What Is Mortgage?
A mortgage lets you buy a property without paying cash for the whole thing. You borrow from a lender, put a percentage down (LTV determines how much), and make monthly payments of principal and interest. The property secures the loan—default and the lender can foreclose. For investors, conventional loans require 25% down on rentals; FHA and DSCR loans offer different paths. Your payment follows an amortization schedule—early years go mostly to interest, later years to principal. Equity is what's left when you subtract the loan balance from the property's value.
A mortgage is a loan used to purchase real estate, with the property serving as collateral—if you stop paying, the lender can foreclose and sell the property to recover their money.
At a Glance
- What it is: A secured loan to buy real estate—the property is collateral. Default = foreclosure.
- Why it matters: Leverage—you control a $300,000 asset with $75,000 down. The bank takes the risk; you build equity as you pay it down.
- Key types: Conventional (25% down for investment), FHA (3.5% down, owner-occupy), DSCR (qualify on NOI, not W-2), hard money (short-term, asset-based).
- Underwriting: Personal income (DTI) for owner-occupied; property cash flow (DSCR) for investment.
- Risk: Miss payments and the lender forecloses. Stay above water—LTV and DSCR are your guardrails.
How It Works
A mortgage is a loan with the property as collateral. You don't own the property free and clear until the loan is paid off—the lender has a lien. Make your payments and you keep the property. Stop paying and they can foreclose.
The structure. You borrow a lump sum (the principal) at an interest rate. You repay it in monthly installments over 15 or 30 years. Each payment covers principal and interest per the amortization schedule. Taxes and insurance are often escrowed—you pay them as part of your monthly payment, and the lender pays the bills when due.
Residential vs investment. For a primary residence or house hacking, lenders underwrite your personal income (debt-to-income ratio). For a rental, they often use DSCR—does the property's NOI cover the debt service? DSCR of 1.25x means the property generates 25% more income than the payment. No W-2 needed. That's how investors with 10+ properties still get loans.
Lien and foreclosure. The mortgage creates a lien on the property. If you default, the lender can foreclose—sell the property and use the proceeds to pay off the loan. Any surplus goes to you. Shortfall? In some states they can pursue a deficiency judgment. Don't default. Run the DSCR before you buy—make sure the property can cover the payment with room to spare.
Real-World Example
Indianapolis fourplex. Purchase price $420,000. You put 25% down: $105,000. Loan: $315,000 at 7.25% for 30 years. Monthly P&I: ~$2,148.
Gross rent: $5,200/month. NOI after taxes, insurance, maintenance, vacancy: ~$3,100/month. Debt service: $2,148. DSCR: $3,100 ÷ $2,148 = 1.44x. The lender is happy—the property covers the payment with a 44% cushion.
Year 1: You've paid ~$22,800 in interest and ~$3,000 in principal. Equity from paydown: $3,000. The property appreciated to $445,000. Total equity: $133,000 ($130,000 appreciation + $3,000 paydown). The mortgage let you control a $420,000 asset with $105,000—that's leverage. Without it, you'd need all cash.
If you'd missed payments: After 90 days, the lender sends a notice of default. In Indiana (non-judicial foreclosure), they can schedule a sale in ~4–5 months. You lose the property and any equity. The DSCR cushion exists for a reason—vacancy, repairs, rate resets. Don't cut it close.
Pros & Cons
- Leverage—control a large asset with a fraction of the price.
- Predictable payments—fixed-rate mortgages don't change for 15–30 years.
- Equity builds as you pay down principal and as the property appreciates.
- Interest is tax-deductible on rentals—reduces taxable income.
- DSCR loans let you qualify on property income, not W-2—scale beyond personal income limits.
- Foreclosure risk—miss payments and you lose the property.
- Debt service eats cash flow—high payments mean thin margins.
- LTV caps—investment property requires 25% down (conventional) or 20–25% (DSCR).
- Refinancing resets amortization—you start the interest-heavy phase again.
- Rate sensitivity—a 1% rate change shifts your payment by hundreds per month.
Watch Out
- DSCR too tight: A 1.0x DSCR means one month of vacancy and you're subsidizing the mortgage from your pocket. Target 1.25x minimum. Some lenders go to 0.75x—that's risky. Know your numbers before you offer.
- LTV at refinance: You buy at 75% LTV. Property drops 10%. You're at 83% LTV. Refinance? Maybe not—you might not qualify. Don't assume you can always refi. Build cushion.
- Balloon and ARM risk: Some commercial and hard money mortgages have balloon payments or adjustable rates. Know when the balloon hits and what happens at reset. BRRRR investors use hard money for the buy—plan the refinance exit before you close.
- Cross-collateralization: Portfolio loans secure multiple properties. Default on one and the lender can foreclose on all. Understand what's pledged before you sign.
Ask an Investor
The Takeaway
A mortgage is the tool that lets you buy real estate with borrowed money. The property secures the loan—pay it and you keep the asset; default and the lender forecloses. For investors, DSCR loans qualify on property cash flow, not your paycheck. Run the DSCR before you buy. Keep a cushion. The amortization schedule shows how equity builds—slow at first, faster later. Don't over-leverage. A property that barely covers the payment is one vacancy away from trouble.