How Mortgages Work
A mortgage is a home loan where the property serves as collateral. Monthly payments (P&I) cover principal and interest. In the US and UK, additional costs include property taxes, homeowner's insurance, and possibly PMI (private mortgage insurance) if down payment is under 20%.
Common Mortgage Terms
- Down payment: Typically 5–20% of home price
- PMI: Required when down payment < 20% (adds ~0.5–1% of loan to annual cost)
- Points: Upfront fee to lower interest rate (1 point = 1% of loan)
- ARM vs. Fixed: Adjustable rate starts lower but can rise; fixed rate is stable
Monthly Payment Examples (USA, 30-Year Fixed, 7%)
- $200,000 mortgage → ~$1,331/month
- $350,000 mortgage → ~$2,329/month
- $500,000 mortgage → ~$3,327/month
- $750,000 mortgage → ~$4,990/month
Frequently Asked Questions
What is included in a mortgage payment?
A full mortgage payment (PITI) includes: Principal, Interest, property Taxes, and homeowner's Insurance. PMI may also be included if your down payment was less than 20%.
Should I choose a 15-year or 30-year mortgage?
30-year: lower monthly payment, more flexibility. 15-year: higher payment but roughly half the interest cost over the life of the loan. If you can afford 15-year payments, it's often the better financial choice.
What is an ARM mortgage?
ARM (Adjustable Rate Mortgage) starts with a fixed rate for 3, 5, or 7 years, then adjusts annually based on market rates. It's risky if rates rise significantly.
How does my credit score affect my mortgage rate?
A FICO score of 760+ typically qualifies for the lowest rates. Each step down (750→720→700) increases your rate by approximately 0.1–0.5%, costing thousands more over the loan life.