Module 1: How Mortgages Work

A mortgage is simply a loan secured by real property. If you stop paying, the lender can foreclose and take the property. This security is why mortgage rates are typically lower than other consumer debt. But the mechanics of how mortgages work have important implications for your financial strategy.

Understanding Amortization

In a fully amortizing mortgage, each monthly payment consists of interest and principal. In the early years, most of your payment goes toward interest. In the final years, most goes toward principal. This is front-loaded interest — which is why paying extra early has an outsized impact on total interest paid.

What Determines Your Rate?

• Credit score: Higher score = lower rate. Improving from 660 to 760 can save 1%+ on your rate.
• Loan-to-value ratio: Lower LTV (larger down payment) = lower rate.
• Loan type: VA and conventional conforming typically have the lowest rates; jumbo and investment property loans carry premiums.
• Term length: 15-year rates are lower than 30-year.
• Market conditions: Rates follow the 10-year Treasury yield plus a spread.