Mortgage Glossary

Amortization

The process of paying off a loan over time through regular monthly payments. Each payment covers both principal and interest, with the interest portion decreasing as the balance is paid down.

Annual Percentage Rate (APR)

The true yearly cost of a loan, expressed as a percentage. APR includes the interest rate plus fees and other costs, giving you a more complete picture of what you'll pay.

Appraisal

A professional assessment of a property's market value, conducted by a licensed appraiser. Lenders require an appraisal to confirm the home is worth the loan amount.

Closing Costs

Fees and expenses paid at the closing of a real estate transaction, typically ranging from 2–5% of the loan amount. These include origination fees, title insurance, appraisal fees, and prepaid items.

Closing Disclosure

A five-page document provided at least three business days before closing that outlines the final terms of your loan, including interest rate, monthly payment, and all closing costs.

Conforming Loan

A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits set annually by the Federal Housing Finance Agency (FHFA).

Conventional Loan

A mortgage not insured or guaranteed by the federal government. Conventional loans typically require a higher credit score and down payment than government-backed loans.

Debt-to-Income Ratio (DTI)

A measure of your monthly debt payments compared to your gross monthly income. Lenders use DTI to assess your ability to manage monthly payments and repay the loan.

Down Payment

The upfront cash payment you make toward the purchase price of a home. The remainder is financed through your mortgage. A larger down payment typically results in better loan terms.

Earnest Money

A deposit made by the buyer to demonstrate serious intent to purchase a home. It is typically applied toward the down payment or closing costs at settlement.

Equity

The portion of your home's value that you own outright — the difference between the home's current market value and the remaining mortgage balance.

Escrow

An account held by a third party that collects funds for property taxes and homeowner's insurance. Your monthly mortgage payment often includes an escrow contribution.

FHA Loan

A mortgage insured by the Federal Housing Administration. FHA loans allow lower down payments (as low as 3.5%) and more flexible credit requirements, making them popular with first-time buyers.

Fixed-Rate Mortgage

A home loan with an interest rate that remains the same for the entire loan term. Your principal and interest payment never changes, providing predictable monthly costs.

Jumbo Loan

A mortgage that exceeds the conforming loan limits set by the FHFA. Jumbo loans typically require stronger credit, larger down payments, and carry slightly higher interest rates.

Loan Estimate

A three-page document provided within three business days of your loan application that outlines the estimated interest rate, monthly payment, and closing costs.

Loan-to-Value Ratio (LTV)

The ratio of your loan amount to the appraised value of the property. A lower LTV generally means better loan terms and may eliminate the need for private mortgage insurance.

Origination Fee

A fee charged by the lender for processing your loan application. It is typically expressed as a percentage of the loan amount and included in your closing costs.

Pre-Approval

A lender's conditional commitment to loan you a specific amount based on a review of your credit, income, and assets. A pre-approval letter strengthens your offer when buying a home.

Pre-Qualification

An informal estimate of how much you may be able to borrow, based on self-reported financial information. Less rigorous than pre-approval and not a commitment to lend.

Principal

The original loan amount borrowed, or the remaining balance owed on the loan, not including interest.

Private Mortgage Insurance (PMI)

Insurance required by lenders when a borrower puts down less than 20% on a conventional loan. PMI protects the lender if you default and can be removed once you reach 20% equity.

Rate Lock

A lender's guarantee that your interest rate will not change for a specified period — typically 30 to 60 days — while your loan is being processed.

Refinancing

The process of replacing your existing mortgage with a new one, typically to obtain a lower interest rate, reduce your monthly payment, shorten your loan term, or access home equity.

Title Insurance

Insurance that protects lenders and buyers against financial loss from defects in a property's title, such as liens, encumbrances, or ownership disputes.

Underwriting

The process by which a lender evaluates the risk of offering you a mortgage. The underwriter reviews your credit, income, assets, and the property to make a final loan decision.

VA Loan

A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. VA loans require no down payment and no PMI.