A mortgage is a loan used to purchase real estate. The property itself serves as collateral — meaning if you stop making payments, the lender can take the property through a process called foreclosure.
When you take out a mortgage, you agree to repay the loan amount (called the principal) plus interest over a set period of time — typically 15 or 30 years. Each monthly payment covers a portion of both.
In the early years of a mortgage, most of your payment goes toward interest. Over time, more of each payment goes toward reducing the principal. This is called amortization.
Your monthly payment typically includes:
- Principal — the portion that reduces your loan balance
- Interest — the cost of borrowing
- Property taxes — collected monthly and paid to the county
- Homeowner's insurance — required by lenders
- PMI — if your down payment is less than 20% (see below)