Mortgage 101: Understanding the Basics

If adulting had a to-do list, buying a home would occupy one of the biggest checkboxes for many of us. Of course, buying a home isn't a one-step process. An essential move toward homeowner status is understanding how to apply for a mortgage.

Whether you’re at the “What is a mortgage?” stage or already have a decent idea, it never hurts to review the pros and cons of different types of mortgages, what to expect from the application process, and where to find the best rates. And speaking of top rates, did you know credit union mortgage rates are among the best in the country? Brush up on mortgage basics below, then visit your local credit union to see for yourself!

What Is a Mortgage?

One of the most common types of loans, a mortgage, is an agreement between you and a lender to borrow money toward purchasing or refinancing a home.

Each mortgage payment to your lender includes a portion that pays off the principal (the initial loan amount) and part that covers the interest due on the loan. As you pay down the loan, the interest portion becomes smaller. As a result, more of your payment goes toward the principal.

Depending on your mortgage agreement with your lender, your monthly payment might also cover amounts due for homeowners insurance and property taxes.

Types of Mortgages

There are several types of mortgages and terms available from most lenders. You may also be able to take advantage of federal or state programs to lower your interest rate or down payment. 

It helps to be familiar with all your options before shopping for a mortgage.


Fixed-Rate Mortgages

If you choose a fixed-rate mortgage, you’re betting that interest rates will stay the same or rise. This type of mortgage has a monthly payment that typically remains the same over the life of the loan.

Pros of a fixed-rate mortgage:

Fixed-rate mortgages do have potential drawbacks. Cons of a fixed-rate mortgage include:


Adjustable-Rate Mortgage

If you choose an adjustable-rate mortgage (ARM), you’re betting that interest rates will stay the same or drop. This type of mortgage has a monthly payment that can increase or decrease based on changes in interest rates. 

Adjustable rate mortgages can deliver satisfying returns under the right circumstances. Pros of an adjustable-rate mortgage include:

However, an adjustable-rate mortgage might be more trouble than it's worth. Cons of an adjustable-rate mortgage include:


Government-Backed Mortgages

The federal government has multiple homebuyer programs that decrease initial costs like down payments — especially when some lenders require as much as 20% of the price of the home to be paid upfront. 

The different types of government-backed mortgages include:

The Mortgage Application Process

Before you throw yourself into the house-hunting process, you'll want to understand what you are getting into. From pre-approval to closing, each step has potential pitfalls and opportunities.

Mortgage Rates

A crucial part of knowing how to apply for a mortgage is understanding mortgage rates. Mortgage rates are part of the price you pay to the lender for providing the mortgage. 

The Federal Reserve has a base rate, called the federal funds rate, which it raises and lowers depending on the economy.

How much interest lenders charge you above this rate base will vary with perceived risk and the lender. For instance, not-for-profit credit union mortgage rates are typically lower than at other financial institutions.


Factors that affect mortgage rates

When your lender underwrites your application, they assess the risk of extending a loan to you and assign a mortgage rate. This can be affected by:


How to get the best mortgage rate

The most common way to lower your interest payments on a mortgage is by making a larger down payment. If you can afford it, this can save you thousands over the life of the loan. Similarly, a shorter loan term can save you tens of thousands on interest, although your monthly payment will be higher.

You can also shop for better rates and look at alternative lending sources. Never settle for the first rate. However, know that you can likely do little about the short-term interest rates you encounter.

If interest rates are exceptionally high at the time you'd like to house hunt, you may be able to save money by waiting. On the other hand, housing prices generally trend upward, and waiting for a lower interest rate may only save you a little if home prices rise significantly. 

You can also take steps to improve your credit. Again though, this takes time, usually at least six months, to see a difference, so paying down debts is not likely an immediate option when looking for the best mortgage rate.

Repaying the Mortgage

Traditionally, mortgage payments are due on the same agreed-upon date each month. If you have a fixed-rate mortgage, payments are the same every month. If you have an adjustable-rate mortgage, your payments can and likely will change over time. 

You can also pay a mortgage off early, either with a lump-sum payment or by making an extra monthly payment.

However, this may open you up to prepayment penalties. Review the details of your loan agreement before signing so you know how, when, and whether you can take advantage of paying it off early.



Amortization is the calculation of when each payment is due, how much the total payment is, how much of each payment goes to principal or interest, and the date you will pay the loan in full.

The longer your amortization period, the smaller your monthly payments. However, remember that you will also pay more interest this way and ultimately pay more for your home, even if the interest rate is lower. Alternatively, a shorter amortization period results in larger payments and usually a higher interest rate, reflecting the lender's reduced time for charging interest.

Whichever you choose, you have options if your finances change. Common actions include refinancing to lengthen the term of your loan or making extra payments to lower your total interest paid. However, remember that interest rates may change significantly over time, so do not count on securing a better rate down the road.


Extra payments

One extra house payment a year can take four to six years off your amortization period. You can also make additional monthly payments directly to the principal to reduce your interest. You will need to communicate with your lender to set up this process. 



Mortgage refinancing is basically a do-over of your home loan. A refinance takes the balance of your loan principal and resets the amortization period and monthly payment according to the new loan terms. Many people refinance to lengthen their amortization period and lower their monthly payments or to take advantage of a lower interest rate.  

Further Resources on How to Apply for a Mortgage

Applying for a home loan can be arduous, but the right lender will be ready and willing to walk you through every step. Make sure you protect yourself and your financial future by considering the following:

Ready to Mark Mortgage Off Your List?  

Committing to a mortgage can be an exciting step toward solidifying your future. Knowing how to apply for a mortgage, what affects your rate, and how to improve your chances of having an offer accepted will all get you closer to the satisfaction of scratching ‘homeowner’ off your to-do list. 

What’s your next move now that you can confidently answer the question, “What is a mortgage?” How about checking out our Credit Union Locator Tool to find the perfect lender!

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Did you know?

Getting a reasonable interest rate is critical to obtaining a mortgage that will work for you in the long term. Not-for-profit, community-focused credit union mortgage rates are often lower than those offered by large national financial institutions that must satisfy profit-driven shareholders.

Find the right Credit Union for you

There are more than 5000 credit unions to choose from across the U.S.