What is a mortgage
Strictly speaking, the mortgage (or deed of trust in many states) is the legal document that pledges your home as security; the money you borrow is the mortgage loan. In everyday language both are called a mortgage.
Until the loan is repaid, the lender holds a lien on the property: you own the home, but the lien is recorded in public land records and must be paid off when you sell or refinance. If you stop paying, the lender can foreclose and sell the property.
Because the loan is secured, mortgages are cheaper than unsecured loans and run for long terms — most commonly 30 or 15 years.
Key features
- Down payment. Conventional loans start at 3% down, FHA loans at 3.5% (with a credit score of 580+), and VA and USDA loans can require nothing down. The loan-to-value ratio (LTV) drives your rate and insurance costs.
- Private mortgage insurance (PMI). With less than 20% down on a conventional loan you pay PMI, which protects the lender, not you. You can ask to cancel it at 80% LTV, and it ends automatically at 78% of the original value under the Homeowners Protection Act. FHA loans charge their own mortgage insurance premium (MIP), which with less than 10% down lasts for the life of the loan.
- Escrow. Most lenders collect property taxes and homeowners insurance with your monthly payment, so your payment can change even with a fixed rate.
- Required insurance. Homeowners insurance is required; flood insurance is required for federally backed loans in high-risk flood zones; a lender’s title insurance policy is standard.
- Closing costs. Typically 2–5% of the loan: origination and underwriting fees, appraisal, title, recording, prepaid interest and escrow deposits.
Loan programs
- Conventional — not government-insured; most follow Fannie Mae and Freddie Mac rules up to the annual conforming loan limit. Larger loans are jumbo loans with stricter requirements.
- FHA — insured by the Federal Housing Administration; easier credit requirements but upfront and annual MIP.
- VA — for eligible veterans and service members; no down payment and no monthly mortgage insurance, but usually a one-time funding fee.
- USDA — for eligible rural and suburban areas and income limits; no down payment.
- State and local programs — many state housing finance agencies offer down-payment assistance for first-time buyers.
Fixed vs. adjustable rates
Fixed rate
The rate stays the same for the full term. The 30-year fixed is the most common US mortgage; a 15-year fixed has a lower rate and much less total interest but higher payments.
Adjustable rate (ARM)
A fixed rate for an initial period — for example 5, 7 or 10 years (a “5/6 ARM” adjusts every six months after year five) — then a rate tied to an index such as SOFR plus a margin. Caps limit each adjustment and the lifetime increase. ARMs can make sense if you expect to sell or refinance before the first reset.
Points
You can pay discount points at closing (1 point = 1% of the loan) to lower the rate. Calculate the break-even period: points pay off only if you keep the loan long enough.
How payments work
US mortgages are fully amortizing: each monthly payment is the same (for principal and interest), with mostly interest at first and mostly principal later. On a 30-year loan, it takes many years before principal becomes the larger share.
SMARTPRO builds a full amortization schedule so you can see how much of every payment goes to interest and how much to principal.
APR, Loan Estimate and Closing Disclosure
The APR (annual percentage rate) under the Truth in Lending Act includes interest plus most lender fees and points, so it is the better number for comparing offers. Within three business days of your application, each lender must give you a standardized Loan Estimate — request several and compare them line by line. At least three business days before closing you receive the Closing Disclosure with the final terms.
Tax considerations
If you itemize deductions, mortgage interest on up to $750,000 of acquisition debt on your main and second home is deductible ($375,000 if married filing separately). Starting with the 2026 tax year, mortgage insurance premiums are again treated as deductible mortgage interest. Most homeowners take the standard deduction, so check whether itemizing actually benefits you.
How terms differ between lenders
Banks, credit unions and online lenders price the same borrower differently. Compare the whole package:
| Term | How it can differ |
|---|---|
| Rate and points | The rate offered with and without points; rate-lock length and cost. |
| Lender fees | Origination, underwriting, application and processing fees (section A of the Loan Estimate). |
| Programs | Not every lender offers FHA, VA, USDA, jumbo or down-payment assistance loans. |
| Credit overlays | Minimum credit score and maximum debt-to-income ratio stricter than program rules. |
| PMI | Monthly, single-premium or lender-paid; price varies with credit score. |
| Servicing | Whether the lender keeps servicing your loan or sells it; online tools for extra payments. |
| Prepayment | Most loans have no prepayment penalty; some lenders offer a cheap recast after a lump-sum payment. |
Checklist before you sign
- Get Loan Estimates from at least three lenders on the same day and compare APR, points and section A fees.
- For an ARM, calculate the payment at the first and the lifetime rate cap.
- Know when PMI ends and how much it adds to the payment.
- Budget for taxes, insurance and HOA dues, not just principal and interest. A common guideline is housing costs under about 28% of gross income and total debt payments under about 36%.
- Keep an emergency fund after closing.
This material is for general information only, describes US rules in effect on the publication date, and is not financial, legal or tax advice. Federal and state rules, programs and lender terms change — always check your loan documents, your lender’s current terms and official sources such as the CFPB and IRS.