What is a Mortgage?

You may have heard the term "mortgage" before and wondered how it is used to purchase a home. For most people, buying a home is the largest financial investment they’ll ever make. We're here to help provide the answers you need to learn more.

A mortgage is a type of loan specifically designed to help individuals purchase a home or other real estate. This loan is provided by a lender—typically a bank or credit union—to the individual so they can buy a property. The individual, also called the borrower, repays the loan over time, usually in monthly installments, for a typical period of 15 to 30 years. At its core, a mortgage allows people to become homeowners without needing to pay the full purchase price upfront.

Types of Mortgage

There are several types of mortgages available, each with its own features and benefits. Understanding the differences can help you choose the right mortgage for your needs.

Fixed-Rate Mortgages:  A fixed-rate mortgage has an interest rate that remains the same for the entire term of the loan. This means your monthly payments will stay consistent, making it easier to budget. Fixed-rate mortgages are popular among homebuyers who plan to stay in their homes for a long time and prefer the stability of predictable payments.

Adjustable-Rate Mortgages (ARMs):  An adjustable-rate mortgage (ARM) has an interest rate that can change periodically, usually in relation to an index. This means your monthly payments can go up or down over time. ARMs often start with a lower interest rate than fixed-rate mortgages, making them attractive to homebuyers who plan to move or refinance within a few years.

FHA Loans:  FHA loans are mortgages insured by the Federal Housing Administration (FHA). They are designed for low-to-moderate-income borrowers who may have lower credit scores or smaller down payments. FHA loans are popular among first-time homebuyers because they offer more flexible qualification requirements.

VA Loans:  VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs (VA). They are available to eligible veterans, active-duty service members, and certain members of the National Guard and Reserves. VA loans offer competitive interest rates, no down payment requirements, and no private mortgage insurance (PMI).

USDA Loans:  USDA loans are mortgages backed by the U.S. Department of Agriculture (USDA). They are designed for rural and suburban homebuyers who meet certain income requirements. USDA loans offer low interest rates and no down payment options, making homeownership more accessible in eligible areas.

Jumbo Loans:  Jumbo loans are mortgages that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). They are used to finance luxury homes or properties in high-cost areas. Jumbo loans typically have stricter qualification requirements and higher interest rates than conforming loans.

Understanding Mortgage Terms

Understanding key mortgage terms can empower you to make informed decisions and feel more confident throughout your homebuying journey. Here are some of the most important terms to know:

Interest Rate

The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. It determines how much you’ll pay your lender in addition to repaying the principal. Interest rates can be:

Fixed: The rate stays the same for the life of the loan, offering predictable monthly payments.

Adjustable: The rate may change periodically based on market conditions, which can affect your monthly payment.

Even a small difference in interest rates can significantly impact your total loan cost over time, so it’s important to shop around and compare offers.

Principal

The principal is the original amount of money you borrow from the lender. For example, if you buy a home for $300,000 and make a $60,000 down payment, your principal loan amount would be $240,000. Each mortgage payment you make reduces the principal, gradually building your equity in the home.

Escrow

An escrow account is a separate account managed by your lender to hold funds for property-related expenses such as property taxes, Homeowners insurance, and Mortgage insurance (if applicable).

Each month, a portion of your mortgage payment goes into the escrow account, and your lender uses those funds to pay these bills on your behalf. This helps ensure that essential expenses are paid on time and reduces the risk of missed payments.

PMI (Private Mortgage Insurance)

Private Mortgage Insurance (PMI) is typically required if your down payment is less than 20% of the home’s purchase price. PMI protects the lender—not you—in case you default on the loan. While it adds to your monthly costs, PMI can help you qualify for a mortgage sooner if you don’t have a large down payment saved. The good news? You can usually cancel PMI once you reach 20% equity in your home.

Amortization

Amortization refers to the process of gradually paying off your mortgage through regular monthly payments. Each payment includes:

Interest: The cost of borrowing

Principal: The amount that reduces your loan balance

In the early years of your mortgage, a larger portion of your payment goes toward interest. Over time, more of your payment is applied to the principal. This structured repayment plan ensures your loan is fully paid off by the end of the term—typically 15, 20, or 30 years.

Tips for First-Time Homebuyers

Buying your first home is an exciting milestone, but it can also feel overwhelming without the right guidance. Below are important steps to consider:

Create a realistic budget: This means looking beyond just the purchase price and factoring in closing costs, property taxes, homeowners insurance, and ongoing maintenance. Knowing what you can comfortably afford helps you avoid financial stress down the road.

Understand your credit score: Your credit score plays a major role in determining your mortgage eligibility and the interest rate you’ll receive. If your score needs improvement, consider paying down debt, making on-time payments, and avoiding new credit inquiries in the months leading up to your application.

Know your mortgage options: The right mortgage depends on your financial goals, how long you plan to stay in the home, and your comfort with risk. Taking the time to explore your options and ask questions can make all the difference in finding a mortgage that supports your future.

Mortgage Application Process

Applying for a mortgage may seem complex, but breaking it down into clear steps can make the journey to homeownership much more manageable.

1. Pre-Approval vs. Pre-Qualification: Pre-qualification is an informal estimate of how much you might be able to borrow, based on basic financial information you provide. It’s a good first step to gauge your budget. Pre-approval is a more formal process. A lender reviews your credit report, income, assets, and debts to determine how much they’re willing to lend you. You’ll receive a pre-approval letter, which strengthens your offer when you’re ready to buy. A pre-approval shows sellers you’re a serious buyer and can give you a competitive edge in a hot market.
   
2. Gather Necessary Documents: To move forward with a mortgage application, you’ll need to provide documentation that verifies your financial situation. Commonly required documents include: Recent pay stubs or proof of income, W-2s or tax returns from the past two years, Bank statements and asset documentation, Credit history and score, Employment verification, and Government-issued ID. Having these documents ready in advance can speed up the process and reduce stress.
   
3. Submit the Mortgage Application: Once you’ve chosen a lender and gathered your documents, it’s time to complete the mortgage application. This includes: providing detailed personal and financial information, selecting the type of mortgage you want, and authorizing a credit check. After submission, your lender will issue a Loan Estimate outlining the terms, interest rate, monthly payment, and closing costs. Review this carefully to ensure it aligns with your expectations.
   
4. Underwriting and Approval: During underwriting, the lender evaluates your application to assess risk and determine whether to approve the loan. This step may involve: Verifying your income and employment, reviewing your credit history, and appraising the property to ensure its value supports the loan amount The underwriter may request additional documentation or clarification. Once everything checks out, you’ll receive a clear to close—meaning your loan is approved and ready for final steps.
   
5. Closing the Loan: The final step is closing, where you’ll sign all the necessary paperwork and officially take ownership of your new home. At closing, you’ll review and sign the Closing Disclosure, which details your loan terms and final costs, pay any remaining closing costs and your down payment, and receive the keys to your new home!

Managing Your Mortgage

Once you’ve secured your mortgage and moved into your new home, it’s important to manage your loan wisely.

Familiarize yourself with the due dates and frequency of your mortgage payments. To ensure you never miss a payment, consider setting up automatic payments so that your mortgage payment will be deducted from your account before the due date, giving you peace of mind. It’s also smart to budget for those payments to everything aligns in your finances.

Review your mortgage statement each month to keep track of your account. And, if you ever encounter financial difficulties and are unable to make a payment, contact your lender immediately. They may offer options such as payment deferrals or loan modifications to help you through tough times.

Resources and Tools

At NASA Federal Credit Union, we understand that navigating the mortgage process can feel overwhelming, especially for first-time homebuyers or those considering refinancing. That’s why we encourage you to reach out to one of our experienced mortgage advisors for personalized guidance tailored to your unique financial goals. You can even use one of our useful calculators to get started: Mortgage Budget Calculator or our Mortgage Monthly Payment Calculator.

Whether you're just starting to explore your options or ready to take the next step, our team is here to help you make informed decisions with confidence. You can easily begin the process by contacting us. Understanding how mortgages work—from the types available to the application process and long-term management—is essential to making a smart decision. At every stage of your journey, NASA FCU is committed to being a trusted partner, offering the tools, resources, and support you need to achieve homeownership with peace of mind.