What Is a Mortgage and How Does It Work in Texas? Your Complete 2026 Guide

Understanding Home Loans from the Basics to Closing Day

Buying a home is one of the most significant financial decisions you’ll ever make. For most Texans, it’s simply not possible to pay hundreds of thousands of dollars in cash upfront. That’s where a mortgage comes in—a financial tool that makes homeownership accessible to millions of people each year.

Whether you’re a first-time buyer in Dallas Fort Worth, upgrading to a larger home in Houston, or settling down in Austin, understanding how mortgages work is essential. This guide breaks down everything you need to know about home loans in Texas, from basic concepts to the step-by-step process of getting approved.

What Is a Mortgage?

A mortgage is a loan specifically designed for purchasing real estate. When you take out a mortgage, a lender provides the funds to buy a home, and you agree to repay that amount plus interest over a set period—typically 15 or 30 years.

What makes a mortgage different from other loans is that your home serves as collateral. This means if you fail to make your payments, the lender has the legal right to take ownership of the property through a process called foreclosure.

According to the National Association of REALTORS®, approximately 74% of all homebuyers finance their purchase with a mortgage. For first-time buyers, that number jumps to 91%. Simply put, mortgages are the primary pathway to homeownership in America.

Key Mortgage Terms You Should Know

• Principal: The amount you borrow to purchase the home, not including interest.

• Interest: The cost of borrowing money, expressed as a percentage rate.

• Down Payment: The upfront cash you pay toward the home’s purchase price.

• Equity: The portion of your home you actually own—the difference between its value and what you owe.

• Amortization: The process of paying off your loan through regular monthly payments over time.

How Does a Mortgage Work?

Understanding the mechanics of a mortgage helps you make smarter financial decisions. Here’s how the process works from start to finish.

The Borrowing Process

When you apply for a mortgage, the lender evaluates your financial situation to determine if you’re likely to repay the loan. They review your credit score and credit history, income and employment stability, debt-to-income ratio (how much you owe versus how much you earn), assets and savings, and down payment amount.

Once approved, you sign a promissory note—a legal agreement to repay the loan according to specific terms. The lender then places a lien on your property, giving them the right to foreclose if you default.

Understanding Your Monthly Payment (PITI)

Your monthly mortgage payment isn’t just one number—it’s made up of several components, often referred to as PITI:

• P – Principal: The portion that reduces your loan balance.

• I – Interest: The cost charged by your lender for borrowing.

• T – Taxes: Property taxes collected monthly and held in escrow.

• I – Insurance: Homeowner’s insurance (and possibly mortgage insurance).

Many lenders collect taxes and insurance through an escrow account. Each month, a portion of your payment goes into this account, and the lender pays your property taxes and insurance premiums on your behalf.

How Amortization Works

Mortgage loans are amortized, meaning each payment is calculated to pay off the loan completely by the end of the term. However, the way your payment is applied changes over time. In the early years, most of your payment goes toward interest, with only a small portion reducing the principal. In later years, the balance shifts, with more going toward principal and less toward interest.

This is why making extra principal payments early in your loan can save significant money on interest over time.

Types of Mortgages Available in Texas

Not all mortgages are created equal. Understanding the different types helps you choose the best option for your situation.

Fixed-Rate Mortgages

With a fixed-rate mortgage, your interest rate stays the same for the entire loan term. This means your principal and interest payment never changes, making budgeting predictable and straightforward.

The 30-year fixed-rate mortgage is by far the most popular choice, representing approximately 90% of all home loans. A 15-year fixed-rate option is also available for borrowers who want to pay off their home faster and save on interest.

Adjustable-Rate Mortgages (ARMs)

An adjustable-rate mortgage starts with a lower introductory rate that remains fixed for a set period (typically 5, 7, or 10 years). After that, the rate adjusts periodically based on market conditions.

ARMs are often described as “5/1” or “7/1″—the first number indicates years at the fixed rate, and the second shows how often it adjusts afterward. A 7/1 ARM has a fixed rate for 7 years, then adjusts annually.

ARMs can be beneficial if you plan to sell or refinance before the adjustment period, but they carry risk if rates increase significantly.

Conventional Loans

Conventional loans are not backed by the government and are the most common type of mortgage. They typically require higher credit scores (usually 620+) and down payments of 3% to 20%. These down payments all come with different conditions and credit score requirements.

For 2026, the conforming loan limit in Texas is $832,750 for single-family homes. Loans exceeding this amount are considered jumbo loans and have different requirements.

Government-Backed Loans

• FHA Loans: Insured by the Federal Housing Administration, these loans allow lower credit scores and and minimum out of pocket requirement of 3.5% of the sales price. Popular with first-time buyers. FHA loan require a mortgage insurance premium (MIP), some of which will be financed in the loan and the rest is charged monthly with your mortgage payment.

• VA Loans: Available to veterans, active military, and surviving spouses. These loans offer no down payment requirement and no private mortgage insurance. However the VA loan does have a minimum funding fee charged upfront which is typically financed in the mortgage. The funding fee differs depending on many factors including considerations of disability, and/or whether you are using your VA loan for the first or second time.

• USDA Loans: For rural and suburban homebuyers who meet income requirements, rural zoning requirements, and other conditions. These also offer no down payment option. Note there is a USDA insurance fee financed in mortgage and rates and terms will defer for each borrower.

NON QM Loans

Non QM Loans are typically used for borrowers with alternative income documentation or higher credit risk loans. They usually come with larger down payments, higher rates, and different conditions than conventional and government loans.

Understanding Down Payments and Mortgage Insurance

How Much Down Payment Do You Need?

The traditional recommendation is 20% down, but many loan programs accept much less. Conventional loans require as low as 3% for first time homebuyers, FHA loans require 3.5% minimum out of pocket with credit score of 580+, VA loans require 0% for eligible borrowers, and USDA loans require 0% in eligible rural areas. Each of these loans will come with different mortgage insurance, terms, APR, credit requirements, and other conditions.

A larger down payment reduces your loan amount, lowers your monthly payment, and helps you build equity faster.

What Is Mortgage Insurance?

Private Mortgage Insurance (PMI) is required on conventional loans when your down payment is less than 20%. PMI protects the lender—not you—if you default on the loan.

PMI typically costs 0.5% to 1.3% of your loan amount annually. Federal law requires PMI to be automatically discontinued on conventional loans once the loan has been paid down to 78% of the original appraised value used to extend the loan.

FHA loans have their own version called Mortgage Insurance Premium (MIP), which includes an upfront fee (1.75% of the loan) and annual premiums which in many cases are lower than PMI on conventional loans. Unlike PMI, FHA mortgage insurance often remains for the life of the loan unless you pay a significant down payment or refinance to a loan other than FHA.

How Interest Rates Affect Your Mortgage

Your interest rate has a massive impact on what you’ll pay over the life of your loan. Even small differences can add up to tens of thousands of dollars.

Current Rate Environment

As of early 2026, most conventional and government loan mortgage rates are found in the range of 5.75% APR to 7.5% APR depending on your loan type, While these rates are higher than the historic lows seen during the pandemic (when rates dropped below 3%), they remain reasonable by historical standards.

To illustrate the impact: on a $300,000 loan over 30 years, the difference between a 6% APR and a 7% APR means paying an average of approximately $215 more per month—and over $77,000 more in total interest over the life of the loan.

Factors That Determine Your Rate

Lenders consider several factors when setting your interest rate: credit score (higher scores typically qualify for lower rates), down payment (larger down payments often mean better rates), loan type (Conventional, FHA, and VA loans have different rate structures), loan term (15-year loans typically have lower rates than 30-year loans), and property type (primary residences get better rates than investment properties).

The Mortgage Process: From Application to Closing

Understanding the mortgage process helps you prepare and avoid surprises. Here’s what to expect:

• Step 1 – Get Pre-Approved: Before house hunting, get pre-approved for a mortgage. The lender reviews your finances and provides a letter stating how much you can borrow. This shows sellers you’re a serious buyer.

• Step 2 – Find Your Home: Work with a real estate agent to find a property within your budget. Once you find the right home, make an offer.

• Step 3 – Complete Your Application: Submit a formal loan application with documentation including pay stubs, tax returns, bank statements, and employment verification.

• Step 4 – Appraisal and Inspection: The lender orders an appraisal to confirm the home’s value. You should also get a home inspection to identify any issues with the property.

• Step 5 – Underwriting: The lender’s underwriting team reviews all documentation to verify your ability to repay the loan and ensure the property meets their standards.

• Step 6 – Closing: Once approved, you’ll attend a closing meeting to sign final documents, pay closing costs and your down payment, and receive the keys to your new home. Most mortgages close within 30 to 45 days.

Using a Mortgage Calculator Texas Homebuyers Trust

Before committing to a loan, use a mortgage calculator to understand your potential costs. A good calculator helps you estimate monthly principal and interest payments, property tax estimates based on Texas rates, homeowner’s insurance costs, PMI or MIP if applicable, and total interest paid over the life of the loan.

Try different scenarios—adjust the down payment, loan term, or interest rate to see how each change affects your payment. This helps you find the sweet spot between affordable monthly payments and long-term costs.

Building Home Equity in Texas

Home equity is one of the most valuable aspects of homeownership. It represents the portion of your home you truly own—calculated as your home’s market value minus what you owe on your mortgage.

You build equity in two ways: paying down your mortgage (each payment reduces your loan balance) and home appreciation (as property values rise, your equity increases).

Accessing Your Home Equity in Texas

Once you’ve built substantial equity, you can access it through home equity loans or home equity lines of credit (HELOCs) for home improvements, debt consolidation, or other major expenses. However, Texas has unique regulations that differ from other states:

• 80% LTV Maximum: Texas law limits borrowing to 80% of your home’s appraised value, meaning you must always retain at least 20% equity.

• Primary, second homes and Investment Properties may qualify

• Mandatory Waiting Periods: Primary residences in Texas require a 12-day disclosure period before closing and a three-day rescission period after closing before funds can be disbursed. This waiting period is not required for investment properties.

• 2% Fee Cap: Lender fees on home equity loans cannot exceed 2% of the loan principal.

• Closing Location: Home equity loans must close at a lender’s office, title company, or attorney’s office—not at your home.

• One Loan Per Year: You can only close on one home equity loan per calendar year on the same property.

• No Prepayment Penalties: Texas law prohibits prepayment penalties, so you can pay off your home equity loan early without additional fees.

These Texas-specific protections are designed to help homeowners avoid over-leveraging their most valuable asset and ensure they make informed borrowing decisions.

Conclusion

A mortgage is more than just a loan—it’s a pathway to building wealth and achieving the dream of homeownership. By understanding how mortgages work, you can make informed decisions that benefit your financial future for decades to come.

Whether you’re exploring options for your first home or considering a Texas home refinance, the key is education and preparation. Compare offers from multiple home lenders in Texas, understand your total costs using a mortgage calculator, and choose the loan type that best fits your financial situation.

Ready to take the next step? Start by checking your credit score, gathering financial documents, and connecting with a trusted lender who can guide you through the process.