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Mortgage Basics

The essential terms and steps of getting a home loan.

By Fountain Finances Editorial TeamUpdated

The key mortgage terms

  • Principal: the amount you borrow.
  • Interest rate: the cost of borrowing, fixed or adjustable.
  • APR: the rate plus certain fees, expressed yearly — useful for comparing lenders.
  • Term: most often 30 or 15 years.
  • Down payment: your upfront cash contribution.
  • PMI: private mortgage insurance, usually required on conventional loans with less than 20% down.
  • Escrow: an account for property taxes and insurance.
  • Points: optional upfront fees paid to lower your interest rate.

Fixed-rate vs. adjustable-rate mortgages

A fixed-rate mortgage keeps the same rate for the life of the loan, so principal and interest never change. An adjustable-rate mortgage (ARM) — for example, a 5/6 ARM — has a fixed rate for an initial period, then adjusts periodically within caps. ARMs can start lower but carry the risk of higher payments later.

The path to a mortgage

  1. Check your credit and pay down card balances.
  2. Set a budget with the home affordability calculator.
  3. Get preapproved by at least one lender.
  4. Make an offer; after acceptance, submit a full application.
  5. Compare Loan Estimates from several lenders.
  6. Complete the appraisal, inspection and underwriting.
  7. Review the Closing Disclosure at least three business days before closing, then sign.

Our guide on how mortgage payments work covers amortization and escrow in depth, and the mortgage calculator estimates your full monthly cost.

Frequently asked questions

What is the difference between prequalification and preapproval?

Prequalification is an informal estimate based on information you provide. Preapproval involves the lender verifying your income, assets and credit, so it carries more weight with sellers.

What are closing costs?

Fees and prepaid items due at closing, such as lender fees, appraisal, title insurance, recording fees and prepaid taxes and insurance. They commonly total a few percent of the loan amount and are listed on your Loan Estimate.

What is escrow?

An escrow account is managed by your loan servicer to pay property taxes and homeowners insurance. Part of each monthly payment goes into the account, and the servicer pays the bills when due.

Part of our Mortgage hub and our complete personal finance guide. Read our editorial standards.

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