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Mortgages Explained in Basic Terms

House Market Solutions Real Estate Basics Mortgages Explained in Basic Terms

mortgages explained

There are many different types of mortgages, so it is a good idea first to understand mortgages explained in basic terms.  Because few people have enough cash to buy a home outright, a mortgage must come into play.  Becoming educated about mortgages is one of the most critical tasks you can accomplish in the home buying process.

Simply put, a mortgage is a collateral-based loan used for the purchase of a home. The lender will pay the borrower in full for the subject property in return for the right to collect interest from the borrower and retain the legal power, better known as a lien position, which allows the lender to foreclose if the borrower fails to make payments per their agreement.

You can begin the entire approval process through a broker or bank.  A borrower can obtain a mortgage for either a primary residence or for an investment property to rent out to tenants.

After the buyer and seller agree upon a purchase price, the transaction will go into escrow, and a lender will continue with the underwriting process.  It is during the underwriting process that a lender will confirm your financial capability to meet the obligations of the note.  When the lender has completed that determination and approved the loan request, you will proceed to close escrow with a title company or attorney on the property.

At closing, the buyer will usually bring a cashier’s check for their costs which will typically consist of a down payment for at least 20% of the purchase price if they are securing the mortgage with “traditional” financing (i.e., non-FHA or VA, etc.). – A $250,000 home, for example, would require a down payment of approximately $50,000.

In addition to a purchase price and down payment amount, mortgages explained in simple terms include:


Like any other loan, interest – a percentage of the purchase price amount – must be paid to the lender for the cost of using their money. The current market interest rate is around 4%, although it can fluctuate depending on some other factors, including the purpose (primary residence vs. investment), the term, or whether it is a fixed or adjustable (ARM) interest rate.

While a fixed interest rate stays the same for the life of the loan, an adjustable rate can be changed by the lender after a set period of years. Although an initial interest rate may be lower than a fixed rate, it can also subsequently increase – thereby increasing the monthly payment over time.


Closing costs are other fees incurred for processing the mortgage and are due at closing, which is the day when all paperwork is signed, and the transaction becomes final. Among these fees are service charges such as the cost of a home inspection and an appraisal, as well as title services – the research to determine whether there are any unpaid liens against the home. There are various other costs associated with closing, all of which must be outlined by the lender at least three days before closing.

While they can often seem overwhelming, mortgages explained in clear-cut, precise manner by a knowledgeable real estate professional or loan officer can help a buyer and seller’s confidence in the home buying process.  As always, feel free to contact us if you have any questions or concerns.

This article is a part of our “Real Estate 101” series of posts, written to make you aware of the basics.  Click to learn more.

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