What Is a Mortgage and How Does It Work?

A mortgage is a loan to buy a home, or to borrow against one you own, in which the home itself secures the debt. You sign a promissory note promising to repay the money with interest, and a mortgage or deed of trust that gives the lender a lien on the home, meaning the right to take and sell it if you stop paying. You repay in monthly installments, usually over 15 or 30 years, and each payment covers interest and some principal, often with property taxes and homeowners insurance added through an escrow account. When the loan is paid off, the lender releases the lien and the home is yours free and clear.

What documents create a mortgage?

At closing you sign two documents, and together they make up the mortgage.

• The promissory note is the debt. It states the amount you borrowed, the interest rate, the monthly payment, the date the loan must be paid in full, and the late charge if a payment arrives after the grace period. The standard Fannie Mae and Freddie Mac note also lets you prepay principal at any time without a prepayment charge.
• The security instrument pledges the home as collateral for the note. It is called a mortgage in some states, such as Florida, and a deed of trust in others, such as California, where a neutral trustee holds the power to sell the home if you default. The lender records it in the county land records, where anyone checking the title can see the lien.

The security instrument also sets the rules you agree to while you own the home: keep it insured, pay the property taxes, and maintain it. It includes a due-on-sale clause, which lets the lender demand full payment if you sell or transfer the home without its consent. In a normal sale, that is what happens: part of the sale proceeds pays off the loan at closing.

In everyday U.S. usage, "mortgage," "home loan," and "mortgage loan" mean the same thing. How a mortgage differs from other loans compares it with personal, auto, and student loans.

What does your monthly payment cover?

A mortgage payment is often described as PITI:

• Principal: the part that reduces what you owe.
• Interest: the lender's charge for the money.
• Taxes: property taxes, if the lender collects them through escrow.
• Insurance: homeowners insurance, also usually through escrow.

Some payments include a fifth piece, mortgage insurance, which protects the lender against losses if you stop paying. On a conventional loan (one not insured or guaranteed by the government), you generally pay private mortgage insurance (PMI) if you put less than 20% down.

You can ask your servicer in writing to cancel PMI when the balance reaches 80% of the home's original value, or on the scheduled date for reaching that level. You must be current, have a good payment history, and meet requirements for no other liens and evidence that the home's value has not fallen. PMI generally ends automatically on the scheduled date for reaching 78% if you are current; extra payments do not move that date forward.

FHA and USDA loans charge their own premiums, and VA loans charge a one-time funding fee instead unless you qualify for an exemption, such as receiving VA compensation for a service-connected disability or being a surviving spouse receiving Dependency and Indemnity Compensation. Types of mortgage loans compares them.

Example: You buy a $400,000 home with 20% down ($80,000) and borrow $320,000 for 30 years at 7.32%, Freddie Mac's average 30-year fixed rate for the week of October 22, 2026.

The tax and insurance figures are assumptions for the example. Your Loan Estimate shows the lender's estimate for your home. Homeowners association dues are usually paid separately to the association.

How does amortization work?

Amortization is the schedule that pays off the loan in equal monthly payments. On a fixed-rate loan, the principal and interest payment stays the same for the whole term, but the split inside it changes every month.

Each month, interest is the current balance times the annual rate divided by 12. Whatever is left of the payment goes to principal. For the $320,000 loan above:

• Month 1: $320,000 x 7.32% / 12 = $1,952.00 interest. The remaining $246.18 reduces the balance to $319,753.82.
• Month 2: interest is figured on the lower balance, so it drops to $1,950.50 and principal rises to $247.68.

That shift keeps going for 30 years:

Principal does not exceed interest until payment 248, more than 20 years in. Over the full term you would pay $471,344.07 in interest on top of the $320,000 borrowed. The same loan over 15 years at Freddie Mac's 6.68% average would cost $2,819.31 a month and $187,475.05 in total interest.

Two ways to change this math:

1. Pay extra principal. Under the standard note, you must have made all monthly payments due and notify the lender in writing that the extra payment is for principal. The lender may first apply it to accrued unpaid interest on the amount prepaid; the rest reduces principal and shortens repayment. Your required monthly payment stays the same unless the lender agrees in writing to change it. Whether to pay your mortgage early weighs that against other uses of the money.
2. Choose a shorter term. Average mortgage length covers how long loans run and how long people actually keep them.

As the balance falls and the home's value changes, the difference between the two is your home equity, which you can tap later with a home equity loan, a line of credit, or a cash-out refinance.

How does escrow work?

Many lenders require an escrow account, also called an impound account. An escrow account may also be required by law. Each month, part of your payment goes into the account, and your servicer, the company that collects your payments, pays the property tax and insurance bills when they come due.

Federal rules set the limits:

• The servicer may hold a cushion of no more than one-sixth of the year's expected escrow bills, about 2 months' worth.
• It must analyze the account once a year and send you a statement within 30 days of the end of the escrow year.
• If the analysis shows a surplus of $50 or more and you are current, it must refund the surplus within 30 days.

Because escrow follows your actual tax and insurance bills, your total payment can rise or fall even on a fixed-rate loan. How an escrow account works covers shortages and how to read the annual statement.

How do you get from application to closing?

1. Check what you can qualify for. Lenders look at your credit score, your debt-to-income ratio (your monthly debts divided by gross monthly income), your income history, and your savings. See how to qualify for a mortgage.
2. Plan the down payment and choose a loan type. The minimum ranges from 0% on VA and USDA loans to 3.5% on FHA loans and 3% to 5% on most conventional loans. What a down payment is explains how it affects the rate and mortgage insurance.
3. Apply and compare offers. The lender must give you a Loan Estimate within 3 business days of receiving your application, so you can compare rates and fees from several lenders on the same form.
4. Underwriting and appraisal. The lender verifies your documents and orders an appraisal to confirm the home's value supports the loan.
5. Closing. You must receive the Closing Disclosure, with the final terms and cash to close, at least 3 business days before you close. At closing you sign the note and the security instrument and pay the down payment and closing costs.

The mortgage application process walks through each step and the documents to gather.

What happens if you stop paying?

A payment that arrives after the grace period in your note triggers the late charge the note sets. Missing payments is a default under the security instrument, and the consequences build from there:

• Before foreclosure can start: federal servicing rules bar the servicer from making the first foreclosure notice or filing until you are more than 120 days behind. That window is the time to apply for help such as a repayment plan or loan modification.
• Notice to cure: on the standard Fannie Mae and Freddie Mac forms, the lender must send a notice naming the default and giving you at least 30 days to fix it before it can demand the full balance.
• Foreclosure: depending on your state, the sale runs through a court case (judicial foreclosure) or through notices and a trustee's sale without a lawsuit (nonjudicial foreclosure). The standard forms let you reinstate the loan, by paying what is past due plus the lender's costs, up to 5 days before the sale or a different deadline set by state law.

How foreclosure works covers state timelines and what happens to any balance left after the sale. If you expect to miss a payment, call your servicer and a HUD-approved housing counselor before the first missed due date.

What happens when you pay it off?

You pay off a mortgage by making the last scheduled payment, by refinancing into a new loan, or by selling the home. Ask your servicer for a written payoff statement, which shows the exact amount owed through a specific date, including interest that accrues after your last payment.

Once the debt is paid, the lender must release its lien. On the Florida mortgage form, the lender releases the security instrument; on the California deed of trust form, the lender asks the trustee to reconvey the property to you. Either way, a release document should be recorded in the county land records. Check the county records a few months after payoff, and contact your servicer if no release appears, because an unreleased lien can delay a later sale or refinance.

Payoff ends the old loan's escrow account. If you refinance, your new loan may have an escrow account for property taxes and homeowners insurance. If you keep the home without an escrow account, you pay those bills yourself, so set them up before the next due date.