Glossary

Mortgage terms — translated.

44 of the terms you'll encounter, defined in one or two sentences. Searchable and bias-free.

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Adjustable-Rate Mortgage (ARM): A mortgage whose interest rate changes periodically based on a market index. Common forms include 5/1, 7/1, and 10/1 ARMs — the first number is the fixed-rate period in years.
Amortization: The schedule by which loan principal and interest are paid down over time. Early payments are mostly interest; later payments are mostly principal.
Annual Percentage Rate (APR): The total yearly cost of a loan including interest plus fees, expressed as a percentage. Always higher than the note rate; useful for comparing offers apples-to-apples.
Appraisal: An independent professional's opinion of a home's market value, ordered by the lender. Loans cannot exceed appraised value.
Assumable Loan: A mortgage that a buyer can take over from the seller, keeping the existing rate and terms. Common on FHA and VA loans; rare on conventional.

Bridge Loan: Short-term financing to bridge the gap between buying a new home and selling your current one.
Buydown: Paying upfront points to lower your interest rate, either permanently or temporarily (2-1, 3-2-1).

Cash-Out Refinance: Replacing your existing mortgage with a larger one and taking the difference in cash. Useful for consolidating debt or funding home improvements.
Closing Costs: Fees paid at closing — typically 2–5% of the loan amount. Includes lender fees, title insurance, escrow setup, and prepaid taxes/insurance.
Conforming Loan: A conventional loan that meets Fannie Mae and Freddie Mac size limits ($766,550 in most US counties for 2026). Above this is a jumbo loan.
Conventional Loan: A mortgage not backed by a government program (FHA, VA, USDA). Most flexible product, requires 3–20% down and 620+ credit.

Debt-to-Income Ratio (DTI): Your monthly debt payments divided by gross monthly income. Most lenders cap DTI at 43–50% depending on the program.
Discount Points: Optional fee paid at closing to lower the interest rate. One point = 1% of the loan amount, typically reduces rate by ~0.25%.
Down Payment: The portion of the home price you pay in cash up front. Ranges from 0% (VA/USDA) to 20%+ (jumbo).
DSCR (Debt Service Coverage Ratio): On investor loans, the ratio of rental income to mortgage payment. A 1.25 DSCR means the property generates 25% more income than the payment.

Earnest Money: A deposit submitted with your purchase offer to show you're serious. Typically 1–3% of purchase price; applied to closing costs at closing.
Equity: The portion of your home you actually own — current market value minus what you still owe on the mortgage.
Escrow: A neutral third-party account that holds funds for property taxes and insurance, paid out by your lender when due.

FHA Loan: A government-backed loan with 3.5% down minimum and credit score floors of 580. Requires upfront and lifetime mortgage insurance.
Fixed-Rate Mortgage: A mortgage with the same interest rate for the entire term. Most common are 15-year and 30-year fixed loans.
Forbearance: Temporary suspension or reduction of mortgage payments due to hardship. Missed payments are typically owed in full at the end.
Foreclosure: Legal process by which a lender takes ownership of a home when the borrower stops making payments.

Gift Funds: Money from a family member used toward a down payment. Allowed on most loan programs with a documented gift letter.

HELOC: Home Equity Line of Credit. A revolving credit line secured by your home, with a variable rate. Draw what you need during the draw period.
Home Equity Loan (HELOAN): A fixed-rate, lump-sum loan secured by your home equity. Predictable monthly payment for a set term.
Homeowners Insurance: Insurance covering damage to your home and belongings. Required by lenders; typically paid through your escrow account.

Jumbo Loan: A mortgage exceeding the conforming loan limit. Requires stronger credit (typically 700+) and larger down payments (10–20%).

LTV (Loan-to-Value): The loan amount divided by the home's appraised value. 80% LTV or lower typically removes PMI on conventional loans.

Mortgage Insurance Premium (MIP): FHA's version of PMI — required upfront (1.75% of loan) and annually for the life of the loan if down payment is under 10%.

Origination Fee: A lender fee for processing your loan, usually 0.5–1% of the loan amount. Negotiable.

PITI: Principal, Interest, Taxes, and Insurance — the four components of a typical monthly mortgage payment.
PMI (Private Mortgage Insurance): Insurance protecting the lender if you default. Required on conventional loans with less than 20% down. Drops off automatically at 78% LTV.
Pre-Approval: A lender's conditional commitment to lend up to a certain amount based on a hard credit pull and verified documentation. Stronger than pre-qualification.
Pre-Qualification: An initial estimate of how much you might borrow, based on self-reported information. Soft credit pull, no commitment.
Principal: The actual amount you owe on your loan, separate from interest. Each payment reduces principal as you amortize.

Rate Lock: An agreement guaranteeing your interest rate for a set period (30, 45, or 60 days) while you complete underwriting and close.
Refinance: Replacing your existing mortgage with a new one — usually for a lower rate, shorter term, or to access equity (cash-out).
Reverse Mortgage: A loan available to homeowners 62+ that converts equity into cash with no monthly payments. The loan is repaid when the home is sold.

Seller Concessions: Closing costs the seller agrees to pay on the buyer's behalf. Capped by loan program (typically 3–6%).
Short Sale: Selling a home for less than the mortgage balance, with lender approval. Typically used to avoid foreclosure.

Title Insurance: One-time policy protecting against ownership disputes or liens that surface after closing. Owner's policy is optional but recommended.

Underwriting: The lender's review process — verifying income, credit, assets, appraisal, and title before issuing a final loan approval.
USDA Loan: A government-backed loan for rural and suburban properties with 0% down and income limits. Requires the property to be in a USDA-eligible area.

VA Loan: A government-backed loan for veterans and active-duty service members. 0% down, no PMI, competitive rates.