Mortgage Glossary

Plain-language definitions of the terms you will meet when you shop for a mortgage.

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Adjustable-rate mortgage (ARM): A loan whose interest rate is fixed for an initial period and then adjusts at set intervals based on a market index plus a margin, within caps. ARM calculator.
Amortization: The process of paying off a loan with regular payments that cover interest first and reduce the principal balance with the rest, so the balance reaches zero at the end of the term. Amortization calculator.
Annual percentage rate (APR): A yearly rate that includes the interest rate plus points and certain lender fees, which makes loan offers easier to compare. It is usually higher than the interest rate. APR calculator.
Appraisal: An independent estimate of a home's market value, ordered by the lender to confirm the property is worth at least the loan amount.
Assessed value: The value a local government assigns to a property for property tax purposes. It can differ from the market value.

Back-end ratio: Your total monthly debt payments, including the proposed housing payment, divided by your gross monthly income. See debt-to-income ratio. DTI calculator.
Balloon payment: A large lump sum due at the end of a loan whose regular payments did not fully pay it off.

Closing costs: Fees and prepaid items due when a home purchase or refinance closes, such as lender charges, title and settlement services, recording fees, and prepaid taxes and insurance. Commonly about 2% to 5% of the price. Closing costs explained.
Closing Disclosure: A form with the final loan terms and costs, which a lender must give you at least three business days before closing. Compare it with your Loan Estimate. How to read a Loan Estimate.
Conforming loan: A loan that meets the size limits and guidelines set by the Federal Housing Finance Agency and can be bought by Fannie Mae or Freddie Mac. Loans above the limit are jumbo loans.

Debt-to-income ratio (DTI): Your monthly debt payments as a percentage of your gross monthly income. Lenders look at a front-end ratio (housing only) and a back-end ratio (all debts). DTI calculator.
Discount points: Optional upfront fees paid to lower your interest rate. One point costs 1% of the loan amount. Are points worth it?.
Down payment: The part of the purchase price you pay in cash rather than borrow. The loan amount is the price minus the down payment. Down payment calculator.

Earnest money: A deposit you make when your offer is accepted to show good faith. It is credited toward your down payment or closing costs at closing.
Equity: The part of the home you own: its current value minus what you owe on the mortgage.
Escrow account: An account held by your loan servicer that collects part of your monthly payment and pays property taxes and insurance when they are due. Escrow explained.

FHA loan: A mortgage insured by the Federal Housing Administration, with a minimum down payment of 3.5% for borrowers with a 580 credit score or higher, and mortgage insurance premiums. FHA loan calculator.
Fixed-rate mortgage: A loan whose interest rate stays the same for the entire term, so the principal and interest payment never changes.
Front-end ratio: Your proposed monthly housing payment divided by your gross monthly income.
Funding fee (VA): A one-time fee on VA loans, a percentage of the loan amount that depends on your down payment and whether you have used the benefit before. It can be financed. VA funding fee.

HOA (homeowners association) dues: Regular fees paid to an association that maintains shared areas and enforces community rules. Lenders count them in your monthly housing cost.
Homeowners insurance: Insurance that covers damage to your home and belongings and liability. Lenders require it, and it is often paid through escrow.

Interest rate: The percentage a lender charges on the amount you borrow, expressed as a yearly rate. It sets your principal and interest payment, and differs from the APR.

Jumbo loan: A loan larger than the conforming loan limit for the county. Jumbo loans can have different rates and down payment requirements. Mortgage calculator.

Loan Estimate: A standardized three-page form a lender must give you within three business days of applying, showing the loan terms, payments and costs so you can compare offers. How to read a Loan Estimate.
Loan-to-value ratio (LTV): The loan amount divided by the home's value, as a percentage. An LTV above 80% generally means mortgage insurance on a conventional loan. PMI calculator.

Mortgage insurance premium (MIP): The insurance charged on FHA loans: an upfront premium of 1.75% of the loan plus an annual premium paid monthly. FHA loan calculator.

Origination fee: A lender charge for processing and underwriting a loan, often expressed as a percentage of the loan amount.

PITI: Principal, interest, taxes and insurance: the four main parts of a monthly mortgage payment when taxes and insurance are collected in escrow.
Pre-approval: A lender's written conditional commitment, after reviewing your income, assets and credit, for how much you can borrow. It is stronger than pre-qualification.
Pre-qualification: A quick estimate of how much you might be able to borrow, based on information you provide, without full verification.
Prepayment penalty: A fee some loans charge if you pay off the loan or make large extra payments early. Most current mortgages do not have one.
Principal: The amount you borrowed, or the remaining balance. Each payment reduces the principal by the portion that is not interest.
Private mortgage insurance (PMI): Insurance that protects the lender on a conventional loan when your down payment is under 20%. It can be cancelled at 80% of the original value and ends automatically at 78%. PMI explained.
Property tax: A yearly tax on real estate set by local governments, based on the assessed value and the local tax rate. Property tax by state.

Rate lock: A lender's commitment to hold a quoted interest rate for a set period while your loan is processed.
Recast: Re-amortizing a loan after a large principal payment, which lowers the monthly payment while keeping the same rate and term. Not all lenders offer it.
Refinance: Replacing your current mortgage with a new one, usually to get a lower rate, change the term, or take out cash. Refinance calculator.

Title insurance: Insurance that protects the owner and lender against problems with the property's ownership history, such as liens or errors in public records.

Underwriting: The lender's process of verifying your finances and the property to decide whether to approve the loan.
USDA loan: A government-backed loan for eligible homes in eligible areas and households with moderate incomes, with no required down payment and a guarantee fee plus an annual fee. USDA loan calculator.

VA loan: A mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans and some surviving spouses, with no required down payment and no monthly mortgage insurance. VA loan calculator.