Understanding mortgage terminology is essential when buying a home. This comprehensive glossary covers loan types, key concepts, costs, and the mortgage process to help you make informed decisions.
83 terms defined
A conventional loan is a mortgage not insured or guaranteed by a government agency. Conventional loans typically require higher credit scores (620+) and larger down payments, but offer competitive rates and the ability to remove PMI once you reach 20% equity. They can be conforming (meeting Fannie Mae/Freddie Mac guidelines) or non-conforming.
A jumbo loan is a mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These limits change over time and can be higher in expensive markets. Jumbo loans typically require higher credit scores (700+), larger down payments (10-20%), and more reserves.
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions. ARMs typically start with a lower fixed rate for an initial period (5, 7, or 10 years), then adjust annually. A 5/6 ARM means 5 years fixed, then adjusts every 6 months. ARMs have rate caps limiting how much the rate can increase.
A fixed-rate mortgage has an interest rate that remains constant for the entire loan term, providing predictable monthly payments. Common terms are 15-year and 30-year fixed. The rate never changes regardless of market conditions, protecting borrowers from rate increases but also meaning they cannot benefit from rate decreases without refinancing.
A conforming loan meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits that change over time and can be higher in expensive markets. Because these loans can be sold to government-sponsored enterprises, they typically offer lower interest rates than non-conforming loans. Conforming loans have standardized requirements for credit, DTI, and documentation.
The Annual Percentage Rate (APR) represents the total yearly cost of borrowing, including the interest rate plus fees, points, and other charges expressed as a percentage. APR is typically higher than the interest rate because it includes these additional costs, making it useful for comparing loan offers from different lenders.
The mortgage interest rate is the cost of borrowing money, expressed as a percentage of the loan amount charged annually. Rates are influenced by economic factors, your credit score, down payment, loan type, and term. The rate directly affects your monthly payment: on a $300,000 loan, each 1% rate increase adds roughly $170/month to your payment.
A down payment is the upfront cash you pay toward a home purchase, expressed as a percentage of the purchase price. Requirements vary by loan type: conventional allows 3-5% for many first-time buyers, while jumbo loans often require 10-20%. Putting 20% down avoids private mortgage insurance (PMI) on conventional loans.
Home equity is the difference between your home's market value and what you owe on your mortgage. For example, if your home is worth $400,000 and you owe $300,000, you have $100,000 (25%) in equity. Equity builds through mortgage payments and home appreciation. You can access equity through cash-out refinancing, HELOCs, or home equity loans.
Loan-to-value ratio (LTV) is your loan amount divided by the home's appraised value or purchase price (whichever is lower), expressed as a percentage. For example, borrowing $240,000 on a $300,000 home = 80% LTV. Lower LTV means more equity and often better rates. LTV above 80% on conventional loans requires PMI.
Debt-to-income ratio (DTI) compares your monthly debt payments to your gross monthly income. Lenders use two DTI calculations: front-end (housing costs only) and back-end (all debts including housing). Most lenders prefer back-end DTI under 43%, though exceptions can be made with strong compensating factors. Lower DTI improves approval odds and may qualify you for better rates.
Amortization is the process of paying off a mortgage through regular payments over time. Each payment includes principal (reducing your balance) and interest. Early in the loan, most of your payment goes to interest; over time, more goes to principal. An amortization schedule shows how each payment is split and your remaining balance throughout the loan term.
Closing costs are fees and expenses paid when finalizing a mortgage, typically ranging from 2-5% of the loan amount. They include origination and processing fees, third-party fees (appraisal, title insurance, attorney), prepaid items (property taxes, insurance), and government fees (recording). Some costs are negotiable or can be rolled into the loan.
Private mortgage insurance (PMI) protects the lender if you default on a conventional loan with less than 20% down payment. PMI typically costs 0.5-1.5% of the loan amount annually, added to your monthly payment. PMI can be removed once you reach 20% equity (and must be automatically cancelled at 22%).
Discount points are upfront fees paid to the lender at closing to reduce your interest rate. One point equals 1% of the loan amount and typically lowers the rate by 0.25%. For example, on a $300,000 loan, one point costs $3,000. Points make sense if you'll keep the loan long enough for monthly savings to exceed the upfront cost (break-even calculation).
Escrow has two meanings in mortgages: (1) During purchase, an escrow account holds earnest money and funds until closing. (2) After closing, an escrow account is maintained by your lender to pay property taxes and homeowners insurance. Your monthly payment includes principal, interest, plus escrow contributions. Lenders analyze escrow annually and adjust payments accordingly.
Mortgage pre-approval is a conditional determination issued through a creditor or loan program based on verified income, assets, credit, and debt. Unlike pre-qualification (a rough estimate), pre-approval usually involves a credit check and document review. A pre-approval letter can strengthen your offer when buying by showing sellers that financing has been reviewed.
Refinancing replaces your existing mortgage with a new loan, typically to get a lower interest rate, change loan terms, or access equity (cash-out refinance). Rate-and-term refinancing changes the rate or term without taking cash. Refinancing has closing costs (2-5% of loan), so you should calculate break-even time to ensure savings exceed costs.
A credit score is a three-digit number (300-850) that represents your creditworthiness based on your credit history. For mortgages, FICO scores are typically used. Higher scores generally qualify for more favorable pricing. Minimum requirements vary by loan type: conventional typically requires 620+, and jumbo loans often need 700+.
An adjustable-rate mortgage has an interest rate that can change after an initial fixed period, based on a specified index and margin.
An appraisal is an independent professional opinion of a home's market value, ordered by the lender to ensure the property supports the loan amount.
An appraisal gap is the difference between a home's appraised value and the higher purchase price a buyer agreed to pay, which the lender will not finance.
The back-end ratio is the percentage of a borrower's gross monthly income that goes toward all monthly debt payments, including housing costs.
A balloon payment is a large, lump-sum payment due at the end of a loan term that does not fully amortize over its life.
A bank statement loan is a mortgage that qualifies self-employed borrowers using bank statements to verify income instead of tax returns or pay stubs.
A buydown is a mortgage financing technique where you pay upfront points to reduce your interest rate, lowering monthly payments over the loan term or for a set period.
A cash-out refinance replaces your current mortgage with a larger loan and gives you the difference in cash, typically for debt consolidation, home improvements, or other expenses.
Cash to close is the total amount of money you need to bring to the closing table, including down payment, closing costs, prepaids, and other fees, minus any credits.
A changed circumstance is an event that allows a lender to revise a loan estimate, such as new information about your credit, income, or the property, within specific rules.
Clear to close is a status indicating that a mortgage lender has completed all underwriting conditions and is ready to fund the loan, allowing closing to be scheduled.
The Closing Disclosure is a five-page form a lender must provide at least three business days before closing, itemizing final loan terms and closing costs.
Conditional approval is a lender's decision to approve a mortgage application subject to satisfying specific conditions, such as providing missing documents or clearing underwriting conditions.
A conforming loan limit is the maximum loan amount that can be sold to certain government-sponsored enterprises, set annually based on home prices.
Your debt-to-income ratio is the percentage of your gross monthly income that goes toward paying debts, used by lenders to assess your ability to manage a mortgage payment.
A DSCR loan is a mortgage for investment properties that qualifies borrowers based on the property's rental income relative to its debt obligations, rather than personal income.
Earnest money is a good-faith deposit a buyer submits with an offer, held in escrow and applied to closing costs or down payment if the sale closes.
An FHA loan is a government-insured mortgage backed by the Federal Housing Administration, offering lower down payment and credit score requirements than many conventional loans.
A float-down is an option in a rate lock that lets you lower your interest rate if market rates drop during the lock period, usually for a fee and subject to conditions.
The front-end ratio is the percentage of a borrower's gross monthly income that goes toward housing costs, including principal, interest, taxes, and insurance.
The fully indexed rate is the interest rate on an adjustable-rate mortgage calculated by adding the current index value to the lender's margin.
Gift funds are money given by a relative or approved donor to help a homebuyer with down payment or closing costs, usually requiring a gift letter.
A HELOC is a home equity line of credit, a revolving credit line secured by your home that you can draw from as needed, similar to a credit card.
A high-balance loan is a conforming loan in a high-cost area with a loan amount above the standard conforming limit but within the local ceiling.
A home equity loan is a second mortgage that provides a lump sum with a fixed interest rate and fixed monthly payments, secured by your home's equity.
Homeowners insurance is a property insurance policy that covers damage to your home and belongings and provides liability protection against certain accidents.
An impound account is a lender-managed account that collects monthly portions of property taxes and insurance and pays those bills when due.
The index and margin are the two components that determine the interest rate on an adjustable-rate mortgage: a market index plus a fixed margin.
An investment property loan is a mortgage for a property the borrower does not occupy, typically used to generate rental income or appreciation.
A lender credit is a sum a lender agrees to pay toward a borrower's closing costs in exchange for a higher interest rate on the mortgage.
A Loan Estimate is a standardized form that lenders must provide within three business days of a mortgage application, detailing loan terms and estimated costs.
A loan officer is a licensed professional who guides borrowers through the mortgage application, evaluates their financial profile, and recommends loan options.
The loan-to-value ratio is the percentage of a property's appraised value or purchase price that your mortgage loan represents, helping lenders gauge risk.
A lock period is the timeframe during which a lender guarantees a specific interest rate and points for your mortgage, protecting you from market fluctuations until closing.
A mortgage broker is a licensed professional who matches borrowers with multiple lenders, helping them compare loan options and navigate the application process.
Mortgage insurance premium is a monthly or annual fee that protects the lender against loss if a borrower defaults on a loan with a low down payment.
A mortgage lender is a financial institution that originates and funds mortgage loans, either holding them in portfolio or selling them on the secondary market.
A mortgage note is a legal document in which you promise to repay a specific loan amount plus interest according to set terms, and it is separate from the mortgage or deed of trust.
Negative amortization occurs when a mortgage payment is less than the interest due, causing the unpaid interest to be added to the loan balance.
A non-QM loan is a mortgage that does not meet the Consumer Financial Protection Bureau's qualified mortgage rules, often used by borrowers with unique income or credit situations.
Occupancy refers to how a borrower intends to use a property, such as a primary residence, second home, or investment property.
An origination fee is a charge by a mortgage lender for processing and underwriting a new loan, typically shown as a percentage of the loan amount.
A piggyback loan is a second mortgage taken out simultaneously with a first mortgage to cover part of the down payment, often to avoid mortgage insurance.
PITI stands for principal, interest, taxes, and insurance, the four components that typically make up a monthly mortgage payment.
Pre-qualification is an initial assessment by a lender of how much you might borrow, based on self-reported financial information, without a full credit check or verification.
Prepaids are costs paid at closing for expenses that are due before the first mortgage payment, such as property taxes and homeowners insurance premiums.
A prepayment penalty is a fee some mortgages charge if you pay off the loan early or make extra principal payments beyond a set limit during a specified period.
The principal is the original amount of money borrowed on a mortgage, separate from interest and other costs, and it decreases as you make payments over time.
A rate-and-term refinance replaces your existing mortgage with a new one to obtain a lower interest rate, different term, or both, without taking additional cash out.
A rate cap limits how much the interest rate on an adjustable-rate mortgage can increase at each adjustment and over the life of the loan.
A rate lock is a commitment from a lender to hold a specific interest rate for a set period while a mortgage application is processed.
A recast is a process where a lender recalculates your mortgage payment after you make a large lump-sum principal payment, spreading the remaining balance over the original term.
Reserves are liquid financial assets a borrower must have after closing, measured in months of mortgage payments, to qualify for certain loans.
A second mortgage is a loan secured by a property that already has a first mortgage, providing additional funds but with higher risk and often higher interest rates.
The secondary market is where mortgage loans are bought and sold among investors, providing liquidity for lenders to originate new loans.
A seller concession is an agreement where the seller pays some of the buyer's closing costs or prepaid items to facilitate the sale.
A servicer is a company that handles the day-to-day administration of your mortgage loan, including payment collection and escrow management.
SOFR, the Secured Overnight Financing Rate, is a benchmark interest rate used to set the index for many adjustable-rate mortgages and other loans.
A temporary buydown is a mortgage feature where the interest rate is reduced for a set period, typically the first few years, and then gradually increases to the note rate.
Title insurance protects against financial loss from defects in a property's title, such as liens, encumbrances, or ownership disputes, that existed before your purchase.
Underwriting is the process where a lender verifies your financial information and assesses the risk of lending to you before final loan approval.
Upfront mortgage insurance premium is a one-time fee paid at closing on certain government-backed loans, separate from ongoing monthly mortgage insurance.
A USDA loan is a mortgage backed by the U.S. Department of Agriculture, designed for low- to moderate-income borrowers purchasing homes in eligible rural areas, often with no down payment.
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses, often with no down payment.
Now that you understand the terminology, let us help you find the right mortgage for your needs.
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