Mortgage Glossary

Clear definitions of every mortgage term you will encounter -- from amortization and APR to VA loans and underwriting. Use this as your reference guide throughout the home buying process.

A

Amortization: The process of paying off a mortgage through regular monthly payments over a fixed term. Each payment includes both principal and interest, with the split shifting over time -- more interest early, more principal later.

APR (Annual Percentage Rate): The true annual cost of a loan expressed as a percentage. APR includes the interest rate plus lender fees and points, making it more useful than the interest rate alone when comparing loan offers.

ARM (Adjustable-Rate Mortgage): A mortgage with a fixed rate for an initial period, after which the rate adjusts periodically based on a market index. Common structures include 5/1 ARMs (fixed for 5 years, then adjusts annually) and 7/1 ARMs.

Appraisal: A professional estimate of a property's market value, required by lenders before approving a mortgage. The appraised value determines the maximum loan amount the lender will provide.

Assessed Value: The value assigned to a property by a local government for property tax purposes. The assessed value may differ significantly from market value or appraised value.

B

Back-End DTI: The ratio of your total monthly debt payments (including housing costs) to your gross monthly income. Most lenders cap back-end DTI at 43 to 45%.

Balloon Mortgage: A mortgage with relatively small payments for a fixed period, followed by a large lump-sum payment of the remaining balance at the end of the term.

Break-Even Point: In refinancing, the number of months required for cumulative monthly savings to cover the upfront closing costs. Calculated by dividing total closing costs by monthly payment savings.

C

Closing Costs: Fees and expenses paid at closing to complete a mortgage transaction. Typically 2 to 5% of the loan amount and include origination fees, appraisal, title insurance, recording fees, and prepaid items.

Closing Disclosure: A five-page document provided by the lender three business days before closing that itemizes all final loan terms, closing costs, and cash required at closing.

Conforming Loan: A mortgage that meets Fannie Mae and Freddie Mac purchasing guidelines, including loan size limits. For 2024, the conforming loan limit in most areas is $766,550.

Conventional Loan: A mortgage not insured or guaranteed by the federal government. Conventional loans are originated by private lenders and typically sold to Fannie Mae or Freddie Mac.

D

Debt-to-Income Ratio (DTI): The percentage of your gross monthly income that goes toward debt payments. Lenders evaluate two DTI ratios: front-end (housing costs only) and back-end (all debts).

Discount Points: Upfront fees paid to a lender to reduce the interest rate on a mortgage. One point equals 1% of the loan amount and typically reduces the rate by 0.25%.

Down Payment: The portion of the home purchase price paid upfront in cash. Expressed as a percentage of the purchase price. A 20% down payment eliminates PMI on conventional loans.

E

Equity: The difference between your home's current market value and your remaining mortgage balance. Equity grows through principal paydown and home price appreciation.

Escrow: An account held by a neutral third party (or your lender) to hold funds for property taxes and homeowners insurance. Your monthly mortgage payment typically includes an escrow contribution.

F

FHA Loan: A mortgage insured by the Federal Housing Administration. FHA loans allow down payments as low as 3.5% with a 580+ credit score and are more flexible on debt ratios than conventional loans, but require mortgage insurance premium (MIP) for the life of the loan in most cases.

Fixed-Rate Mortgage: A mortgage with an interest rate that does not change for the full loan term. Monthly principal and interest payments remain constant throughout the life of the loan.

Front-End DTI: The ratio of your monthly housing costs (PITI -- principal, interest, taxes, insurance) to your gross monthly income. Most lenders limit front-end DTI to 28 to 31%.

H--L

HELOC (Home Equity Line of Credit): A revolving line of credit secured by your home equity, similar to a credit card. Interest is charged only on the amount drawn. Rates are typically variable.

Home Equity Loan: A fixed-rate lump-sum loan secured by your home equity. Unlike a HELOC, the full amount is disbursed at once with a fixed repayment schedule.

Jumbo Loan: A mortgage that exceeds conforming loan limits. Jumbo loans are not eligible for purchase by Fannie Mae or Freddie Mac and typically carry higher rates and stricter qualification requirements.

Loan Estimate: A three-page document provided within three business days of applying for a mortgage that outlines estimated loan terms, monthly payment, and closing costs. Required by federal law (RESPA).

LTV (Loan-to-Value Ratio): The ratio of your mortgage balance to the appraised value of the property. Expressed as a percentage. A $320,000 loan on a $400,000 home is 80% LTV.

M--P

MIP (Mortgage Insurance Premium): The mortgage insurance required on FHA loans. Unlike PMI on conventional loans, MIP for FHA loans with less than 10% down is permanent for the life of the loan.

Origination Fee: A lender charge for processing a mortgage loan. Typically 0.5 to 1% of the loan amount. May be negotiable.

PITI: An acronym for the four components of a full mortgage payment: Principal, Interest, Taxes, and Insurance.

PMI (Private Mortgage Insurance): Insurance required on conventional loans when the down payment is less than 20%. Protects the lender (not the borrower) in case of default. Required to be canceled automatically at 78% LTV by federal law.

Pre-Approval: A formal lender evaluation of your creditworthiness, income, and assets that produces a specific loan amount you qualify for. Requires documentation and a credit pull. Carries significant weight with sellers.

Pre-Qualification: An informal estimate of what you might qualify for based on self-reported information. No documentation required and no credit pull. Does not carry the same weight as pre-approval.

Principal: The original loan amount, or the remaining unpaid balance of a mortgage. Each monthly payment includes a portion that reduces the principal balance.

R--U

Rate Lock: An agreement between a borrower and lender that guarantees a specific interest rate for a defined period (typically 30 to 60 days) while the loan is being processed.

Refinancing: Replacing an existing mortgage with a new one, typically to obtain a lower interest rate, reduce monthly payments, change the loan term, or access home equity.

Title Insurance: Insurance that protects against losses arising from defects in property ownership history, such as undisclosed liens, forgery, or clerical errors in public records. Required by most lenders; owner's title insurance is optional but recommended.

Underwriting: The process by which a lender evaluates the risk of a mortgage application. Underwriters verify income, assets, credit, and property value before approving a loan.

USDA Loan: A mortgage backed by the U.S. Department of Agriculture for buyers in eligible rural and suburban areas. Offers 0% down payment and competitive rates for qualifying income levels.

VA Loan: A mortgage benefit for eligible veterans, active-duty service members, and surviving spouses, backed by the Department of Veterans Affairs. Offers 0% down payment, no PMI, and competitive rates.

Definitions are for educational purposes only and do not constitute legal or financial advice. Mortgage terms and program requirements change frequently. Consult a licensed mortgage professional for guidance specific to your situation.