Mortgage Basics: A Tutorial

By Lisa Smith

A home of your own. That little phrase captures so much emotion, and so many hopes and dreams. It's a place to express yourself and somewhere you can do what you want, when you want. You can decorate, landscape and shape your surroundings with no limits other than your imagination and your budget. Quite simply, for many people, homeownership represents freedom.

Owning a home is also an opportunity to put down roots and get involved in the community. Buying a home is your chance to leave behind the transient lifestyle and rent increases of the apartment dweller, exchanging something temporary that belongs to someone else for something permanent that belongs to you. It's a powerful emotional pull that encourages millions of people to make the move from renting to buying. (For more on this, read To Rent Or Buy? The Financial Issues - Part 1 and Part 2.)

Beyond all of the emotion invested in homeownership, owning a home can also be a powerful financial tool. Even if you don't have enough money left at the end of the month to invest in traditional wealth-building vehicles like stocks and bonds, simply paying for the place where you live can help you amass a substantial net worth. In fact, used properly, homeownership is often an individual's single largest source of wealth. Money paid into a house and not taken back out generally continues to grow over time as the value of the property appreciates. It is possible that in 30 years, that $100,000 house may be worth double or triple what you paid for it.

While buying home can give you a great place to live and a way to build wealth, all of these hopes, dreams and financial benefits come with a cost. For most people, the bulk of that cost is wrapped up in a mortgage.

So what is a mortgage? If you take a look at the mortgage calculator below, you'll see examples of lenders and the various types of mortgages. However, at its most basic, a mortgage is a loan used to purchase a house.

This definition is simple enough to capture the essence of the issue, but it barely scratches the surface of the complex issues that underlie this topic.
In this tutorial, we'll provide the foundation you need to research and find a mortgage. We'll start by explaining the basic types of popular mortgages available in the marketplace, and then we'll review the costs associated with a mortgage and the process that you must go through in order to secure one. We'll also review the pros and cons of homeownership and highlight some tips for positioning your finances in a way that will help you qualify for a favorable interest rate such as using a mortgage calculator like the one above. (For a one-stop shop on subprime mortgages and the subprime meltdown, check out the Subprime Mortgages Feature.)