Real Estate Law · Haute Lawyer Network
What Is a Mortgage and How Does It Work?
Last reviewed: June 2026
A mortgage is a loan used to purchase or refinance real estate, secured by a lien on the property. The borrower signs two key documents: a promissory note — the personal promise to repay the loan — and a mortgage or deed of trust — the document that creates the lien on the property.
As long as the loan is being repaid, the borrower has full use of the property. If the borrower defaults, the lender can foreclose — enforce the lien by selling the property to recover the outstanding balance.
Mortgages come in many types. Fixed-rate mortgages have the same interest rate for the entire loan term — typically 15 or 30 years. Adjustable-rate mortgages (ARMs) have rates that change periodically based on a benchmark index after an initial fixed period. Government-backed mortgages — FHA, VA, USDA — have different qualification requirements and are insured or guaranteed by federal agencies.
Frequently Asked Questions
What is the difference between the interest rate and the APR?
The interest rate is the cost of borrowing the principal. The annual percentage rate (APR) includes the interest rate plus fees and costs associated with the loan, expressed as a yearly rate. APR gives a more complete picture of the loan's total cost.
What is private mortgage insurance (PMI)?
Insurance required by most conventional lenders when the down payment is less than 20%. PMI protects the lender — not the borrower — if the borrower defaults. It can typically be cancelled once the loan balance reaches 80% of the original home value.
What happens if I miss a mortgage payment?
Most mortgages have a grace period — typically 10-15 days — after which a late fee is assessed. After 30 days, the delinquency may be reported to credit bureaus. After multiple missed payments, the lender may initiate foreclosure proceedings.
What is an escrow account for a mortgage?
Many lenders require an escrow account funded with monthly payments to cover property taxes and homeowner's insurance when due. The lender manages the account and makes the payments on your behalf.
Can I pay off my mortgage early?
Yes. Most modern mortgages have no prepayment penalty. Check your loan documents — some older mortgages and certain loan types do have prepayment penalties for early payoff.
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