Understanding Mortgages

Understanding Mortgages
Jim Collins

If you’re planning to buy your first home, you’ll want to know how mortgages work. Mortgages are necessary for most people to be able to afford a home.

Hiring experts to help you deal with your mortgage is a wise choice. Even if you’re going to get the extra help, you should first learn how mortgages work. You will be in the right position to explain what your needs are. You are then more likely to end up with the mortgage that works best for your situation.

What is a mortgage?

A mortgage is a personal loan that is used to buy a home. Instead of saving up the entire cost of a home, you can pay just a portion upfront and pay the majority of the price over time.

Mortgages are secured loans, meaning they require collateral. The home you’re purchasing serves as collateral for any mortgage you take.

How mortgages work when you’re buying a home.

The first step to getting a mortgage is finding the right lender to provide you with one. This may sound simple, but there are quite a few things to consider when choosing one.

You will need to apply for a mortgage from a lender. Once a lender accepts your application, you’ll have to make your down payment. Down payments start at a minimum of 5% of the home’s price. But most borrowers pay around 20% upfront. In most cases, you can move into the new home once the closing is complete.


Once you purchase your home with the down payment, you need to start repaying your lender. Repayments are typically monthly, and you’ll have to repay the money you owe plus interest. But some borrowers choose other repayment schedules such as bi-weekly.

How to choose the right mortgage.

Your mortgage will likely be the largest loan you take out in your lifetime. Your choice of mortgage terms will be one that stays with you for years. It’s ideal to take your time and consult a specialist while searching.

You’ll want to consider several factors to make the right choice in mortgages:

Mortgage Type: Like many installment loans, mortgages can come as fixed-rate or variable-rate loans. But they can also be open or closed loans. Open mortgages can be paid off in full at any point in the mortgage’s term. But a closed mortgage can only be paid in small installments as per the term you agreed to when you took your mortgage. If you want to repay a closed mortgage early, you’ll most likely have to pay a penalty.

Interest Rates: The interest rate on your mortgage will be the percentage that your lender will charge you for borrowing. The rates a lender is willing to offer you depends on their perceived risk. Using the factors below, they will perform a risk analysis of your mortgage and offer you a rate. Not all lenders are the same. That’s why you should take your time to compare different lenders. As discussed above, mortgages can come with fixed or variable interest rates. 

Your interest rates will vary depending on several factors:

  • Personal credit score
  • Income
  • Your existing debt
  • The home’s location
  • The size of your down payment
  • Mortgage type and term

Mortgage Term: Your mortgage’s term is the length of time that the mortgage’s interest rate and conditions remain in effect. Terms can range from a few months to years.

Amortization Period: Your amortization period is how long it takes you to pay off your mortgage in full. The amortization period most borrowers pick is around 25 years. If you decide on an amortization period of over 25 years, your down payment must be at least 20% of the home’s purchase price.


Equity is the difference between your home’s value and the unpaid balance of your mortgage. Building equity is an important priority for homeowners. In some cases, you can build further equity by making more frequent payments than those laid out on your mortgage contract. Be aware that you may face penalties for making extra or larger payments depending on the mortgage type you chose. If you want another way to build equity, you can also make improvements to your property to increase its value.

Get professional mortgage advice.

If you’re a first-time home buyer, taking out a mortgage will likely be one of the most significant events of your life. Knowing that, it’s likely no surprise that it’s a good idea to look for a professional opinion about your situation. Mortgage specialists can walk you through the mortgage options available to you.