businesses use mortgages to purchase realty without paying the whole purchase rate upfront. The borrower pays back the loan plus interest over a specified number of years until they own the residential or commercial property complimentary and clear. Most conventional mortgages are completely amortized. This means that the regular payment quantity will remain the same, but different percentages of principal vs. interest will be paid over the life of the loan with each payment. Typical mortgage terms are for 15 or 30 years, but some mortgages can run for longer terms.
    
    Mortgages are also called liens against residential or commercial property or claims on residential or commercial property. If the debtor stops paying the mortgage, the loan provider can foreclose on the residential or commercial property.
    
    For example, a property homebuyer pledges their home to their lender, which then has a claim on the residential or commercial property. This makes sure the lending institution's interest in the residential or commercial property ought to the purchaser default on their monetary responsibility. In the case of foreclosure, the lender might kick out the citizens, offer the residential or commercial property, and use the cash from the sale to settle the mortgage financial obligation.
    
    The Mortgage Process
    
    Would-be borrowers start the process by using to several mortgage loan providers. The lending institution will ask for proof that the customer can pay back the loan. This may consist of bank and financial investment declarations, recent income tax return, and evidence of present employment. The lender will typically run a credit check as well.
    
    If the application is authorized, the loan provider will provide the borrower a loan as much as a particular amount and at a particular rates of interest. Thanks to a process known as pre-approval, homebuyers can request a mortgage after they have chosen a residential or commercial property to purchase and even while they are still buying one. Being pre-approved for a mortgage can offer buyers an edge in a tight housing market since sellers will know that they have the money to support their deal.
    
    Once a purchaser and seller settle on the regards to their deal, they or their agents will meet at what's called a closing. This is when the customer makes their down payment to the lender. The seller will transfer ownership of the residential or commercial property to the purchaser and receive the agreed-upon sum of cash, and the buyer will sign any remaining mortgage files. The loan provider might charge costs for coming from the loan (sometimes in the kind of points) at the closing.
    
    Options
    
    There are numerous options for where you can get a mortgage. You can get a mortgage through a credit union, bank, mortgage-specific lender, online-only lending institution, or mortgage broker. No matter which alternative you select, compare rates across types to ensure that you're getting the very best offer.
    
    Kinds of Mortgages
    
    Mortgages come in various kinds. The most typical types are 30-year and 15-year fixed-rate mortgages. Some mortgage terms are as brief as 5 years, while others can run 40 years or longer. Stretching payments over more years may lower the regular monthly payment, however it likewise increases the overall quantity of interest that the borrower pays over the life of the loan.
    
    Various term lengths consist of numerous types of mortgage, consisting of Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and U.S. Department of Veterans Affairs (VA) loans readily available for specific populations that might not have the earnings, credit rating, or deposits needed to get approved for traditional mortgages.
    
    The following are just a couple of examples of a few of the most popular types of mortgage loans offered to customers.
    
    Fixed-Rate Mortgages
    
    The standard type of mortgage is fixed-rate. With a fixed-rate mortgage, the rate of interest stays the exact same for the whole term of the loan, as do the customer's monthly payments toward the mortgage. A fixed-rate mortgage is likewise called a traditional mortgage.
    
    Mortgage loaning discrimination is unlawful. If you think you've been discriminated against based upon race, faith, sex, marital status, use of public support, national origin, disability, or age, there are actions that you can take. One such action 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 rate of interest is fixed for an initial term, after which it can alter periodically based upon dominating rate of interest. The preliminary rates of interest is often below market, which can make the mortgage more cost effective in the brief term but possibly less budget friendly in the long term if the rate rises significantly.
    
    ARMs usually have limits, or caps, on just how much the rates of interest can increase each time it changes and in total over the life of the loan.
    
    A 5/1 adjustable-rate mortgage is an ARM that preserves a fixed interest rate for the very first five years and after that adjusts each year after that.
    
    Interest-Only Loans
    
    Other, less typical types of mortgages, such as interest-only mortgages and payment-option ARMs, can involve complex repayment schedules and are best utilized by advanced debtors. These loans may feature a large balloon payment at the end.
    
    Many house owners got into financial problem with these kinds of mortgages throughout the housing bubble of the early 2000s.
    
    Reverse Mortgages
    
    As their name suggests, reverse mortgages are a very various monetary product. They are for house owners age 62 or older who wish to convert part of the equity in their homes into money.
    
    These house owners can borrow against the value of their home and receive the cash as a swelling sum, fixed month-to-month payment, or line of credit. The whole loan balance ends up being due when the debtor dies, moves away completely, or sells the home.
    
    Tip
    
    Within each type of mortgage, debtors have the choice to buy discount rate indicate lower their interest rate. Points are essentially a cost that borrowers pay upfront to have a lower rate of interest over the life of their loan. When comparing mortgage rates, compare rates with the very same number of discount rate points for a real apples-to-apples comparison.
    
    Average Mortgage Rates (Up Until Now for 2025)
    
    Just how much you'll have to pay for a mortgage depends upon the type (such as fixed or adjustable), its term (such as 20 or 30 years), any discount points paid, and the rate of interest at the time. Rate of interest can vary from week to week and from lender to lender, so it pays to search.
    
    Mortgage rates sank to historical lows in 2020 and 2021, taping their least expensive levels in practically 50 years. From approximately the start of the pandemic (April 2020) to Jan. 2022, the 30-year fixed-rate average hovered listed below 3.50%- consisting of a supreme low of 2.65%.
    
    But 2022 and 2023 saw mortgage rates increase, setting records in the opposite instructions. The 30-year fixed-rate average breached the 7% limit for the first time in 20 years in Oct. 2022. This past October, the rate was closer to 8%, notching a 24-year peak reading of 7.79%. In the months because then, the 30-year mortgage rate has changed, visiting more than a portion point by the end of 2023 and exceeding 7% once again in April and May 2024.
    
    According to the Federal Mortgage Mortgage Corp., typical rate of interest appeared like this since April 2025:
    
    30-year fixed-rate mortgage: 6.83%.
    15-year fixed-rate mortgage: 6. 03%
    
    How to Compare Mortgages
    
    Banks, cost savings and loan associations, and cooperative credit union were once virtually the only sources of mortgages. Today, nevertheless, a burgeoning share of the mortgage market includes nonbank loan providers such as Better, loanDepot, Rocket Mortgage, and SoFi.
    
    If you're buying a home loan, an online mortgage calculator can assist you compare approximated monthly payments based on the type of home mortgage, the rate of interest, and how large a down payment you prepare to make. It can also assist you identify how pricey a residential or commercial property you can fairly afford.
    
    In addition to the principal and interest you'll be paying on the home mortgage, the lending institution or home mortgage servicer may establish an escrow account to pay regional residential or commercial property taxes, homeowners insurance premiums, and other expenses. Those expenses will contribute to your regular monthly mortgage payment.
    
    Also, note that if you make less than a 20% deposit when you secure your home mortgage, your lending institution may require that you acquire private mortgage insurance (PMI), which ends up being another monthly cost.
    
    Important
    
    If you have a home mortgage, you still own your home (rather of the bank). Your bank might have lent you cash to purchase your house, but instead of owning the residential or commercial property, they impose a lien on it (the house is utilized as security, however just if the loan goes into default). If you default and foreclose on your home loan, nevertheless, the bank might become the brand-new owner of your home.
    
    Why Do People Need Mortgages?
    
    The price of a home is typically far greater than the quantity of money that most households conserve. As a result, mortgages allow individuals and families to buy a home by putting down just a reasonably little down payment, such as 20% of the purchase rate, and acquiring a loan for the balance. The loan is then secured by the value of the residential or commercial property in case the borrower defaults.
    
    Can Anybody Get a Mortgage?
    
    Mortgage loan providers should approve prospective customers through an application and underwriting procedure. Home loans are just offered to those with enough assets and income relative to their debts to almost carry the worth of a home with time. An individual's credit rating is likewise assessed when deciding to extend a home loan. The rate of interest on the home mortgage also varies, with riskier debtors getting greater rates of interest.
    
    Mortgages are provided by a range of sources. Banks and credit unions often offer home loans. There are also specialized home mortgage business that deal only with home loans. You may likewise employ an unaffiliated home loan broker to assist you look around for the very best rate among different lenders.
    
    What Does Fixed vs. Variable Mean on a Home mortgage?
    
    Many mortgages carry a set rate of interest. This suggests that the rate will not change for the entire term of the mortgage, normally 15 or thirty years, even if rates of interest increase or fall in the future. A variable- or variable-rate mortgage (ARM) has an interest rate that fluctuates over the loan's life based upon what rates of interest are doing.
    
    How Many Mortgages Can I Have on My Home?
    
    Lenders normally release a very first or main home mortgage before allowing a 2nd one. This additional home loan is commonly referred to as a home equity loan. Most loan providers do not offer a subsequent home mortgage backed by the very same residential or commercial property. There's technically no limitation to the number of junior loans you can have on your home as long as you have the equity, debt-to-income ratio, and credit report to get authorized for them.
    
    Why Is It Called a Home loan?
    
    The word "home loan" originates from Old English and French, implying "death vow." It gets that name because this type of loan "passes away" when it is either totally paid back or if the borrower defaults.
    
    Mortgages are a crucial part of home buying for a lot of debtors who aren't resting on numerous thousands of dollars of cash to purchase a residential or commercial property outright. Different types of mortgage are readily available for whatever your situations may be. Different government-backed programs allow more people to get approved for home mortgages and make their dream of homeownership a reality, but comparing the very best home mortgage rates will make the home-buying process more affordable.
    
    Federal Housing Finance Agency, Office of Inspector General. "Fannie Mae and Freddie Mac Purchases of Adjustable-Rate Mortgages," Pages 7-8.
    
    U.S. Department of Housing and Urban Development. "How the HECM Program Works."
    
    Freddie Mac. "Mortgage Market Survey Archive: 2020."
    
    Freddie Mac. "Mortgage Market Research Archive: 2021."
    
    Freddie Mac. "Mortgage Market Survey Archive: 2022."
    
    The Federal Reserve Bank of St. Louis. "30-Year Fixed Rate Mortgage Average in the United States."
    
    Freddie Mac. "Mortgage Market Survey Archive: 2023."
    
    Freddie Mac. "Mortgage Rates"
    
    Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?"
    
    Federal Reserve Bank of St. Louis." Primer on the Mortgage Market and Mortgage Finance," Page 1 of PDF.
    
    1. Overview CURRENT ARTICLE
    
    2. Shopping for Mortgage Rates.
16. 5 Things You Need to Get Pre-Approved for a Mortgage
17. Mistakes to Avoid
18. Locking In the Rate
    
    1. Points and Your Rate
19. How Much Do I Need to Put Down on a Home loan?
20. Understanding Different Rates
21. Fixed vs. Adjustable Rate 5.