What Is a Mortgage? Breaking Down the Home Loan Process

When you’re buying a home, one of the first terms you’ll hear is “mortgage.” Since most buyers don’t purchase homes with cash, mortgages make homeownership possible for millions. But what exactly is a mortgage, how does it work, and why does it matter?

At Redfin Real Estate, we help buyers navigate every step of the homebuying journey, from understanding financing to finding the right home. Whether you’re browsing homes for sale in Phoenix, AZ or searching homes for sale in Philadelphia, PA, knowing how mortgages work is the first step toward confident homeownership. 

What is a mortgage?

A mortgage is a loan used to buy a home or property, with the home itself serving as collateral. If you stop making payments, the lender can foreclose to recover their money.

When you take out a mortgage, you agree to repay the borrowed money (the principal) plus interest over a set number of years, typically through monthly payments.

How does a mortgage work?

Mortgages are typically 15-, 20-, or 30-year loans, repaid in monthly installments that often include four parts (known as PITI):

• Principal: the portion that reduces your loan balance.
• Interest: the cost of borrowing money, based on your interest rate.
• Taxes: property taxes collected by your local government.
• Insurance: homeowners insurance, and sometimes private mortgage insurance (PMI).

Additionally, it’s important to remember that your true monthly housing costs may go beyond your mortgage payment. Homeowners association (HOA) fees, utilities, and ongoing maintenance can all add up. Factoring these expenses into your budget ensures you choose a mortgage payment that’s realistic and sustainable long-term.

Who are the parties involved in a mortgage?

A mortgage isn’t just between you and the bank — there are several key players involved in the process:

• Borrower: The individual (or individuals) taking out the loan to buy the property.
• Lender: The financial institution, bank, or mortgage company that provides the loan.
• Mortgage servicer: Sometimes different from the lender, this is the company you send your monthly payments to. They handle billing, escrow accounts, and customer service.
• Appraiser: A licensed professional who determines the fair market value of the home to ensure the loan amount is appropriate.
• Title company: Handles the legal aspects of transferring ownership and ensures the property title is clear of claims or disputes.
• Closing agent or escrow officer: Oversees the signing of documents and the distribution of funds at closing.

Each of these parties plays a role in making sure the loan is valid, the property is secure as collateral, and the transfer of ownership goes smoothly.

Key mortgage terms explained

• Down payment: The upfront money you pay, typically 3%–20% of the home price.
• Interest rate: The percentage charged by the lender for borrowing money.
• Loan term: The length of time you’ll take to repay (e.g., 30 years).
• Amortization: The schedule that breaks down how each payment applies to principal and interest.
• Escrow: the servicer-managed account used to collect monthly amounts for taxes and insurance and pay those bills when due.

>>>Read: Down Payment Assistance Programs

Types of mortgages

There are several loan options depending on your finances and goals:

Loan programs:

• Conventional loans: Not backed by the government, usually require higher credit scores.
• FHA loans: Government-insured, often good for first-time buyers with lower credit.
• VA loans: Exclusive to veterans and service members, with no down payment required.
• USDA loans: For homes in designated rural areas, with low or no down payment.

Rate structures:

• Adjustable-rate mortgages (ARMs): Start with a lower fixed rate, then adjust based on the market. 
• Fixed-rate mortgages: The interest rate stays the same for the entire term.

Further reading on mortgage types:

• What Is an Adjustable-Rate Mortgage?
• How to Find and Buy a USDA-Eligible Home
• First-Time Home Buyer FHA Loans

Mortgage process step by step (the basics)

1. Get pre-approved:  A lender reviews your income, credit, debts, and assets to estimate how much you can borrow. This gives you a clear budget and strengthens your offer when you find a home.
2. Find a home: Work with your real estate agent to tour properties and make an offer within your approved price range. A signed purchase agreement will trigger the next steps in the loan process.
3. Apply for a mortgage: Provide your lender with detailed financial documents (pay stubs, bank statements, tax returns) and select the loan program and rate that best fits your needs.
4. Underwriting: The lender’s underwriter verifies your information, reviews the appraisal, and ensures the home meets lending guidelines. You may be asked for additional documents during this stage.
5. Closing: Review and sign final loan documents, pay closing costs, and receive the keys. Once the loan funds, the home is officially yours.

>>>Learn more: 14-Step Guide to Navigating the Mortgage Loan Process

Why mortgages matter

Mortgages make it possible for people to buy homes without paying the full price upfront. They also allow you to build equity, which is the portion of the home you truly own as you pay down the loan. Over time, equity can grow and become one of your largest financial assets.

Common questions about mortgages

1. Can you pay off a mortgage early?

Yes. Many lenders allow extra payments toward the principal. This can save thousands in interest, though some loans may have prepayment penalties.

2. What happens if you don’t pay your mortgage?

If you fall behind on payments, your lender may start the foreclosure process. This can damage your credit score and result in losing your home.

3. Do you need perfect credit to get a mortgage?

No. While higher scores unlock better interest rates, government-backed loans and some lenders offer options for buyers with lower credit or no credit history.

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