Mortgage Glossary
Clear definitions for 50+ essential mortgage terms — from adjustable-rate to zoning. Use Ctrl+F to find any term quickly.
A
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically after an initial fixed period. An ARM is described by two numbers (e.g., 5/1): the first is the fixed period in years; the second is how often the rate adjusts afterward. The rate is tied to a market index (now SOFR) plus a fixed margin. Rate caps limit how much the rate can change at each adjustment and over the loan's life. See: ARM Calculator
Amortization
The process of gradually paying off a loan through equal regular payments that cover both interest and principal. In early payments, most of the amount goes toward interest; over time, more goes to principal. A fully amortizing loan reaches a $0 balance on the final payment. See: Amortization Calculator | Guide
Annual Percentage Rate (APR)
The true annual cost of a loan, expressed as a percentage. Unlike the interest rate, APR includes lender fees (origination points, underwriting fees) — making it the best single number for comparing offers from different lenders. A loan with a 6.875% rate and $3,000 in fees will have an APR higher than 6.875%.
Appraisal
An independent professional assessment of a property's market value, ordered and paid for by the buyer (usually $400–$700). Lenders require an appraisal to ensure the home's value supports the loan amount. If the home appraises below the purchase price, the lender will not fund the full loan — triggering renegotiation or the appraisal contingency.
Assumable Mortgage
A mortgage that a new buyer can take over from the seller, keeping the original rate, term, and balance. FHA, VA, and USDA loans are generally assumable; conventional loans typically are not. In a high-rate environment, assuming a low-rate loan is a valuable option. The buyer must qualify with the lender.
B
Balloon Mortgage
A loan with regular payments for a fixed term (often 5 or 7 years), after which the entire remaining balance is due in a lump sum ("balloon payment"). Balloon mortgages are rare for primary residences today but occasionally appear in commercial real estate. Borrowers typically refinance before the balloon is due.
Bridge Loan
A short-term loan (usually 6–12 months) used to "bridge" the gap when a buyer needs to purchase a new home before selling their current one. Bridge loans are typically expensive (higher rates and fees) and secured by the existing home's equity. They are paid off when the old home sells.
C
Cash-Out Refinance
A refinance where the new loan is larger than the existing balance, and the borrower receives the difference in cash. Most lenders limit cash-out to 80% LTV. Rates are typically 0.25–0.75% higher than rate-and-term refinances. Common uses: home improvements, debt consolidation, or investment. See: Refinance Calculator
Closing
The final step of a real estate transaction where documents are signed, funds are transferred, and ownership is officially conveyed. Buyers sign the mortgage note, deed of trust, and many other documents. The lender funds the loan. The title company records the deed. The buyer receives keys.
Closing Costs
Fees and prepaid expenses paid at closing. Buyers typically pay 2–5% of the loan amount; sellers typically pay 5–9% of the sale price. Buyer costs include lender fees, appraisal, title insurance, escrow fees, and prepaids. See: Closing Costs Calculator | Guide
Closing Disclosure (CD)
A federally required document provided at least 3 business days before closing that shows the final, confirmed loan terms and closing costs. Compare it carefully to the Loan Estimate — significant discrepancies should be explained before you sign.
Conforming Loan
A mortgage that meets Fannie Mae and Freddie Mac guidelines, including loan limit caps ($806,500 in most US areas for 2026). Conforming loans can be sold to the GSEs, which creates liquidity and results in lower rates for borrowers. Loans above these limits are jumbo loans.
Contingency
A condition written into a purchase offer that must be satisfied for the contract to proceed. Common contingencies: financing (deal dies if loan is not approved), inspection (allows negotiation after inspection), and appraisal (protects buyer if home appraises below purchase price). Removing contingencies strengthens offers but increases buyer risk.
Conventional Loan
A mortgage not backed by a federal government agency. Conventional loans follow Fannie Mae/Freddie Mac guidelines and typically require a 620+ credit score and 3–20% down. They offer more flexibility than government loans (investment properties, second homes) but stricter credit requirements. See: Mortgage Calculator
D
Debt-to-Income Ratio (DTI)
Total monthly debt payments ÷ gross monthly income, expressed as a percentage. Lenders use DTI to assess repayment ability. The "front-end" DTI includes only housing costs; the "back-end" DTI includes all monthly debts. Conventional loans cap DTI at 43–50%; FHA allows up to 57% in some cases.
Default
Failure to meet the legal obligations of a loan — most commonly, missing mortgage payments. After a borrower defaults, the lender can initiate foreclosure proceedings. Most loan agreements allow a short grace period (15 days is common) before the payment is considered late, and foreclosure typically begins after 90–120 days of non-payment.
Deed
The legal document that transfers ownership of real property from seller to buyer. The deed is recorded with the county government after closing, creating a public record of ownership. Common deed types: warranty deed (seller guarantees clear title), quitclaim deed (no warranty — used in certain transfers), and grant deed.
Deed of Trust
In most US states, the document that gives the lender a lien on the property as security for the mortgage. Similar in function to a mortgage, but involves three parties: borrower, lender, and a trustee. If the borrower defaults, the trustee can sell the property without court involvement (non-judicial foreclosure), which is faster than states that use mortgages.
Down Payment
The portion of the purchase price paid in cash by the buyer at closing (not financed). The down payment equals the purchase price minus the loan amount. Minimum down payments: 3.5% FHA, 3% certain conventional programs, 5% standard conventional, 0% VA and USDA. Down payments below 20% on conventional loans require PMI. See: Down Payment Calculator
E
Earnest Money
A good-faith deposit (typically 1–3% of the purchase price) submitted with the purchase offer. Held in escrow, it shows the seller the buyer is serious. If the deal closes, earnest money applies to the down payment. If the buyer backs out within a contingency, the money is returned. If the buyer backs out without a valid contingency, the seller typically keeps it.
Equity
The difference between the home's current market value and the outstanding mortgage balance. Equity = Value − Amount Owed. You build equity through appreciation (the home value rising) and by paying down your loan balance. Equity is accessed through cash-out refinancing, a HELOC, or a home equity loan. See: Home Equity Calculator
Escrow
Two common uses: (1) During a transaction, escrow is a neutral account held by a third party where earnest money and closing funds are held until all conditions are met and closing occurs. (2) After closing, your mortgage servicer maintains an escrow account to collect monthly deposits for property taxes and homeowner's insurance, paying those bills on your behalf when due.
F
FHA Loan
A mortgage insured by the Federal Housing Administration. Accepts credit scores as low as 580 (3.5% down) or 500 (10% down). Requires mortgage insurance premium (MIP) — 1.75% upfront plus annual premiums. MIP lasts the life of the loan for most FHA loans. Used primarily by first-time buyers or those with lower credit scores. See: FHA Calculator | FHA vs Conventional Guide
Fixed-Rate Mortgage
A mortgage where the interest rate remains constant for the entire loan term. Your principal and interest payment never changes, providing complete payment predictability. The most common terms are 15-year and 30-year. Higher initial rates than ARMs, but no risk of future rate increases. See: Mortgage Calculator
Foreclosure
The legal process by which a lender takes possession of a property after the borrower defaults on the mortgage. After foreclosure, the lender sells the property to recover the outstanding loan balance. Foreclosure severely damages credit scores and can result in the lender pursuing a deficiency judgment for any remaining balance after the sale.
G
Good Faith Estimate (GFE)
Predecessor to the Loan Estimate — used before the TRID rules took effect in 2015. If someone uses this term today in a mortgage context, they likely mean the Loan Estimate, which replaced the GFE for residential mortgages.
GSE (Government-Sponsored Enterprise)
Fannie Mae (FNMA) and Freddie Mac (FHLMC) — private companies with an implicit government backing that buy conforming mortgages from lenders, package them into mortgage-backed securities, and sell them to investors. This secondary market function keeps capital flowing into mortgage lending and is why most Americans can get 30-year fixed-rate mortgages at reasonable rates.
H
HELOC (Home Equity Line of Credit)
A revolving line of credit secured by your home's equity. Works like a credit card — you draw and repay funds as needed up to a set limit. The draw period (typically 10 years) allows access to funds; the repayment period (typically 20 years) requires full repayment. HELOCs typically have variable rates. See: HELOC Calculator
Home Equity Loan
A lump-sum loan secured by your home's equity. Fixed rate, fixed term, fixed monthly payment — like a second mortgage. Disbursed all at once (unlike a HELOC). Used for large, one-time expenses like home renovations or debt consolidation. See: Home Equity Loan Calculator
Homeowner's Insurance
Insurance that covers your home and personal property against damage (fire, storm, theft, etc.) and provides liability coverage if someone is injured on your property. Required by all mortgage lenders as a condition of the loan. Typically includes dwelling coverage, personal property coverage, loss of use, and liability. Flood and earthquake coverage are almost always separate policies.
I
Index Rate
The published benchmark interest rate that serves as the basis for ARM rate adjustments. Currently SOFR (Secured Overnight Financing Rate), which replaced LIBOR after 2023. Your ARM rate = Index Rate + Margin. The index changes with market conditions; the margin is fixed at origination.
Interest Rate
The annual cost of borrowing, expressed as a percentage of the outstanding loan balance. Distinguished from APR in that it does not include lender fees. Your monthly interest charge = Balance × (Rate ÷ 12). On a fixed-rate mortgage, the rate never changes; on an ARM, it adjusts periodically.
J
Jumbo Loan
A mortgage that exceeds conforming loan limits ($806,500 in most US areas for 2026). Jumbo loans cannot be sold to Fannie/Freddie and are kept on lender balance sheets. They typically require larger down payments (10–20%), excellent credit (700+), and significant financial reserves. Rates may be slightly higher than conforming. See: Jumbo Loan Calculator
L
Lien
A legal claim against a property as security for a debt. Your mortgage is a lien on your home. Other types: mechanic's liens (unpaid contractors), tax liens (unpaid property taxes), and judgment liens (court-ordered claims). Liens must be paid off or cleared before a property can be sold with a clean title.
Loan Estimate (LE)
A standardized 3-page document from lenders that shows projected loan terms, monthly payment, and estimated closing costs — required within 3 business days of application. Use it to compare multiple lender offers side by side. Some fees shown are firm; others are estimates. The final numbers are confirmed in the Closing Disclosure.
Loan-to-Value (LTV)
The loan amount divided by the home's appraised value, expressed as a percentage. LTV = Loan Amount ÷ Appraised Value × 100. 90% LTV means you borrowed 90% of the home's value. Key thresholds: above 80% triggers PMI on conventional loans; above 97% requires special programs. Lower LTV = better rates and terms.
M
Margin
On an ARM, the fixed percentage added to the index rate to calculate your interest rate. Set at origination and never changes. If your margin is 2.75% and SOFR is 4.50%, your rate is 7.25% (subject to rate caps). The margin is disclosed on page 1 of your Loan Estimate and the ARM disclosure document.
Mortgage Insurance Premium (MIP)
Mortgage insurance on FHA loans. Consists of an upfront premium (1.75% of the loan, paid at closing or rolled in) and an annual premium (0.15–0.75%, paid monthly). For most FHA loans with less than 10% down, MIP lasts the life of the loan. Cannot be canceled without refinancing out of the FHA loan.
O
Origination Fee
The lender's fee for creating (originating) your mortgage loan. Expressed as a percentage of the loan amount (0–1% is typical) or a flat dollar amount. This is the lender's primary profit center — it is fully negotiable and varies significantly between lenders. Always compare origination fees alongside the interest rate when shopping lenders.
P
PITI
Acronym for the four components of a typical monthly mortgage payment: Principal, Interest, Taxes (property taxes collected in escrow), and Insurance (homeowner's insurance, plus PMI if applicable). Lenders calculate your DTI using the full PITI payment, not just principal and interest.
Points
Prepaid interest paid at closing to reduce the mortgage interest rate. One point = 1% of the loan amount. One point typically reduces the rate by approximately 0.25% (varies by lender and market). Buying points makes sense if you plan to stay long enough to recoup the upfront cost through lower monthly payments.
Pre-Approval
A formal process where a lender verifies your income, assets, employment, and credit, and issues a conditional commitment to lend up to a specified amount. Requires documentation and a hard credit inquiry. Results in a pre-approval letter that sellers take seriously. Valid for 60–90 days. Stronger than pre-qualification.
Pre-Qualification
An informal estimate of how much you might be able to borrow, based on self-reported income and debt information. No credit check, no documentation. Provides a rough idea for planning but carries no weight with sellers. Always get pre-approved before making offers.
Principal
The amount of money you borrowed (and still owe), not counting interest. Your monthly payment is split between principal (which reduces your balance) and interest (which is the cost of borrowing). In early mortgage payments, the principal portion is small; it grows with each payment as the balance falls.
Private Mortgage Insurance (PMI)
Insurance required on conventional loans with less than 20% down. Protects the lender — not the borrower — if the borrower defaults. PMI costs 0.5–1.5% of the loan annually. Automatically canceled at 78% LTV; can be requested at 80% LTV. See: PMI Calculator | PMI Guide
Property Tax
Annual tax assessed by local governments on real property, based on the assessed value. Rates vary enormously by location — from under 0.3% in some southern states to over 2% in New Jersey and Illinois. Collected monthly via your escrow account (1/12 of annual taxes per payment). Use the Property Tax Calculator to estimate local rates.
R
Rate Lock
An agreement with your lender to hold a specific interest rate for a set period (typically 30–60 days) while your loan is processed. Protects you from rate increases during the closing process. If rates fall after your lock, you may not automatically get the lower rate (though some lenders offer "float down" provisions). Lock expiration requires an extension fee.
Refinancing
Replacing an existing mortgage with a new one. Common reasons: lower rate, shorter term, cash-out, switching from ARM to fixed, or removing PMI. Involves new closing costs (2–5% of loan amount). Calculate the break-even point: months to recoup closing costs = Closing Costs ÷ Monthly Savings. See: Refinance Calculator | Refinancing Guide
S
Second Mortgage
An additional loan taken against a home that already has a first mortgage. In foreclosure, the first mortgage lender is paid first — making second mortgages riskier for lenders and therefore carrying higher rates. Types: home equity loans (fixed) and HELOCs (variable). Also used in piggyback loan structures (80/10/10) to avoid PMI.
SOFR (Secured Overnight Financing Rate)
The benchmark interest rate that replaced LIBOR as the index for most US adjustable-rate mortgages. Published daily by the Federal Reserve Bank of New York. SOFR is based on overnight repurchase agreement transactions in the Treasury market — making it a highly transparent and market-driven benchmark.
T
Title
Legal ownership of real property. Holding title means you are the legal owner. "Clear title" means the property has no liens, disputes, or encumbrances that would prevent a clean transfer of ownership. A title search (part of every mortgage transaction) reviews public records to confirm clear title.
Title Insurance
Insurance that protects against claims arising from defects in the property's title history — forged deeds, undisclosed heirs, recording errors, unpaid liens. Two types: lender's policy (required; protects the lender) and owner's policy (optional but recommended; protects the buyer). Unlike other insurance, title insurance is a one-time premium paid at closing.
Title Search
A review of public records to trace the history of ownership and uncover any liens, encumbrances, or defects on a property's title before closing. Performed by a title company or attorney. Essential to ensure the seller has the legal right to transfer clear ownership.
U
Underwriting
The lender's process of evaluating a loan application to determine risk and approve or deny the loan. The underwriter reviews income, assets, credit, employment, the appraisal, and the property itself. They may issue the loan with conditions ("suspended" — needs more docs) or deny it. Most underwriting now is automated, with complex files going to manual underwriters.
USDA Loan
A mortgage guaranteed by the US Department of Agriculture for homes in eligible rural and suburban areas. No down payment required. Borrowers must meet income limits (typically below 115% of area median income). Has a guarantee fee (1% upfront, 0.35% annual) but no traditional PMI. See: USDA Calculator
V
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses. No down payment required, no PMI ever, competitive rates, and no loan limits for most eligible borrowers. A one-time funding fee (1.25–3.3%) applies at closing (waived for disabled veterans). One of the most valuable benefits available to service members. See: VA Loan Calculator
Z
Zoning
Local government regulations that specify how land can be used — residential, commercial, industrial, agricultural, or mixed use — and what can be built on it. Zoning affects property values and what you can legally do with a property (build an accessory dwelling unit, run a home business, etc.). Zoning variances can be requested but are not guaranteed.