How Do Mortgages Work? The Beginner’s Guide to Navigating 2025 Home Purchases

Buying a home is exciting. A place you can call your own, where you don’t have to worry about your neighbors yeeting their fully decorated Christmas tree out the window in front of your apartment. (Anyone else? No?)

First, though, you’ll likely need to jump over a big hurdle: getting a mortgage. The concept is straightforward—it’s a loan to buy a home—but as with most finance topics, understanding mortgages can be tricky as you dive in further. Let’s go on a journey together to see how mortgages work.

Table of Contents

1. What is a mortgage?
2. How do home loans work?
3. How do you actually get a mortgage?
4. How much are mortgage payments?
5. Who’s eligible?
6. What type of mortgage do you need?
7. Rates
8. How to get the best mortgage

What is a mortgage?

Quite simply, a mortgage is a home loan. Houses are expensive, and so it’s the largest loan most people will ever take out in their lifetimes. So large, in fact, that there’s a whole ecosystem surrounding mortgages that you don’t find with other loans, all designed to protect you (and the lender giving you the cash, of course).  

If that sounds like a big deal, it is. Fun (?) fact: The word “mortgage” means “death pledge” in Old French.

@etymologynerd

Why “mortgage” originally meant “death pledge” #etymology #linguistics #mortgage #english #language #interesting #trivia #funfact #harvard

♬ original sound – etymologynerd

As in, the debt dies when you either pay off the loan or you stop making payments, at which point your lender will take your house away and ruin your credit.

How do home loans work?

Lenders offer all kinds of mortgages with different rules and costs, so it’s on you to shop around. Some might be easier to qualify for if your credit isn’t the best, for example, or they might offer lower rates than other lenders. The Federal Reserve sets rates for banks, which they, in turn, pass down to you. 

All mortgages share some similarities, though. You’ll sign a mortgage contract at closing that sets up your house as collateral for the loan. You’re still the legal owner of the home with the title and everything, but your lender will place a lien on your home. This lets them foreclose on it if you default. 

Each month, you’ll make a mortgage payment. Over time, you’ll slowly repay the balance of the loan through a process called “amortization,” which determines how each monthly payment is split between interest and your remaining balance. Most of your early payments go toward interest, but by the end, more goes toward paying down the balance. 

Also: don’t be surprised if your mortgage company changes after you close on the loan. Lenders often sell your loan to other companies, or hire a loan “servicer” to handle the repayment process for them. That tripped me up when I first bought a home with XYZ Mortgage and the next week, Wells Fargo was actually my lender.

 

How do you actually get a mortgage? Step-by-step guide

Getting a home loan isn’t quite the same as signing up for a credit card at Target. It’s a massive loan with even heavier legal ramifications, and that means it’ll take a lot more time to cross your T’s and dot your I’s than you might be used to. Here’s a brief rundown of how getting a mortgage actually works:

1. Choose a loan type: Conventional? Jumbo? USDA? FHA? VA? There are specific types of mortgages for all shapes and sizes of would-be homeowners. Your lender can help you pick the right one, but it helps to know what direction you’re leaning toward first. 
2. Choose a lender: Different mortgage lenders offer various types of loans, with varying rates and fees. You can get prequalified with lenders just before you’re ready to start shopping. A prequalification letter tells sellers you’re ready to buy.
A document showing sellers that a lender has reviewed your finances and you’re likely to qualify for a loan.
An initial estimate from a lender of how much you might be able to borrow, based on basic financial info.
3. Find a home: Interview real estate agents to find one you’re comfortable with, and start home shopping. Don’t rush into choosing a home, but don’t wait, either. Markets are changing all the time. Put in an offer when you find the right home.  
4. Underwriting: If your offer is accepted, congrats! Swing back around to your lender so they can start the process of vetting and approving the actual home you chose, too. You’ll generally need a home appraisal and a more in-depth check of your own finances. 
The lender’s review process to decide if you qualify for a loan and on what terms.
A professional estimate of a home’s market value, required by lenders before approving a mortgage.
5. Closing: Now you’ll work with a settlement agent or escrow agent to check off the final items on your to-do list, which can vary depending on where you live. You’ll get a loan disclosure in advance, pay the closing costs, and then schedule an appointment to sign the legal paperwork.
The final step in buying a home, when you sign paperwork and the property officially becomes yours.
Fees you pay at closing for things like appraisals, inspections, and legal documents.
A neutral third party who finalizes the home purchase, ensuring all money and documents are properly exchanged.
Fees you pay at closing for things like appraisals, inspections, and legal documents.

When clients are buying their first home, coming up with the down payment is generally the most intimidating part. Avoiding private mortgage insurance (PMI) is important to many our clients because that’s “wasted money.”
In those cases, we plan how to save for a 20% down payment, rather than an FHA loan. We do this by getting way ahead of their goal of purchasing their first home, so we can work toward saving enough for that down payment.

That’s it! From your initial prep in saving up and building your credit to (insert what seems like a lifetime later), and you’ll have the keys to your new home. 

How much are mortgage payments?

Getting a good handle on how much your mortgage payments will be can be tough, but it’s especially important for understanding mortgages and whether they’re affordable. It’s often easier to look at how your lender will break down every monthly mortgage payment you make:

• Principal: Pays down your loan balance.
The original amount of money borrowed or the remaining balance on your loan.
• Interest: Pays the lender.
The cost you pay a lender for borrowing money, shown as a percentage rate.
• Taxes: Goes into an escrow account so your lender can pay your property taxes for you.
• Insurance: Same as for taxes—goes into an escrow account that your lender pays out from.
A separate account your lender uses to pay property taxes and homeowners insurance on your behalf.
• Other costs: Sometimes your HOA fees, if applicable, or things like PMI if you made a smaller down payment (typically less than 20% of the home price). 
Insurance you pay if your down payment is under 20%, protecting the lender if you stop paying your mortgage.

Your mortgage payments can change over time, as property taxes and insurance costs go up or down. That’s especially true if you have an adjustable-rate mortgage (or ARM, as they’re known), where even your interest rate can change depending on the whims of the economy. 

It’s always good to play around with a mortgage payment calculator to help you understand these costs for homes you’re interested in. Here are a few examples of how payments can vary based on a 30-year mortgage for real homes on Zillow:

• A $237,000 house in Albany, Missouri, with a 20% down payment ($47,400) at 6.08% APR would cost $1,462 per month.
The total yearly cost of borrowing, including interest and most fees, shown as a percentage.
The amount of money you pay upfront when buying a home, usually a percentage of the total price.
• A $600,000 house in Waitsfield, Vermont, with a 5% down payment ($30,000) at 6.547% APR would cost $4,229 per month.
• A $490,000 house in Mount Pleasant, Utah, with a 10% down payment ($49,000) at 6.403% APR would cost $3,328 per month.

Important: Just because a lender approves you for a mortgage for a certain amount, that doesn’t automatically mean you can afford it. It comes down to your excess cash flow after receiving income and paying for expenses. How much wiggle room do you have left?
Just accounting for a mortgage payment isn’t enough. Homeownership has many other associated costs that aren’t common with renting or leasing. This must be a long-term decision. Most people need to realize at least 10% in appreciation to break even on what they purchased the home for when considering realtor fees and closing costs.

Who’s eligible for a mortgage?

Much to the chagrin of my 20-year-old self, mortgage lenders do not, in fact, hand out mortgages like candy at Halloween. (In hindsight, that was probably for the best.) 

Instead, building up your chops for a mortgage can take years, because it takes time to develop the things that lenders consider first and foremost in your mortgage application:

• Income: Stable income from a W-2 job, or—if you have a few years under your belt—income from a side gig or small business you own.
• Credit score: A FICO Score of 620 or higher, which indicates you’ve managed other debt well.  
• Down payment: Lenders often want a minimum down payment of 20% of your home’s purchase price. That’s tough for first-time homebuyers. Many lenders and even some mortgages allow for a smaller down payment, but they may charge you more over time.
• Debt-to-income ratio (DTI): This metric measures what fraction of your monthly income goes toward debt payments. Lenders use it to make sure you have enough left over to pay your mortgage after you pay other bills. 
A comparison of your monthly debt payments to your monthly income, used to judge affordability.
A comparison of your monthly debt payments to your monthly income, used to judge affordability.

What type of mortgage do you need?

A “mortgage” is a general description for a home loan, but there are many sub-classifications to meet you where you’re at.

• Conventional: “Traditional” mortgages offered by lenders that aren’t made through a special government program. Nearly half of first-time homebuyers opted for conventional loans in mid-2025, according to ICE Mortgage Technology. 
A standard mortgage not insured or guaranteed by the government.
• Jumbo mortgage: Lenders can’t sell loans for over $806,500 (in most areas of the country) to Fannie Mae and Freddie Mac, the two largest loan purchasers in the country. As a result, rates are often higher. 
A mortgage for an amount higher than the limits set by Fannie Mae and Freddie Mac.
Government-sponsored companies that buy mortgages from lenders, helping keep loans available to borrowers.
• Government-backed mortgage (VA loan, USDA loan, FHA loan): The government offers to repay some or all of these loans if you default. Since it’s not as risky, lenders often approve people who don’t meet regular loan requirements. A third of first-time homebuyers opt for FHA loans.
A mortgage insured or guaranteed by the federal government, such as FHA, VA, or USDA loans.
A loan guaranteed by the Department of Veterans Affairs for eligible veterans and military members.
A government-backed loan program for buying homes in qualifying rural or suburban areas.
A loan backed by the Federal Housing Administration, designed to help people with lower credit scores or smaller down payments.
A loan backed by the Federal Housing Administration, designed to help people with lower credit scores or smaller down payments.
A government-backed loan program for buying homes in qualifying rural or suburban areas.
A loan guaranteed by the Department of Veterans Affairs for eligible veterans and military members.

There are other types of “mortgages” that you might see, too. And while they’re not important yet, it’s good to have an idea in your head going forward, so you know how they can help out:

• Reverse mortgage: If you’re 62 or older, you can borrow money from your home with no monthly payments, to be repaid after you no longer need your home. 
A loan for homeowners 62+ that lets them borrow against home equity without monthly payments.
• Rate-and-term refinance: Replace your mortgage with a new one offering a different term length or interest rate. This can help you save on interest and/or lower your monthly payment. (View our mortgage refinance calculator.)
Refinancing your mortgage to change the interest rate or repayment term, without borrowing extra cash.
The length of time you have to repay your loan, such as 15 or 30 years.
• Cash-out refinance: Same idea as above, but taking out an even larger loan means you’ll get the extra back as cash. It’s handy for big home improvements or upgrades. (See our cash-out refi calculator.)
Replacing your mortgage with a larger one and getting the difference in cash.
• Second mortgage (home equity loan and line of credit): These add on to your existing home debts without replacing your mortgage, as per a cash-out refinance. You can get a one-time home equity loan or open a line of credit (HELOC) to use as needed. 
Replacing your current mortgage with a new one, usually to change your rate, term, or loan amount.
The difference between your home’s market value and what you still owe on your mortgage.
A flexible line of credit that lets you borrow against your home’s equity as needed.
A one-time loan using your home’s equity as collateral, repaid in fixed payments.
The difference between your home’s market value and what you still owe on your mortgage.
A flexible line of credit that lets you borrow against your home’s equity as needed.
A one-time loan using your home’s equity as collateral, repaid in fixed payments.

Mortgage rates

Mortgages might seem expensive today, but that’s more because the cost of homes, in general, is going up so much faster than incomes. In fact, in the olden days of yore, mortgage rates were generally a lot higher than they are today, which you can see in this chart. 

That’s true, but interest rates do have a huge impact. The average mortgage in the COVID-19 era has a much lower monthly payment than most have had historically in the last 15 to 20 years, regardless of the increase in home prices.

Interestingly, during the COVID pandemic, rates dipped to the lowest point ever recorded since the Federal Reserve started tracking them in the 1970s. That drop in mortgage rates explained much of the pandemic buying frenzy we saw a few years ago.

How to get the best mortgage

Most people don’t think that getting the mortgage is as sexy as buying the actual home. That said, small tweaks you make now can set you up big-time in terms of how much house you can buy, and how much you’ll pay over the long run.

• Start building credit early: Marks can stay on your credit report for two to 10 years. Put all your bills on autopay and start using credit responsibly (i.e., not racking up credit card debt, if possible) to build your credit score over time. 
• Shop for mortgages: It’s easy to forget when house-shopping that you can (and should) shop for a mortgage too. Lenders vary in terms of rates, fees, and service quality. Mortgage lenders like SoFi offer deals and perks to help you save even more.
• Save as much as possible: The larger your down payment, the less you need to borrow. If you can save a 20% down payment, you can also nix the extra PMI costs. 
Short for private mortgage insurance, required if your down payment is under 20%.

Do it right, and you can save thousands while stepping into the home of your dreams.