A mortgage is a long-term loan used to purchase a home, typically repaid over 15 to 30 years. Borrowers agree to pay the lender (e.g., a bank or mortgage company) in monthly installments that include principal and interest. To secure the loan, the borrower must put down a down payment (often 5–20% of the home price) and obtain title insurance. The property serves as collateral; if payments are missed, the lender can foreclose. Closing costs, including origination fees, appraisal, and taxes, are paid at settlement. Lenders evaluate credit scores, income, and debt-to-income ratios to determine eligibility and interest rates.

The mortgage process ensures lenders mitigate risk while enabling home ownership. A 20% down payment reduces loan-to-value (LTV) ratio, lowering default risk. For example, a 20% down payment on a $300,000 home limits the loan to $240,000, reducing the lender’s exposure. Government-backed programs like FHA loans allow 3.5% down but require mortgage insurance (PMI), increasing costs by 0.5–1.5% annually. According to the Consumer Financial Protection Bureau (CFPB), 72% of homebuyers in 2022 used mortgages, with average loan amounts reaching $383,000, up 15% from 2021. Interest rates, influenced by the Federal Reserve’s policies, affect affordability. In late 2023, the 30-year fixed-rate mortgage averaged 7.25%, per Freddie Mac, making monthly payments ~$1,675 for a $300,000 loan. Strict underwriting criteria, such as a minimum credit score of 620 for conforming loans, ensure borrowers can repay debt. Data from the National Association of Realtors (NAR) shows median U.S. home prices rose 14% year-over-year in 2023, pushing loan sizes higher. This structured process balances accessibility with financial stability, fostering a sustainable housing market.