On the highest-effort end of the spectrum, you can invest in residential or commercial real estate property to lease out or sell for a profit later. The benefits can include tax advantages, a steady stream of passive income, and the potential for long-term security and high returns. On the other hand, realizing returns may take a while, maintaining rental property takes time and money, and you run the risk of declining market value and occupancy demand.

Many investors go for the much lower-effort and lower-barrier option of purchasing shares in a Real Estate Investment Trust (REIT), which can help you diversify your portfolio by gaining exposure to the real estate industry without having to buy any rental property. Other options for real estate investing include using an online real estate platform, renting out a spare room, or house flipping. Depending on the amount of time and money you want to put in, you may find a real estate investing strategy that works for you.

In this article, we’ll cover:

• Buying REITs
• Online real estate platforms
• Renting out a room
• Buying rental property
• Flipping houses

1. Purchase a REIT (Real Estate Investment Trust)

Effort required: Low

A REIT, short for Real Estate Investment Trust, is a company that owns, operates, or finances income-producing real estate. Types of residential or commercial real estate may include a wide array of properties such as: 

• Apartments
• Office buildings
• Shopping malls
• Hotels, resorts
• Self-storage facilities
• Warehouses
• Hospitals
• Infrastructure

You can also invest in mortgages on those properties. The company earns money from renting or leasing the rental property it owns or, in the case of mortgage REITs, from interest on mortgages and mortgage-backed securities. REITs work similarly to mutual funds by pooling the capital of many investors. When you buy shares in a REIT, you can then earn dividends from the shares you own without having to purchase, manage, or finance property yourself. Most REITs are registered with the Securities and Exchange Commission and publicly traded, which can allow more people to get exposure to the real estate sector. If you’re looking for the easiest way to diversify your portfolio with real estate investment, a REIT or an exchange-traded fund (ETF) that includes REITs may be worth exploring. 

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2. Use an online real estate platform

Effort required: Low

Online real estate platforms connect real estate developers with individual investors who want to finance projects, either through debt or equity. You might think of them as crowdfunding platforms specifically for real estate. Generally, investors pay a fee to the platform and take on a significant amount of risk with the hope of receiving monthly or quarterly distributions. While online platforms make real estate investing a bit more accessible to investors who don’t want to own or maintain property directly, the income requirements may be prohibitive. Many of the platforms are only open to accredited investors, people who’ve earned more than $200,000 in each of the last two years, or who have a net worth exceeding $1 million. However, there are some alternative platforms with lower account minimums available to nonaccredited investors. You may be able to get started with $1,000, $500, or even as little as $10.

3. Rent out a room in your house

Effort required: Medium

If you already own a home, you may consider renting out extra space to generate income. Rental income from a spare room, basement apartment, or converted garage can help offset the cost of your monthly mortgage payment. Knowing that you’ll be sharing expenses may also make the prospect of financing a more expensive property feel within reach. But unlike splitting rent with a roommate, when you own the home, the person living with you is your tenant. That means your passive rental income stream comes with obligations like tenant management, property maintenance, and adhering to strict landlord-tenant laws. You may also wish to keep in mind that living with a stranger may be uncomfortable or pose safety risks, especially for vulnerable people who are often the targets of hate-based violent crime. 

4. Buy a rental property 

Effort required: High

While this option may not be accessible to most average investors, purchasing a property specifically for rental to long-term tenants or short-term vacationers definitely gets you into the real estate market. If you’ve got the financial means and the inclination to be a fair and responsible landlord, buying a rental property might be the right investment for you. Long-term, single or multi-family rentals can generate monthly passive income from rental contracts. Short-term rentals, properties typically rented for vacations or stays of less than 12 months, are also passive income generators. But your passive income stream won’t come without the hard work of property maintenance and tenant management. There are also risks like damage to your property, low demand leaving the space sitting vacant, and the inability to quickly and easily sell if you want to convert your investment to cash. 

5. Try your hand at house flipping

Effort required: Highest

If you’re a truly adventurous investor, you may want to try your hand at flipping houses. House flipping involves buying a property, holding onto it for a short time, and selling it for profit. Sometimes the flip involves renovating a fixer-upper before selling, but it may be as simple as holding the property until you can sell it for more than you bought it. In either case, the goal is to buy low and sell high, usually within a year. House flipping generates active income rather than passive, and it’s a classic spend-money-to-make-money scenario: you’ll need to pay the costs associated with buying and selling a house, which can eat into your return. This kind of real estate investment can turn into a full-time job before you know it; even if you don’t renovate the property, it’s a lot of work to find the right house, secure a mortgage, make the purchase, maintain the property, and get it sold. You’ll need a strong knowledge of the local real estate market, but at the end of the day, you could be set to make a tidy profit if you make smart moves. 

Real estate investing within reach

Investing in real estate can take a significant amount of capital and credit, so options like purchasing a rental property or flipping a house may not be accessible to all investors. It’s also worth noting that financial barriers aren’t the only challenges to buying investment or rental property; discrimination against marginalized populations can make it harder to get a mortgage loan for some people, and growing public concern about the effect of house flipping on home prices in historically lower-income neighborhoods can make that route unappealing to some.

Lower barrier options like investing in REITs or using an online investment platform make it easier to dip your toe into the real estate market and diversify your portfolio. When you’re deciding how to invest in real estate, you might look for options with the lowest barriers to entry, like REIT ETFs that offer fractional shares, to get you started. 

As with any type of investing, the real estate investing strategy you choose should align with your risk tolerance, time horizon, current financial state, and future financial goals. If you’re ready to start investing, consider building a diverse portfolio that includes multiple types of investments and focus on building wealth for the long term.  

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Individual investors, like yourself, can buy shares in a REIT, which allows you to earn dividends, or a share of the company’s income. Since many everyday investors aren’t likely to have the cash to purchase, lease, and manage properties, REITs can allow more people to get exposure to the real estate sector in their investment portfolios. 

In this article, we’ll cover:

• How REITs work
• Types of REITs
• Pros of REITs
• Cons of REITs

How do Real Estate Investment Trusts work?

There are two primary ways people invest in the real estate sector: buying property or buying shares in a REIT. Congress established REITs in 1960 to lower the barrier and allow individual investors access to large-scale, income-producing real estate. Before 1960, that kind of investment was only available to those who could afford direct real estate investment through purchasing properties, such as wealthy individuals or companies, often using large financial intermediaries. 

With REITs, investing in real estate is more accessible to the average individual. REITs work similarly to mutual funds by pooling the capital of many investors. Investors buy shares in a REIT, and can then earn dividends from the shares they own without having to purchase, manage, or finance property themselves. 

Criteria to qualify as a REIT

REITs enjoy some special tax benefits, and real estate companies must meet several criteria set by the IRS to qualify as a REIT. First, REITs must primarily buy and operate properties as part of their investment portfolio, versus “flipping” real estate by purchasing, developing, and then reselling the properties. Further, a REIT must have the majority of its income and assets connected to real estate investments. 

From there it gets a bit more complicated. Additional criteria for a REIT include:

• At least 90% of its taxable income must be distributed as dividends to shareholders annually 
• At least 75% of its total assets must be invested in real estate and cash
• At least 75% of its gross income must be derived from real estate-related sources, including rent and interest on mortgages
• At least 95% of its gross income must be derived from real estate sources and dividends or interest from any source
• No more than 25% of its assets may consist of non-qualifying securities or stock in taxable REIT subsidiaries
• No more than 50% of its shares can be held by five or fewer individuals
• It must be an entity that would be taxable without the special REIT tax treatment
• It must have fully transferable shares
• It must have a minimum of 100 shareholders after its first year as a REIT
• It must be managed by a board of directors or trustees

Types of REITs

There are a few different types of real estate investment trusts. Most are publicly traded REITs, registered with the SEC and available for trading on major stock exchanges, similar to mutual funds. Others, known as non-traded REITs, are registered with the SEC but are not publicly traded. Finally, private REITs are neither registered with the SEC nor available on securities exchanges. REITs are further divided into three asset types: 

1. Equity REITs: The majority of REITs are publicly traded equity REITs that own or operate income-generating real estate
2. Mortgage REITs: Also known as mREITs, these REITs hold mortgages on real property and earn income from the interest on those investments 
3. Hybrid REITs: This type of REIT takes a diversified approach, investing in both mortgages and properties

Equity REITs can be broken down even further based on types of property; it’s common for REITs to specialize in one type of property. 

• Office REITs
• Industrial REITs
• Retail REITs
• Hospitality REITs
• Healthcare REITs
• Residential REITs
• Timberland REITs

Office REITs

Office REITs own and operate office real estate and rent space in those properties to businesses. The properties can range from office parks to skyscrapers. Some focus on specific types of tenants or markets as well. For example, an office REIT might primarily lease offices to biotech firms in suburban areas.

Industrial REITs

Industrial REITs own and manage industrial real estate spaces like warehouses and distribution centers. They generate income by renting out space in those properties. Industrial REITs are playing an increasingly important role in e-commerce and the demand for rapid delivery. Companies like Walmart and Amazon rely on industrial REITs for their delivery and distribution operations.

Retail REITs

Retail REITs focus on managing and renting space in outlet centers, large regional malls, strip malls, grocery-anchored shopping centers, and power centers that feature big-box retailers. For example, Tanger Outlets is one of the largest retail REITs in the U.S. The company’s shopping centers rent space to well-known retailers like Gap, H&M, and Nike.

Hospitality REITs

Hotels, motels, luxury resorts, and business-class hotels may all be owned and managed by hospitality REITs. They generate income by offering accommodations, conference venues, meals, beverages, and other services people need for large gatherings or when they travel. Many well-known hotel brands, including Hilton and Marriott, operate out of REIT-owned real estate.

Healthcare REITs

Hospitals, senior living facilities, medical offices, and skilled nursing facilities are among the properties developed, owned, and managed by healthcare REITs. Tennessee-based REIT Community Healthcare Trust, for example, has 161 properties across 34 states in its portfolio, including surgical centers, hospitals, physician clinics, and behavioral specialty facilities. Healthcare REITs may tend to generate a stable revenue stream due to the consistently high demand for healthcare-related services. 

Residential REITs

These REITs specialize in apartment buildings, single-family homes, student housing, vacation homes, and manufactured homes. They generate revenue by renting space to tenants in those properties. Some residential REITs focus on specific geographical markets or property classes, such as high-rise buildings in urban areas or suburban, single-family family dwellings. 

Timberland REITs

While other REITs concentrate on owning buildings or other facilities, timberland REITs focus on owning and managing land used to grow, harvest, and sell lumber. They sell to lumber mills and wood product manufacturing facilities owned by the REIT or a third party. Timberland REITs may also maximize the value of their land holdings by selling portions for other uses like housing or conservation.

Pros of investing in REIT stocks

The wide variety of REIT investment opportunities appeals to a lot of investors. And they allow you to diversify your portfolio by investing in the real estate sector, which is known for delivering steady income over time. Another upside for investors comes from the special tax advantages REITs enjoy. They’re allowed to deduct all the dividends they pay to shareholders from their taxable income, so they usually pay out 100% of their taxable income, which benefits both the company and the shareholders.

Additional benefits of investing in REITs include:

• They can be an accessible way to diversify your portfolio with real estate holdings, which can help protect your portfolio if other investments underperform
• They’re typically listed on national exchanges, making them accessible to investors
• They may help to protect your returns if other investments in your portfolio underperform during certain periods
• They’re known for generally paying healthy dividends and helping you build a passive income flow 
• Unlike other stocks, which can choose whether or not to pay dividends, REITs are required to distribute profits via dividends

Cons of investing in REIT stocks

As with any type of investment, there are potential downsides to investing in REITs. In addition to the typical risks of investing, such as potential market volatility, REITs are subject to some variables specific to the real estate sector, such as the possibility that property values will decline or demand for rental space will fall. The way REIT dividend income is taxed may also be a deterrent, which is why some investors prefer to hold REIT shares in tax-advantaged retirement accounts. 

The cons of investing in REITs include:

• REITs are especially sensitive to interest rates; when interest rates are high, REIT returns might fall because the company may depend on borrowed money to finance its real estate purchases 
• You usually have to pay ordinary income tax on dividends, unlike other investments that may allow you to pay a lower capital gains tax rate 
• REITs may have high up-front fees or sales commissions, along with annual management fees that can put a dent in your returns
• REITs are typically subject to the same risks as the real estate market, including fluctuations in property value and geographic demand
• Income is dependent on occupancy levels and the underlying business or industry that leases the properties

Diversifying your portfolio with REITs

When you’re looking for ways to diversify your portfolio, REITs could be one avenue to putting your money into another sector, giving you access to the expansive real estate market without buying or managing a property yourself. Diversification can be an important strategy for protecting your overall investments because losses in one asset class or sector can be balanced by gains in another. Many investors also appreciate earning passive income in the form of dividends. 

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Frequently asked questions about investing in REITs

How do you make money with a REIT?

Real estate investment trusts generate income for investors by distributing their profits in the form of dividends to shareholders. They earn profits either through renting space in the properties they own and manage or, in the case of mortgage REITs, through interest payments on the mortgages they own. 

Is a REIT a good investment?

REITs can be a good way to invest in the real estate market if you don’t have the funds, time, and expertise to purchase and manage a property yourself. Some investors also put their money into REITs due to the typically healthy dividends. However, as with any investment, there are risks to consider.

Do REITs have to pay 90%?

Yes; to qualify as a REIT, the trust must distribute at least 90% of its taxable income to its shareholders.

Is a REIT better than stocks?

In the eyes of many experts, the value of REIT shares tends to be more stable than stocks. REITs have also outperformed stocks on 20-to-50-year horizons, as well as in the latest full year of data.

Why are REITs better than stocks?

Neither security is necessarily better or worse; it all depends on your investing goals. Many investors opt for REITs because they are guaranteed to pay dividends. Stocks, on the other hand, are not required to pay dividends, and even those who do may opt not to do so at times. 

Do REITs have tax advantages?

REITs themselves enjoy special tax treatment; the company can deduct all of the dividends it pays to shareholders from its corporate income tax. For investors, however, there’s usually no tax advantage, and you may even pay more in taxes because REIT dividends are usually taxed at your normal income tax rate instead of the capital gains rate. That’s why some investors prefer to hold shares of REITs in tax-advantaged retirement accounts, like an IRA.

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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.

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Valentine’s Day, as an annual romantic celebration, was invented by Hallmark about a hundred years ago to sell greeting cards. Since then, it’s expanded into a $20 billion industry. That’s how much people spend on Valentine’s every year, according to the National Retail Federation.

We break down Love Inc., by the numbers.

Gold

Gold, the key ingredient in wedding bands, has been in use since ancient times, as jewelry and also as money, because everybody recognized the value of the glinting, yellow metal. It has industrial uses as well, that have nothing to do with ornamentation. Your cell phone contains bits of gold. It’s also in cars, circuit boards, dental fillings and NASA space equipment.

All the gold in the world totals about 170,000 metric tons, if it were all gathered together in one place. If all the world’s gold were melted into a cube, that cube of solid gold would measure 20.7 feet to the side.

Americans eat $18 billion worth of chocolate per year, which amounts to 18 percent of the world supply.

So how much is gold worth? We normally weigh it in ounces, not tons, and it’s currently trading at about $1,300 an ounce. Gold is volatile, and it increased increasing 12% in December and January, before dropping to its current level, as the stock market roiled through its extreme sell-offs since last week, including the Dow’s biggest single-day point drop ever (down 1,175) on Monday.

With gold priced at about $1,300 an ounce, now might not be a bad time to buy a wedding band. Yet,  the price of gold has gone way down since hitting its peak in 2011 of $1,889.70 an ounce.

Fortunately most wedding bands weigh no more than 0.35 ounces. That little band around your finger doesn’t amount to much weight. But here we are, paying $300 to $3,000 for a wedding ring. Why? Because it’s “platinum”? No. It’s because of the sentiment.

But that pales compared to engagement rings, which can cost more than $6,000, on average. Remember, there’s no rule that says you have to spend that much. Or even that a ring must have a diamond at all.

Chocolate

Americans love chocolate. Those $5 heart-shaped Russell Stovers at Walgreens and those $125 gilded boxes of Godivas really add up to billions and billions of dollars of consumer spending.

Americans eat $18 billion worth of chocolate per year, which amounts to 18 percent of the world supply.

Valentine’s Day spending gets a big piece of that. We’re expected to spend about $1.8 billion on candy on February 14. And that includes a lot of chocolate hearts with gooey centers.

Where does all this chocolate come from? Big Chocolate is dominated by Nestle, a Swiss conglomerate, and Hershey and Mars Inc., and also Ferrero, the maker of Nutella.

One of the biggest business stories of the year so far is when Nestle sold $3 billion worth of candy brands, including Butterfinger and Babe Ruth to Ferrero. Chocolate is big business.

Weddings

Weddings are a $76 billion industry. There are more than 300,000 wedding-related businesses employing 1.2 million people and the industry is growing 2.8% every year.

How much does the average wedding cost? About $35,000, according to recent survey from The Knot, a site devoted to the wedding industry.

The venue where the wedding actually takes place gets the lion’s share of the take, about $16,000, followed by the band, who typically earn about  $4,000. Overall wedding prices vary widely depending on the location, with Manhattan being the most expensive, at $78,000. For those on a budget, Arkansas is the cheapest, but even in Little Rock the typical wedding costs $19,000.

That doesn’t even count the cost of the honeymoon.

The average cost of a honeymoon is harder to nail down, because it depends on the destination. A 2015 report from WeddingWire, a company that works in the wedding retail industry, puts the average honeymoon cost at about $3,882.

One classic honeymoon is the ocean cruise, and cruises are a big business, creating a $117 billion industry annually, according to the Cruise Lines International Association. How much does a cruise cost? A website for cruise line might list packages starts at $1,000 for two, but the travel guide Frommer’s says the average is closer to $4,000.

Remember: Food is included, but many times, the drinks are not

Starter homes

The term “starter home” seems to suggest something cheap purchased by newlyweds, in the hope that it will appreciate in value and they’ll someday sell up to something bigger. The median price of a home sold in the U.S. in December 2017 was $335,400, according to the U.S. Census. So a starter home is likely to  be cheaper than that, on average.

Hundreds of thousands of people are buying these lower-cost homes. In tracking real estate deals by price, the Census Bureau says that 18,000 units sold for less than $150,000 in 2017. Another 62,000 houses sold for between $150,000 to $199,999, and 187,000 abodes sold for between $200,000 and $299,999.

Beyond that, as the price of houses get more expensive, the number of buyers drops.

Who says you can’t put a price on love?

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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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