A Mortgage Loan Basics: Everything You Need To Know As A Beginner

One of the most important decisions you will make when buying a home is how to finance it. Many different types of mortgages are available, and it can be challenging to decide which one is right for you.

Mortgages can be confusing for first-time buyers. This guide will completely break down the basics of mortgages and loan terminology, including what they are, how to get one, and the different types available. We will also explain the different types of mortgages available so you can decide which one is best for you and be ready to take the next step in your home-buying journey!

What is a Mortgage Loan, and How Does It Work?

A mortgage loan is a type of loan used to finance the purchase of a property. The loan is secured against the property, which means that if you default on the loan, the lender can repossess the property.

These are usually long-term loans, which means they have low-interest rates, and you can spread out your payments over several years. This makes them an enticing way for many homebuyers. However, it’s crucial to understand how mortgage loans work before you apply for one.

Mortgage loans are typically based on the value of the home you’re purchasing. The lender will hold onto your home until the loan is paid off. This means that if you default on your loan, the lender could foreclose on your home. That’s why it’s essential to make sure you can afford your mortgage loan before you apply for one.

What is the Main Purpose of a Mortgage?

Most people know that a mortgage is a loan used to purchase a home. However, not everyone knows the main purpose of a mortgage. The primary purpose of a mortgage is to provide security for the lender in case the borrower defaults on their loan.

This security is given in the form of collateral, which is usually the home itself. If the borrower defaults on their loan, the lender can then foreclose on the house and sell it in order to recoup their losses.

While this may seem like a harsh consequence, it is essential to remember that a mortgage is a significant amount of money and the lender needs to protect their investment.

Pros and Cons of a Mortgage Loan


There are a few pros and cons of a mortgage loan. Some of the pros include:

  • A mortgage loan can help you purchase a home without having to come up with a large sum of cash upfront.
  • Your monthly payments may be lower than if you rented or took out a personal loan to finance your home.
  • A mortgage loan can be a good investment, as your home is likely to appreciate in value over time.


Some of the cons of a mortgage loan include:

  • You may be required to purchase private mortgage insurance (PMI) if you put less than 20% down on your home.
  • Your interest payments may be tax-deductible.
  • You may have to pay for a home appraisal and other closing costs when you apply for a mortgage loan.

If you are considering taking out a mortgage loan, it is crucial to weigh the pros and cons carefully before making a decision. Speak with a financial advisor to learn more about whether a mortgage loan is right for you.

The Different Types of Mortgage Loans Available

There are several various types of mortgage loans available, and each has its own unique benefits. Here is a brief overview of the most common types of mortgages:

Conventional Loans

A conventional loan is the most popular type of mortgage and does not involve the government. Homeowners can make a small down payment, as little as 3%, but anything under 20% requires monthly private mortgage insurance (PMI) payments.

Fixed-Rate Mortgages

As the name suggests, this type of mortgage has a fixed interest rate for the entire loan term. This means your monthly payments will stay the same, even if market interest rates rise. This makes budgeting for your mortgage easier and can help you lock in a low-interest rate if rates are currently low.

Adjustable-Rate Mortgages (ARMs)

With an ARM, your interest rate will change periodically, usually in relation to changes in the market. This means your monthly mortgage payments could go up or down, making budgeting more difficult. However, ARMs often start with lower interest rates than fixed-rate mortgages, so they can be a good option if you plan to sell your home before the rate adjusts.

FHA Loans

These loans are backed by the Federal Housing Administration and are available to buyers with low credit scores or those who can’t afford a large down payment. FHA loan comes with a low-interest rate and flexible term, but you will have to pay mortgage insurance.

VA Loans

VA loans are available to eligible veterans and active duty service members. These loans offer competitive interest rates and don’t require a down payment or private mortgage insurance.

USDA Loans

USDA loans are typically available to buyers in rural areas who have low incomes. These loans offer 100% financing and low-interest rates, but they do require you to pay mortgage insurance.

There are a few other less common types of mortgages, but these are the most popular options.

How to Get Pre-Approved for a Mortgage Loan
  1. The pre-approval process is the first step in getting a mortgage loan. It’s essential to get pre-approved before you start shopping for a home because it will give you an idea of how much you can afford and what kind of interest rate you’ll be able to get.
  2. To get pre-approved, you’ll need to provide some personal information and financial documentation to your lender. This includes things like your monthly income, your debts, and any assets you have. Your lender will use this information to pull your credit report and calculate how much they’re willing to lend you.
  3. Once you have your pre-approval letter in hand, you can start shopping for a home within your price range. Keep in mind that pre-approvals are not binding, so you’ll still need to go through the formal mortgage application process once you’ve found a home. But getting pre-approved will give you a good idea of what kind of loan you can expect to get.
The Closing Process

The closing process is the final step in getting a mortgage loan. This is when all of the paperwork is signed, and the loan funds are disbursed to the borrower. The closing usually takes place at the offices of the title company or escrow agent but can also be done at the home of the borrower or at the office of the lender.

The closing process can be confusing and overwhelming, but it is vital to understand what is happening and to ask questions if anything is unclear. An agent can go over all the documents that need to be signed and explain any terms or conditions that may be attached to the loan. Be sure to read everything carefully before signing, and ask questions if anything is unclear.

What Happens When You Finalize Your Loan
  1. The lender will send you the mortgage note when you finalize your mortgage loan. This document outlines the terms of your loan, including the interest rate, monthly payments, and length of the loan. You’ll need to sign and return this document to the lender before your loan can be funded.
  2. Once all of the mortgage paperwork is signed, the loan funds will be disbursed to the borrower. The borrower will then need to make their first payment on the loan within 30 days.
  3. Once your loan is funded, you’ll need to make your first payment. This payment will be due on the date specified in your mortgage note. You’ll need to continue sending your monthly mortgage payments until your loan is paid off in full.
Different Parts of a Mortgage Payment

For many people, a mortgage is considered the most significant financial obligation they will ever have. Given the size of the loan and its importance in your life, it’s paramount to understand all aspects of your mortgage payment. Here we’ll take a look at the various parts of a typical mortgage payment.


This is the amount of money you borrowed to purchase your home. Each month, a portion of your payment will go towards paying off the principal. The remaining balance is the amount of money you still owe on your loan.


This is the fee charged by the mortgage lender for borrowing the money. The interest rate is the percentage of the loan amount that you will pay in interest each year. Your monthly payment will include a portion of the interest charged for that month. A good credit score increases the likelihood of being approved for a low-interest mortgage.


This is an account set up by the lender to pay for property taxes and insurance on your behalf. The amount of escrow included in your payment will vary depending on the amount of taxes and insurance due.

Private Mortgage Insurance (PMI)

This is a type of home insurance that protects the lender in the event that you default on your loan. If you put down less than 20% when you purchased your home, you will likely be required to pay PMI. If you are unable to continue making payments on your loan and default, PMI will cover the lender. You can expect to pay an annual rate of 1% of your outstanding loan balance for PMI, which is added to your monthly mortgage payment.

Tips for Keeping Your Monthly Mortgage Payments Affordable

If you’re worried about being able to afford your mortgage payments, here are a few tips that may help:

  • Make sure you understand all the costs of buying a home and getting a mortgage. In addition to the house’s purchase price, there are costs like appraisal fees, loan origination fees, and closing costs. Knowing all of these costs upfront can help you budget for them and avoid being caught off guard.
  • Get pre-approved for a mortgage before you start shopping for a home. This way, you’ll know how much you can afford to spend on a home and won’t be tempted to overextend yourself financially.
  • Shop around for a mortgage. Don’t just go with the first lender you talk to. Compare multiple mortgage lenders’ rates, terms, and conditions to get the best deal.
  • If you’re having trouble qualifying for a traditional mortgage, there are other options available, such as government-backed loans.
  • Consider a shorter loan term. A 15-year mortgage will have a higher monthly mortgage payment than a 30-year mortgage, but you’ll ultimately pay less interest over the life of the loan.
  • Make extra payments whenever possible. Even an additional $50 or $100 per month can significantly affect the interest you end up paying.

Following these tips can help ensure that your mortgage payments are affordable.

Learning How to Manage Your Mortgage Loan Properly

If you’re struggling to keep up with your mortgage payments, here are a few tips that may help:

Talk to your lender: If you’re having trouble making payments, the first step is to contact your lender. They may be able to offer assistance, such as a modification or forbearance.

Create a budget: Take a close look at your income and expenses to see where you can cut back. Even small changes can make a big difference.

Get help from a housing counselor: If you’re still struggling, there’s no shame in seeking help from a housing counselor. They can offer guidance and connect you with resources that may be able to help.

No one wants to fall behind on their mortgage payments, but it happens. If you’re struggling, don’t hesitate to reach out for help. With a little effort, you can get back on track.

Bottom Line

A mortgage loan is an excellent way to finance the purchase of your new home, but as a beginner, it is vital to understand all the terms and conditions before signing on the dotted line. The key things to remember are that mortgage loans come with interest, they are typically repaid over a period of 15-30 years, and your monthly payment will be determined by the loan’s interest rate, term, and principal balance.

By understanding these key components, you will be in a better position to make an informed decision about whether or not a mortgage loan is right for you.