What is a mortgage?
A mortgage is a loan commonly used to finance real estate. The borrower repays the amount borrowed over an agreed term, together with interest and potentially other housing-related costs.
Principal and interest
Principal is the amount of the loan that remains to be repaid. Interest is the borrowing cost charged on the outstanding balance. With a typical amortizing fixed-rate mortgage, the payment allocation changes over time even when the scheduled principal-and-interest payment stays the same.
Down payment and loan amount
The down payment reduces the amount that needs to be financed. For example, a higher down payment on the same purchase price generally means a smaller starting loan balance.
Loan term
The loan term is the period over which the mortgage is scheduled to be repaid. A longer term can reduce the scheduled monthly principal-and-interest payment, but it can also increase the total interest paid over the life of the loan when other assumptions are equal.
Amortization
Amortization describes the scheduled reduction of a loan balance through payments over time. Early payments on a standard amortizing loan usually contain a larger interest component than later payments.
Put the concepts into numbers
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Common questions
Does a mortgage payment include property taxes?
Not always. A principal-and-interest calculation covers the loan itself. Depending on the loan and payment arrangement, taxes and insurance may be collected separately or through an escrow account.
Does a larger down payment reduce the mortgage payment?
When purchase price, interest rate and term are unchanged, a larger down payment reduces the amount financed and therefore generally reduces the principal-and-interest payment.
Why does so much interest appear early in an amortization schedule?
Interest is calculated from the outstanding balance. Because the balance is largest near the beginning of the loan, the interest portion is generally larger at that stage.
This guide is for general educational purposes. Mortgage products, qualification rules, fees and borrower circumstances vary.