Mortgage Glossary

A mortgage with an interest rate that changes periodically based on a benchmark index. ARMs typically start with a lower fixed rate for an initial period (e.g., 5 years), then adjust annually. The rate can go up or down, affecting your monthly payment.

The process of paying off a loan through regular scheduled payments over time. Each payment covers both principal and interest. Early payments are mostly interest; later payments are mostly principal. A 30-year mortgage is fully amortized over 360 monthly payments.

A complete table showing each loan payment broken down into principal and interest, along with the remaining balance after each payment. You can request this from your lender at any time.

The true yearly cost of borrowing, expressed as a percentage. Unlike the interest rate, APR includes fees and other costs (like origination fees and mortgage insurance), giving you a more complete picture of the loan's cost.

A professional assessment of a property's market value, conducted by a licensed appraiser. Lenders require an appraisal to ensure the property is worth at least as much as the loan amount. Typically costs $300–$600.

The dollar value assigned to a property by a licensed appraiser based on comparable sales, property condition, and market conditions. This value determines how much a lender will lend against the property.

A mortgage that can be transferred from the seller to the buyer, allowing the buyer to take over the existing loan terms, including the interest rate. FHA and VA loans are typically assumable; conventional loans usually are not.

A short-term mortgage where payments are calculated as if the loan were a 30-year mortgage, but the entire remaining balance is due in a lump sum (balloon payment) after a shorter period, typically 5–7 years.

One hundredth of one percent (0.01%). Used to describe small changes in interest rates. For example, if a rate moves from 6.50% to 6.75%, it increased by 25 basis points.

A short-term loan used to bridge the gap between buying a new home and selling your current one. Allows you to use your current home's equity as a down payment on the new home before the sale closes.

A financing technique where the buyer (or seller, or builder) pays extra money upfront to reduce the mortgage interest rate, either permanently or for the first few years. A '2-1 buydown' reduces the rate by 2% in year 1 and 1% in year 2.

A limit on how much an adjustable-rate mortgage's interest rate or payment can change. Periodic caps limit each adjustment; lifetime caps limit the total change over the life of the loan.

A refinance in which you borrow more than you owe on your current mortgage and receive the difference in cash. Used to access home equity for home improvements, debt consolidation, or other expenses.

The final step in a real estate transaction where ownership is transferred from seller to buyer. At closing, all documents are signed, funds are distributed, and the buyer receives the keys. Also called 'settlement.'

Fees and expenses paid at the closing of a real estate transaction, typically 2–5% of the loan amount. Includes origination fees, appraisal, title insurance, attorney fees, prepaid taxes and insurance, and more.

A five-page form that provides final details about your mortgage loan, including loan terms, projected monthly payments, and closing costs. You must receive it at least 3 business days before closing.

A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits ($766,550 in most areas for 2024), borrower credit requirements, and documentation standards. Typically offers lower rates than non-conforming loans.

A mortgage not backed by a government agency (unlike FHA, VA, or USDA loans). Can be conforming or jumbo. Typically requires a higher credit score and larger down payment than government-backed loans.

A numerical representation of your creditworthiness, typically ranging from 300 to 850. The most common scoring model is FICO. Higher scores indicate lower risk to lenders and typically result in better loan terms. Most conventional loans require a 620+ score.

The percentage of your gross monthly income that goes toward paying debts. Calculated by dividing total monthly debt payments by gross monthly income. Most lenders require a DTI of 43% or less. Lower is better.

A legal document that transfers ownership of real property from one party to another. The deed must be signed by the seller (grantor) and delivered to the buyer (grantee). Different types include warranty deeds, quitclaim deeds, and grant deeds.

A legal document used in some states instead of a mortgage. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds the title until the loan is paid off.

Failure to fulfill the terms of a loan agreement, most commonly by missing mortgage payments. A mortgage is typically considered in default after 30 days of non-payment. Default can lead to foreclosure.

Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point equals 1% of the loan amount. Paying points makes sense if you plan to stay in the home long enough to recoup the upfront cost through lower monthly payments.

The portion of the home's purchase price paid upfront by the buyer, not financed by the mortgage. Expressed as a percentage (e.g., 20% down on a $400,000 home = $80,000). Larger down payments reduce the loan amount and may eliminate PMI.

A deposit made by the buyer to demonstrate serious intent to purchase a property. Typically 1–3% of the purchase price. Held in escrow and applied to the down payment or closing costs at settlement.

The difference between a home's current market value and the outstanding mortgage balance. As you pay down your mortgage and/or as the home appreciates, your equity grows. Equity can be accessed through a cash-out refinance or HELOC.

A neutral third-party account that holds funds during a real estate transaction. Also refers to the portion of your monthly mortgage payment held by the lender to pay property taxes and homeowner's insurance when they come due.

The Federal National Mortgage Association (FNMA), a government-sponsored enterprise that buys mortgages from lenders, packages them into mortgage-backed securities, and sells them to investors. This process provides lenders with capital to make more loans.

A mortgage insured by the Federal Housing Administration, designed for low-to-moderate income borrowers. Requires as little as 3.5% down with a 580+ credit score, or 10% down with a 500–579 score. Requires mortgage insurance for the life of the loan in most cases.

The most widely used credit scoring model, developed by Fair Isaac Corporation. Scores range from 300–850 and are based on payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).

A mortgage with an interest rate that remains constant for the entire loan term. The most common terms are 30 years and 15 years. Provides payment stability and predictability, making budgeting easier.

An agreement between a borrower and lender to temporarily reduce or pause mortgage payments during a period of financial hardship. Interest typically continues to accrue. The paused payments must be repaid later through a repayment plan, deferral, or loan modification.

The legal process by which a lender takes possession of a property after the borrower fails to make mortgage payments. The lender then sells the property to recover the outstanding loan balance.

The Federal Home Loan Mortgage Corporation (FHLMC), a government-sponsored enterprise similar to Fannie Mae. Buys mortgages from lenders and sells them as mortgage-backed securities to provide liquidity to the mortgage market.

A document previously required by RESPA that estimated closing costs for a mortgage. Replaced by the Loan Estimate form in 2015 under TRID regulations.

Total income before taxes and other deductions. Lenders use gross monthly income (not take-home pay) to calculate your debt-to-income ratio.

A Home Equity Line of Credit — a revolving line of credit secured by your home's equity. Works like a credit card: you can borrow, repay, and borrow again up to your credit limit during the draw period (typically 10 years), then repay the balance over the repayment period.

The portion of your home's value that you own outright, calculated as the market value minus any outstanding mortgage balances. Equity builds through mortgage payments and home appreciation.

Insurance that protects your home and personal property against damage or loss from events like fire, theft, and certain natural disasters. Required by lenders. Does not typically cover floods or earthquakes, which require separate policies.

A form previously used to itemize all charges imposed on borrowers and sellers in a real estate transaction. Replaced by the Closing Disclosure form in 2015 under TRID regulations.

A benchmark interest rate used to calculate the rate on an adjustable-rate mortgage. Common indexes include the Secured Overnight Financing Rate (SOFR), the 1-year Treasury, and LIBOR (being phased out). Your ARM rate = Index + Margin.

The percentage of the loan amount charged by the lender for borrowing money, expressed as an annual rate. Does not include fees. Compare to APR, which includes fees and gives a more complete picture of borrowing costs.

A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac ($766,550 in most areas for 2024). Requires higher credit scores, larger down payments, and more cash reserves than conforming loans.

A legal claim against a property as security for a debt. A mortgage creates a lien on your property. Other liens can include tax liens, mechanic's liens, and judgment liens. All liens must be satisfied before a property can be sold with clear title.

A three-page form required by TRID that provides key details about a mortgage loan, including estimated interest rate, monthly payment, and closing costs. Must be provided within 3 business days of receiving a loan application.

A permanent change to one or more terms of your mortgage, such as the interest rate, loan term, or principal balance. Used to make payments more affordable for borrowers experiencing long-term hardship.

The ratio of the mortgage loan amount to the appraised value of the property, expressed as a percentage. A $320,000 loan on a $400,000 home = 80% LTV. Higher LTV means more risk for the lender and may require PMI.

The period during which a lender guarantees a specific interest rate on a mortgage. Typically 30–60 days, though longer locks are available (often at a higher cost). If the loan doesn't close before the lock expires, you may need to relock at the current rate.

A fixed percentage added to an index rate to determine the interest rate on an adjustable-rate mortgage. For example, if the index is 5.0% and the margin is 2.5%, your rate would be 7.5%. The margin stays constant for the life of the loan.

A loan used to purchase or refinance real estate, where the property serves as collateral. If the borrower fails to repay, the lender can foreclose on the property. The two main components are principal (the amount borrowed) and interest (the cost of borrowing).

Insurance required on FHA loans to protect the lender if the borrower defaults. Includes an upfront premium (1.75% of the loan amount) and an annual premium (0.15%–0.75% depending on loan terms), paid monthly.

A fee charged by the lender for processing a new loan application. Typically 0.5%–1% of the loan amount. May be negotiable. Included in the APR calculation.

An acronym for the four components of a monthly mortgage payment: Principal, Interest, Taxes, and Insurance. Lenders use PITI to calculate your housing expense ratio when qualifying you for a loan.

Private Mortgage Insurance — required on conventional loans when the down payment is less than 20% (LTV above 80%). Protects the lender, not the borrower. Typically costs 0.5%–1.5% of the loan amount annually. Can be removed once equity reaches 20%.

A lender's written commitment to loan you up to a specific amount based on a review of your credit, income, assets, and debts. Stronger than pre-qualification. Shows sellers you're a serious buyer and can close quickly.

An informal estimate of how much you might be able to borrow, based on self-reported financial information (no credit check). Less reliable than pre-approval. Useful for early planning but not sufficient for making offers.

The original amount of money borrowed in a loan, or the remaining balance owed (excluding interest). Each mortgage payment reduces the principal balance. The portion of each payment that goes to principal increases over time as the loan amortizes.

Annual taxes assessed by local governments based on the assessed value of real property. Typically paid through an escrow account as part of your monthly mortgage payment. Rates vary significantly by location.

An agreement between a borrower and lender that guarantees a specific interest rate for a set period (typically 30–60 days) while the loan is being processed. Protects the borrower from rate increases before closing.

The process of replacing an existing mortgage with a new one, typically to get a lower interest rate, reduce the monthly payment, change the loan term, or access equity. Involves closing costs similar to the original mortgage.

The Real Estate Settlement Procedures Act — a federal law that requires lenders to provide borrowers with disclosures about the costs of the mortgage process and prohibits certain practices like kickbacks between settlement service providers.

A loan secured by a property that already has a first mortgage. Includes home equity loans and HELOCs. In foreclosure, the first mortgage is paid off before the second. Higher risk = higher interest rates.

A sale of a home for less than the outstanding mortgage balance, with the lender's approval. Used to avoid foreclosure. The lender may forgive the remaining balance or pursue a deficiency judgment depending on state law.

The process of ranking liens in order of priority. In a refinance, a second mortgage lender may need to agree to remain in second position (subordinate) to the new first mortgage.

Legal ownership of a property. A clear title means there are no liens, disputes, or other claims against the property. Title is transferred via deed at closing.

Insurance that protects against losses from defects in the title, such as undisclosed liens, errors in public records, or fraud. Lender's title insurance is required; owner's title insurance is optional but recommended.

An examination of public records to verify the seller's right to transfer ownership and to identify any liens, encumbrances, or other issues with the title.

TILA-RESPA Integrated Disclosure — a set of rules that combined the Truth in Lending Act (TILA) and RESPA disclosures into two forms: the Loan Estimate (given within 3 days of application) and the Closing Disclosure (given 3 days before closing).

The process by which a lender evaluates the risk of a loan application by reviewing the borrower's credit, income, assets, and the property's value. The underwriter issues an approval, conditional approval, or denial.

A mortgage backed by the U.S. Department of Agriculture for eligible rural and suburban homebuyers. Offers 100% financing (no down payment required) for qualifying borrowers and properties.

A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. Offers 100% financing, no PMI, and competitive rates.

Local government regulations that dictate how land can be used in specific areas. Common designations include residential (R), commercial (C), and industrial (I). Zoning affects what you can build or do with a property.