What Is a Mortgage?

Mortgage Loan Process, Types and Payments Overview

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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:

  1. 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
  2. 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. 
  3. 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.

 

Current mortgage interest rates

What are current home loan rates?

Today’s mortgage rates are dramatically higher than last year, more than doubling from 3.14% toward the end of October 2021 to 7.08% by October 2022 as the Federal Reserve continues to hike the federal funds rate to tame inflation.

Where are mortgage rates headed?

December’s mortgage rate forecast comes with a silver lining as rates are expected to end the year close to 6.25% or 6.0% and head lower in 2023, according to Jacob Channel, LendingTree’s senior economist.

How to find mortgage lenders

You can find mortgage lenders online, by referral from a friend or family member or ask your real estate agent for a recommendation.  To get the best rates for your mortgage, shop current mortgage rates with at least three different lenders. 

Make sure you get quotes from mortgage brokers, mortgage bankers and your local bank. Rates change daily, so gather the quotes on the same day to ensure you’re comparing apples to apples figures. Get a mortgage rate lock once you find a home and keep track of the expiration date to avoid costly extension or relock fees.

Mortgage requirements

What you need to know about a mortgage loan

Lenders set minimum mortgage requirements you'll need to meet to get preapproved for a home loan.
  • The higher your credit score, the lower your interest rate will be

    A lower interest rate means a lower monthly payment, which makes homeownership more affordable.

  • The higher your down payment, the lower your monthly payment

    A down payment of 20% will help you avoid mortgage insurance if you’re taking out a conventional loan. Mortgage insurance covers the lender’s foreclosure costs if you default on your loan.

  • The longer the term, the lower your monthly payment

    First-time homebuyers typically choose 30-year terms to get the lowest monthly payment.

  • The less monthly debt you have, the more you can borrow

    Clear out those car loans, student loans and credit card balances if you want the most mortgage borrowing power.

  • The more you shop, the more likely you are to get a lower rate

    A recent LendingTree study showed borrowers who shop multiple lenders can save thousands of dollars in interest charges over the life of their loans.

How to qualify for a home loan

Lenders look at four aspects of your finances to assess whether you meet the minimum mortgage requirements for a mortgage preapproval:
  • 1. Your credit scores

    A credit score of 740 or higher is likely to get you the best interest rate and an easier path to mortgage approval. However, some government-backed loan programs allow you to get approved with a credit score as low as 500.
  • 2. Your debt compared to your income

    Lenders divide your monthly income by your monthly debt (including your new mortgage payment) to determine your debt-to-income (DTI) ratio. The gold standard is 43%, but you may get an exception if you have lots of extra savings and a high credit score.
  • 3. Your down payment and savings funds

    A large down payment shows lenders you have good savings habits and also keeps your monthly payment lower since you borrow less of your home’s price. If you’ve had rough patches in your credit history, mortgage reserves – which are just extra funds in the bank to cover mortgage payments – may mean the difference between approval and a loan denial.
  • 4. Your income and employment history

    A steady employment history for the last two years shows lenders you have the stability to afford a regular monthly payment. Keep copies of your paystubs, W-2 and federal tax returns handy – you’ll need them during the mortgage process.

10 steps to getting a mortgage

  1. Check your finances. Request a credit report with scores from all three major credit reporting bureaus: Equifax, Experian and TransUnion. Use a home affordability calculator to understand how much you might qualify for.
  2. Choose the right type of mortgage. Do you need to focus on a low down payment mortgage program? Do you want to put 20% down to avoid mortgage insurance? Knowing your real estate and financial goals can help you choose the best mortgage for your needs.
  3. Decide on your mortgage term. A 30-year, fixed-rate loan is the most popular choice for the lowest monthly payment. However, a shorter, 15-year fixed loan may save you thousands of dollars in interest charges, as long as your budget can handle the higher monthly payments.
  4. Save, save, save. Besides saving for a down payment, you’ll need cash to cover your closing costs, which could range from 2% to 6%, depending on your loan amount. Boost your emergency savings to cover unexpected repair costs and maintenance expenses. Lenders may require you to have cash reserves that could allow you to continue paying your mortgage in case you lose your job or have a medical emergency.
  5. Shop, shop, shop. LendingTree studies show that borrowers save money when they compare rates from at least three to five mortgage lenders. Give the same information to each lender so you’re comparing apples to apples when reviewing rate and fee quotes.
  6. Get a mortgage preapproval before you house hunt. A preapproval letter confirms you can get a mortgage loan to shop for homes within a set price range. Home sellers are more likely to take you seriously as a buyer if you’ve been preapproved.
  7. Make an offer on your dream home. Once you’ve found the perfect place, submit your best offer along with a copy of your preapproval letter. If your offer is accepted, you’ll also pay the required earnest money deposit to show your commitment to the transaction.
  8. Get a home inspection. Once your offer is accepted, schedule a home inspection to identify any needed repairs or major issues. Once you negotiate repairs with the seller, your lender will typically order a home appraisal to verify the home’s market value.
  9. Cooperate with the underwriter. Your lender’s underwriting team will ask for paperwork to verify all the information on your loan application. Be prompt in your responses to prevent delays. Once you receive final loan approval, a closing disclosure (CD) will be given to you at least three business days before your closing date. It will reflect the final costs of the transaction, including how much money you need to bring to the closing table.
  10. Complete your final walk-through and closing. Before you head to the mortgage closing, walk through the property to double-check that all necessary repairs were completed and that the home is ready for you. At the closing, you’ll cut a check for your down payment and closing costs, sign the closing paperwork and receive the keys to your new home.

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. 

Learn more

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. 

Learn more

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.

Learn more

VA MORTGAGE

Your military service may make you eligible for a no-down payment 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. 

Learn more

FHA MORTGAGE

First-time homebuyers with credit scores below 620 may find it easier and more cost-effective to get 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.

Learn more

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.

Learn more

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. 

Learn more

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.

Learn more

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 2023, 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.

Learn more

Mortgage Calculators

Home Loan Calculator: Estimate Your Monthly Mortgage Payment

More Calculator Resources

How to shop for a mortgage

Once you’ve chosen a loan program, it’s time to start shopping around with some lenders. Compare mortgage interest rates from local lenders, banks, credit unions and online lenders. Ask family or friends for referrals, as well as your real estate agent. Try a rate comparison website, and lenders will contact you with competing offers, saving you the hassle of doing all the work yourself. You can also work with a mortgage broker who can shop on your behalf. Once you’ve gathered the contact information for three to five lenders, follow these four shopping steps:
  1. Request price quotes on the same day.
  2. Ask the same questions of each lender, including: How long is the rate quote good for? What fees are charged upfront? Is the rate fixed or adjustable? What is the annual percentage rate (APR)?
  3. Expect loan estimates from each lender within three business days of submitting your mortgage application.
  4. Keep the estimates to compare rates and fees as you make your final choice.

Additional mortgage loan FAQs

With just three pieces of information — your income, other debt and loan type — you can use LendingTree’s home affordability calculator to figure out how much home you can afford. Experiment with different down payment amounts and loan terms to see how homebuying might affect your budget.

LendingTree updates mortgage rates daily so you can make the most informed decision. Rates are constantly changing, so make sure you lock in your interest rate once you’ve found the best quote.

A credit score of 740 or higher will typically get you the lowest rate offers. Lenders also tend to offer lower rates if you make a higher down payment on a single-family home compared to a two- to four-unit or manufactured home.