Understanding Mortgage Basics

Thinking about buying a new home can be an overwhelming experience. We’re here to help you learn more about the process—you’re not alone!

A bank mortgage application form

Let’s discuss the definition of a mortgage.
First, a mortgage is a loan specifically for financing or refinancing your home. To pursue a mortgage, you create an agreement with a lender or bank. Lenders provide you with the loan as cash and afterwards you’ll pay back the loan over a specific time span.

What are the different types of mortgages?
Fixed-rate mortgages and adjustable-rate mortgages are two common types for you to choose from.

  • An adjustable-rate mortgage, or ARM, has a varied interest rate from year to year. ARMs have the ability to be a mix of both an adjustable-rate and a fixed-rate mortgage. For example, if you receive a loan from your lender at six percent for ten years. After ten years, the lender can adjust the interest rate according to their practices. ARMs are generally a good option in the short-term, such as financing a house you don’t plan on living in for more than a few years.

  • A fixed-rate mortgage has a fixed interest rate for home loans. This translates to that the interest rate is the same until the loan is completely paid off. The entirety of the loan will have the same monthly principal and interest payment. Since the life of a fixed-rate mortgage is typically 15-30 years, these are the preferred option for homeowners who plan on living in their home for a long period of time.

What are the parts to a mortgage?
Now that we’ve discussed the definition of mortgage and the types of mortgages, let’s talk about the different parts! There are five parts to a mortgage: collateral, principal, interest, taxes, and insurance.

  • Collateral, the first part of a mortgage begins when you start the legal agreement with your lender. While paying back the loan, your house is used as collateral. If you default on the loan, the bank can take your house through a process called foreclosure.

  • Principal, otherwise known as the money you borrow from the bank, is the initial portion of the loan. These funds can be applied to the down payment of your home.

  • Interest is an amount of money the lender charges you for borrowing a loan. The interest rate is shown as a percentage. Your loan’s principal and interest make up the majority of your payments. These payments will help to reduce your debt over time as you continue to pay back your mortgage.

  • Taxes are included when you purchase a home. These taxes benefit the community by providing money to roads, schools, parks, and more. Taxes are collected based upon the value of the home.

  • Insurance, or specifically home insurance, is required to help you cover natural disasters, fire, theft, or other circumstances. Home insurance is similar to car or health insurance - it’s there to protect you.

Knowing these five different parts of mortgages will help prepare you for homeownership.

Now that you’ve learned the basics regarding mortgages, what’s next? Continue learning more about the mortgage process and decide on a loan type that’s best for you.

We’re here to help you discuss your options, contact us to jumpstart your homeownership journey.


The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its affiliates and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.