How Mortgages Work

Mortgages are long-term loans that allow you to spread the cost of a home over many years. Understanding how payments are structured can help you make better borrowing decisions.

Principal and interest

Each mortgage payment is made up of principal and interest. Principal reduces the amount you owe, while interest is the cost of borrowing the money.

Amortization

Mortgages are amortized, meaning payments are scheduled so the loan is fully paid off by the end of the term. Early payments include more interest, while later payments apply more toward principal.

Loan terms

Common mortgage terms are 15 and 30 years. Shorter terms usually have higher monthly payments but lower total interest. Longer terms reduce monthly payments but increase overall cost.

Escrow and additional costs

Some lenders collect property taxes and homeowners insurance through an escrow account. These costs are often included in your monthly payment.

What affects your monthly payment

• Loan amount
• Interest rate
• Loan term
• Taxes and insurance

Understanding total loan cost

Looking beyond the monthly payment helps you understand the true cost of a mortgage. Total interest paid over the life of the loan can be significant.