Mortgage

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What is a Mortgage Loan?

A home mortgage is a long-term loan used to purchase real estate, often a primary residence or investment property, with the home serving as collateral. Borrowers repay the loan in monthly installments with interest, typically over 15 or 30 years. Failure to make payments can lead to repossession, while refinancing allows changes to interest rates or loan terms.

What Is a Mortgage Rate?

Mortgage rates express the amount of interest you will pay on your mortgage as a percentage. For example, if you borrow $300,000 with a 5% fixed interest rate, you will pay $15,000 in interest by the time you pay off your home (unless you pay more toward the principal or refinance).

A variety of factors determine the current mortgage rates, including economic indicators such as inflation and unemployment as well as actions by the Federal Reserve. The rates change each day, which is why most lenders post today’s mortgage rates on their homepages.

Your financial history affects your ability to qualify for the best mortgage rates. In general, you should aim for a credit score of at least 740 to save the most money possible on interest. Lenders also look at the loan-to-value ratio (LTV) when determining home loan rates. This number represents the amount you will borrow in comparison to the value of the property. The LTV should be less than 80% for the lowest mortgage rates.

What is a Mortgage Refinance?

Mortgage refinancing is the process of replacing your existing home loan with a new one—typically to secure better terms. Homeowners often refinance to take advantage of lower interest rates, reduce monthly payments, change the loan duration, or switch from an adjustable-rate mortgage to a fixed-rate mortgage. Refinancing can also be used to tap into home equity, providing funds for major expenses like home renovations, education, or debt consolidation.

When you refinance, the new loan pays off your original mortgage, and you begin making payments on the new terms. While refinancing can offer significant financial benefits, it’s important to consider associated costs such as closing fees and the overall impact on your long-term financial goals. Working with an experienced loan advisor can help you determine whether refinancing is the right move based on your personal and financial situation.

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Types of Mortgage Loans

CONVENTIONAL LOANS

A conventional loan isn’t guaranteed by any government agency and remains the most popular mortgage option. Lending rules for conventional loans are set by Fannie Mae and Freddie Mac, and borrowers with scores as low as 620 may qualify for 3% down payment financing.

FIXED-RATE MORTGAGE

Most homeowners prefer fixed-rate mortgages because they offer the financial comfort of a stable and predictable monthly payment. The 30-year fixed-rate mortgage is the most common fixed mortgage chosen, because it allows for the lowest monthly payment spread out for the longest period of time.

ADJUSTABLE-RATE MORTGAGE

Borrowers that need short term savings may choose an adjustable-rate mortgage (ARM) to take advantage of lower ARM rates for the first three, five, seven or 10 years of their loan term. The 5/1 ARM is a popular choice: The rates are typically lower than current 30-year rates for the first five years and then adjust yearly until the loan is paid off.

VA MORTGAGE

Your military service may make you eligible for a no-down payment VA loan, a loan backed by the U.S. Department of Veterans Affairs (VA). There’s no mortgage insurance requirement regardless of your down payment, and qualifying guidelines are more flexible than other loan types.

FHA MORTGAGE

First-time homebuyers with credit scores below 620 may find it easier and more cost-effective to get an FHA loan, a loan backed by the Federal Housing Administration (FHA). Homebuyers may qualify with only a 3.5% down payment and a 580 credit score. One drawback: FHA loan limits are capped at $472,030 for a one-unit home in most parts of the U.S.

USDA MORTGAGE

This specialized loan program is guaranteed by the U.S. Department of Agriculture (USDA) allows for no down payment financing to help low- to moderate income consumers buy homes in designated rural areas.

SECOND MORTGAGE

A second mortgage is a home loan secured by a home that will be – or already is – secured by a first mortgage. The most common types of second mortgages include home equity lines of credit (HELOCS) and home equity loans. Second mortgages can be combined with a first mortgage to buy, refinance or renovate a home.

REFINANCE MORTGAGE

A refinance mortgage is a home loan that replaces your current mortgage with a new one. Homeowners often refinance to lower their payment, pay their loan off faster or take cash-out for debt consolidation, home repairs or renovations.

JUMBO MORTGAGE

A jumbo mortgage is part of the conventional loan family, but it’s considered “jumbo” because it exceeds the conforming loan limits set by the Federal Housing Financial Agency (FHA). For a single-family loan in 2025, any loan above $726,200 in most parts of the country would be considered a jumbo loan. Expect higher down payment, and more stringent credit and debt requirements to qualify.

FAQs

? What’s the difference between adjustable and fixed-rate mortgage?

A fixed-rate mortgage has the same interest rate for the life of the loan. Adjustable-rate mortgages (ARMs) have a low fixed rate for an initial period, often one year. The terms of your loan indicate how and when the rate will adjust. For example, a 5/1 ARM has a low fixed rate for five years and then changes every year. It can go up or down.

? Will applying for a mortgage affect my credit score?

During the underwriting process, your lender will do a “hard pull” of your credit. This can lower your score, especially if you have several hard inquiries within just a few months. Over time, however, a mortgage tends to build credit by diversifying your history and establishing a good payment record over many years.

? What do mortgage lenders consider when reviewing applications?

Each lender has its own requirements for loan approval. However, most mortgage lenders require a debt-to-income ratio of no more than 43% and a credit score of at least 580 depending on the type of mortgage. You must also account for your down payment funds and show a work history of at least two years. The property must meet the lender’s appraisal requirements.

? Which mortgage term is best?

If you choose a 30-year mortgage, you will have lower monthly payments. However, the loan will cost more in interest by the time you pay it off. A 15-year mortgage has higher monthly payments but less expensive interest over the life of the loan. The answer depends on your individual situation and financial goals.

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