Mortgage Terms
Mortgage Terms
Mortgage words, defined like a human would say them. Search for a term or browse the list.
Showing 46 of 46 terms
A
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage, or ARM, starts with a fixed rate for a set number of years, then adjusts up or down on a schedule based on the market. A 7/6 ARM, for example, is fixed for seven years, then can change every six months. The early rate is often lower, but the payment can rise later.
Amortization
Amortization is how your loan gets paid off over time through regular payments. Early on, more of each payment goes to interest and less to principal. As the years pass, that flips, and more goes toward the balance. By the end of the term, the loan is fully paid off.
Appraisal
An appraisal is an independent estimate of a home's market value, done by a licensed appraiser the lender orders. It protects the lender, and you, from paying more than the home is worth. The appraiser compares the home to similar recent sales nearby. If the value comes in low, it can change your loan or your negotiations.
Appraisal Contingency
An appraisal contingency is a clause in your purchase contract that lets you back out, or renegotiate, if the home appraises for less than your offer price, usually without losing your earnest money. It's a safety net for buyers. In hot markets, some buyers waive it to compete, which adds risk if the appraisal comes in low.
Appraisal Gap
An appraisal gap is the difference when a home appraises for less than the agreed price. Say you offer $405,000 and it appraises at $390,000: that $15,000 gap is money the lender won't finance. You'd need to cover it in cash, renegotiate the price, or walk away if you have an appraisal contingency.
APR
APR, or annual percentage rate, is the yearly cost of your loan including certain fees, not just the interest rate. Because it folds in some closing costs, the APR is usually a bit higher than your rate. It's meant to help you compare loan offers on a more apples-to-apples basis.
Assumable Mortgage
An assumable mortgage lets a qualified buyer take over the seller's existing loan, including its interest rate and remaining balance, instead of getting a brand-new loan. FHA, VA, and USDA loans are often assumable, while most conventional loans aren't. When rates have risen, assuming a seller's lower-rate loan can be a real advantage.
C
Cash to Close
Cash to close is the total amount of money you need to bring to the closing table. It rolls together your down payment and closing costs, then subtracts things already paid or credited to you, like your earnest money deposit and any seller credits. It's the real out-of-pocket number for closing day.
Closing Costs
Closing costs are the fees you pay to finalize your home purchase, on top of your down payment. They include lender fees, title and escrow charges, an appraisal, and prepaid items like taxes and insurance. Closing costs commonly run roughly 2% to 5% of the purchase price, though it varies by location and loan.
Closing Disclosure
A Closing Disclosure is the five-page form that spells out your final loan terms and costs. Your lender must give it to you at least three business days before you close, so you can check it against your Loan Estimate and make sure the numbers didn't drift. Those three days are your built-in time to review.
Conforming Loan
A conforming loan is a conventional loan that meets the guidelines and loan limits set by Fannie Mae and Freddie Mac. Staying within the conforming limit often means more competitive terms. Loans above that limit are called jumbo loans and follow different rules, since they can't be sold to those agencies.
Conventional Loan
A conventional loan is a mortgage that isn't backed by a government program like FHA or VA. It often needs solid credit, but it can allow down payments as low as 3% and lets you drop mortgage insurance once you build enough equity. It's the most common loan type for many buyers.
D
Discount Points
Discount points are an up-front fee you can pay to permanently lower your interest rate. One point usually costs 1% of your loan amount. Points may be worth it if you keep the loan long enough for the monthly savings to outweigh the cost, but not if you'll move or refinance soon.
Down Payment
A down payment is the part of the purchase price you pay upfront in cash, with the loan covering the rest. It's shown as a percentage, so 5% down on a $400,000 home is $20,000. A bigger down payment lowers your loan amount and can reduce or remove mortgage insurance. Some programs allow as little as zero down.
DTI (Debt-to-Income Ratio)
DTI, or debt-to-income ratio, compares your monthly debt payments to your gross monthly income, shown as a percentage. Lenders use it to judge how much new payment you can handle. There are two versions: front-end counts housing only, and back-end counts all your monthly debts plus the housing payment.
E
Earnest Money
Earnest money is a good-faith deposit you put down when your offer is accepted, showing the seller you're serious. It's usually held in escrow and applied toward your down payment or closing costs at closing. If the deal falls through for a reason your contract protects, you can often get it back.
Escrow
Escrow has two meanings in a home purchase. Before closing, it's a neutral account that holds your earnest money and documents. After closing, an escrow account is where your lender collects part of your payment each month to pay property taxes and insurance for you when they come due.
F
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration. It often allows a lower down payment and more flexible credit guidelines than conventional loans, which helps many first-time and credit-rebuilding buyers. The trade-off is mortgage insurance (MIP), which on many FHA loans can last longer than conventional PMI.
Fixed-Rate Mortgage
A fixed-rate mortgage keeps the same interest rate for the entire loan term, so your principal and interest payment never changes. Your taxes and insurance can still move, but the loan part stays put. It's the most popular choice because it's predictable: the payment you start with is the payment you'll have years from now.
H
Home Equity
Home equity is the part of your home you actually own: its current value minus what you still owe on the mortgage. If your home is worth $400,000 and you owe $300,000, you have $100,000 in equity. It grows as you pay down the loan and as the home's value rises, and you can sometimes borrow against it.
Homeowner's Insurance
Homeowner's insurance covers damage to your home and belongings from things like fire, storms, and theft, plus liability if someone is hurt on your property. Lenders require it because the home is their collateral too. The first year is often paid at closing, and future payments are usually collected monthly through escrow.
L
Lender Credit
A lender credit is money the lender puts toward your closing costs, usually in exchange for a slightly higher interest rate. It lowers the cash you need today, but you may pay more over time through the rate. It's the mirror image of paying points, and whether it's worth it depends on how long you keep the loan.
Lien
A lien is a legal claim against your property for a debt, which has to be paid before the home can be sold with clear title. Your mortgage itself is a lien: it lets the lender be repaid from the sale. Other liens, like unpaid taxes or contractor bills, can also attach to a home and must be cleared.
Loan Estimate
A Loan Estimate is a three-page form your lender must send within three business days of your application. It lays out your estimated interest rate, monthly payment, closing costs, and cash to close in a standard layout, so you can compare offers from different lenders side by side. It's an estimate, not a final bill.
Loan Servicing
Your loan servicer is the company you send your monthly mortgage payment to and who manages your escrow, statements, and questions. It's often not the same company that originated your loan, and your servicer can change after closing. Your loan terms stay exactly the same when servicing transfers; only the payment address changes.
Loan Term
Your loan term is how long you have to pay back the mortgage, written in years. Thirty years and fifteen years are the most common. A longer term means a lower monthly payment but more interest paid over time. A shorter term costs more each month but builds equity faster and saves on total interest.
LTV (Loan-to-Value Ratio)
LTV, or loan-to-value ratio, compares your loan amount to the home's value, shown as a percentage. If you borrow $360,000 on a $400,000 home, your LTV is 90%. A lower LTV means more equity, which can affect your rate, your mortgage insurance, and the programs you may qualify for.
P
PITI (Principal, Interest, Taxes, Insurance)
PITI stands for the four parts of a typical mortgage payment: principal, interest, taxes, and insurance. Principal and interest pay back the loan, while taxes and insurance are often collected in an escrow account and paid for you. Lenders look at your full PITI, not just principal and interest, when they decide what you can afford.
PMI (Private Mortgage Insurance)
PMI, or private mortgage insurance, is a fee that protects the lender, not you, when you put less than 20% down on a conventional loan. It's usually added to your monthly payment. Once you build enough equity, you can often request to have PMI removed, which lowers your payment.
Pre-Approval vs. Pre-Qualification
A pre-qualification is a quick estimate of what you may borrow, based on info you share. A pre-approval goes further: the lender verifies your credit, income, and assets, so it carries more weight with sellers. Think of pre-qualification as a starting point and pre-approval as the stronger, documented version.
Prepaids
Prepaids are upfront costs for things you pay regularly as a homeowner, collected at closing to get you started. They usually include some homeowner's insurance, property taxes, and interest for the days between closing and your first payment. They aren't lender fees, they're your own expenses paid a little early, so don't confuse them with closing costs proper.
Prepayment Penalty
A prepayment penalty is a fee some loans charge if you pay the mortgage off early, whether by selling, refinancing, or paying extra. Most everyday home loans today don't have one, and your Loan Estimate states clearly whether yours does. Always check that box before you sign, since it affects your freedom to refinance.
Principal
Principal is the amount you actually borrow, before any interest. Each mortgage payment splits between principal and interest, and early on, most of it goes to interest. As the years pass, more of each payment chips away at the principal, which is how you slowly build equity in your home.
Property Taxes
Property taxes are what your local government charges based on your home's assessed value, and they fund schools, roads, and services. Lenders often collect them monthly in an escrow account and pay the bill for you when it's due. Rates and amounts vary a lot by state and county, so the same priced home can cost very different amounts.
T
Title Insurance
Title insurance protects against problems with the home's ownership history, like an unknown lien, a past clerical error, or a missed heir. There are two policies: a lender's policy that protects the bank, which is usually required, and an owner's policy that protects you, which is optional but often worth it. You pay once, at closing.
Total Interest Percentage (TIP)
The Total Interest Percentage, or TIP, on your Loan Estimate shows the total interest you'll pay over the full loan term as a percentage of your loan amount. A TIP of 119% means that, if you keep the loan the whole term, you'll pay about $1.19 in interest for every dollar you borrowed. It's a plain way to see long-term cost.
U
Underwriting
Underwriting is the behind-the-scenes review where the lender checks that your income, assets, credit, and the property all support the loan. An underwriter verifies your documents and decides whether the loan meets the program's rules. It's the step that turns a pre-approval into a real, final approval, and it's where conditions get cleared.
USDA Loan
A USDA loan is a mortgage backed by the U.S. Department of Agriculture for buyers in eligible rural and many suburban areas, with no required down payment. It has income limits based on your area and household size, and a guarantee fee instead of traditional mortgage insurance. The home must be in a USDA-eligible location.
V
VA Funding Fee
The VA funding fee is a one-time fee paid to the Department of Veterans Affairs on most VA loans. It helps keep the program running, which is how the VA can back loans with no required down payment and no monthly mortgage insurance. What you pay depends on your down payment and whether it's your first or a later use, and many veterans, including most with a service-connected disability, are exempt.
VA Loan
A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs and made by private lenders for eligible veterans, service members, and some surviving spouses. Its biggest draws are no required down payment and no monthly mortgage insurance. A one-time funding fee usually applies, though some borrowers are exempt.
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