Mortgage Terms Glossary
Your comprehensive guide to understanding mortgage terminology
A
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period.
Amortization
The process of paying off a loan over time through regular payments that cover both principal and interest.
Annual Percentage Rate (APR)
The yearly cost of a loan including interest and fees, expressed as a percentage. APR provides a more complete picture of loan costs than interest rate alone.
Appraisal
A professional assessment of a property's market value conducted by a licensed appraiser, required by most lenders before approving a mortgage.
Assessed Value
The dollar value assigned to a property by a public tax assessor for taxation purposes.
Assets
Items of value owned by a borrower, including cash, investments, real estate, and personal property.
B
Balloon Mortgage
A loan with regular monthly payments for a set period, followed by a large final payment (balloon payment) that pays off the remaining balance.
Bridge Loan
A short-term loan used to "bridge" the gap between buying a new home and selling your current one.
Buydown
A financing technique where the buyer pays additional upfront fees to reduce the interest rate for a specified period or the life of the loan.
C
Cap
The limit on how much an adjustable-rate mortgage's interest rate or payment can increase, either per adjustment period or over the life of the loan.
Cash-Out Refinance
Refinancing your mortgage for more than you currently owe and taking the difference in cash.
Closing
The final step in a real estate transaction where the title is transferred, documents are signed, and funds are exchanged.
Closing Costs
Fees and expenses paid at closing, including origination fees, title insurance, appraisal fees, and attorney fees. Typically 2-5% of the purchase price.
Collateral
Property or assets pledged to secure a loan. In a mortgage, the home itself serves as collateral.
Conforming Loan
A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan amount limits.
Conventional Loan
A mortgage not insured or guaranteed by the federal government (not FHA, VA, or USDA).
Credit Report
A detailed record of your credit history, including payment history, current debts, and public records.
Credit Score
A numerical representation of your creditworthiness, typically ranging from 300-850. Higher scores indicate lower credit risk.
D
Debt-to-Income Ratio (DTI)
The percentage of your gross monthly income that goes toward paying debts. Lenders use this to assess your ability to manage monthly payments.
Deed
The legal document that transfers ownership of property from seller to buyer.
Default
Failure to make mortgage payments as agreed in the loan contract.
Down Payment
The upfront cash payment made when purchasing a home, typically expressed as a percentage of the purchase price.
E
Earnest Money
A deposit made to demonstrate serious intent to purchase a property, typically held in escrow and applied toward the down payment at closing.
Equity
The difference between your home's current market value and the amount you owe on your mortgage.
Escrow
A neutral third-party account that holds funds or documents until all conditions of a real estate transaction are met.
Escrow Account
An account held by the lender to pay property taxes, homeowners insurance, and sometimes HOA fees on the borrower's behalf.
F
Fannie Mae
Federal National Mortgage Association (FNMA), a government-sponsored enterprise that purchases mortgages from lenders.
FHA Loan
A mortgage insured by the Federal Housing Administration, typically requiring lower down payments and credit scores than conventional loans.
Fixed-Rate Mortgage
A mortgage with an interest rate that remains constant throughout the entire loan term.
Forbearance
A temporary postponement of mortgage payments, typically granted during financial hardship.
Foreclosure
The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments.
Freddie Mac
Federal Home Loan Mortgage Corporation (FHLMC), a government-sponsored enterprise that purchases mortgages from lenders.
G
Good Faith Estimate (GFE)
A document that provides an estimate of closing costs and loan terms (now replaced by the Loan Estimate form).
Grace Period
The period after a payment due date during which a late payment can be made without penalty.
H
HELOC
Home Equity Line of Credit - a revolving line of credit secured by your home equity, similar to a credit card.
Home Equity Loan
A fixed-amount loan secured by your home equity, with fixed payments over a set term.
Home Inspection
A thorough examination of a property's physical condition, typically conducted before purchase.
Homeowners Association (HOA)
An organization in a subdivision or planned community that makes and enforces rules and charges fees for common area maintenance.
Homeowners Insurance
Insurance that protects your home and belongings against damage or theft, required by most lenders.
I
Index
A benchmark interest rate used to determine rate changes for adjustable-rate mortgages.
Interest
The cost of borrowing money, calculated as a percentage of the loan amount.
Interest Rate
The percentage charged by a lender for borrowing money, typically expressed as an annual rate.
J
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac.
L
Lien
A legal claim against a property that must be satisfied when the property is sold.
Loan Estimate
A standardized form that provides key loan terms and estimated costs, required to be provided within three business days of application.
Loan Officer
A representative of a lending institution who assists borrowers in the loan application process.
Loan-to-Value Ratio (LTV)
The percentage of the property's value that is financed. A $200,000 loan on a $250,000 home has an 80% LTV.
Lock-In Period
A specified period during which a lender guarantees a specific interest rate for a borrower.
M
Margin
The percentage points added to the index to determine the interest rate on an adjustable-rate mortgage.
Mortgage
A loan used to purchase real estate, secured by the property itself.
Mortgage Insurance
Insurance that protects the lender if a borrower defaults on the loan, typically required when the down payment is less than 20%.
Mortgage Insurance Premium (MIP)
The mortgage insurance required on FHA loans, paid monthly and/or upfront.
N
Negative Amortization
When monthly payments are insufficient to cover the interest due, causing the loan balance to increase over time.
Non-Conforming Loan
A mortgage that does not meet Fannie Mae or Freddie Mac guidelines, often due to loan amount or borrower qualifications.
O
Origination
The process of creating a new loan, from application through funding.
Origination Fee
A fee charged by the lender for processing a new loan, typically expressed as a percentage of the loan amount.
P
PITI
Principal, Interest, Taxes, and Insurance - the four components of a typical monthly mortgage payment.
PMI
Private Mortgage Insurance - insurance required on conventional loans when the down payment is less than 20%.
Points
Prepaid interest paid at closing to reduce the interest rate. One point equals 1% of the loan amount.
Pre-Approval
A lender's conditional commitment to lend a specific amount, based on verified financial information.
Pre-Qualification
An informal estimate of how much you can borrow, based on self-reported financial information.
Prepayment Penalty
A fee charged if you pay off your mortgage early, though most modern loans do not include this.
Principal
The amount borrowed or the outstanding balance on a loan, excluding interest.
Private Mortgage Insurance (PMI)
Insurance that protects the lender if a borrower defaults, required on conventional loans with less than 20% down.
Q
Qualifying Ratios
Calculations used to determine a borrower's ability to qualify for a mortgage, including housing expense ratio and debt-to-income ratio.
R
Rate Lock
A commitment from a lender to hold a specific interest rate for a certain period, protecting against rate increases.
Refinance
Replacing an existing mortgage with a new one, typically to obtain a better interest rate or change loan terms.
RESPA
Real Estate Settlement Procedures Act - a federal law that requires lenders to disclose settlement costs and prohibits certain practices.
S
Second Mortgage
An additional loan taken out on a property that already has a mortgage, subordinate to the first mortgage.
Servicer
The company that collects mortgage payments, manages escrow accounts, and handles customer service for a loan.
Settlement
Another term for closing, when the property title transfers and all funds are exchanged.
Survey
A drawing or map showing the precise legal boundaries of a property and the location of improvements, easements, and rights of way.
T
Term
The length of time over which a loan must be repaid, such as 15 or 30 years.
Title
Legal ownership and right to use a property.
Title Insurance
Insurance that protects the lender and/or buyer against loss due to disputes over property ownership.
Title Search
An examination of public records to confirm a property's legal ownership and discover any claims or liens.
Truth in Lending Act (TILA)
Federal law requiring lenders to disclose credit terms and costs in a standardized way.
U
Underwriting
The process of evaluating a loan application to determine the risk involved and whether to approve the loan.
USDA Loan
A mortgage guaranteed by the U.S. Department of Agriculture for eligible rural and suburban properties, often requiring no down payment.
V
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans, service members, and spouses, often requiring no down payment.
Variable Rate
An interest rate that fluctuates based on market conditions, as in an adjustable-rate mortgage.
W
Waiver
The voluntary relinquishment of a right or privilege, such as waiving an inspection contingency.