Mortgage Glossary
Clear, jargon-free definitions for every mortgage term you will encounter during the home buying process. Jump to a letter or scroll through all 29 terms.
A
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on a benchmark index. ARMs typically start with a lower rate than fixed-rate mortgages but can increase over time.
Amortization
The process of paying off a loan with regular payments over time. Each payment covers both principal and interest, with early payments being mostly interest and later payments being mostly principal.
Annual Percentage Rate (APR)
The total annual cost of a loan expressed as a percentage, including the interest rate plus fees, points, and other charges. APR provides a more complete picture of borrowing costs than the interest rate alone.
C
Closing Costs
Fees and expenses paid at the closing of a real estate transaction, typically 2-5% of the home price. Includes lender fees, title insurance, appraisal, attorney fees, prepaid taxes, and insurance.
Conventional Loan
A mortgage not insured or guaranteed by a government agency. Conventional loans typically require higher credit scores and larger down payments than government-backed loans but may offer better terms for qualified borrowers.
D
Debt-to-Income Ratio (DTI)
The percentage of your gross monthly income that goes toward paying debts. Lenders use DTI to assess your ability to manage monthly payments. Most lenders prefer DTI below 36%, with a maximum of 43% for most loan types.
Down Payment
The upfront cash payment made by the buyer toward the purchase price of a home. Down payments typically range from 3% to 20%+ of the home price. Putting down less than 20% usually requires PMI.
E
Earnest Money
A deposit made by the buyer to show serious intent to purchase a home, typically 1-3% of the purchase price. Earnest money is held in escrow and applied to closing costs or the down payment at closing.
Equity
The difference between your home's current market value and the amount you owe on your mortgage. Equity increases as you pay down your loan and as your home appreciates in value.
Escrow
An account held by a third party (usually your lender) that collects and distributes property taxes and homeowners insurance. A portion of each mortgage payment goes into escrow to cover these expenses when due.
F
FHA Loan
A mortgage insured by the Federal Housing Administration. FHA loans require as little as 3.5% down payment and have more flexible credit requirements, but require mortgage insurance for the life of the loan.
Fixed-Rate Mortgage
A mortgage with an interest rate that remains the same for the entire loan term. Fixed-rate mortgages provide predictable monthly payments and protection against rising interest rates.
H
Home Equity Line of Credit (HELOC)
A revolving line of credit secured by your home equity. HELOCs typically have variable interest rates and allow you to borrow and repay as needed during a draw period, similar to a credit card.
Homeowners Association (HOA)
An organization in a subdivision or planned community that makes and enforces rules for the properties within its jurisdiction. HOA fees cover shared amenities, maintenance, and services.
Homeowners Insurance
Insurance that covers your home and personal property against damage, theft, and liability. Lenders require homeowners insurance as a condition of the mortgage. Costs vary by location, home value, and coverage level.
I
Interest Rate
The cost of borrowing money, expressed as a percentage of the loan amount. Your interest rate determines how much you pay in interest each month and over the life of the loan.
J
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans typically require higher credit scores, larger down payments, and may have higher interest rates.
L
Loan-to-Value Ratio (LTV)
The ratio of the loan amount to the appraised value of the property, expressed as a percentage. An 80% LTV means you're borrowing 80% of the home's value. Lower LTV ratios typically get better rates and no PMI.
O
Origination Fee
A fee charged by the lender for processing a new mortgage, typically 0.5-1% of the loan amount. This fee covers underwriting, document preparation, and funding the loan.
P
Points (Discount Points)
Upfront fees paid to the lender at closing to reduce the interest rate. One point equals 1% of the loan amount and typically reduces the rate by about 0.25%. Points make sense if you plan to keep the loan long enough to recoup the upfront cost.
Preapproval
A lender's conditional commitment to lend you a specific amount based on a thorough review of your financial situation. Preapproval involves a credit check and verification of income, assets, and debts. Stronger than prequalification.
Prequalification
A preliminary estimate from a lender of how much you might be able to borrow, based on self-reported financial information. Less rigorous than preapproval and does not guarantee loan approval.
Principal
The amount of money you borrow for your mortgage — the loan amount. Each monthly payment includes a portion that goes toward reducing the principal balance. As principal decreases, so does the interest portion of your payment.
Private Mortgage Insurance (PMI)
Insurance required by lenders when the down payment is less than 20% of the home price. PMI protects the lender (not you) if you default. It typically costs 0.3-1.5% of the loan amount annually and can be removed once you reach 20% equity.
Property Tax
An annual tax levied by local governments based on the assessed value of your property. Property tax rates vary significantly by location, typically ranging from 0.5% to 2.5% of home value annually.
R
Refinancing
The process of replacing your existing mortgage with a new one, typically to get a lower interest rate, change the loan term, or convert from an ARM to a fixed rate. Refinancing involves closing costs similar to the original loan.
T
Title Insurance
Insurance that protects against losses from defects in the title to a property, such as liens, encumbrances, or ownership disputes. Lender's title insurance is required; owner's title insurance is optional but recommended.
U
Underwriting
The process by which a lender evaluates the risk of lending to a borrower. Underwriters review credit history, income, assets, property value, and other factors to determine whether to approve the loan and at what terms.
V
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. VA loans require no down payment and no PMI, but charge a funding fee.
Frequently Asked Questions
What is the difference between interest rate and APR?
The interest rate is the cost of borrowing the principal loan amount. APR (Annual Percentage Rate) includes the interest rate plus lender fees, points, and other costs, expressed as a yearly percentage. APR gives you a more complete picture of the total borrowing cost and is always equal to or higher than the interest rate.
What does PMI stand for and why do I have to pay it?
PMI stands for Private Mortgage Insurance. Lenders require it when your down payment is less than 20% of the home price because the smaller down payment represents higher risk for the lender. PMI protects the lender — not you — if you default on the loan. It typically costs 0.3-1.5% of the loan amount annually and can be removed once you reach 20% equity.
What is a good debt-to-income ratio for a mortgage?
Most lenders prefer a total DTI (debt-to-income ratio) below 36%, though many will approve loans up to 43%. FHA loans may allow DTI up to 50% in some cases. Your housing expenses alone should ideally stay below 28% of your gross monthly income. Lower DTI ratios qualify you for better rates and terms.
What is the difference between prequalification and preapproval?
Prequalification is a preliminary estimate based on self-reported financial information — it is quick but not verified. Preapproval is a more rigorous process where the lender verifies your income, assets, credit, and debts. Preapproval carries more weight with sellers and gives you a more accurate borrowing limit.
What is escrow and why do I need an escrow account?
Escrow is an account managed by your lender that collects a portion of each mortgage payment to cover property taxes and homeowners insurance when they come due. It ensures these critical expenses are paid on time. Most lenders require escrow accounts, especially when the down payment is less than 20%.
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