Written by Denny Ceizyk | Edited by Kurt Adams | Updated January 18, 2023
Definition: What is a mortgage?
A mortgage is a written agreement that gives a lender the right to take your home if you don’t repay the money they lend you at the terms you agreed on. Your mortgage payment is paid over a set number of years based on how much you borrow and the interest rate you’re approved for.
Here’s how a mortgage works:
Each month you pay principal and interest. The principal is the portion that’s paid down each month. The interest is the rate charged monthly by your lender. At first you pay more principal than interest. As time goes on, you pay more principal than interest until the balance is paid off.
Consumers often prefer 30-year fixed-rate mortgages because they offer the lowest stable payment for the life of the loan. Borrowers may also choose an adjustable-rate mortgage (ARM) for temporary savings over a three- to 10-year period, but after that, the rate typically changes each year.
You’re not stuck with your mortgage — you can pay it off and replace it with a mortgage refinance.
What is a mortgage refinance?
A mortgage refinance is the process of getting a new home loan to replace an existing one. Homeowners typically refinance for three reasons:
- To get a lower interest rate. When mortgage rates fall, you can save on your monthly payment by refinancing to the lowest refinance rates available.
- To pay your loan off faster. Switching from a 30-year to a 15-year term can save you thousands of dollars in interest, if you can afford the higher payment.
- To put extra money in the bank. You can convert home equity into cash with a cash-out refinance, and put the extra funds toward financial goals or home improvements.