Mortgage Glossary
55+ home loan terms defined in plain English. Whether you are a first-time buyer or a seasoned homeowner, this glossary helps you navigate mortgage terminology with confidence.
A
Adjustable-Rate Mortgage (ARM)
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, 7, or 10 years), then adjust annually. While initial payments are lower than fixed-rate mortgages, payments can increase significantly when rates rise.
Amortization
The process of gradually paying off a loan through scheduled payments over time. With a fixed-rate mortgage, early payments go mostly toward interest, while later payments go mostly toward principal. An amortization schedule shows the exact breakdown of every payment over the life of the loan.
Annual Percentage Rate (APR)
The total yearly cost of borrowing expressed as a percentage. APR includes the interest rate plus other lender fees and charges, giving you a more complete picture of what a loan truly costs. Always compare APR — not just the interest rate — when shopping for a mortgage.
Appraisal
A professional estimate of a property's market value conducted by a licensed appraiser. Lenders require appraisals to ensure the home is worth the loan amount. If the appraisal comes in lower than the purchase price, it can delay or derail the sale.
B
Balloon Payment
A large lump-sum payment due at the end of a balloon mortgage loan. Balloon loans have lower monthly payments for a fixed period (typically 5–7 years), but the remaining balance comes due all at once. Borrowers must refinance or sell before the balloon payment is due.
Biweekly Payment
A payment schedule where you make half your monthly mortgage payment every two weeks instead of one full payment per month. This results in 26 half-payments (equivalent to 13 full payments per year), which pays down principal faster and can cut years off your loan term.
C
Cash-Out Refinance
A refinancing option where you replace your existing mortgage with a new, larger loan and receive the difference in cash. The cash can be used for home improvements, debt consolidation, or other expenses. Cash-out refinancing increases your loan balance and may change your interest rate.
Closing Costs
Fees and expenses paid when finalizing a real estate transaction, typically 2–5% of the purchase price. Closing costs include loan origination fees, appraisal fees, title insurance, attorney fees, recording fees, and prepaid items like property taxes and homeowners insurance.
Conforming Loan
A mortgage that meets the loan limits and underwriting guidelines set by Fannie Mae and Freddie Mac. For 2026, the conforming loan limit for most areas is $766,550. Conforming loans typically offer lower interest rates and more favorable terms than non-conforming (jumbo) loans.
Conventional Loan
A mortgage not insured or guaranteed by the federal government (unlike FHA, VA, or USDA loans). Conventional loans can be conforming (meeting Fannie/Freddie guidelines) or non-conforming. They typically require a credit score of 620+ and a down payment of at least 3%.
Credit Score
A three-digit number (typically 300–850) that lenders use to evaluate your creditworthiness. Higher scores qualify for better interest rates and loan terms. Mortgage lenders look at FICO scores: 740+ is excellent, 700–739 is good, 660–699 is fair, and below 620 is considered poor.
D
Debt-to-Income Ratio (DTI)
A key metric lenders use to determine how much house you can afford. DTI compares your total monthly debt payments (including the proposed mortgage payment) to your gross monthly income. Most lenders prefer a DTI of 36% or lower, though FHA loans may allow up to 43%.
Down Payment
The portion of the home's purchase price paid upfront in cash, expressed as a percentage. Common down payment amounts: 3% for conventional loans, 3.5% for FHA loans, 0% for VA and USDA loans. A down payment of 20% or more eliminates the need for private mortgage insurance (PMI).
E
Earnest Money
A good-faith deposit made by the buyer to show serious intent to purchase the home. Earnest money is typically 1–3% of the purchase price and is held in escrow. If the sale closes, the deposit is applied to the down payment or closing costs. If the buyer backs out without a valid reason, the seller may keep the deposit.
Equity
The difference between your home's current market value and the remaining balance on your mortgage. Equity increases as you make mortgage payments and as your home appreciates in value. You can tap equity through a home equity loan, HELOC, or cash-out refinance.
Escrow
A neutral third-party account where funds are held until certain conditions are met. In mortgages, escrow serves two purposes: (1) holding earnest money during the purchase, and (2) collecting monthly payments for property taxes and homeowners insurance, then paying those bills when due.
F
FHA Loan
A mortgage insured by the Federal Housing Administration (FHA) that allows lower credit scores (580+) and smaller down payments (3.5%). FHA loans are popular with first-time home buyers but require both an upfront mortgage insurance premium (1.75% of loan amount) and annual MIP (0.55%).
Fixed-Rate Mortgage
A mortgage with an interest rate that remains the same for the entire loan term. Fixed-rate mortgages offer predictable monthly payments and protection from rising interest rates. The most common fixed-rate terms are 15-year and 30-year mortgages.
Flood Insurance
A separate insurance policy required by lenders for homes located in designated flood zones. Flood insurance is not covered by standard homeowners insurance. The National Flood Insurance Program (NFIP) provides coverage, with annual premiums averaging $700–$1,000.
Foreclosure
The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments. Foreclosure typically begins after 90–180 days of missed payments and can remain on your credit report for 7 years. Avoiding foreclosure through loan modification, short sale, or deed-in-lieu is strongly recommended.
G
Gift Letter
A formal document stating that money given to a home buyer for their down payment or closing costs is a genuine gift — not a loan that must be repaid. Gift letters must include the donor's name, relationship to the buyer, the exact amount, and confirmation that no repayment is expected.
H
HOA Fees (Homeowners Association Fees)
Monthly or annual fees paid by homeowners in planned communities, condos, or subdivisions with shared amenities. HOA fees cover maintenance of common areas, landscaping, amenities (pools, gyms), and sometimes utilities. Fees range from $100 to $1,000+ per month and are included in your housing costs.
Home Appraisal
See Appraisal. A professional assessment of a home's market value required by lenders before approving a mortgage. The appraisal protects both the lender and buyer by confirming the property is worth the loan amount.
Home Inspection
A thorough examination of a home's physical structure and systems (roof, foundation, HVAC, plumbing, electrical) by a licensed inspector. Unlike an appraisal (which determines value), an inspection identifies defects and safety issues. Buyers can negotiate repairs or walk away based on inspection findings.
Homeowners Insurance
An insurance policy that protects your home and belongings against damage from fire, theft, storms, and other covered perils. Lenders require homeowners insurance (often called "hazard insurance") for the duration of the mortgage. Annual premiums average $1,200–$2,400 depending on location and coverage.
I
Interest Rate
The percentage a lender charges for borrowing money, expressed as an annual rate. The interest rate directly affects your monthly payment: higher rates mean higher payments. Mortgage rates are influenced by the Federal Reserve, inflation, the bond market, and your personal credit profile.
J
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac ($766,550 in most areas for 2026). Jumbo loans have stricter requirements (higher credit scores, larger down payments) and typically carry slightly higher interest rates than conforming loans.
L
Loan Estimate
A standardized three-page form lenders must provide within three business days of receiving your mortgage application. The Loan Estimate details the loan terms, projected monthly payment, interest rate, closing costs, and other key information, making it easy to compare offers from different lenders.
Loan-to-Value (LTV) Ratio
A percentage calculated by dividing the loan amount by the appraised property value. For example, an $180,000 loan on a $200,000 home equals a 90% LTV. Lower LTV ratios mean lower risk for lenders and generally result in better rates. LTV above 80% requires PMI on conventional loans.
M
Maturity Date
The date on which the final mortgage payment is due and the loan is fully paid off. For a 30-year mortgage originated in January 2026, the maturity date would be January 2056. The maturity date is fixed regardless of extra payments, though paying extra moves the effective payoff date earlier.
MIP (Mortgage Insurance Premium)
Insurance required on FHA loans, consisting of an upfront premium (1.75% of the loan amount) paid at closing and an annual premium (0.55%) paid monthly. Unlike conventional PMI, FHA MIP typically lasts for the life of the loan unless you put down 10% or more (then MIP drops after 11 years).
Mortgage Broker
A financial professional who acts as an intermediary between home buyers and multiple lenders. Mortgage brokers compare products from different banks and credit unions to find the best loan for your situation. They earn a commission (typically 1–2% of the loan amount) paid by the lender or borrower.
Mortgage Points (Discount Points)
Prepaid interest that lowers your mortgage rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%. Paying points upfront can save significant interest over the long term, but takes several years to break even. Best for buyers planning to stay in the home for many years.
N
NMLS Number (Nationwide Multistate Licensing System)
A unique identification number assigned to mortgage loan originators and companies. You can verify a loan officer's license, employment history, and any disciplinary actions by searching their NMLS number at nmlsconsumeraccess.org. Always verify your lender's NMLS credentials.
Note Rate
The actual interest rate specified in your promissory note — the legal document you sign agreeing to repay the loan. The note rate is different from APR, which includes fees. Your monthly payment is calculated based on the note rate and loan amount.
O
Origination Fee
A fee charged by the lender for processing and underwriting your mortgage application, typically 0.5–1% of the loan amount. This fee covers the lender's administrative costs: reviewing your application, verifying documents, and preparing the loan. Origination fees are included in the APR calculation.
P
PITI (Principal, Interest, Taxes, Insurance)
The four components of your full monthly housing payment. Principal reduces the loan balance, interest is the cost of borrowing, taxes are property taxes paid to the local government, and insurance covers homeowners insurance. PITI is the true measure of your monthly housing cost.
PMI (Private Mortgage Insurance)
Insurance required on conventional loans when the down payment is less than 20%. PMI protects the lender (not you) if you default. Costs range from 0.5% to 1.5% of the loan amount annually ($50–$300/month). PMI can be cancelled once you reach 20% equity.
Pre-Approval
A lender's conditional commitment to lend you a specific amount, issued after reviewing your credit, income, assets, and debts. A pre-approval letter (not just pre-qualification) shows sellers you're a serious, qualified buyer and carries real weight in competitive markets.
Pre-Qualification
An informal estimate of how much you might be able to borrow, based on self-reported information. Pre-qualification is not a commitment to lend — the lender has not verified your income, assets, or credit. It's a helpful first step but carries far less weight than a full pre-approval.
Prepayment Penalty
A fee charged by some lenders if you pay off your mortgage early (within the first 3–5 years). Most conventional loans, FHA loans, and VA loans do not have prepayment penalties. Always check your loan documents before making extra payments or refinancing.
Principal
The original amount of money borrowed, excluding interest and fees. Each mortgage payment reduces the principal balance. Paying extra toward principal builds equity faster and reduces total interest paid over the life of the loan.
Principal Balance
The remaining amount owed on a mortgage at any given time. As you make payments, the principal balance decreases. The current principal balance is used to calculate future interest charges.
Property Tax
A tax assessed by local governments based on the value of your property. Property tax rates vary by location (from 0.3% in Hawaii to 2.5% in New Jersey). Lenders collect property taxes through your escrow account and pay them on your behalf when due.
Proration
The division of property-related expenses (taxes, HOA fees, utility bills) between buyer and seller at closing, based on the exact closing date. Proration ensures each party pays only for the portion of time they owned or occupied the property.
R
Rate Lock
A lender's guarantee to hold a specific interest rate and points for a set period (typically 30–60 days). Rate locks protect you from rate increases while your loan is being processed. Some lenders charge a fee for locking rates, and locking for longer periods may come with a slightly higher rate.
Refinance
Replacing your existing mortgage with a new loan, typically to secure a lower interest rate, change loan terms, or access equity. Common refinancing types include rate-and-term refinance (better rate/terms), cash-out refinance (access equity), and streamline refinance (reduced documentation for FHA/VA loans).
T
Title Insurance
An insurance policy that protects home buyers and lenders against financial loss from defects in the property title (e.g., unknown liens, undisclosed heirs, forgery). Lender's title insurance is required; owner's title insurance is optional but recommended for peace of mind.
Truth in Lending Act (TILA)
A federal law requiring lenders to disclose the true cost of borrowing in a clear, standardized format. TILA mandates the Loan Estimate and Closing Disclosure forms, ensures borrowers see the APR, finance charges, and payment schedule before committing to a loan.
U
Underwriting
The process by which a lender evaluates your financial profile to decide whether to approve your mortgage application. Underwriters review your credit, income, assets, debts, and the property appraisal. Automated underwriting systems (DU, LP) speed the process, while manual underwriting may be needed for complex cases.
USDA Loan
A mortgage guaranteed by the U.S. Department of Agriculture for eligible rural and suburban home buyers. USDA loans offer 0% down payment and competitive interest rates. Eligibility depends on location and income limits. USDA loans require an upfront guarantee fee (1%) and annual fee (0.35%).
V
VA Loan
A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible military service members, veterans, and surviving spouses. VA loans offer 0% down payment, no PMI, competitive rates, and flexible credit requirements. A VA funding fee (2.15–3.3%) applies unless exempt due to service-connected disability.
1–5
15-Year Mortgage
A fixed-rate mortgage paid off over 15 years instead of 30. Monthly payments are about 40% higher than a 30-year mortgage, but the loan is paid off twice as fast with significantly less total interest. Ideal for borrowers with stable income who want to build equity quickly and own their home debt-free sooner.
30-Year Mortgage
The most common mortgage term, offering the lowest monthly payments by spreading repayment over 30 years. While payments are manageable, you'll pay substantially more total interest compared to shorter terms. A 30-year fixed mortgage is the best choice for most first-time home buyers who want affordable monthly payments.
5/1 ARM
A type of adjustable-rate mortgage with a fixed interest rate for the first 5 years, after which the rate adjusts annually (the "1" in 5/1). The 5/1 ARM typically starts with a lower rate than fixed mortgages, making it attractive for buyers who plan to sell or refinance within 5 years.