It can best be described as a long term loan on property that must be repaid.  It has a fixed monthly payment, usually having a lifespan of ten to thirty years.  There are various types of mortgages, so be careful to choose the one best suited for your future, and your budget. 
 

 
 Your mortgage is set up on an amortization schedule.  This is the plan of repayment.  Usually when making payments on a mortgage, the interest of the mortgage is paid before the principal (aka, the amount of the loan).  Your lender should have copy of the amortization schedule to give you.   And don’t worry, each month, you pay less on interest and more towards the principal.  Here is an example of an amortization schedule:
 
*Please see Loan Amortization payment schedule article
 
 

 
There are multiple types of mortgages to choose from.  Look closely at the differences between fixed-rate mortgage, adjustable rate mortgages and balloon/reset mortgages.  Here are a summary of each to get you started.
 

 
Fixed rate mortgages are nice because they allow for accurate planning.  The payments will remain the same no matter what inflation, or interest rates vary.    Fixed rates are a smart option for first time buyers or for people who are planning to keep their home for a longer length of time.
 
However, the drawbacks to fixed rate mortgages are something to keep in mind.  If you have a fixed rate mortgage and interest rates drop, you will still have the same interest rate.  Also, the interest rates on fixed rate mortgages are usually higher then other loans, thus you may not qualify for as large of a loan.  In addition, there is a chance that your monthly payments may increase due to changes in your taxes or insurance.  In most instances, the difference is paid via an escrow account that your lender has set up.
 

 
What is nice about ARMs is that they usually begin with a lower interest rate, which means lower monthly payments and larger loan approval amounts.  However, these rates can fluctuate there for possibly increasing the monthly payment.  At the beginning of the loan there is a period in which the rate is fixed.  This may last anywhere from 1 month to 10 years.  After the fixed period, interests rated usually fluctuate annually. Don’t worry; there are caps set in place to keep the interest rates under control.  There is a lifetime cap in which your loan interest rate will never be allowed to raise above and a periodic cap in which your loan interest rate is not allowed to increase from adjustment period to adjustment period.
 
What causes this fluctuation of interest rates?  There are 2 variables to this equation:  “Index” and Margins.  The “index” comes from the LIBOR and the US Treasury Bill.  It reflects the conditions of the financial market, thus, is susceptible to change.  Margin is simply the amount added to the index to figure out what your new rate will be until the next adjustment period.  It is shown as a percentage.
 
How to decipher the numbers game:  ARM’s usually come with terms such as 10/1, 7/1, 5/1, or 3/1.  This simply explains the length of the fixed period verses how often the loan can be adjusted afterwards.  For example, 10/1 means that the fixed period will be for 10 years and then interest rates will vary from year to year.   
 
 
           
With an Interest only adjustable mortgage rate only the interest payments are made during the interest only period.  However, once the adjustable rates start, payment on both the interest and principal is due.  Do keep in mind, sometimes the interest only period will last longer then the fixed interest period, therefore, causing a variation in interest only payments.
 

 
Balloon/Reset mortgages are on a 30 year amortization schedule. There are 2 types of balloon/reset mortgages.  A 7/23 and a 5/25.  Notice that each fraction adds to 30.  30 is the number of years that the mortgage payments will be based upon. The first number, (7 and 5) represent the length of time before the balloon matures.   At the end of either 5 years or 7 years you must pay off the remaining balance or either reset the mortgage to the current market rate.  This will be the rate for the rest of the amortization period.  The denominators (23 and 25) represent the life of the mortgage.  A balloon mortgage may be advantageous if you are planning on selling your home before the balloon matures.  Another benefit to balloon mortgages is, like an ARM, their initial interest rate is lower then most fixed mortgages, therefore, obtaining a larger loan is quite feasible.  With a balloon mortgage, interest rates do not adjust annually like an ARM; instead, they change only at the end of balloon maturity.  However, if the interest rates rise, it could be a significant increase in your monthly payments.  If your income level has decreased or financial obligations increased, refinancing into a new mortgage could be difficult.