A mortgage is a loan you use to buy a home, and the home itself is the collateral. If you stop paying, the lender can foreclose and take the property. Your monthly payment has four parts, known as PITI: principal, interest, taxes, and insurance. Most buyers borrow for 15 or 30 years, put down somewhere between 0% and 20%, and pay closing costs of roughly 2% – 5% of the purchase price on top of that down payment.

Two numbers do most of the work in deciding what your loan costs. A credit score of 620 opens the door to most conventional loans and 580 opens FHA financing, while pricing keeps improving in tiers up to about 740. Your debt-to-income ratio, total monthly debt divided by gross monthly income, is the second gate, and most programs want it at or below 43% – 50%.

Learn how mortgages work from application to payoff, what each dollar of your monthly payment actually buys, what lenders check when they underwrite your file, and the terminology you’ll see on every disclosure you sign.

Key takeaways:

• Your payment has four parts: Principal, interest, taxes, and insurance, PITI, make up a typical monthly mortgage payment, and the tax and insurance pieces are usually collected in an escrow account and paid on your behalf.
• The 20% down payment is a myth: Conventional loans start at 3% down, FHA at 3.5%, and VA and USDA loans at 0%, but plan for closing costs of 2% – 5% of the purchase price on top of whatever you put down.
• Credit and DTI set your price: Most conventional loans want a 620 score and a debt-to-income ratio at or under 43% – 50%, and because Align Lending is an independent broker, we can send that same file to several wholesale lenders and show you which one prices it best.

What is a mortgage?

A mortgage is a secured loan that lets you buy a home now and repay the money over a set number of years, with the home pledged as collateral. That collateral piece is what makes a mortgage different from a credit card or a personal loan: because the lender can foreclose if you default, the risk is lower, and that is why mortgage rates are typically the cheapest long-term borrowing most households ever get.

Three parties sit in every transaction. You are the borrower. A lender funds the loan. And a servicer, sometimes the same company, sometimes not, collects your payments and manages your escrow account for the life of the loan. A mortgage broker like Align Lending is a fourth role: we don’t lend the money ourselves, we take one application and shop it across a network of wholesale lenders so you can compare real offers instead of guessing.

If you want the concept from the ground up, start with our plain-English explainer on what a mortgage is before you go further into the mechanics below.

How does a mortgage work?

A mortgage works by spreading repayment across a fixed number of years, usually 15 or 30, while interest accrues each month on the balance you still owe. Every payment is split between interest (the lender’s charge for the money) and principal (the balance itself), and the split shifts steadily toward principal as the years pass. Our How Mortgages Work hub covers the mechanics, the paperwork, and the people involved in more detail.

Amortization: why your first payments are mostly interest

On a standard 30-year loan, roughly the first third of your payments go overwhelmingly to interest, and you cross the halfway point on principal only in the later years. That front-loading is called amortization, and it is pure math: interest is charged on the outstanding balance, so when the balance is largest, the interest slice is largest too.

The practical takeaway is that extra principal payments are worth the most early. Our guide to mortgage amortization walks through the formula, and reading an amortization schedule shows you exactly how much of each payment is doing real work.

Fixed vs. adjustable interest rates

A fixed-rate mortgage locks your interest rate for the entire term, so the principal-and-interest portion of your payment never changes. An adjustable-rate mortgage (ARM) fixes the rate for an intro period, commonly 5, 7, or 10 years, and then adjusts on a schedule tied to an index, within caps spelled out in your note.

Fixed loans dominate the U.S. market because certainty is worth a lot over 30 years, but an ARM can make sense if you’re confident you’ll sell or refinance before the first adjustment. Compare the two in our breakdown of fixed- vs. adjustable-rate mortgages. Rates move constantly, so check current market rates from Freddie Mac’s weekly survey rather than relying on any figure printed in an article.

What are the steps to getting a mortgage?

Most purchase loans take 30 – 45 days from accepted offer to closing, and the sequence rarely changes. Here’s the short version:

• Preapproval: A lender reviews your credit, income, and assets and issues a letter stating what you can borrow. Expect 1 – 3 business days once your documents are in.
• Application: After your offer is accepted, you submit a full application and receive a Loan Estimate within three business days.
• Processing: A processor orders the appraisal, title work, and verifications, and chases anything missing from your file.
• Underwriting: An underwriter approves the loan, usually with conditions you’ll need to clear.
• Closing: You review the Closing Disclosure at least three business days before signing, then sign and fund.

Our step-by-step guide to the mortgage loan process covers what happens inside each stage. Before you pick anyone to run that process, read what to look for when comparing mortgage lenders, the differences between quotes show up in fees and terms, not just the rate, and see the benefits of working with a mortgage broker if you’d rather compare several offers from one application.

What’s in a monthly mortgage payment?

A typical monthly mortgage payment has four components, principal, interest, taxes, and insurance, abbreviated PITI, and on many loans the taxes and insurance are collected monthly into an escrow account rather than billed to you separately. Homeowners association dues, when they apply, sit outside PITI but still hit your budget every month. Our Payments, Escrow & Servicing hub covers everything that happens after you close.

Component	What it pays for	Usually escrowed?
Principal	Reduces the loan balance and builds your equity	No, paid straight to the loan
Interest	The lender’s charge for borrowing, calculated on the remaining balance	No, paid straight to the loan
Taxes	Property taxes owed to your city, township, county, and school district	Yes on most loans
Insurance	Homeowners insurance, plus mortgage insurance if you put down less than 20%	Yes on most loans

How do escrow accounts work?

An escrow account is a holding account your servicer funds with roughly one-twelfth of your annual tax and insurance bills each month, then uses to pay those bills when they come due. Your servicer runs an escrow analysis at least once a year; if taxes or premiums rose, your monthly payment rises with them, which is why a “fixed-rate” payment can still change.

Read our explainer on mortgage escrow accounts for how shortages and surpluses are handled, and see the Consumer Financial Protection Bureau’s guide to what an escrow account is for the federal ground rules.

When does mortgage insurance go away?

On a conventional loan, private mortgage insurance (PMI) must be automatically terminated once your balance reaches 78% of the original value, and you can request cancellation at 80%. FHA loans work differently: the annual mortgage insurance premium stays for the life of the loan when you put down less than 10%, which is one reason refinancing out of FHA is common once equity builds.

Our guide to mortgage insurance compares PMI, FHA MIP, VA funding fees, and lender-paid options so you can see what each really costs per month.

Who do you actually pay each month?

You pay your servicer, not necessarily the lender that funded your loan. Servicing rights are bought and sold routinely, and federal rules require both the old and new servicer to notify you in writing. Your rate, balance, and terms do not change when this happens. Our guide to mortgage servicing explains what your servicer is responsible for and how to get problems fixed.

Your servicer is also who you call when life changes. If you come into a lump sum, recasting your mortgage can lower your payment by re-amortizing the smaller balance without a full refinance. If you hit a hardship, mortgage forbearance can pause or reduce payments temporarily, and calling before you miss a payment always produces better options than calling after.

What do lenders look at when you apply?

Lenders evaluate four things: credit, income, assets, and the property itself, and the first two carry the most weight in whether you’re approved and what rate you’re offered. Our Credit & Qualifying hub goes deep on each one, including how to fix problems before you apply.

What credit score do you need to buy a house?

Most conventional loans require a minimum score of 620, FHA loans go down to 580 with 3.5% down (or 500 with 10% down), and VA and USDA loans leave the minimum largely to the lender, with many setting it around 580 – 620. Minimums only get you approved, though. Pricing tiers keep improving up to roughly 740, and the gap between a 660 and a 760 borrower on the same loan is real money every month.

See what counts as a good credit score to buy a house and how your credit affects buying a home for the tier-by-tier picture. If you’re starting below 620, buying a home with bad credit covers the programs that still work, and credit repair strategies for home buyers lists the moves that lift a score fastest in the 60 – 90 days before you apply.

What is a debt-to-income ratio?

Your debt-to-income (DTI) ratio is your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Most conventional loans cap DTI around 45%, with automated approvals stretching to 50% for strong files; FHA can go higher with compensating factors. If you earn $6,000 a month and carry $2,400 in debt payments including the new mortgage, your DTI is 40%.

Our explainer on the debt-to-income ratio shows the math and which debts count, and how to improve your debt-to-income ratio covers which balances to attack first, paying off a $300-a-month car loan usually helps more than paying down a much larger mortgage-adjacent balance.

What happens in underwriting?

Underwriting is the review where a human (or an automated engine, then a human) verifies that your file matches the program’s rules, income documented, assets sourced and seasoned, credit explained, property appraised at or above the contract price. Most approvals come back “approved with conditions,” and clearing those conditions quickly is the single biggest thing you control in the timeline. Our guide to mortgage underwriting lists what underwriters ask for and why.

What if your file isn’t textbook?

Plenty of approvable borrowers don’t look like the textbook W-2 case, and this is where working with a broker changes the outcome, different wholesale lenders read the same guidelines differently, so a file one lender declines another approves.

• Self-employed or 1099 income: Expect to document two years of returns, though some programs work with less. Start with buying a home as a freelancer.
• Student loan debt: How a lender counts deferred or income-driven payments varies by program and can swing your DTI several points. See buying a home with student loan debt.
• Thin credit files: If you have few tradelines, reporting rent to build credit can establish payment history that some scoring models recognize.
• Adding a co-signer: A co-signer’s income can help you qualify, but the debt appears on their credit too. Weigh the risks and benefits of co-signing a mortgage before anyone signs.

Mortgage terms you’ll see on every disclosure

Five or six terms carry most of the meaning on a Loan Estimate, and knowing them turns an intimidating document into a comparison tool. Our Mortgage Terminology hub defines the full vocabulary; these are the ones that change what you pay.

• Annual percentage rate (APR): The interest rate plus most lender fees, expressed as a yearly percentage. It’s the number to compare across quotes, because a low rate with high fees can carry a higher APR than a slightly higher rate with none.
• Loan-to-value ratio (LTV): The loan amount divided by the home’s value. Borrow $285,000 on a $300,000 home and your loan-to-value ratio is 95%. LTV drives mortgage insurance, pricing, and refinance eligibility.
• Escrow: Used two ways in a transaction, the neutral third party holding funds before closing, and the account your servicer uses for taxes and insurance afterward. Our guide to escrow covers both.
• Discount points: Prepaid interest. One point costs 1% of the loan amount and buys the rate down by a fraction of a percent, so the question is always whether you’ll keep the loan long enough to break even.
• Rate lock: A lender’s commitment to hold your quoted rate for a set window, commonly 30 – 60 days. Locks are free within the standard window and cost money to extend.
• Origination fee: What the lender charges to make the loan, shown in Section A of your Loan Estimate. Compare Section A across quotes, not just the rate on page one.

What does a mortgage cost up front?

Plan for a down payment plus closing costs of roughly 2% – 5% of the purchase price. Those closing costs cover the appraisal, title work and title insurance, lender fees, recording fees, and prepaid items like the first year of homeowners insurance and a few months of taxes to fund your escrow account.

Say you’re buying a $300,000 home in Waterford with 5% down. That’s $15,000 down, a $285,000 loan, and roughly $6,000 – $15,000 in closing costs, call it $21,000 – $30,000 in total cash, before any seller credits or lender credits reduce it. Sellers can and often do contribute toward closing costs, and that concession is negotiable in your offer.

If cash is the constraint rather than credit, look at low-down-payment mortgages, conventional programs starting at 3% down, FHA at 3.5%, and zero-down VA and USDA loans for eligible buyers. Our breakdown of closing costs for buyers itemizes each line so you can spot which fees are negotiable and which aren’t.

What Michigan buyers should know

Michigan adds three wrinkles to the national picture, and all three are worth knowing before you write an offer.

• MSHDA assistance: The Michigan State Housing Development Authority pairs its MI Home Loan with down payment assistance, currently as much as $10,000 through the MI 10K DPA Loan, structured as a second mortgage with no monthly payment, repaid when you sell or refinance. Income and sales-price limits apply and vary by county.
• Two property tax bills, not one: Michigan communities bill summer and winter taxes separately, which affects how your escrow account is funded at closing. Filing the principal residence exemption on your new home removes up to 18 mills of local school operating tax, a meaningful cut to the “T” in your PITI.
• Winter timing: Appraisers and inspectors can’t evaluate a roof under snow or run an exterior water test in February, so Michigan closings between December and March occasionally need a re-inspection once weather clears. Build a few days of cushion into winter purchase agreements.

Align Lending is based in Waterford and places Michigan loans every week, so we know which wholesale lenders in our network handle MSHDA files cleanly and which don’t. Michigan buyers should also review first-time home buyer grants and programs before assuming assistance is out of reach.

FAQ: Mortgage basics

Here are answers to common questions about mortgage basics.

How much cash do I really need to buy a house?

It depends on your loan program, but plan on your down payment plus 2% – 5% of the purchase price in closing costs. On a $250,000 home with 3.5% down, that’s about $8,750 down plus $5,000 – $12,500 in closing costs. Gift funds from family are allowed on most programs, and seller concessions can cover part of the closing costs. Our guide on how to save for a down payment lays out a timeline.

What’s the difference between prequalified and preapproved?

Prequalification is an estimate based on what you tell a lender; preapproval is a decision based on documents a lender verified. Sellers in competitive markets generally want to see a preapproval letter, because prequalification carries no verification behind it. See prequalified vs. preapproved for what each one requires.

How long does it take to get a mortgage?

Most purchase loans close in 30 – 45 days from accepted offer, and preapproval itself usually takes 1 – 3 business days once your documents are in. The two things that stretch a timeline are appraisal scheduling and slow document returns, both partly in your control. Getting preapproved before you shop removes days from the back end.

Can I pay off my mortgage early without a penalty?

Almost always yes. Prepayment penalties are rare on today’s owner-occupied loans and tightly restricted by federal rules, so extra principal payments are usually free. Send them clearly labeled as principal-only so your servicer doesn’t apply them to next month’s payment instead. If a faster payoff is the real goal, price it against a shorter term first, our 15-year vs. 30-year mortgage comparison shows what each route costs.

Should I keep renting until I can put 20% down?

Not necessarily, and holding off is always a legitimate choice. Waiting to reach 20% avoids mortgage insurance, but it also means years of rent and potentially higher home prices. Buying at 5% down with PMI you cancel at 80% loan-to-value often beats waiting, though not always. Run both scenarios in our renting vs. buying financial comparison before you decide.

What credit score do I need to buy a house?

Most conventional loans look for a 620 score, FHA reaches down to 580 with 3.5% down and 500 with 10% down, and VA and USDA set no agency minimum although lenders apply their own overlays. Higher scores buy better pricing, not just approval. Our guide to what’s a good credit score to buy a house shows where the pricing tiers break.

Why did my mortgage payment go up on a fixed-rate loan?

Almost always escrow. Your rate and principal-and-interest payment are fixed, but the taxes and insurance your servicer collects are not, when the tax bill or the premium rises, the escrow portion rises with it, and a shortage from last year gets spread across the next twelve months. Our explainer on mortgage escrow accounts covers the annual analysis.

The bottom line on mortgage basics

A mortgage is a loan secured by your home, repaid over 15 or 30 years, with a monthly payment made of four parts: principal, interest, taxes, and insurance. You don’t need 20% down. Conventional loans start at 3%, FHA at 3.5%, and VA and USDA at 0%, but you do need closing costs of 2% – 5% of the purchase price, a credit score of at least 580 – 620 depending on program, and a debt-to-income ratio generally at or below 43% – 50%. Understand those numbers and you can evaluate any loan offer put in front of you.

If you’re ready to see what you actually qualify for, talk to Align Lending, we’ll shop your scenario across our lender network and show you the numbers side by side. Call 248-506-5727 or start online today.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Consult a qualified professional about your situation. Align Lending works with FHA- and VA-approved lenders and is not acting on behalf of, endorsed by, or sponsored by FHA, HUD, or the Department of Veterans Affairs.