Mortgage Glossary
Plain-language definitions for 52 mortgage terms. No jargon explaining other jargon.
A
Adjustable-Rate Mortgage (ARM)
A mortgage whose interest rate is fixed for an initial period, then resets periodically based on a market index. A 5/1 ARM is fixed for 5 years, then adjusts annually. Rate caps limit how much it can move at each reset and over the life of the loan.
Fixed vs. adjustable-rate mortgages →Amortization
The process of paying off a loan through equal monthly payments over a set term. Each payment covers both interest and principal, but the ratio shifts over time — early payments are mostly interest; later payments are mostly principal.
What is amortization? →Annual Percentage Rate (APR)
The true annual cost of a loan, expressed as a percentage. Unlike the interest rate, APR includes lender fees, origination charges, and mortgage insurance — making it the right number to compare across lenders.
Appraisal
An independent estimate of a property's market value, performed by a licensed appraiser. Lenders require it to confirm the home is worth at least the purchase price before funding the loan. If the appraisal comes in low, you may need to renegotiate or cover the gap in cash.
Assessed Value
The value a local government assigns to a property for tax purposes. Assessed value is often different (usually lower) than market value and is used to calculate annual property taxes.
B
Balloon Payment
A large lump-sum payment due at the end of a loan term. Uncommon in standard residential mortgages today, but sometimes seen in commercial loans or seller-financed deals.
Basis Points
A unit of measure for interest rates equal to 0.01%. A rate increase of 25 basis points (bps) means the rate rose 0.25%. Lenders and the Federal Reserve use basis points to describe rate changes precisely.
C
Cash-Out Refinance
A refinance in which you borrow more than your current loan balance, receiving the difference in cash. You're converting home equity into debt. The new loan replaces the old one at the higher balance.
When does it make sense to refinance? →Clear to Close
The confirmation from your lender's underwriting team that all conditions have been satisfied and the loan is approved. You'll receive the Closing Disclosure and schedule your closing date after this milestone.
Closing
The final step of a real estate transaction where ownership transfers. You sign all loan and title documents, pay closing costs and the down payment, and receive the keys.
Steps to getting a mortgage →Closing Costs
Fees paid at closing in addition to the down payment. Typically 2–5% of the loan amount. Includes lender fees (origination, underwriting), third-party fees (title, appraisal), prepaid items (insurance, taxes), and government taxes.
Closing costs explained →Closing Disclosure
A standardized five-page document the lender must provide at least 3 business days before closing. It shows the final loan terms, monthly payment, and all closing costs. Compare it carefully to your Loan Estimate.
Conforming Loan
A conventional mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits ($806,500 in most U.S. counties for 2025). Conforming loans typically offer lower rates than jumbo loans.
Conventional Loan
A mortgage not backed by a government agency (unlike FHA, VA, or USDA loans). Conventional loans generally require stronger credit and a higher down payment, but offer more flexibility and avoid FHA's lifetime mortgage insurance.
Credit Score (FICO)
A 300–850 numerical rating of your creditworthiness. Mortgage lenders use the middle of three bureau scores. Higher scores qualify for lower rates — a 100-point difference can change your rate by 0.5–1.0%, affecting your total cost by tens of thousands of dollars.
How credit score affects your rate →D
Debt-to-Income Ratio (DTI)
Your total monthly debt payments (including the new mortgage) divided by your gross monthly income. Most conventional lenders cap DTI at 43–45%. Lower is better — it signals you can comfortably handle the payment.
Deed
The legal document that transfers ownership of a property from seller to buyer. Signed at closing and recorded with the local government. Whoever holds the deed holds the title.
Default
Failure to meet the terms of the mortgage — typically by missing payments. Defaulting can trigger foreclosure proceedings, damage your credit, and result in losing the home.
Discount Points
Upfront fees paid to the lender at closing to buy a lower interest rate. One point = 1% of the loan amount, typically reducing the rate by ~0.25%. Only worth it if you stay in the home past the break-even date.
Closing costs explained →Down Payment
The portion of the home's purchase price you pay in cash upfront. The remainder is financed. A 20% down payment eliminates PMI; lower down payments are possible (3% conventional, 3.5% FHA, 0% VA/USDA) but typically require mortgage insurance.
How much down payment do you need? →E
Earnest Money
A deposit (typically 1–3% of the purchase price) submitted with an offer to demonstrate serious intent. Held in escrow until closing and credited toward your down payment. At risk if you back out without a valid contingency.
Equity
The portion of the home's value you own outright — current market value minus the outstanding loan balance. Equity builds through principal payments, extra payments, and home appreciation.
Escrow
An account managed by your lender that collects a portion of your monthly payment to cover property taxes and homeowner's insurance. The lender pays these bills when due, ensuring they're never missed.
What is escrow? →F
FHA Loan
A mortgage insured by the Federal Housing Administration. Allows down payments as low as 3.5% and accepts lower credit scores than conventional loans. Requires a Mortgage Insurance Premium (MIP) — which stays for the life of the loan if you put less than 10% down.
Fixed-Rate Mortgage
A mortgage where the interest rate and monthly P&I payment remain the same for the entire loan term — 10, 15, 20, or 30 years. Predictable and immune to market rate increases.
Fixed vs. adjustable-rate mortgages →Forbearance
A temporary agreement with your lender to pause or reduce mortgage payments during financial hardship. Not forgiveness — the paused amounts must eventually be repaid. Widely used during COVID-19.
Foreclosure
The legal process by which a lender takes possession of a property after the borrower defaults. Timeline and process vary by state. Foreclosure devastates credit and typically means losing the home.
H
HELOC (Home Equity Line of Credit)
A revolving line of credit secured by your home equity, similar to a credit card. You draw and repay as needed during the draw period, then repay the balance. Rate is variable. Risk: your home is collateral.
Home Equity Loan
A lump-sum loan secured by your home equity, paid back in fixed monthly installments at a fixed rate. Sometimes called a second mortgage. Different from a HELOC, which is revolving.
Homeowners Insurance
Insurance covering the structure and contents of your home against damage (fire, storms, theft). Lenders require it and collect the premium monthly in escrow. Does not cover floods or earthquakes — those need separate policies.
I
Interest Rate
The annual cost of borrowing, expressed as a percentage of the loan amount. Determines how much of each payment goes to interest vs. principal. Compare APR (not just the rate) across lenders — APR includes fees.
J
Jumbo Loan
A mortgage exceeding the conforming loan limits set by Fannie Mae and Freddie Mac ($806,500 in most counties for 2025). Jumbo loans require stronger credit, larger down payments, and often carry slightly higher rates.
L
Lien
A legal claim against a property, typically as security for a debt. Your mortgage is a lien. Unpaid property taxes, contractor bills, or judgments can also create liens — which must be cleared before a sale can close.
Loan Estimate
A standardized three-page document lenders must provide within 3 business days of receiving your application. Shows the interest rate, monthly payment, closing costs, and loan terms. Use it to compare offers across lenders.
Loan-to-Value Ratio (LTV)
Your loan balance divided by the home's appraised value, expressed as a percentage. A $360,000 loan on a $400,000 home = 90% LTV. LTV below 80% eliminates PMI on conventional loans. Lower LTV = less risk for the lender = potentially better rate.
What is PMI and when does it drop off? →Lock / Rate Lock
An agreement with your lender that guarantees your interest rate for a set period — typically 30–60 days — while your loan processes. Protects you if rates rise before closing. May have a fee; float-down options exist on some locks.
M
Mortgage
A loan secured by real property. The lender holds a lien on the home until the loan is repaid. If payments stop, the lender can foreclose. Monthly payments typically cover principal, interest, taxes, and insurance (PITI).
How a mortgage works →Mortgage Broker
An independent professional who shops your application across multiple wholesale lenders. Brokers have access to rates not available to the public, but are paid by lenders — which can create an incentive to steer you toward certain products.
Do I need a mortgage broker? →Mortgage Insurance Premium (MIP)
Insurance required on FHA loans, paid by the borrower. Includes an upfront fee (1.75% of the loan, typically rolled in) and an annual premium (0.55–1.05%). Unlike PMI, MIP often lasts the life of the loan if you put less than 10% down.
O
Origination Fee
A fee charged by the lender for processing and funding your loan. Usually 0–1% of the loan amount. Some lenders advertise no origination fee but compensate with a slightly higher rate. Compare APR to see the true cost.
P
PITI
Principal, Interest, Taxes, and Insurance — the four components of a fully loaded monthly mortgage payment. Lenders qualify borrowers based on total PITI, not just P&I. Always budget the full PITI, not just the advertised rate.
PMI (Private Mortgage Insurance)
Insurance required on conventional loans when the down payment is less than 20%. Protects the lender, not the borrower. Costs 0.5–1.5% of the loan annually. Must be automatically canceled when the balance reaches 78% of the original home value.
What is PMI and when does it drop off? →Pre-Approval
A lender's conditional commitment to loan you up to a specified amount, based on a real credit pull and verification of income and assets. Stronger than pre-qualification. Required to be taken seriously in competitive markets.
Steps to getting a mortgage →Pre-Qualification
A rough estimate of how much you might borrow, based on self-reported income — no credit pull, no verification. Not the same as pre-approval. Sellers and agents often treat it as meaningless in competitive markets.
Principal
The outstanding balance of the loan — the amount you borrowed minus what you've paid back. Each mortgage payment reduces principal (though only a small amount in early years). Extra payments go entirely to principal.
Property Tax
An annual tax levied by local government based on assessed property value. Collected monthly by your lender in escrow and paid when due. Rates vary widely by location — from under 0.5% to over 2.5% of assessed value annually.
R
Rate-and-Term Refinance
A refinance that changes your interest rate, loan term, or both — without taking cash out. The goal is typically a lower monthly payment, a shorter payoff timeline, or both.
When does it make sense to refinance? →Refinance
Replacing an existing mortgage with a new one — usually to get a lower rate, change the term, or access equity. Comes with closing costs (2–3% of the loan). Calculate the break-even point: closing costs ÷ monthly savings = months to break even.
When does it make sense to refinance? →T
Title
Legal ownership of a property. At closing, title transfers from seller to buyer. A title search confirms the seller has the right to sell and that there are no outstanding liens, claims, or legal issues attached to the property.
Title Insurance
Insurance protecting against ownership disputes or defects in the title discovered after closing. Lender's title insurance (required) protects the lender. Owner's title insurance (optional but recommended) protects you.
U
Underwriting
The process by which a lender evaluates the risk of a loan application — verifying income, assets, credit, and the property appraisal. The underwriter decides whether to approve, approve with conditions, or deny the loan.
V
VA Loan
A mortgage backed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. No down payment required, no PMI, competitive rates. Requires a one-time VA funding fee.
Put the terms into practice
Compare two real loan scenarios and see how rate, term, and down payment change the numbers.