One of the many aspects of the American Dream is owning a home. Getting a mortgage is just one of the many complex steps it takes to get there.

If you are contemplating homeownership and have no idea where to get started, we’ve created a simple breakdown of a mortgage to make this big, but complicated, step a whole lot easier.

The Simple Explanation—What is a Mortgage?

A mortgage is a type of loan used to buy or refinance a home. Most people who buy a home will do so with a mortgage as it’s a way to make your purchase without having to pay cash upfront.

The Different Types of Loans

Mortgages come in many shapes and sizes.

• Conventional mortgages
  • A conventional mortgage is made up of conforming and non-conforming loans. In a conforming loan, the loan amount falls within limits set by the Federal Housing Finance Agency. Loans that do not meet these guidelines are considered non-conforming loans. Conventional loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least three percent.
• Adjustable-rate mortgages
  • In an adjustable-rate mortgage (ARM), the initial interest rate is fixed for a period of time. Look for an ARM that caps the amount your interest rate or monthly mortgage rate can increase to so that you don’t wind up in financial trouble when the loan resets. If you do not plan to stay in your home beyond a few years, an ARM could save you big on interest payments.
• Fixed-rate mortgages
  • The term “fixed-rate mortgage” refers to a home loan that has a fixed interest rate for the entire term of the loan. In other words, your monthly mortgage payment always stays the same. If you plan to stay in your home for a long period of time, this loan type might be ideal.
• Government-insured mortgages
  • A government-backed or insured mortgage program is when a private sector lender issues the loan to the borrower and the government insures or guarantees it. Examples of government-insured loans are FHA loans, USDA loans, and VA loans. Government-insured loans are ideal if you have low cash savings or less-than-stellar credit and cannot qualify for a conventional loan.
• Jumbo mortgages
  • Jumbo mortgages are conventional types of loans where the loan amount is higher than the conforming loan limits set by the Federal Housing Finance Agency. Jumbo loans make sense for more affluent buyers purchasing a high-end home.

Qualifying for a mortgage

To qualify for a mortgage, you must meet certain eligibility requirements. It’s important to be realistic about what you can afford on a monthly basis. Your lender does need to know that you have enough money coming in to cover your mortgage payment, as well as your other bills. The type of property you want to buy will also affect your ability to get a loan. Your credit score is an important factor in qualifying for a mortgage. A high credit score typically means that you pay your bills on time.

How does a Mortgage Loan Work?

Your lender will give you a set amount of money to purchase a home. You will agree to pay back this loan with interest over a set amount of time. Until you pay off this loan, the home is not completely yours.

The Bottom Line is

A mortgage is likely to be the largest loan you take out over the course of your lifetime and comes with a lot of variables. If you are looking to buy a home, this article hopefully has given you some confidence to continue on your journey. Work with a mortgage expert to get the deal that will best work for you.