Mortgage

A mortgage is the most common method by which Americans finance the purchase of a home. In a standard mortgage transaction, a borrower (the mortgagor) receives a lump-sum loan from a lender (the mortgagee) — typically a bank, credit union, or mortgage company — and uses the funds to purchase a property. In exchange, the borrower pledges the property as collateral and agrees to repay the loan with interest over a specified term, most commonly 30 years in the United States. The mortgage is recorded as a lien against the property's title, and the lien is released when the loan is fully repaid.

The U.S. mortgage market is the largest in the world and is heavily influenced by two government-sponsored enterprises (GSEs): Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). These entities do not originate mortgages directly. Instead, they purchase conforming mortgages that meet specific underwriting standards from lenders, package them into mortgage-backed securities (MBS), and sell those securities to investors. This secondary market function funnels capital back into the mortgage origination system, enabling lenders to make new loans. Loans that meet Fannie Mae and Freddie Mac standards are called conforming loans; those that exceed the conforming loan limit (which varies by geographic area and is updated annually by the Federal Housing Finance Agency) are called jumbo loans and are subject to different underwriting and pricing.

There are two primary mortgage structures in the U.S. market: fixed-rate and adjustable-rate. A fixed-rate mortgage (FRM) carries the same interest rate and monthly principal-and-interest payment for the entire loan term. The 30-year fixed-rate mortgage is the most popular mortgage product in the United States, offering payment stability over a long term. A 15-year fixed-rate mortgage amortizes faster and typically carries a lower interest rate but requires higher monthly payments. An adjustable-rate mortgage (ARM) starts with a fixed rate for an initial period (commonly 5, 7, or 10 years) and then adjusts periodically based on a reference rate such as the Secured Overnight Financing Rate (SOFR), subject to periodic and lifetime caps that limit how much the rate can increase.

Mortgage applications are subject to federal regulations under several statutes including the Truth in Lending Act (TILA), which requires lenders to disclose the Annual Percentage Rate (APR) and other loan terms; the Real Estate Settlement Procedures Act (RESPA), which governs settlement costs and prohibits kickbacks; and the Equal Credit Opportunity Act (ECOA), which prohibits discrimination in lending. Lenders must provide borrowers with a standardized Loan Estimate within three business days of receiving a loan application, and a Closing Disclosure at least three business days before closing, facilitating comparison of loan terms across lenders.

Interest paid on a mortgage secured by a primary residence or one qualified second home is potentially deductible for federal income tax purposes under the home mortgage interest deduction (IRC Section 163), subject to the $750,000 acquisition indebtedness limit enacted by the Tax Cuts and Jobs Act of 2017 (reduced from the prior $1 million limit for loans originated after December 15, 2017). This deduction is available only to taxpayers who itemize rather than taking the standard deduction, and since the standard deduction was nearly doubled by the 2017 tax law, fewer households now benefit from itemizing.