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How does a mortgage work?
Quick answer
A mortgage works as a long-term loan used to buy a home, where the property itself is the collateral. You repay it in monthly installments over many years, covering both the amount borrowed and interest — and the lender can take the home if you don't pay.
Step by step
- It's a large loan to buy property, repaid over 15–30 years.
- The home serves as collateral securing the loan.
- Each payment covers part of the principal plus interest.
- Early payments are mostly interest; later ones mostly principal.
- Missing payments can lead to foreclosure — losing the home.
People also ask
How does a mortgage work?
A lender pays for your home upfront; you repay them monthly over years, with interest, and they hold the home as security until it's paid off.
Why are early mortgage payments mostly interest?
Interest is charged on the remaining balance, which is largest at the start, so early payments cover mostly interest and little principal.
What is foreclosure?
If you stop paying, the lender can legally seize and sell the home to recover the money it lent.
What is a down payment?
An upfront share of the home's price you pay yourself; the mortgage covers the rest.
What's the difference between fixed and variable rates?
A fixed rate stays the same for a set period; a variable rate can rise or fall with the market.
Part of the guide: Money Basics: Save, Borrow & Invest →