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Mortgage

Loan & Credit

Home Loan Product (US / Global)

A long-term loan secured against residential property, repaid in fixed monthly instalments over 15–30 years, used primarily in the US and UK to purchase homes.

Definition

A mortgage is a type of secured loan used to purchase real estate, where the property itself serves as collateral. If the borrower fails to make payments, the lender can seize and sell the property through a process called foreclosure. Mortgages are the primary means of home ownership financing in the US, UK, Canada, and Australia.

A standard mortgage has four components: principal (the amount borrowed), interest (the cost of borrowing), term (the repayment period, typically 15 or 30 years in the US), and monthly payment (a fixed amount covering both principal and interest). Most US mortgages also include escrow for property taxes and homeowner's insurance, adding those costs to the monthly payment.

In India, the equivalent product is called a home loan, offered by banks and HFCs (Housing Finance Companies) like HDFC, SBI, and LIC Housing Finance — typically at floating rates linked to the lender's benchmark rate.

Formula

Monthly mortgage payment:

M = P × [r(1+r)^n] / [(1+r)^n − 1]

Where:

  • M = Monthly payment
  • P = Principal loan amount
  • r = Monthly interest rate = Annual rate ÷ 12 ÷ 100
  • n = Total number of payments = Loan term in years × 12

Worked Example

You borrow $350,000 at a fixed rate of 6.75% for 30 years.

  • r = 6.75 ÷ 12 ÷ 100 = 0.005625
  • n = 30 × 12 = 360

M = 350,000 × [0.005625 × (1.005625)^360] / [(1.005625)^360 − 1] ≈ $2,270/month

Over 30 years, total payments = $817,200 — meaning $467,200 in interest on a $350,000 loan. Use the mortgage calculator to model your scenario, or the mortgage payoff calculator to see how extra payments reduce your total interest.

Key Things to Know

  • Down payment determines LTV: A 20% down payment avoids PMI and reduces the borrowed amount. On a $400,000 home, 20% down means borrowing $320,000.
  • Rate comparison: Even 0.5% difference in rate matters significantly — on $350,000 over 30 years, 6.75% vs 7.25% is roughly $115/month and $41,000 in total interest.
  • 15 vs 30-year trade-off: A 15-year mortgage has higher monthly payments (~40% more) but you pay roughly half the total interest. It is also typically offered at 0.5–0.75% lower rates.
  • Closing costs: Expect to pay 2–5% of the loan amount in closing costs (origination fees, appraisal, title insurance). These are in addition to the down payment.
  • Pre-approval vs pre-qualification: Pre-approval involves a hard credit check and verifies income/assets — it is taken seriously by sellers. Pre-qualification is a soft estimate only.
  • Comparison to Indian home loans: Indian home loans are almost always floating rate, reset against EBLR (External Benchmark Lending Rate). US mortgages can be fixed for the full term, giving much more payment certainty.

Related Calculators

Mortgage Calculator →Calculate your monthly mortgage payment, total interest, and amortisation schedule. Switch currency — USD, INR, EUR, GBP, CAD, or AUD. Free online tool.
Mortgage Payoff Calculator →See how extra monthly or annual lump-sum payments shorten your mortgage term and reduce interest paid. Calculate your new payoff date and total interest savings.
Mortgage Refinance Calculator →Compare your current mortgage against a new refinance offer. Find monthly savings, break-even point, and total interest saved over the remaining loan life.
Home Affordability Calculator →Find out what price home you can afford based on your income, savings, and existing EMIs. Calculates maximum home price, loan eligibility, and required down payment.

Related Terms

EMIEquated Monthly InstalmentAPRAnnual Percentage RateAmortisationLoan AmortisationDown PaymentDown PaymentLTVLoan-to-Value Ratio

Frequently Asked Questions

Functionally they are identical — both are secured loans where your property is collateral. The term 'mortgage' is used in the US and UK, while 'home loan' is the standard term in India. The core mechanics — EMI, amortisation, LTV ratio — are the same in both markets.
A fixed-rate mortgage (FRM) locks your interest rate for the entire loan term, so your monthly payment never changes. An adjustable-rate mortgage (ARM) starts with a lower fixed rate for an initial period (e.g., 5 years), then adjusts periodically based on a benchmark index like SOFR. ARMs carry interest rate risk if rates rise.
Private Mortgage Insurance (PMI) is required by US lenders when your down payment is less than 20%, protecting the lender if you default. PMI typically costs 0.5–1.5% of the loan amount annually. Under the Homeowners Protection Act, you can request cancellation when your loan-to-value ratio reaches 80%, and it auto-cancels at 78% LTV.
In the early years of a mortgage, most of your monthly payment goes towards interest because the outstanding principal is highest. As the principal reduces, the interest portion shrinks and more of each payment goes to principal. This front-loading of interest is called amortisation. After 10 years on a 30-year mortgage, you have paid off less than 20% of the principal despite making a third of the total payments.
Refinancing means replacing your existing mortgage with a new one — typically to secure a lower interest rate, reduce the loan term, or switch from an ARM to a fixed rate. The break-even point for refinancing is when the savings from the lower rate exceed the closing costs, which typically run 2–5% of the loan amount. Use the mortgage refinance calculator to find your break-even month.