A mortgage is a type of secured loan used to finance the purchase of real property. The property itself serves as collateral. The lender provides funds to purchase the home and the borrower repays the loan with interest over a defined term, typically 15 or 30 years. If the borrower fails to make payments, the lender can foreclose on the property.

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Written by

Brian McKay

| Fact checked | Published April 8, 2023 | Updated September 28, 2026 | 6 min read

Mortgage Basics: What You Should Know Before Buying a Home

Q: What types of mortgages are available?

The main types are fixed-rate mortgages (rate stays the same for the entire term), adjustable-rate mortgages or ARMs (rate is fixed for an initial period then adjusts periodically), FHA loans (government-backed, lower down payment requirements), VA loans (for eligible veterans and service members, 0% down available), and USDA loans (for eligible rural properties, 0% down available).

Q: What is the difference between a fixed-rate and adjustable-rate mortgage?

A fixed-rate mortgage has an interest rate that remains the same for the entire loan term, providing predictable monthly payments. An adjustable-rate mortgage (ARM) starts with a fixed rate for an initial period (typically 3, 5, 7, or 10 years) then adjusts periodically based on a benchmark index. ARMs carry rate risk after the initial period ends but may offer lower initial rates.

Q: What credit score do I need to get a mortgage?

Conventional loans generally require a credit score of 620 or higher, though scores below 740 may result in higher rates. FHA loans allow scores as low as 580 for a 3.5% down payment (or 500 with 10% down). VA and USDA loans do not set a minimum score by regulation, but most lenders require at least 620. The higher your score, the better the rate you are likely to receive.

Q: What is private mortgage insurance (PMI)?

PMI is insurance that protects the lender if a borrower defaults. It is required on conventional loans when the down payment is less than 20% of the purchase price. PMI typically costs 0.5% to 1.5% of the loan amount per year. It can be canceled once you reach 20% equity in the home based on the original purchase price, and is automatically removed at 22% equity under the Homeowners Protection Act.

Mortgage basics before buying a home: a mortgage is a loan secured by the property and repaid over 15 or 30 years through monthly payments of principal, interest, taxes and insurance. Lenders price it on your credit score, debt to income ratio, down payment and loan type, so comparing offers from several lenders is the single biggest money saver. The MonitorBankRates national average is 7.18% on a 30 year fixed mortgage and 6.73% on a 15 year fixed, verified by MonitorBankRates as of October 13, 2026.

A mortgage is the most significant financial commitment most people will ever make, yet many borrowers enter the process without a clear understanding of how mortgages work, how lenders evaluate them, or how the loan type and term they choose will affect the total cost over time. This guide covers the essentials: what a mortgage is, how lenders qualify you, the main types of loans available, how rate and term interact to determine your total cost, and how to shop for the best deal.

Understanding the fundamentals before you apply puts you in a stronger negotiating position, helps you avoid costly mistakes, and ensures you choose a mortgage structure that fits your long-term financial goals, not just your immediate monthly budget.

30 year fixed

7.18%

avg rate

15 year fixed

6.73%

avg rate

MonitorBankRates national averages as of October 13, 2026, computed from rates published by more than 8,000 banks and credit unions.

Key facts

Common Loan Terms: 15 years or 30 years
PMI Threshold: Required with less than 20% down
Rate Types: Fixed rate or adjustable rate (ARM)
Key Approval Factors: Credit score, income, DTI, down payment

What Is a Mortgage?

A mortgage is a type of secured loan used to purchase real property. The property itself serves as collateral for the loan. The lender provides the funds needed to complete the purchase, and the borrower repays the principal plus interest over a defined term through regular monthly payments. If the borrower stops making payments, the lender has the legal right to foreclose on the property and sell it to recover the outstanding balance.

A monthly mortgage payment typically consists of four components, often abbreviated as PITI: principal (repayment of the loan balance), interest (the cost of borrowing), taxes (property taxes collected in escrow), and insurance (homeowner's insurance and, if applicable, private mortgage insurance).

How Lenders Qualify You

When you apply for a mortgage, the lender evaluates your financial profile across several dimensions to determine whether to approve the loan and at what rate. Understanding these factors in advance allows you to take steps to improve your profile before applying.

Credit score: Most conventional lenders require a score of at least 620. Scores below 740 typically result in higher interest rates. FHA loans allow scores as low as 580 for a 3.5% down payment. The higher your score, the lower your offered rate is likely to be.
Debt-to-income ratio (DTI): Lenders calculate the percentage of your gross monthly income that goes toward monthly debt payments. Most conventional programs cap DTI at 43%, though some allow higher with strong compensating factors.
Income verification: Lenders verify income through pay stubs, W-2s, and tax returns. Self-employed borrowers typically need two years of tax returns.
Down payment and assets: The size of your down payment affects your loan-to-value ratio, rate, and whether PMI is required. Lenders also verify that you have sufficient reserves after closing.
Employment history: Stable employment history of at least two years in the same field is generally preferred. Job changes within the same industry are usually acceptable.

Types of Mortgages

Common Mortgage Types: Key Characteristics
Loan Type	Rate Structure	Min. Down	Best For
30-Year Fixed	Stable for 30 years	3% to 5%	Long-term stability, lower payment
15-Year Fixed	Stable for 15 years	3% to 5%	Faster payoff, less total interest
5/1 ARM	Fixed 5 yrs, adjusts annually	3% to 5%	Short-term ownership plans
FHA Loan	Fixed or adjustable	3.5%	Lower credit scores, limited down payment
VA Loan	Fixed or adjustable	0%	Eligible veterans & service members
USDA Loan	Fixed	0%	Rural/suburban properties, income limits

Fixed-Rate Mortgages

A fixed-rate mortgage locks in an interest rate for the life of the loan. Your principal and interest payment never changes, providing complete predictability in your monthly housing cost regardless of what happens to interest rates in the broader market. Fixed-rate loans are the most common choice for borrowers who plan to stay in a home for many years.

Adjustable-Rate Mortgages (ARMs)

An ARM offers a fixed rate for an initial period (commonly 3, 5, 7, or 10 years) followed by annual rate adjustments tied to a market index such as SOFR (the Secured Overnight Financing Rate). The initial rate on an ARM is typically lower than a comparable fixed-rate mortgage. After the initial period, the rate can rise or fall depending on market conditions, subject to caps on how much it can change per adjustment and over the life of the loan. ARMs carry risk if you remain in the home longer than the initial fixed period.

Government-Backed Loans

FHA loans (insured by the Federal Housing Administration), VA loans (guaranteed by the Department of Veterans Affairs), and USDA loans (guaranteed by the U.S. Department of Agriculture) are designed to expand access to homeownership. They allow lower down payments and, in some cases, accept lower credit scores than conventional loans. Each program has specific eligibility criteria, fees, and mortgage insurance requirements that differ from conventional financing.

Loan Terms and How They Affect Total Cost

The loan term is the number of years over which you repay the mortgage. A longer term means lower monthly payments but substantially more total interest paid. A shorter term means higher monthly payments but a dramatically lower total cost over the life of the loan.

Example: On a $300,000 loan at the same interest rate, a 30-year term produces a significantly lower monthly payment than a 15-year term, but the 30-year loan may cost more than twice as much in total interest over its life. Choosing between terms is a trade-off between monthly cash flow and total long-term cost.

The 30-year fixed mortgage remains the most popular choice in the United States because of its lower monthly payment, which preserves cash flow for other financial goals. The 15-year mortgage is the better financial choice for borrowers who can comfortably afford the higher payment and want to build equity faster or minimize total interest paid.

How Your Interest Rate Affects Total Cost

Your interest rate has a compounding effect on total mortgage cost. A difference of even 0.5% in rate, maintained over a 30-year term on a large loan balance, can mean tens of thousands of dollars in additional interest paid. This makes rate shopping (comparing offers from multiple lenders before committing) one of the highest-value actions you can take in the mortgage process.

Your rate is determined by a combination of market conditions (which you cannot control) and your personal financial profile (which you can improve). The factors within your control include your credit score, DTI ratio, down payment size, and the loan type you choose. Improving your credit score before applying, reducing existing debt, and saving for a larger down payment can all lower your offered rate.

Get Multiple Loan Estimates: Under federal law, lenders must provide a Loan Estimate within three business days of receiving your application. Comparing Loan Estimates from at least three lenders side by side (including the interest rate, APR, origination fees, and total closing costs) is the most reliable way to find the best deal. Compare current mortgage rates at MonitorBankRates.com to benchmark what lenders are offering.

Compare Mortgage Rates

Shop rates from multiple lenders before you apply; it can save thousands over the life of your loan.

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Frequently Asked Questions

What is a mortgage? ▼

A mortgage is a secured loan used to purchase real property. The property serves as collateral. The lender funds the purchase and the borrower repays the principal and interest over a defined term, typically 15 or 30 years. If the borrower defaults, the lender can foreclose on the property. Monthly payments typically include principal, interest, property taxes (in escrow), and insurance.

What types of mortgages are available? ▼

The main types are fixed-rate mortgages (rate stays constant for the full term), adjustable-rate mortgages (fixed initially, then adjusts annually), FHA loans (government-insured with lower down payment requirements), VA loans (for eligible veterans and service members, with 0% down available), and USDA loans (for eligible rural properties, with 0% down available). Each has different down payment requirements, credit score thresholds, and insurance costs.

What is the difference between a fixed-rate and adjustable-rate mortgage? ▼

A fixed-rate mortgage has an interest rate that stays the same for the entire loan term, providing predictable payments. An adjustable-rate mortgage (ARM) starts with a fixed rate for an initial period (commonly 5 or 7 years) then adjusts annually based on a market index. ARMs often offer lower initial rates but carry risk if rates rise after the initial period ends.

What credit score do I need to get a mortgage? ▼

Conventional loans generally require a 620 or higher score, though rates improve significantly above 740. FHA loans allow scores as low as 580 for a 3.5% down payment (or 500 with 10% down). VA and USDA loans have no set regulatory minimum, but most lenders require at least 620. The higher your score, the better the rate you are likely to receive.

What is private mortgage insurance (PMI)? ▼

PMI is insurance that protects the lender if you default on the loan. It is required on conventional loans when the down payment is less than 20% and typically costs 0.5% to 1.5% of the loan amount per year. You can request cancellation once your equity reaches 20% of the original purchase price; it is automatically removed at 22% equity under the Homeowners Protection Act, provided payments are current.

This article is for general information and is not financial advice. Rates shown are market averages, not offers; terms and fees are set by each institution.