How much house can I afford?

Generally, you can afford a home priced 2.5-3x your annual income, but this depends on your debts, down payment, and local market. Use the 28/36 rule: spend no more than 28% of gross income on housing.

What credit score do I need for a mortgage?

Conventional loans typically require 620+, FHA loans accept 580+ (or 500+ with 10% down), VA loans have no minimum but lenders usually want 620+, and jumbo loans often require 700+.

Should I get a 15 or 30-year mortgage?

15-year mortgages save significant interest but have higher payments. 30-year mortgages offer lower payments and more flexibility. Choose based on your budget and long-term goals.

The Complete Mortgage Guide 2025

Everything you need to know about home financing, from first-time buying to refinancing strategies

Mortgage Basics Types of Mortgages Understanding Rates Key Calculations The Home Buying Process Money-Saving Tips

Chapter 1: Mortgage Basics

What is a Mortgage?

A mortgage is a loan used to purchase real estate, where the property itself serves as collateral. If you fail to make payments, the lender can foreclose on the property. Mortgages typically have terms of 15 or 30 years, though other options exist.

Key Components of a Mortgage

Principal: The amount you borrow
Interest: The cost of borrowing money
Term: The length of time to repay the loan
Down Payment: Your initial payment (typically 3-20%)
PMI: Private Mortgage Insurance (required if down payment < 20%)

Understanding PITI

Your monthly mortgage payment typically includes four components, known as PITI:

Principal: Reduces your loan balance
Interest: The cost of borrowing
Taxes: Property taxes (often held in escrow)
Insurance: Homeowners insurance and PMI if applicable

💡 Pro Tip

Use our Mortgage Calculator to see exactly how much each component of PITI will cost for your specific situation.

Chapter 2: Types of Mortgages

Fixed-Rate Mortgages

The most popular type, offering consistent monthly payments throughout the loan term. Your interest rate never changes, providing predictability and protection against rate increases.

30-Year Fixed: Lower monthly payments, more total interest
15-Year Fixed: Higher payments, significant interest savings
20-Year Fixed: Balance between payment size and interest savings

Adjustable-Rate Mortgages (ARM)

ARMs start with a lower fixed rate for a set period, then adjust periodically based on market conditions.

5/1 ARM: Fixed for 5 years, then adjusts annually
7/1 ARM: Fixed for 7 years, then adjusts annually
10/1 ARM: Fixed for 10 years, then adjusts annually

Government-Backed Loans

FHA Loans: 3.5% down payment, easier qualification
VA Loans: For veterans, no down payment required
USDA Loans: For rural properties, no down payment

Jumbo Loans

For loan amounts exceeding conforming loan limits (varies by location, typically $766,550+ in 2024). These require excellent credit and larger down payments.

Chapter 3: Understanding Mortgage Rates

What Affects Your Rate?

Credit Score: Higher scores get better rates
Down Payment: Larger down payments reduce risk
Loan Term: Shorter terms have lower rates
Loan Type: Government loans may have different rates
Market Conditions: Federal Reserve policy and economy
Points: Pay upfront to reduce your rate

APR vs Interest Rate

The interest rate is the cost of borrowing the principal. APR (Annual Percentage Rate) includes the interest rate plus other costs like origination fees, points, and PMI, giving you the true cost of the loan.

Rate Shopping Strategy

Get quotes from multiple lenders within 14-45 days
Compare APRs, not just interest rates
Negotiate with lenders using competing offers
Consider the total cost, not just monthly payment

📊 Current Market Rates

Check today's live mortgage rates with our Mortgage Calculator, which pulls data from official economic sources daily.

Chapter 4: Key Mortgage Calculations

Debt-to-Income Ratio (DTI)

Lenders use DTI to determine how much you can afford. Calculate it by dividing your monthly debt payments by gross monthly income.

Front-end DTI: Housing costs ÷ gross income (target: <28%)
Back-end DTI: All debts ÷ gross income (target: <43%)

Loan-to-Value Ratio (LTV)

LTV = Loan Amount ÷ Property Value. Lower LTV means better rates and no PMI requirement if LTV < 80%.

28/36 Rule

A guideline suggesting you spend no more than 28% of gross income on housing and 36% on total debt payments.

Important Formulas

Monthly Payment = P × [r(1+r)^n] / [(1+r)^n - 1]

Where:

P = Principal loan amount
r = Monthly interest rate
n = Number of months

Chapter 5: The Home Buying Process

Step-by-Step Timeline

Pre-Approval (Week 1-2): Get pre-approved to know your budget
House Hunting (Week 3-12): Work with a realtor to find homes
Make an Offer (1-3 days): Submit offer with earnest money
Under Contract (30-45 days): Inspections, appraisal, underwriting
Closing (1 day): Sign documents and get your keys!

Documents You'll Need

Tax returns (2 years)
Pay stubs (2 months)
Bank statements (2-3 months)
Employment verification
ID and Social Security card
Credit report authorization

Closing Costs Breakdown

Expect to pay 2-5% of the purchase price in closing costs:

Origination fees (0.5-1%)
Appraisal ($300-600)
Home inspection ($300-500)
Title insurance (0.5-1%)
Attorney fees ($500-1,500)
Recording fees ($100-250)

Chapter 6: Money-Saving Tips

Before You Buy

Improve your credit score: Even 20 points can save thousands
Save for 20% down: Avoid PMI (~$100-300/month)
Shop multiple lenders: Rates vary by 0.25-0.5%
Consider points: If staying long-term, buying points saves money

During Your Mortgage

Make extra payments: One extra payment yearly saves years of interest
Biweekly payments: Pay half your payment every 2 weeks
Refinance strategically: When rates drop 0.75%+ below your rate
Remove PMI: Request removal when you reach 20% equity

Common Mistakes to Avoid

Not shopping multiple lenders
Ignoring closing costs in comparisons
Making large purchases before closing
Changing jobs during the process
Skipping the home inspection
Not budgeting for maintenance

💰 Savings Example

On a $300,000 loan, improving your credit score from 680 to 740 could save you $45,000+ over 30 years. Use our calculators to see your potential savings!