Explaining a mortgage and how it works

Q: What exactly is a mortgage and how does it work?

A: A mortgage helps make owning a home possible for most people. Simply put, it’s a loan that is secured by real property. The lender holds title to the home until the loan is completely repaid. If you don’t pay what you owe, the lender has a right to take the property and sell it to recover the owed money.

The amount of a mortgage will vary depending on the down payment you make to reduce the money that’s needed to finance your home. You can put however much money down as you like, or you can sometimes pay as little as 3 to 5 percent of the purchase price, or sometimes nothing at all. The more you put down initially, the more you reduce the amount that is financed, which will lower your monthly payment.

The monthly payment includes both principal and interest but also consists of additional amounts to cover property taxes and insurance — specifically hazard insurance and private mortgage insurance, the latter of which is required for down payments less than 20 percent of the purchase price.

Homebuyers in the U.S. have access to several different types of mortgage loans.

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