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What is a mortgage?

Learn how mortgages and mortgage loans work

A mortgage is a loan you use to buy or refinance real estate. Mortgages have two parts. The first is the mortgage loan, which is a financial agreement between you and your lender. The lender agrees to give you money to finance a home (also called the “principal”) in return for your promise to pay back the money with interest.

The second is the mortgage itself, which is a legal agreement that gives the lender the right to take possession of your home if you fail to pay back your mortgage loan.

This difference explains why you’ll often see the phrase “mortgage loan” in application documents and official communications from your lender. Don’t worry about using the words mortgage loan instead of mortgage however. Your lender will know what you mean.

How does a mortgage work?

Your mortgage consists of documents and disclosures that define the loan agreement between you and your lender. These agreements include:

  • Loan amount or principal. The amount of money you will receive to finance your house when the mortgage closes.
  • Interest rate. How much money you will pay the lender to borrow your mortgage’s principal. Interest rates are expressed as percentages and based on the loan amount.
  • Fixed rate or adjustable rate. With a fixed rate mortgage, your interest rate stays the same over the life of the loan. With an adjustable rate mortgage, your interest rate can change and your mortgage will define how, when, and by how much your rate can change.
  • Annual Percentage Rate (APR). Annual percentage rate includes costs associated with getting a mortgage like lender fees, discount points, mortgage insurance, and closing costs. APR can help you better understand the total cost of a mortgage. Learn more about mortgage rate vs APR.
  • Term. Term is the number of years you have to pay a mortgage back. For example, when you get a 30 year mortgage this means you have 30 years to pay off the mortgage. Lenders frequently offer mortgages with 15 or 30 year terms.
  • Projected monthly payment. The estimated total cost of your monthly mortgage bill including payments for the principal, interest, mortgage insurance if required by the loan, property taxes, and homeowners insurance.
  • Prepayment penalty. Whether there is a cost associated with paying off the mortgage sooner than the terms require. When a mortgage has prepayment penalties, they often apply to the first several years of the loan’s term.
  • Closing costs and cash to close. Closing costs are fees you pay when you finalize your agreement with the lender (also called "closing" or "settlement"). Sometimes, you may be able to add your closing costs to your mortgage amount. Other times, you may need to pay these costs in cash at closing. Cash to close is the amount of cash you will need to bring to settlement to pay your closing costs.
  • Loan costs. A summary of costs associated with the mortgage that can include mortgage discount points, application fees, underwriting fees, appraisal fees, credit report fees, and more.
  • Loan calculations. These include estimates of the total amount of money you will pay in interest over the life of the loan.
  • Amortization. An amortized loan is a form of financing that is paid off over a set period of time.
  • Late payments. A definition of when your mortgage payment is considered late and how much the late fee will be. Mortgages typically state whether partial payments are allowed and how these payments will be applied too.
  • Escrow account. Your lender may require you to make regular payments toward your property taxes and homeowners insurance which they will keep in an escrow account and pay for you when these costs come due.
  • HOA or condominium fees. Your mortgage can include information on any homeowners association or condo fees you may have to pay.
  • Occupancy requirements. Whether the mortgage requires you to occupy the home as your primary residence and if so, for how long.
  • Assumption. Some mortgages allow a different borrower to take over (or "assume") your mortgage in certain circumstances. Learn more about assumable mortgages.

Your mortgage documents also contain information about you and any co-borrowers, your lender, the seller if you are using the mortgage to buy a house, and more. To get a mortgage, you will need to complete an application, provide documents, and meet your lender’s credit, income, and financial requirements. Learn more about how to apply for a mortgage.

Once you are approved for a mortgage and the loan closes, you will begin making required minimum monthly payments. You may make these payments to the same company that gave you a mortgage or you may make them to a separate company that specializes in managing your mortgage payments. Companies that specialize in managing mortgage payments are often called mortgage servicers.

What is a mortgage note?

A mortgage note (also called a "promissory" note) is a legal document which states your intention to pay your lender back and includes your principal loan amount, interest rate, and other loan details. You will sign this document at closing. When you have fully paid off your mortgage, your lender will return your mortgage note to you.

What is a deed of trust?

A deed of trust (also called a "mortgage, security instrument") is a legal document that states your lender has the right to take ownership of your home by foreclosure if you do not pay your mortgage according to the agreed terms. You will also sign this document at closing.

What is a conforming mortgage?

A conforming mortgage meets standards that make it eligible for purchase by Fannie Mae and Freddie Mac. These include credit score, debt-to-income, and other requirements. Lenders often prefer to offer mortgages that conform to Fannie and Freddie’s standards. They may charge higher interest rates or have higher credit, income, and financial requirements for mortgages that do not conform to these standards. Learn more about conforming mortgages.

What can you buy with a mortgage?

You can use a mortgage to buy real estate. Many people use a mortgage to buy a home and the land on which the home is built. You can buy single family homes, duplexes, multi-unit homes, townhomes, condominiums, and vacation homes as well as investment and rental properties with mortgages.

In some cases, you may be able to buy a manufactured home with a mortgage. In other cases, you may need to get another type of loan to buy a manufactured home.

Can you buy land with a mortgage?

No. You typically cannot buy land with a mortgage. Instead, you will need to apply for a land loan. Lenders often charge higher interest rates and require higher minimum down payments for land loans because they see these loans as more risky than mortgages. Land loans can have shorter terms than mortgages and can feature balloon payments. Lenders may have higher credit, income, and financial requirements for land loans too. Freedom Mortgage does not offer land loans.

Can you get a mortgage to build a home?

No. You typically cannot finance the construction of a home with a mortgage. Instead, you will need to apply for a construction loan. Construction loans typically have short terms. For example, a construction loan may have a one year term, which means you will need to pay back the full loan in 12 months.

When you get a construction loan, you generally plan to complete building the house before you reach the end of the loan’s term. Then you apply for a mortgage which you use to pay off the construction loan and begin making payments on the mortgage like you would if you had purchased an existing home.

Some construction loans can help you buy land and finance the construction of a home. Some construction loans also allow you to convert them into a mortgage once the home is built rather than applying separately for a mortgage. Freedom Mortgage does not offer construction loans.

Can you get a mortgage to buy things other than real estate?

No. You cannot get mortgages to buy cars, boats, or any other types of possessions or property. You may be able to use the equity in your home to finance these purchases with a cash out refinance however. These refinances allow you to replace your current mortgage with a new mortgage for a higher amount and get the difference in cash at closing.

What is a second mortgage?

A second mortgage is another name for a home equity loan or a home equity line of credit (HELOC). These loans also allow you to borrow against the value of your home’s equity. Home equity loans and HELOCs are loans you take out on your home in addition to your mortgage, which is why they are called “second” mortgages. A cash out refinance is considered a first mortgage.

What kinds of mortgages can you get?

Like many lenders, Freedom Mortgage can help you buy or refinance a home with conventional loans as well as loans backed by the VA, FHA, and USDA. Learn more about the different types of mortgages.

Last reviewed and updated March 2023 by Freedom Mortgage Corporation.

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