How a Mortgage Works

A mortgage isn't just a loan; it's a 30-year contract of indentured servitude to a financial institution. The bank gives you a lump sum to buy a house, and in exchange, you promise to pay them back 2-3 times that amount over the next three decades. The trick is "amortization". In the first few years, almost your entire payment goes to interest (profit for them), not principal (equity for you). They structure it this way so if you move or refinance in 5-7 years (like most people do), you've barely paid off any debt, and they've already collected their profit. It is a system designed to maximize their yield and minimize your wealth. But if you play their game with their rules, you can navigate it without getting fleeced.

1. Save for a Down Payment (20% avoids PMI)

If you put down less than 20%, the bank forces you to buy "Private Mortgage Insurance" (PMI). Let's be clear: PMI protects the bank, not you, but you pay the premiums. It is literally lighting money on fire. It does absolutely nothing for your equity. If you can't afford 20% down, you are agreeing to pay a "poor tax" to the bank every month until you hit that equity threshold. Save the cash. Avoid the scam.

2. Build Your Credit

Your credit score is basically a grade on how good you are at being a profitable customer. But in this game, a high score saves you money. A 760 score might get you a 6.5% rate, while a 640 score gets you 7.5%. That 1% difference on a $400k loan isn't small change; it's over $90,000 in extra interest over the life of the loan. Fix your credit before you apply.

3. Key Terms

Mortgage Rate: The interest rate on the loan. Lower is better, obviously.

Closing Costs: A bucket of "junk fees" the bank charges to process the loan. Origination fees, application fees, "admin" fees. Fight these.

Underwriting: The invasive process where the bank examines your bank accounts, tax returns, and spending habits to decide if you are worthy.

PMI: See point #1. Avoid at all costs.

4. How to Find a Mortgage Lender

Do not just walk into the big bank where you have your checking account. Big banks rely on laziness and brand recognition to charge higher rates. They assume you won't check. You need to look at Credit Unions (non-profits often have lower rates), Online Lenders (lower overhead), and Mortgage Brokers (who shop multiple banks for you).

5. How to Choose a Mortgage Lender

When you get quotes, ask for the "APR" (Annual Percentage Rate), not just the interest rate. The APR includes the interest rate PLUS the closing costs and fees expressed as a percentage. A lender might offer a low interest rate but hide $10,000 in fees. The APR exposes that trick. Choose the lowest APR.

6. Get Pre-Approved for a Loan

"Pre-qualified" means nothing; it's a marketing flyer. "Pre-approved" means an underwriter has actually looked at your finances and committed to lending you money. In a competitive market, sellers won't look at your offer without a pre-approval letter. It turns you into a cash buyer in their eyes.

7. Time to Shop

Here is the most dangerous part. The bank will tell you you "qualify" for a $600,000 house. But your budget says you can only afford $400,000. The bank doesn't care if you are house-poor and eating ramen for 30 years; they just want the interest on the bigger loan. Ignore the bank's number. Stick to your budget.

8. Closing

This is the day you sign your name about 50 times. You will sit at a table with a title agent. 3 days before this, you should have received a "Closing Disclosure". Compare it line-by-line to your "Loan Estimate". If a fee mysteriously went up, stop everything and demand an explanation. Banks love to sneak in a few hundred dollars here and there at the last minute, hoping you are too exhausted to notice. Notice.