Mortgage Glossary
The real estate industry is full of acronyms and jargon. Here's a plain-English translation of the terms you'll encounter on your journey.
A
Amortization
The process of paying off a debt over time through regular, equal payments that cover both principal and interest.
APR (Annual Percentage Rate)
The total cost of borrowing money, expressed as a yearly percentage. It includes the interest rate plus lender fees and discount points, providing a truer picture of the loan's cost than the interest rate alone.
Appraisal
A professional estimate of a property's market value, required by lenders to ensure the home is worth the purchase price.
ARM (Adjustable-Rate Mortgage)
A mortgage where the interest rate changes periodically based on a financial index. It usually starts with a lower fixed rate for a set period (like 5 years) before adjusting.
Assumable Mortgage
A mortgage that can be transferred from the seller to the buyer, allowing the buyer to take over the seller's interest rate and terms. FHA and VA loans are typically assumable.
B
Balloon Payment
A large lump sum payment due at the end of a loan term. The loan is amortized over a longer period, but matures early, requiring the remaining balance to be paid at once.
Bridge Loan
A short-term loan used to bridge the gap between selling an existing home and buying a new one.
Buydown
Paying upfront fees (points) to a lender in exchange for a lower interest rate. Can be permanent or temporary (like a 2-1 buydown).
C
Cap
A limit on how much an Adjustable-Rate Mortgage (ARM) interest rate or payment can increase over a period of time or the life of the loan.
Cash-Out Refinance
A refinance where the new mortgage is for a larger amount than the existing one, allowing the homeowner to take the difference in cash.
Clear Title
A title free of liens, legal questions, or ownership disputes, proving you rightfully own the property.
Closing
The final step in executing a real estate transaction, where documents are signed, money is transferred, and ownership legally changes hands.
Conforming Loan
A conventional loan that meets the guidelines and loan limits set by Fannie Mae and Freddie Mac.
Contingency
A condition in a purchase agreement that must be met for the transaction to proceed (e.g., passing a home inspection or securing financing).
Conventional Loan
A mortgage not insured or guaranteed by the federal government.
D
Debt-to-Income (DTI)
A ratio calculating your total monthly debt payments divided by your gross monthly income. Lenders use this to determine how much you can borrow.
Default
Failure to make mortgage payments as agreed in the loan contract, potentially leading to foreclosure.
Down Payment
The upfront cash a buyer pays toward the purchase price, expressed as a percentage of the total price.
E
Earnest Money
A deposit made by the buyer when submitting an offer to show good faith. It is applied to the down payment at closing.
Equity
The difference between the current market value of a home and the remaining mortgage balance. This is the portion of the property you truly "own".
Escrow
An account held by the lender to collect and pay property taxes and homeowners insurance on behalf of the borrower.
F
FHA Loan
A mortgage insured by the Federal Housing Administration, known for requiring lower minimum down payments and credit scores.
Fixed-Rate Mortgage
A mortgage where the interest rate remains exactly the same for the entire life of the loan.
Foreclosure
The legal process by which a lender takes control of a property, evicts the homeowner, and sells the home to recover the debt.
H
HELOC
Home Equity Line of Credit. A revolving credit line secured by your home's equity.
HOA (Homeowners Association)
An organization that makes and enforces rules for a neighborhood or condo building. HOA dues are factored into your DTI ratio.
HUD
Department of Housing and Urban Development, the federal agency that oversees the FHA.
I
Index
A published financial indicator used to calculate the interest rate adjustments on an ARM.
J
Jumbo Loan
A loan that exceeds the conforming loan limits set by FHFA, typically requiring stricter underwriting and larger down payments.
L
LTV (Loan-to-Value)
The ratio of the loan amount compared to the home's appraised value. An $80k loan on a $100k home is an 80% LTV.
M
Margin
A fixed number added to the index to determine the fully indexed interest rate of an ARM.
MIP
Mortgage Insurance Premium. The specific term for FHA mortgage insurance.
Mortgage
A legal agreement that conveys the conditional right of ownership on an asset or property by its owner to a lender as security for a loan.
N
NMLS
Nationwide Multistate Licensing System. The registry that licenses all loan officers and brokers.
O
Origination Fee
A fee charged by a lender to process a new loan application.
P
PITI
Principal, Interest, Taxes, and Insurance. The four components of a standard monthly mortgage payment.
PMI
Private Mortgage Insurance. Required on conventional loans when the down payment is less than 20%.
Points (Discount Points)
Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point costs 1% of the loan amount.
Pre-Approval
A process where a lender reviews and verifies key financial information such as income, assets, credit, and debts to determine whether a borrower appears qualified for a mortgage and approximately how much they may be able to borrow, subject to final underwriting and property approval.
Pre-qualification
A basic estimate of how much you can borrow based on unverified information you provide to the lender.
Principal
The actual amount of money borrowed, not including interest.
R
Rate Lock
A commitment from a lender guaranteeing a specific interest rate for a set period of time (e.g., 30 or 60 days) while the loan is processed.
Refinance
Paying off an existing loan with the proceeds from a new loan, usually to get a better rate or pull cash out.
T
Title
The legal document evidencing a person's right to or ownership of a property.
U
Underwriting
The process a lender uses to determine if the risk of offering a mortgage loan to a particular borrower is acceptable.
V
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs, available to eligible military members with 0% down and no PMI.