Financial Education

What is a mortgage and how does it work?

Mortgage can be a great choice for getting a loan with low interest rates. Learn more about this type of service.


Get the answers to your mortgage questions

house and table
What is a mortgage? Find out in our post! Source: Adobe Stock

What is a mortgage? This is a very common question among people who want to take out a loan. After all, some available types and services may be ideal for what you are looking for.

Interest rate financial and mortgage rates. Compound interest rate calculation. Risk management financial and managing investment percentage interest rates.

The current mortgage rates

Mortgage rates are rising again. Understand why this is happening and how you can prepare for this financial moment!

The answer to this question has many details, and it is worth reading and knowing about it. However, you may need a loan to settle your debts. Want to know more? Read the article and find out about the mortgage.

What is a mortgage?

A mortgage is a type of guarantee for a loan or financing payment. In this sense, the guarantee is given to a financial institution that finances a house, land, or real estate loan.

It is worth mentioning that, in these cases, the guarantee is operationalized through the offer of a property. This offer is usually agreed upon between the lender and the person receiving the loan money.

The credit modality works as a guarantee right over immovable property. The property owner offers the goods to the bank as collateral to get a high-value loan.

Usually, this service has interest rates much lower than other types of credit. After all, a contract records the relationship between the lender and the borrower.

Once the operation is registered, the financial institution has the right to claim the property in case of default.

House on the coin, arranged from low to high Concept of starting

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What is the difference between a regular loan and a mortgage?

In addition to the question “what is a mortgage”, another question is the difference with other loans. First, the mortgage is secured by the property or land in case of default.

Secondly, due to collateral, you have low-interest rates associated with it. Finally, you also have greater payment flexibility in the mortgage and choose between any of the existing types.

What credit score do you need to get a mortgage?

You don’t necessarily need a good credit score to be entitled to a good mortgage deal. After all, there are many types of mortgages, including from lenders authorized by government agencies.

Therefore, you need an official credit score record and select the most compatible type of loan. Thus, the chances of faster approval increase.

What are the most common types of mortgages?

See the most common types of mortgages! Source: Adobe Stock

Two very common questions are what a mortgage is and the types of mortgages. Check out the most common mortgage types adopted by US citizens.

Fair Rate Mortgage

The fair rate mortgage is the most common type of mortgage. With this service, you have an agreed-upon interest rate between the parties before the loan.

So the rate remains the same for the term, which varies with the contract.

However, the interest rate amounts vary according to the established payment terms. In this sense, short-term loans are more expensive month-to-month but cheaper in full amount.

As the rate is fixed, regardless of your chosen term, the rate does not change during the term. So, if you like a stable payment with no monthly variations, this option is perfect.

Adjustable Rate Mortgage (ARM)

In contrast to the fixed rate mortgage, the adjustable rate has an interest rate that can vary depending on the progress. In this sense, rates change more or less as installments are paid.

This type of mortgage is interesting when looking for lower introductory rates. Or when you want to have the last mortgage installments reduced.

In any case, the adjustable rate is based on the standard financial ratio.

However, there is a regulation about the interest rates charged. This means that no matter how much the interest rate varies, it cannot exceed certain limits depending on the loan amount.

Balloon Mortgage

In the case of a balloon mortgage, payments start with low-value installments and increase over time. Therefore, closer to the end of the loan, the installments reach maximum values.

It is the ideal type of mortgage for anyone who plans to have a larger cash reserve at the end of the loan payment. Another good indication is for people who want to sell the property before the end of the loan period.

It is worth mentioning that you may need to refinance if you do not intend to sell before finalizing the loan payment. Therefore, it is essential to analyze your deadlines and objectives for the mortgage before doing so.

FHA Loan

mortgage counts
Find out what an FHA loan is! Source: Adobe Stock

The FHA Loan is a special mortgage guaranteed by the Federal Housing Administration. This government institution guarantees the loan for first-time homebuyers.

Generally, this mortgage does not require high credit scores and allows for low down payment payments. However, this loan is only provided by some lenders approved by the institution.

VA loan

A VA loan is another type of service guaranteed by a government institution. This type of mortgage is secured by the US Department of Veterans Affairs and requires little initial investment.

However, it is a modality that is only available to veterans, service members, and military spouses. Lenders offer this service with no down payment and with greater flexibility.

USDA loan

A USDA loan is a type of mortgage guaranteed by the United States Department of Agriculture. It is a specific service for rural communities with low- and middle-income people.

This type of mortgage has some interesting benefits. First, it does not require an upfront payment and does not set a maximum purchase price. Also, it has low-interest rates.

However, not everyone in rural communities is eligible for this mortgage. There is a government assessment to qualify eligible households.

How to choose the right mortgage for your finances?

Now that you understand what a mortgage is, you must understand how to choose the best type. In that sense, there are some important tips before closing the deal.

First, analyze your credit score and how much you can pay monthly to choose the type of mortgage. Then, analyze which companies offer the specific type of loan you have chosen.

Finally, look at reviews from other business customers to see their reputation. So, read the entire contract with the conditions to identify if everything is right, and you can sign.

How to apply for a mortgage?

Applying for a mortgage is not very complicated; you can do it online or in person. Firstly, you need to research the potential and most reliable lenders.

So, you should look for a proposal compatible with your needs and separate your documentation. Finally, you can sign the contract and have your mortgage approved.

Now if you want to learn more about how loans work and the other types, you can check out our post below to learn about the different types of loans available!


Different types of loans available

Are you in need of money? A loan can be the immediate solution you need. Learn about the main types of loan you can take out.

About the author  /  Sabrina Paes

Content Writer, Copywriter, and Ghostwriter. Content marketing professional with 5 years of experience. Specialist in investment, finance, and technology niche. MBA in Marketing at the University of São Paulo, Brazil. Content Writer by Rock Content, and University of California (UCDAVIS).

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