Mortgages
A mortgage is a loan to buy a home — typically the largest financial commitment most people ever make. Understanding how mortgages work is essential, even if homeownership feels far away.
How Mortgages Work
When you buy a home with a mortgage, the bank pays the seller and you agree to pay the bank back over time (usually 15 or 30 years). The home itself is collateral — if you stop paying, the bank can take the house (foreclosure).
Your monthly payment typically includes:
- Principal: Paying down what you borrowed
- Interest: The cost of borrowing
- Property taxes: Annual taxes paid to your local government
- Homeowner's insurance: Protection against damage/liability
- PMI: Insurance if your down payment is less than 20%
Fixed vs. Adjustable Rate
Your interest rate stays the same for the entire loan. Your payment is predictable and will not change (except for taxes/insurance adjustments).
Best for: Most people, especially if you plan to stay in the home long-term.
Your rate is fixed for an initial period (often 5-7 years), then adjusts based on market rates. Can go up or down, making future payments unpredictable.
Best for: People who plan to sell or refinance before the rate adjusts.
The True Cost of a Mortgage
You pay for the house twice (or more)
Over a 30-year mortgage, you will pay back far more than the purchase price in interest alone.
Example: $300,000 home at 7% interest
- 30-year mortgage payment: $1,996/month
- Total paid over 30 years: $718,527
- Interest paid: $418,527
A 15-year mortgage at the same rate would cost $2,696/month but only $185,367 in total interest — saving over $233,000.
The Hidden Costs of Homeownership
Your mortgage payment is just the beginning. Homeowners also pay for:
Property taxes: 1-2% of home value per year (varies by location)
Homeowner's insurance: $1,000-$3,000+ per year
Maintenance and repairs: Budget 1-2% of home value per year
HOA fees: $200-$500+ per month in some communities
Utilities: Often higher than renting (larger space, yard care, etc.)
Closing costs when buying: 2-5% of purchase price
When Buying Makes Sense
You plan to stay in the area for 5+ years (time to recover buying costs)
Your total housing costs would be similar to or less than renting
You have a stable income and emergency fund
You can afford 20% down (or at least 10%) plus closing costs
Your debt-to-income ratio is under 36%
You are emotionally ready for the responsibilities of homeownership
Common Mortgage Mistakes
Buying the maximum amount the bank will lend you
Ignoring the total cost and focusing only on monthly payment
Skipping the home inspection to save money or win a bidding war
Not shopping around for rates — even 0.5% difference saves thousands
Buying before you have an emergency fund for repairs
Treating home equity like an ATM (cash-out refinancing for non-essentials)
Key Takeaway
A mortgage can be good debt — you are borrowing to buy an asset that may appreciate. But "the bank approved you for $X" does not mean you can afford $X. Buy less house than you qualify for, understand all the costs, and make sure homeownership fits your life plans. Renting is not "throwing money away" if buying does not make sense yet.