Mortgage 101: How Home Loans Work for Texas Homebuyers
If you're thinking about buying a home, you've probably heard words like mortgage, principal, interest, escrow, PMI, APR, pre-approval, and closing costs thrown around.
If some of it sounds like another language, you're not alone.
You don't need to become a mortgage expert before buying a home. But understanding a few basic concepts can help you ask better questions, compare your options, and make more informed financial decisions.
At TLP Mortgage, we believe mortgage education should be straightforward.
So let's start with the biggest question of all.
Quick Answer: What Is a Mortgage?
A mortgage loan is financing used to purchase or refinance real estate. The property serves as collateral for the loan, and the borrower agrees to repay the amount borrowed, plus applicable interest and other costs, according to the terms of the loan.
Most homebuyers don't pay the entire purchase price of a home in cash. Instead, they contribute an eligible down payment when required and finance the remaining amount with a mortgage.
How Does a Mortgage Work?
Let's use a simplified example.
Suppose you're purchasing a $350,000 home and making a $20,000 down payment.
That doesn't mean your mortgage automatically equals exactly $330,000, because the final loan amount can be affected by the loan program and other financed amounts or requirements.
But conceptually, your mortgage finances the portion of the purchase price you're not paying upfront.
You then repay the mortgage according to the terms of your loan.
Common mortgage terms include 15-year and 30-year loans, although other terms may be available.
What Does It Mean That a Mortgage Is “Secured”?
A mortgage is a form of secured financing, meaning the property is used as collateral for the loan.
The borrower agrees to make the required payments and comply with the terms of the mortgage documents.
If a borrower stops making payments and the default isn't resolved, the lender or loan servicer may eventually pursue foreclosure in accordance with applicable laws and loan documents.
That's one reason it's important to choose a mortgage payment that fits comfortably within your overall financial picture—not simply borrow the maximum amount you may qualify to receive.
What Is Included in a Monthly Mortgage Payment?
You'll often hear mortgage professionals use the acronym PITI:
Principal + Interest + Taxes + Insurance
Here's what each one means.
Principal
Principal is the amount of money you borrowed.
As you make payments over time, a portion of each applicable payment goes toward reducing the outstanding principal balance.
Interest
Interest is the cost of borrowing money.
Your mortgage interest rate helps determine how much interest you'll pay.
On a typical fixed-rate amortizing mortgage, the principal-and-interest payment remains consistent, but the way that payment is divided changes over time.
Earlier in the loan, more of the principal-and-interest payment generally goes toward interest.
As the balance decreases, more generally goes toward principal.
Property Taxes
Texas homeowners generally pay property taxes based on the applicable taxing jurisdictions and assessed property value.
Depending on your mortgage and escrow arrangement, a portion of your estimated property taxes may be collected with your monthly mortgage payment and held in an escrow account until the tax bills are due.
Property taxes can change over time, which means your total monthly housing payment can change even if you have a fixed mortgage interest rate.
Homeowners Insurance
Homeowners insurance helps protect your property against certain covered losses.
Mortgage lenders generally require borrowers to maintain adequate property insurance.
If your mortgage has an escrow account, the lender or servicer may collect a portion of the expected annual insurance premium with your monthly payment and pay the insurance bill when it becomes due.
Insurance premiums can also change over time.
What Is an Escrow Account?
An escrow account is an account your mortgage servicer may use to collect and pay certain property-related expenses, commonly including property taxes and homeowners insurance.
Instead of paying a large annual insurance premium or property-tax bill separately, an estimated portion can be included in your monthly mortgage payment.
However, not every mortgage has an escrow account, and requirements vary by loan program, transaction, lender, and borrower circumstances.
Also remember that escrowed amounts can change.
That's why a homeowner with a fixed interest rate can still experience a change in their total monthly mortgage payment.
What Is Mortgage Insurance?
Mortgage insurance is another term homebuyers frequently encounter.
Whether mortgage insurance applies depends on your loan program and financing structure.
For example:
Conventional loans may require private mortgage insurance (PMI) depending on the down payment, loan-to-value ratio, and other factors.
FHA loans generally include mortgage insurance requirements specific to the FHA program.
VA loans don't require monthly PMI, although an applicable VA funding fee may apply unless the borrower qualifies for an exemption.
Mortgage insurance rules vary, so your TLP Mortgage advisor can explain exactly what applies to the loan options you're considering.
What's the Difference Between Interest Rate and APR?
These two numbers are related, but they aren't the same.
Interest Rate
Your interest rate is the rate used to calculate interest on the amount you've borrowed.
APR
Annual Percentage Rate (APR) is a broader measure designed to reflect certain costs of borrowing in addition to the interest rate.
APR can be helpful when comparing mortgage options, but it shouldn't be the only number you evaluate.
When comparing loans, look at the:
Interest rate
APR
Monthly payment
Discount points
Lender credits
Closing costs
Cash needed at closing
Loan term
Mortgage insurance, when applicable
Overall financial strategy
The lowest advertised interest rate isn't automatically the least expensive or best mortgage for every borrower.
What Is a Down Payment?
Your down payment is the portion of the home's purchase price that you pay upfront rather than finance through the primary mortgage.
And here's an important misconception to clear up:
You don't necessarily need 20% down to buy a home.
Depending on eligibility and qualifications, buyers may have access to:
Low-down-payment conventional financing
FHA financing
VA financing with no down payment in eligible circumstances
USDA financing with no down payment in eligible circumstances
Down payment assistance programs
The right option depends on your finances, property, eligibility, and goals.
What Are Closing Costs?
Your down payment and closing costs are not the same thing.
Closing costs can include expenses associated with obtaining the mortgage and completing the real estate transaction.
Depending on your situation, these may include things such as:
Lender charges
Appraisal fees
Title-related costs
Recording charges
Prepaid expenses
Property-tax-related amounts
Homeowners insurance
Discount points, if applicable
Other third-party costs
Your cash to close takes into account the various amounts you're required to bring to closing after applicable deposits, credits, assistance, and other adjustments are considered.
What Is Mortgage Pre-Approval?
A mortgage pre-approval is an evaluation of your financial information to determine whether you may qualify for financing, subject to applicable conditions.
Depending on the process, your lender may review information regarding your:
Income
Employment
Credit
Debts
Assets
Available funds
Other financial information
A pre-approval can give you a better idea of the price range and payment scenarios you may want to consider before seriously shopping for a home.
However, a pre-approval is not the same as final loan approval or a commitment to lend.
What Types of Mortgages Are Available?
There's no single “best mortgage.”
The right loan depends on the borrower.
Common mortgage options may include:
Conventional Loans
Traditional mortgage financing that isn't insured or guaranteed by a federal government agency.
FHA Loans
Government-insured financing that may provide flexible options for qualified borrowers.
VA Loans
A powerful home loan benefit available to eligible veterans, active-duty service members, and certain surviving spouses.
USDA Loans
Financing that may provide a no-down-payment option for eligible borrowers purchasing qualifying properties.
Jumbo Loans
Financing for loan amounts or scenarios outside applicable conforming loan parameters.
Construction Loans
Specialized financing for qualified borrowers building a home, including certain Build on Your Lot scenarios.
Homebuyer Assistance Programs
Qualified buyers may also have access to programs designed to assist with eligible down payment and/or closing costs.
The best way to determine which mortgage fits your situation is to compare your actual options—not simply choose the loan you've heard about most often.
Mortgage Terms Every Homebuyer Should Know
Here are a few terms you'll probably encounter:
Appraisal: An independent opinion of a property's value used in the mortgage process.
Closing Costs: Expenses associated with completing your mortgage and real estate transaction.
Closing Disclosure: A document containing important final information about your mortgage and closing costs for covered transactions.
Debt-to-Income Ratio (DTI): A comparison of certain monthly debt obligations with qualifying monthly income.
Discount Points: An upfront cost that may be paid to obtain a lower mortgage interest rate.
Equity: The difference between a property's value and debt secured by the property.
Loan Estimate: A standardized disclosure containing important information about the mortgage you've applied for.
Loan-to-Value Ratio (LTV): A comparison of the loan amount with the applicable property value.
Pre-Approval: A lender's preliminary evaluation of a borrower's ability to qualify for a mortgage, subject to applicable conditions.
Underwriting: The process of reviewing a mortgage application, borrower qualifications, property, and supporting documentation against applicable loan requirements.
Frequently Asked Mortgage Questions
Do I need 20% down to get a mortgage?
No. Qualified borrowers may have mortgage options requiring considerably less than 20% down, and certain eligible programs may offer no-down-payment financing.
Does a fixed-rate mortgage mean my payment can never change?
Not necessarily.
With a fixed-rate mortgage, the interest rate doesn't change during the applicable fixed-rate period. However, your total housing payment could still change because of property taxes, homeowners insurance, mortgage insurance, escrow adjustments, or other applicable expenses.
What's the difference between pre-qualified and pre-approved?
The terminology and processes can vary by lender. Generally, a pre-qualification may rely on preliminary borrower information, while a pre-approval may involve a more detailed review of financial information and documentation.
Ask your lender exactly what has been reviewed rather than relying solely on the label.
How much mortgage can I afford?
Qualification and affordability aren't necessarily the same thing.
A lender can help determine the mortgage amount you may qualify for, but your personal budget should also account for your lifestyle, savings goals, other expenses, and financial priorities.
What's the best type of mortgage?
There isn't one mortgage that's best for everyone.
Your income, credit, assets, down payment, military eligibility, property, homeownership plans, and financial goals can all affect which loan makes the most sense.
You Don't Need to Become a Mortgage Expert
Buying a home involves a lot of new terminology.
You don't need to memorize all of it.
You need a mortgage team willing to explain what the numbers mean, why they matter, and how the different options affect you.
That's the approach we take at TLP Mortgage.
Whether you're a first-time homebuyer in San Antonio, a veteran using your VA benefit, building a custom home in Texas, or preparing for your next move, our team is here to help you understand your mortgage options and make an informed decision.
Have a mortgage question? Ask us. There are no “stupid questions” when you're making one of the biggest financial decisions of your life.
Last reviewed: August 2026. Mortgage programs, guidelines, interest rates, costs, mortgage insurance, escrow requirements, and eligibility requirements are subject to change and borrower/property qualification. This information is provided for educational purposes and is not a commitment to lend.
