What Is a Mortgage? Understanding the Basics

A mortgage is a type of loan specifically used to purchase a property. Unlike other loans, a mortgage is secured against the home, meaning if the borrower fails to make payments, the lender can take possession of the property through a process called foreclosure.

Key Components of a Mortgage Loan

1️⃣ Principal – The original loan amount borrowed.
2️⃣ Interest – The cost of borrowing, expressed as an annual percentage rate (APR).
3️⃣ Loan Term – The repayment period (e.g., 15, 20, or 30 years).
4️⃣ Monthly Payment – The amount paid each month, covering both principal and interest.
5️⃣ Property Taxes & Insurance – Additional costs that may be included in your monthly payment.

Understanding these factors helps you make smarter home-buying decisions and avoid financial strain in the future.

Factors That Affect Your Mortgage Payment

Before taking a home loan, it’s important to understand the factors that impact your monthly mortgage payment:

1. Interest Rate

The higher the interest rate, the more you’ll pay over time. A small difference in interest rates can significantly impact your total repayment.

🔹 Example:

• A 4% interest rate on a $250,000 loan = $1,194 monthly payment
• A 6% interest rate on the same loan = $1,499 monthly payment

👉 Tip: A good credit score helps secure lower interest rates.

2. Loan Term (15, 20, or 30 Years?)

A longer loan term (e.g., 30 years) results in lower monthly payments but higher total interest costs. A shorter loan term (e.g., 15 years) has higher monthly payments but saves money on interest.

🔹 Example Comparison:

• A 15-year mortgage on a $200,000 loan at 5% = $1,581 per month
• A 30-year mortgage on the same loan = $1,073 per month

👉 Tip: Choose a loan term that balances affordability and interest savings.