The economy couldn’t function without a solid banking system, but the financial services sector is much more than just banking. The sector also includes alternative lenders, credit card companies, financial service providers, and increasingly, fintech and cryptocurrency businesses, and more. 

However, banks are the backbone, holding and providing the money that consumers spend to keep businesses open. Banks also help people invest money, and potentially build wealth. Additionally, banks provide loans and financial services to businesses which can help them grow and stay in business. 

This sector, which employs over 8.5 million people in the U.S. as of September 2021, keeps money flowing between businesses and people. Financial services contribute about 8% to the gross domestic product of the U.S. And as of the second quarter of 2021, finance and insurance businesses accounted for almost $3.6 trillion of GDP.

As of 2020, there were 4,377 commercial banks insured by the Federal Deposit Insurance Corporation (FDIC) in the U.S., with almost 75,000 branches across the country. And total assets held by U.S. banks totaled almost $22.6 trillion. In 2020, the four biggest banks in the country—JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo—held a record $10 trillion in total assets. 

Source: Federal Reserve, June 2021

How do banks earn money?

Banks earn money in a variety of ways. You may not know it, but when banks take your money as a deposit, they also lend it out to others and make money from the interest they charge on the loan.

That interest can be for loans such as mortgages and credit cards. But banks can also charge fees on checking and savings accounts, such as overdraft or under limit charges.

Banks that issue credit cards also collect a portion of interchange, which is a fee charged to merchants for accepting cards for payment.

And many of the largest banks, known as Wall Street banks, have prominent investment divisions, which charge for stock and bond trading, as well as for their services involved in bringing companies public, through a process called an initial public offering (IPO).

A changing landscape for financial services

Since the financial sector is so essential to the economy, it tends to be heavily regulated, both at the state and federal level. Those regulations ensure that banks meet capital requirements that ensure they have enough cash on hand to meet their obligations to consumers and businesses. They also help to diminish some of the risk they might otherwise take in their investments. Yet other regulations also lay out principles that ensure they behave ethically toward consumers, for example by lending fairly.

The two main overseeing bodies for commercial banks are the Federal Deposit Insurance Corp.(FDIC), which insures consumer deposits, and the Office of the Comptroller of the Currency (OCC)which tests the solvency of banks.

Following the financial crisis of 2009, regulators put in place a new set of requirements called the Dodd-Frank Act that protect consumers from abusive lending practices, and that prevent banks from getting “too big to fail.”  In 2018, however, Congress voted to roll back some of the restrictions outlined in Dodd-Frank for banks with less than $250 billion in assets, easing their reporting requirements and capital restrictions. 

Role of the central bank

There’s another component to the financial sector in the U.S. that’s important to know about.

It’s called the Federal Reserve System.

The Federal Reserve, also known as the Fed, is the central bank of the U.S. It comprises 12 district banks located throughout the country, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates and lending money to the nation’s banks.

The Fed sets something called the overnight funds rate, which is also known as the federal funds rate. This rate dictates how much it costs for banks to lend their money to other banks, specifically the central bank. The Fed can manipulate the rate in certain ways, which can have effects throughout the economy.

For example, at the start of the pandemic, the Fed lowered the federal funds rate to almost zero percent to stimulate the economy with so-called cheap money in the form of low-interest loans.  The Fed has kept the rate there, and has been hesitant to increase it, since the economy is still recovering. But that influx of cash has push inflation up, and maybe keeping inflation higher than normal.

The future of banking 

While commercial banks and the Federal Reserve make up the traditional banking sector, new technology is shaking up the banking industry. And new financial services companies (such as Stash), known as FinTech companies, are disrupting the market.

Today, there are hundreds of such companies changing the way we bank, spend, lend money, accept payments, finance our businesses, apply for mortgages, and more.

Perhaps the oldest and best-known is Paypal, which in the early days of the Internet allowed people to pay for things online in a secure manner, using either a credit card or a bank account.

Paypal is a multibillion-dollar company. It’s also facing disruption by a host of startups including Stripe, Venmo, Dwolla, and Square.

In short, the financial services industry is moving beyond handing hand-written checks to your local bank teller. Banking is becoming global and mobile, giving more people the ability to access their money from wherever they are in the world.

Cryptocurrency and financial services

Cryptocurrency, a digital asset that doesn’t rely on physical currency, is also changing the financial services sector. Cryptocurrency uses something called blockchain, or distributed ledger, software. That means code produces an encrypted record of the value of each virtual coin and the transactions it’s involved in, distributing that record across numerous networks on the Internet. Distributed ledger is different from the way your bank keeps track of your dollars, in a centralized database that only it controls, cryptocurrency experts say. Since its introduction in 2009, more than 2,000 types of cryptocurrency have emerged, including Bitcoin, Ethereum, Stellar, and Binance Coin. 

Cryptocurrency has also opened the door for something called decentralized finance, or DeFi. DeFi is an economy that’s entirely online and based on cryptocurrency, typically Ethereum. Businesses in the DeFi industry, often called DeFi apps or dapps, operate by taking out the middleman: traditional banks. Rather than requiring the many steps banks use, DeFi uses the technology behind cryptocurrency to securely and automatically carry out financial transitions, such as loans, peer-to-peer transactions, and more.

It’s important to remember, however, that cryptocurrency isn’t recognized as an official currency, and it has a tendency to be highly volatile. So you should keep that in mind if you’re interested in cryptocurrency or participating in DeFi.  

Investing in financial services

Banks aren’t just places that hold and move your money. They’re businesses, and you can invest in them. You can invest in individual stocks of financial services. Stash also offers exchange-traded funds (ETFs) within this sector. 

If you do decide to invest in financial services, you should know that investments in this sector tend to be cyclical, meaning that they respond to changes in the economy. When the economy is doing well, financial services also tend to perform well, and vice versa. 

Following the Stash Way can help protect you from market volatility. You can follow the Stash Way by investing regularly in a diversified portfolio that includes stocks, bonds, and ETFs across a variety of sectors. 

The post What the Financial Services Sector is All About appeared first on Stash Learn.

The sector makes up 14.7% of the Gross Domestic Product (GDP) with an output of $4.1 billion in the U.S as of the second quarter of 2020. The real estate sector includes the purchase, sales, development, and management of property, both residential and commercial. These properties are the factories where products are made and stores where they’re sold and the homes where people live. For that reason, the real estate sector is important to every other sector of the economy. 

Houses, apartment buildings, and other housing are considered residential real estate. Commercial real estate includes factories, warehouses, retail locations such as malls and shopping centers, office buildings, restaurants, hotels, and more. People who design, build, and manage those properties are all employed by the real estate sector. 

The residential part of the real estate sector employs almost more than 830,000 construction workers and contributes roughly $3 trillion to the GDP of the United States. Commercial real estate, meanwhile, adds $1.1 trillion to economic output as of 2019. This part of the real estate industry also provides 9.2 million jobs.

For a lot of Americans, buying property, such as a house, is one of the biggest purchases they’ll ever make. A home can be a huge asset to the buyer and help them build wealth over their lifetime. But buying property isn’t the only way to go about investing in real estate. Investors can buy shares of real estate investment trusts, or REITs. REITs are companies that own residential or commercial properties.

How to invest in real estate by buying property 

With the median price of a home in the U.S. at $226,800, most people can’t afford to purchase a home with cash on the spot. So if you’re considering investing in a property, you may need to take out a mortgage, or a loan to buy that property. As with most loans, you need to be approved by a lender before they give you a mortgage. The lender generally reviews a variety of factors when considering your application, such as your credit score, outside debts, income, the value of the home, and more.

Once you’re approved to take out a mortgage, you’re generally required to put a down payment on the house, which is usually equal to 20% of the ticket price. The lender then puts up the rest of the money for the house, and you pay back the loan over an agreed-upon term, such as 15 or 30 years, in monthly installments plus interest. A lender can determine your interest rate by which kind of mortgage you have and how the economy is performing. You can use a mortgage calculator to determine what you can afford.

You may take out one of a number of different types of loans, but the most common are either a fixed-rate or adjustable-rate mortgage. With a fixed-rate mortgage, you’ll pay the same interest rate on the loan for the entire term of the mortgage. With an adjustable-rate mortgage, your interest rate remains fixed at the rate you agreed upon at the beginning of the term for a certain period of time. After that period of time has passed, the rate moves according to the market, which might mean an increase in the interest rate.

The state of the economy can also affect mortgage rates generally. The Federal Reserve or the Fed, which is the central bank of the U.S., issues something called the federal funds rate. The federal funds rate is the interest rate at which banks can borrow money from each other. This rate can influence the rates for Treasury bills, which can then have an impact on interest rates for credit cards and mortgages. 

Current mortgages rates are lower than ever before. The Fed decreased interest rates dramatically in March 2020, when the Covid-19 pandemic took hold, eventually leveling the rates to near 0%. Mortgage rates fell in response. At the end of October, 2020, the average 30-year fixed mortgage rate fell to a record low of 2.8%. Because of falling interest rates, home sales are on the rise, with sales 10.5% higher in September, 2020 than the year before.

Investing in real estate can also be a source of passive income, or money that is generated without much active, daily participation from you. You might buy a property or a second property and rent it out to someone which can help pay down your mortgage, and earn extra income. If you’re able to afford a down payment and get approved for a mortgage, renting out a property this way can help you build wealth.

REIT investing

Another way you can invest in the real estate market is to buy shares of real estate investment trusts (REITs). A REIT can own or operate a variety of commercial and residential properties, including office parks, apartment complexes, shopping centers, and more. Most REITs are focused on one specific industry, such as industrial or residential properties. In the U.S., there are 225 REITs registered with the Securities and Exchange Commission (SEC). 

REITs use funds from investors to buy and manage these properties. The REIT takes revenue from sales and leases of property and can use that income to deliver dividends to investors.¹ Equity REITs allow investors to gain ownership or equity in the real estate sector without actually having to buy a property. 

Most REITs are equity mortgages but there are also mortgage REITs. Mortgage REITs invest in mortgages. So investors can earn money from those investments on the interest paid on those mortgages.

REITs are generally expected to deliver above-average returns to investors because they are required by law to return 90% of their income back to investors in the form of dividends.¹ REIT dividends can sometimes be higher than dividends from other stocks. As is the case with all investments, you have to pay taxes on dividends earned. One good thing about REITs though is that because they’re trusts, they don’t have to pay additional taxes on dividends, meaning more money can be delivered to investors in dividends.¹ Keep in mind that all investing, including investing in REITs, comes with risk. 

If you want to invest in REITs, you can buy shares or fractional shares in a REIT with a brokerage account. You can also purchase shares in REIT exchange-traded funds (ETFs) which are baskets of investments that can contain REITs. One thing to be wary of is that some publicly traded REITs are non-exchange traded. These REITs are often not as liquid, meaning they have less cash on hand, as exchange-traded ones so it might not be as easy to sell shares. Because of this, any dividends earned from these shares might come from borrowed money, according to the SEC, potentially making shares in these REITs less valuable.¹

With a Stash account, you can buy fractional shares in REITs and a REIT ETF. No matter what you invest in, it’s important to follow the Stash Way, which encourages investing regularly for the long-term in a diversified portfolio.

The post Here’s How You Can Invest in the Real Estate Sector, a Crucial Part of the Economy appeared first on Stash Learn.

Regardless of the progress you’ve made (or haven’t made—we’re not judging!) on the goals you set for the new year, we think there’s one more goal to consider adding to your list: getting life insurance. It’s easy, affordable, and could be an important part of your financial plan.

Term life insurance can help protect your family from financial loss and can supplement lost income, as well as provide funding for education and everyday living expenses in the event you’re no longer around to provide for your loved ones.

Here’s why you should consider buying life insurance this year:

1. If you have debt

If you have a cosigner on your loans, whether it’s student or personal loans, they could be liable to pay off the outstanding balance.

2. If you’re buying a home (or you currently own one)

Don’t forget your home! If you have a mortgage, a life insurance policy can help pay off the remaining amount you owe so your family can continue living in their home.

3. If you’re making a major life change

Did you recently get engaged? Are you planning on getting married? Starting a family? Regardless of your family situation, if your loved ones depend on your income, your loss could cause financial hardship.

If you are a one-income family, your family would lose its income without the primary breadwinner. Even in a two-income family, the loss of one income source can make it difficult to maintain your current standard of living.

4. If you’re hitting a milestone birthday

The younger (and healthier) you are, the more affordable it can be to buy insurance.

In life insurance underwriting (the process that determines whether you’re eligible for coverage and at what cost), your age is a major factor. Generally speaking, the younger and healthier you are, the less you’ll pay for life insurance premiums.

Consider getting insurance now, so you can lock in better monthly pricing on a life insurance policy that lasts ten to twenty years and save money on the cost of your monthly premium.

Bestow*, our life insurance partner, makes it easy to apply for coverage in minutes. That way you can check this item off your list for this year, the next, and the years after that.

The post Life Insurance: A New Year’s Goal Worth Having appeared first on Stash Learn.

Home prices in many American cities continue to rise. The median price of a new house in the U.S., as of the beginning of 2018, was $337,200, according to government data.

And yet, that looks downright reasonable compared to some of the country’s most expensive housing markets.

The median price for a house in San Francisco, for example, is now more than $1.6 million, according to industry data. In New York City, it’s $1.5 million.

While those markets are outliers, prices nationwide have been on a slow and steady rise for decades.

To illustrate, consider the median price of a new house 30 years ago, in May of 1988. At that time, the median price was $110,000, according to government data. 20 years ago, in 1998, it was $153,200. And 10 years ago (in the midst of the housing crisis), it was $229,300.

Despite the considerable rise in housing costs, millions of Americans still aspire to own homes.

In fact, 20% are willing to trade their right to vote for a 10% down payment on a house, according to an industry survey.

The true cost of buying a home

But housing prices are only one piece of the puzzle. Buying a house comes with a number of additional costs and fees that many prospective homeowners overlook or don’t account for.

These costs can include:

• Inspection fees
• Closing costs
• Property taxes
• Time and money spent researching and visiting homes that are on the market

On top of that, it’s generally expected that a buyer will have saved up between 3.5% and 20% of the purchase price as a down payment. You’ll need some money in the bank, too, as cash reserves to make sure you can make your initial monthly payments.

America’s cheapest housing markets

The good news is that you don’t need to live in a treehouse or a shoebox to find an affordable home.

There are still places where houses sell for a relative bargain—if you know where to look.

These ten cities are home to America’s cheapest housing markets (as of January 2018), according to data from the National Association of Realtors.

The post The Cheapest Places to Live in the U.S. appeared first on Stash Learn.

Like what you’re hearing? Leave us a review on Apple Podcasts (or wherever you listen to your favorite podcasts).

We’re back with season 2 of Teach Me How to Money!

On this week’s episode, we talk with NYC comedian Mark Normand (Comedy Central, Conan, Tonight Show with Jimmy Fallon, Late Show with Stephen Colbert) about how he handles his money while making a living as a funny person.

At 21, Mark came to New York with $400 and a dream and not much else. Now he’s older, wiser (sort of), and ready to take steps to become a financial adult.

Investing, home ownership, retirement, saving money, he’s making it happen (even if he doesn’t understand exactly how).

Got a question you’d like us to answer on the show? Drop us a line at teachmehowtomoney@stash.com. We’ll do our best to get to all of them.

Ready to start investing? Sign up for Stash and then enter the promo code PODCAST and you’ll get $5 to get started on your financial journey.

Stash, it’s your money simplified.

The post Podcast: Learn How Comedian Mark Normand Saves Money appeared first on Stash Learn.

We’re looking for a starter home in Indianapolis. We’re not looking for anything too fancy–two bedrooms, a decent backyard and a finished basement. We’re hoping to spend between $115,000 and $160,000, but we’re prepared to plunk down more if we find our dream home.

Like many millennials, student loans and lower paying jobs mean we’re buying our first home a lot later than our parents did. Home ownership rates among adults under 35 are roughly half the national average, at 34.1%, according to the Washington Post.

One of the reasons why? Student loans.

But paying off student loans and buying a home don’t have to be mutually exclusive

Buying a home can, can seem like a pipe dream when you’re facing down thousands, tens of thousand or even hundreds of thousands in outstanding student loan debt. Students who graduated in 2016 owe an average of $37,172 in student loans, according to industry research.

Debt-burdened Americans  are understandably squeamish about taking on mortgage debt on top of what they already owe.

But paying off student loans and buying a home don’t have to be mutually exclusive. In fact,it’s normal to have multiple savings goals, like buying a house and being debt free. Lenders are also used to dealing with prospective customers who have other forms of debt.

In short, buying a home while you’re paying off student loans is within your grasp. It might take a little more effort, but you can absolutely start saving for a down payment while staying current on your student loan payments – if you use the right approach.

Here are some things you can do  to become a homeowner while paying off your student loans.

Choose your city

We can’t always choose where we live. Jobs and family obligations can often dictate where we land and where we end up purchasing a home. No matter where you decide to buy, researching your options is key.

First, get a firm idea of how much your dream home costs in the areas you’re looking to move to. Take a few weeks to browse real estate listing sites such as Trulia or Zillow, attend open houses, and check out what people are saying on chat boards in each city. If you’re looking to move just a few miles away, it’s still worthwhile to talk to homeowners in the area. All of this should allow you to come up with a rough estimate of what your ideal home will cost.

The national average for a house is currently $205,100. But there’s a wide range of prices depending on your state and locale. For example, the median value of a house in Seattle, Washington was $708,000 and  $136,000 in Columbus, Ohio, as of December, 2017, according to Zillow.

Think about your down payment and other costs

You need to have a specific dollar amount in mind to start saving for a down payment. Working towards a concrete number will keep you from either significantly under or over-saving.

Then, think about how much you want to put down on your home. While the minimum down payment for a conventional loan is typically 20%, it can reportedly be as low as 5%. By contrast a Federal Housing Administration (FHA) loan only requires a 3.5% down payment. FHA loans are backed by the government, so banks and other mortgage lenders will be more willing to take customers with more modest means or less than perfect credit.

Because FHA loans accept customers with a credit score as low as 580, lenders charge a monthly mortgage insurance premium and overall higher interest rates.

If you can’t afford the standard 20% down payment, and you can only put down 5% to 10% of the total cost, then lenders will charge you private mortgage insurance (PMI) every month. That can cost annually between 0.3% and 1.5% of the total loan, according to Bankrate.com. You’ll pay this in to addition to your regular mortgage payment, until you reach 22% equity in your home.

On a $200,000 home with a 5% down payment of $10,000, that would be an extra $79.16 per month, or $950 a year, assuming PMI of 0.5%.*

You’ll need to save for more than just the down payment, however. The mortgage lender will also charge closing costs, which is what you pay to finalize the loan. These costs usually range between 2% and 5% of the total loan, and can add thousands more to the final amount. Home inspections are optional, but highly recommended so you don’t buy a lemon. These typically run from $200 to $400 or more, depending on the size of the home.

Make sure you also calculate moving fees, new furniture and other expenses. If you want to make any immediate changes to the home, like painting the bedrooms or finishing the basement, include those estimates in your budget.

Start changing your payment plan

Struggling to find enough money in your budget to stash away? Try lowering your student loan payments and putting the difference toward your down payment.

People with federal student loans can often change their payment plan to an extended or income-based one, which will lower your monthly payment. If you’re currently on the standard 10-year term, you can lower your monthly payment by switching to an income-based plan.

These lower monthly payments can allow you to save more toward a down payment. The only downside is that borrowers will pay more in interest while on this plan, and it can stretch out your repayment by years.

As soon as you you’ve purchased your home, you should switch back to the previous plan.

Important note:  People with student loans from private providers might not be able to alter their repayment plans. Nevertheless, they should still call their loan servicer to ask.

Some mortgage lenders will even allow you to roll your student loans into your mortgage. This can simplify your payments and make it possible to get a mortgage while still having student loans. There are cons to this approach, however.

One downside is that while you can often defer payments on your student loans, you can’t do that once your educational loan becomes part of mortgage. (Late payments on your mortgage can lead to default, and potentially the loss of your home.) You should definitely consult a tax specialist if you intend to roll your student debt into your home mortgage, and for any other questions about home ownership.

Automate toward your goal

Keeping your down payment fund in your everyday checking account is like storing cookies on the countertop. If you see that huge wad of savings, you might be tempted to spend it. To avoid that impulse, my husband and I put our down payment in a separate savings account. We can’t write checks from it, and even though the interest rate is low, we do get a few bucks every month that we wouldn’t in a regular checking account.

You can also set up an investment account, with an eye on taking the money out in 5 to ten years. There’s market risk when it comes to investing vs saving but you’d be able take advantage of compounding and dividends. Just don’t forget you have to pay taxes on your gains when you’re ready to use it for your down payment.

Set up automatic transfers

My husband and I currently use automatic transfers to save for our down payment. Every month, we move $1,800 from our general checking account to our payment fund. We use two different banks – one for our everyday checking and the other for our long-term savings goals, including our down payment.

Setting up the transfer only took a few minutes, but it’s been key to making sure we save consistently each month–and we’re no longer tempted to spend our down payment savings on a new purse or TV.

I love seeing the balance grow every month and knowing that each dollar gets us closer and closer to our dream of owning our own home.

The post How to Save For a Down Payment (When You’ve Got Student Loans) appeared first on Stash Learn.

But figuring out finances while living with your significant other is bound to be more challenging than splitting bills with roommates. It takes some work to determine how to share costs in a way that’s fair to you both, while managing the emotions around money. With a little planning and plenty of open communication, however, you’ll be well on your way to cohabitation bliss.

Here are some tips and conversation starters as you prepare for life together under one roof.

Acknowledge income differences

When I moved in with my then-boyfriend, we made vastly different salaries. His job in procurement at a large corporation paid much better than my PR gig at a nonprofit.

For some couples, the solution to disparate salaries is to divide expenses by a percentage proportional to each person’s income, rather than splitting bills right down the middle. That’s how we handled shared finances, tracking every expense—including rent, Internet bills, and grocery trips. He covered 60 percent of the expenses while I covered the remaining 40 percent.

This approach worked for us, and seemed like a fair way for us each to have savings left over each month for the things we wanted to buy individually. For you, it could work better to simply go Dutch on shared bills. The key is to have an honest conversation about what works and feels right to you, so nobody comes away with hard feelings–or a depleted bank account.

Have the hard conversations so you can avoid fights and squabbles

Nearly one-third of spouses and partners say that money is a major source of conflict in their relationship, according to the American Psychological Society. Yet many of us were raised to believe it’s crass to talk openly about money. The reality is that honest conversations about money are a foundation for any healthy relationship.   

The key is to have an honest conversation about what works and feels right to you, so nobody comes away with hard feelings

John M. Gottman, a relationship expert and professor emeritus of psychology at the University of Washington, writes that when we deal with money in our relationships, our reactions are guided more by our personal associations with money, rather than by logic.

But not all is doomed if your partner is a high roller while you prefer to hoard pennies under the mattress.

By learning each other’s personal histories with money, you can use that knowledge as a frame of reference and keep your discourse around finances civil and respectful.

“Work together with this new understanding of each other to create shared meaning around money that brings you closer, rather than pushes you apart,” Gottman says.

Stay organized

Your bedroom may be cluttered with a perpetual pile of your clothes and your partner’s mound of mismatched socks may be strewn everywhere. But finances are one area where you can’t afford to be messy.

Sit down with your significant other to decide the best ways to keep yourselves accountable. Will all the utilities be registered in one person’s name, or will you divide them? Will you pay bills each month by automatic transfer, or will you need to set up reminders to send in payments on time?

Make sure you’re both aligned on the same plan, so that no one comes home one day to find the electricity disconnected.

Anticipate big and unexpected expenses

Even with the best laid plans, life can throw you costly curveballs. If you stumble into a major expense together—like needing a new window AC unit after the old one breaks down—you can spare yourselves a potential headache down the road and decide now who will buy the air conditioner and who owns it, if for some reason the relationship ends.

Which leads me to one final point.

Keep your own rainy day fund

Unfortunately, some relationships don’t last, or can’t withstand a shared living space. That’s why it’s important to have your own rainy-day fund, which sometimes goes by another name that I won’t repeat here.

It’s also important not to get too accustomed to a lifestyle you can’t afford on your own, at least at the outset. If living together doesn’t work out, one of you could get stuck with the lease on a one-bedroom apartment that you could only afford together.

While I hope you’ll be living together for years to come, build up your savings in a bank account now, so that you can be financially independent in case your living situation changes someday.

The post Moving In Together? How to Not Fight About Money appeared first on Stash Learn.

What is a mortgage?

A mortgage is a type of loan used to purchase real estate. With a mortgage, a lender loans you the money you’ll need to purchase a home—usually an amount that covers the cost of the home minus whatever you pay upfront as a down payment. Most lenders want to see borrowers make a down payment that’s 20% of the total price of the home, but there are mortgages available for those who can’t or don’t wish to put that much down.

In exchange for the funds you need to purchase the home now, you agree to pay the lender back with interest. Interest is the money the lender charges you for loaning you the money. Interest rates are usually expressed as a percentage. Generally, the better your credit, the lower your interest rate will be.

With a mortgage, the property itself is used as collateral for the loan. If for some reason you aren’t able to make the payments on your mortgage, the lender can foreclose on your property and take the home in order to recover the funds they loaned you to purchase it.

Most mortgages are paid back with monthly payments spread out over as many as thirty years.

Lenders typically want to see borrowers make a downpayment of at least 20%.

The length of time you’ll spend paying back your mortgage is called the term: longer terms usually mean lower monthly payments, though they can often mean you pay more in interest.

What does my mortgage payment cover?

Each monthly mortgage payment is going to have some portion allocated to repaying the principal amount you borrowed to purchase your property, and some portion allocated to paying interest. Your mortgage payment might also include money for property taxes and homeowner’s insurance.

If you aren’t able or aren’t willing to pay 20% of the price of the home as a down payment, your mortgage payment will typically include private mortgage insurance, or PMI. PMI protects your lender if you stop paying back your mortgage payments. Once you build enough equity in your home, you can usually ask your lender to cancel the PMI insurance.

Lenders divvy up the money in each mortgage payment in a process called amortization: in the beginning, most of your mortgage payment is going towards paying down interest.

As you continue to make payments, the percentage of each payment going towards the principal will increase, and the percentage going towards the interest will decrease. That means you’ll build equity in your home slowly in the beginning, and more quickly as you get closer to paying the mortgage off completely.

What are some common types of mortgages?

Each mortgage is slightly different, though you can sort the basic types into two broad categories: fixed-rate mortgages, and adjustable-rate mortgages.

For a fixed-rate mortgage, the interest rate is steady for the duration of your loan. Once you sign on the dotted line, your mortgage payment is going to be the same each and every month until you pay back the amount you agreed to pay to your lender.

Fixed-rate mortgages are predictable, and if interest rates rise in the future, your mortgage payments won’t change. Fixed rate mortgages are a good choice if interest rates are low, or if you plan to be in your home for decades.

With an adjustable-rate mortgage, the interest on your loan may change over time. Usually, adjustable-rate mortgages will have a low initial rate, which will be locked for a set introductory period—perhaps a year, or five years, or seven years. Then, after the initial introductory period is over, the interest rate for the loan will be recalculated, based on market conditions.

Depending on the specifics of the adjustable-rate mortgage, the interest rate could be reset once or several times over the course of the loan term. Unlike a fixed-rate mortgage, adjustable-rate mortgages are unpredictable. Your future mortgage payments could be higher—potentially much higher—once the interest rate is recalculated.

If you’re financially prepared for the potentially higher payments, and perhaps if you don’t plan to be in your home for more than a few years, an adjustable-rate mortgage is another option.

This post is brought to you by Morty, the world’s first fully digital, fully automated mortgage marketplace.

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