Mortgage Glossary
75+ mortgage and real estate terms explained in plain language to help you navigate the home buying process with confidence.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on market conditions. ARMs typically start with a lower fixed rate for an initial period (such as 5, 7, or 10 years), then adjust annually based on a specified index plus a margin.
Amortization
The process of paying off a loan through regular payments over time. Each payment includes both principal and interest, with early payments going mostly toward interest and later payments applying more to principal.
Annual Percentage Rate (APR)
The total yearly cost of borrowing money, expressed as a percentage. APR includes the interest rate plus other costs like origination fees, points, and mortgage insurance, giving you a more complete picture of loan costs.
Appraisal
A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals to ensure the property is worth at least the loan amount before approving a mortgage.
Appreciation
The increase in a property's value over time due to market conditions, improvements, or other factors. Appreciation builds equity and can result in profit when selling the home.
Assumable Mortgage
A mortgage that can be transferred from the seller to the buyer, allowing the buyer to take over the existing loan terms including the interest rate. This can be advantageous when current rates are higher than the existing loan rate.
Balloon Payment
A large, lump-sum payment due at the end of a loan term after a series of smaller regular payments. Balloon mortgages carry risk because borrowers must pay off or refinance the remaining balance when it comes due.
Basis Points
A unit of measurement equal to 1/100th of a percentage point (0.01%). Used to describe changes in interest rates, where 100 basis points equals 1 percent.
Bridge Loan
A short-term loan used to bridge the gap between buying a new home and selling your current one. Bridge loans provide temporary financing until permanent financing or the sale of an existing property is completed.
Buydown
A financing technique where the seller or buyer pays extra upfront to reduce the mortgage interest rate temporarily or permanently. Common buydowns include 2-1 or 3-2-1 structures that lower rates in the early years.
Cap
A limit on how much the interest rate or monthly payment can increase on an adjustable-rate mortgage. Caps protect borrowers from dramatic payment increases during rate adjustments.
Cash-Out Refinance
A refinancing option where you borrow more than you owe on your current mortgage and receive the difference in cash. Homeowners use cash-out refinancing to access their home equity for major expenses or debt consolidation.
Certificate of Eligibility (COE)
A document issued by the Department of Veterans Affairs that verifies a veteran's eligibility for a VA loan. The COE shows lenders the veteran's entitlement amount and service history.
Clear Title
A property title that is free of liens, disputes, or legal questions regarding ownership. A clear title is required before a property can be sold or mortgaged.
Closing
The final step in a real estate transaction where the property title transfers from seller to buyer. At closing, all documents are signed, funds are exchanged, and the buyer officially becomes the homeowner.
Closing Costs
Fees and expenses paid at the closing of a real estate transaction, typically ranging from 2% to 5% of the loan amount. These include lender fees, title insurance, appraisal, attorney fees, and prepaid items like taxes and insurance.
Closing Disclosure
A five-page document that provides final details about your mortgage loan, including the loan terms, projected monthly payments, and closing costs. Lenders must provide this form at least three business days before closing.
Collateral
An asset pledged as security for a loan. In a mortgage, the property itself serves as collateral, meaning the lender can foreclose and take ownership if the borrower fails to repay the loan.
Commitment Letter
A formal document from a lender stating the terms under which they agree to lend money for a mortgage. The commitment letter specifies the loan amount, interest rate, and conditions that must be met before closing.
Comparative Market Analysis (CMA)
An estimate of a home's value based on recently sold comparable properties in the same area. Real estate agents prepare CMAs to help sellers set listing prices and buyers make competitive offers.
Conforming Loan
A mortgage that meets the standards set by Fannie Mae and Freddie Mac, including loan limits and borrower qualifications. Conforming loans typically offer lower interest rates than non-conforming loans.
Construction Loan
A short-term loan used to finance the building of a home or renovation project. Once construction is complete, the loan typically converts to a permanent mortgage or is paid off with a new loan.
Contingency
A condition that must be met before a real estate contract becomes binding. Common contingencies include home inspection, financing approval, and appraisal contingencies that protect buyers.
Conventional Loan
A mortgage not insured or guaranteed by a government agency like FHA, VA, or USDA. Conventional loans typically require higher credit scores and down payments but offer flexible terms and competitive rates.
Credit Report
A detailed record of an individual's credit history, including payment history, outstanding debts, and credit inquiries. Lenders review credit reports to assess a borrower's creditworthiness and determine loan terms.
Credit Score
A three-digit number (typically 300-850) that represents your creditworthiness based on your credit history. Higher scores indicate lower risk and typically qualify for better mortgage rates and terms.
Debt-to-Income Ratio (DTI)
The percentage of your gross monthly income that goes toward paying debts. Lenders use DTI to determine your ability to manage monthly payments, with most requiring a DTI of 43% or less for mortgage approval.
Deed
A legal document that transfers ownership of real property from one party to another. The deed is recorded with the county to establish the new owner's legal claim to the property.
Deed of Trust
A document used in some states instead of a mortgage that involves three parties: the borrower, lender, and a trustee who holds the title until the loan is paid off.
Default
Failure to meet the legal obligations of a loan, such as missing mortgage payments. Defaulting on a mortgage can lead to foreclosure and significant damage to your credit score.
Depreciation
A decrease in property value due to wear and tear, age, or unfavorable market conditions. Depreciation is the opposite of appreciation and can result in owing more than the home is worth.
Discount Points
Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point typically equals 1% of the loan amount and can lower the rate by about 0.25%.
Down Payment
The upfront cash payment a buyer makes toward the purchase price of a home. Down payments typically range from 3% to 20% of the purchase price, with larger down payments often resulting in better loan terms.
Due-on-Sale Clause
A provision in a mortgage that requires the borrower to pay off the loan in full if the property is sold or transferred. This prevents buyers from assuming loans without lender approval.
Earnest Money
A deposit made by a buyer to demonstrate serious intent to purchase a property. Earnest money is typically 1-3% of the purchase price and is applied toward the down payment or closing costs at closing.
Encumbrance
Any claim, lien, or liability attached to a property that may affect its value or the owner's ability to sell. Examples include mortgages, easements, and unpaid property taxes.
Equity
The difference between a property's market value and the amount owed on the mortgage. Equity builds as you pay down your loan and as the property appreciates in value.
Escrow
A neutral third-party account where funds are held during a real estate transaction. Escrow also refers to the portion of your monthly payment set aside by your lender to pay property taxes and insurance.
Escrow Account
An account maintained by your lender to pay property taxes and homeowners insurance on your behalf. A portion of each monthly mortgage payment is deposited into this account.
Fair Housing Act
A federal law that prohibits discrimination in housing based on race, color, religion, sex, national origin, familial status, or disability. The act applies to mortgage lending, renting, and real estate sales.
Fannie Mae (FNMA)
The Federal National Mortgage Association, a government-sponsored enterprise that buys mortgages from lenders and sells them as mortgage-backed securities. Fannie Mae helps ensure a stable mortgage market and affordable rates.
FHA Loan
A mortgage insured by the Federal Housing Administration, designed for low-to-moderate income borrowers. FHA loans require lower down payments (as low as 3.5%) and more flexible credit requirements than conventional loans.
First Mortgage
The primary loan secured by a property, which takes priority over any subsequent mortgages in case of default. The first mortgage holder is paid first if the property is sold through foreclosure.
Fixed-Rate Mortgage
A mortgage with an interest rate that remains constant throughout the entire loan term. Fixed-rate mortgages offer predictable monthly payments and protection against rising interest rates.
Float
The period before closing when a borrower chooses not to lock in an interest rate, hoping rates will decrease. Floating carries risk because rates could also increase before closing.
Flood Insurance
Insurance coverage for damage caused by flooding, required for properties in designated flood zones. Standard homeowners insurance does not cover flood damage, so separate flood insurance is necessary.
Forbearance
A temporary agreement to reduce or suspend mortgage payments during financial hardship. Forbearance is not loan forgiveness—the missed payments must eventually be repaid through a repayment plan or loan modification.
Foreclosure
The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments. Foreclosure results in the loss of the home and severe damage to the borrower's credit.
Freddie Mac (FHLMC)
The Federal Home Loan Mortgage Corporation, a government-sponsored enterprise similar to Fannie Mae that purchases mortgages from lenders. Freddie Mac helps maintain liquidity and stability in the mortgage market.
Gift Letter
A document stating that money given to a homebuyer for a down payment is a gift, not a loan, and does not need to be repaid. Lenders require gift letters to verify the source of down payment funds.
Good Faith Estimate (GFE)
A document that was previously required from lenders showing estimated closing costs. The GFE has been replaced by the Loan Estimate, which provides similar information in a clearer format.
Gross Monthly Income
Your total income before taxes and deductions. Lenders use gross monthly income to calculate debt-to-income ratios and determine how much you can afford to borrow.
Hazard Insurance
Insurance coverage protecting against damage to a property from fires, storms, and other perils. Hazard insurance is a component of homeowners insurance and is required by mortgage lenders.
HELOC (Home Equity Line of Credit)
A revolving line of credit secured by the equity in your home. A HELOC works like a credit card, allowing you to borrow as needed up to a certain limit during a draw period, typically 10 years.
Home Equity Loan
A second mortgage that allows you to borrow against the equity in your home in a lump sum. Home equity loans have fixed interest rates and set repayment terms, making payments predictable.
Home Inspection
A thorough examination of a property's condition by a licensed inspector before purchase. The inspection evaluates the structure, systems, and components of the home to identify potential issues.
Homeowners Association (HOA)
An organization that manages a community and enforces rules for properties within it. HOA members pay regular dues that cover common area maintenance, amenities, and sometimes exterior maintenance.
Homeowners Insurance
Insurance that protects your home and belongings against damage, theft, and liability. Mortgage lenders require homeowners insurance to protect their investment in the property.
HUD-1 Settlement Statement
A document previously used at closing that itemized all charges and credits in a real estate transaction. The HUD-1 has been replaced by the Closing Disclosure for most residential transactions.
Index
A benchmark interest rate used to calculate the rate on an adjustable-rate mortgage. Common indexes include the Secured Overnight Financing Rate (SOFR) and the Constant Maturity Treasury (CMT).
Interest
The cost of borrowing money, expressed as a percentage of the loan amount. Interest is paid to the lender in addition to repaying the principal balance of the loan.
Interest Rate
The percentage charged by a lender for borrowing money, calculated annually. Your interest rate determines how much you'll pay in interest over the life of your loan.
Interest Rate Lock
An agreement with a lender to guarantee a specific interest rate for a set period while your loan application is processed. Rate locks protect borrowers from rate increases before closing.
Investment Property
Real estate purchased to generate income through rental or to profit from appreciation. Investment properties typically require larger down payments and have higher interest rates than primary residences.
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. In 2024, this limit is $766,550 in most areas. Jumbo loans typically require higher credit scores and larger down payments.
Lender
A financial institution or individual that provides funds for a mortgage in exchange for interest and eventual repayment. Lenders include banks, credit unions, mortgage companies, and online lenders.
Lien
A legal claim against a property as security for a debt. Mortgages create liens, and other liens can result from unpaid taxes, contractor work, or court judgments.
Loan Estimate
A three-page document that lenders must provide within three business days of receiving your mortgage application. It outlines estimated interest rate, monthly payment, closing costs, and loan terms.
Loan Modification
A permanent change to one or more terms of your mortgage to make payments more affordable. Modifications may lower the interest rate, extend the loan term, or reduce the principal balance.
Loan Officer
A professional who helps borrowers through the mortgage application process, from pre-approval to closing. Loan officers evaluate applications, recommend loan products, and guide borrowers through requirements.
Loan Origination
The process of creating a new mortgage loan, including application, processing, underwriting, and closing. Origination involves verifying borrower information and ensuring the loan meets lender guidelines.
Loan Servicer
The company that manages your mortgage after closing, including collecting payments, managing escrow, and handling customer service. Your servicer may be different from your original lender.
Loan-to-Value Ratio (LTV)
The ratio of the mortgage amount to the property's appraised value, expressed as a percentage. A lower LTV indicates more equity and typically results in better loan terms and no PMI requirement.
Lock-In
An agreement to secure a specific interest rate for a set period during the loan process. Lock-ins protect borrowers from rate increases but may require fees or result in missing lower rates.
Margin
The fixed percentage added to an index rate to determine the interest rate on an adjustable-rate mortgage. The margin remains constant while the index fluctuates.
Maturity Date
The date when the final payment on a mortgage is due and the loan is paid in full. For a 30-year fixed mortgage, the maturity date is 30 years from the loan origination date.
MIP (Mortgage Insurance Premium)
Insurance required on FHA loans to protect the lender against default. MIP includes an upfront premium (typically 1.75% of the loan) and annual premiums paid monthly.
Mortgage
A loan used to purchase or refinance real estate, where the property serves as collateral. The borrower makes regular payments of principal and interest until the loan is paid off.
Mortgage Banker
A financial institution that originates, funds, and services mortgage loans. Unlike mortgage brokers, mortgage bankers use their own capital to fund loans.
Mortgage Broker
An intermediary who connects borrowers with lenders but doesn't fund loans directly. Brokers shop multiple lenders to find competitive rates and terms for their clients.
Mortgage Insurance
Insurance that protects the lender if the borrower defaults on the loan. Private mortgage insurance (PMI) is typically required when the down payment is less than 20% on conventional loans.
Mortgage Note
A legal document that contains the promise to repay the mortgage loan, including the amount borrowed, interest rate, payment schedule, and consequences of default.
Negative Amortization
When monthly payments are too small to cover the interest due, causing the unpaid interest to be added to the loan balance. This increases the total amount owed over time.
NMLS (Nationwide Multistate Licensing System)
A database that tracks licensing information for mortgage loan originators across the country. Each licensed loan officer has a unique NMLS ID number that borrowers can use to verify credentials.
No-Closing-Cost Mortgage
A mortgage where the lender covers closing costs in exchange for a higher interest rate. While there are no upfront fees, the higher rate results in paying more over the life of the loan.
Non-Conforming Loan
A mortgage that doesn't meet the standards for purchase by Fannie Mae or Freddie Mac. Non-conforming loans include jumbo loans and loans to borrowers with unique financial situations.
Origination Fee
A fee charged by the lender to process and fund a mortgage loan, typically 0.5% to 1% of the loan amount. Origination fees cover administrative costs and lender profit.
Owner Financing
A transaction where the property seller provides financing to the buyer instead of a traditional lender. Also called seller financing, this arrangement can benefit buyers who don't qualify for conventional loans.
PITI
An acronym for Principal, Interest, Taxes, and Insurance—the four components of a typical monthly mortgage payment. PITI represents your total housing cost and is used to calculate affordability.
PMI (Private Mortgage Insurance)
Insurance required by lenders when a conventional loan down payment is less than 20%. PMI protects the lender against default and can be removed once you reach 20% equity in the home.
Points
Fees paid to the lender at closing to reduce the interest rate, where one point equals 1% of the loan amount. Paying points makes sense when you plan to keep the loan long enough to recoup the cost through lower payments.
Pre-Approval
A lender's conditional commitment to lend a specific amount based on verified financial information. Pre-approval is stronger than pre-qualification and shows sellers you're a serious, qualified buyer.
Pre-Qualification
An initial estimate of how much you might be able to borrow based on self-reported financial information. Pre-qualification is a starting point but doesn't verify income, assets, or credit.
Prepaid Interest
Interest charged for the period between closing and the first mortgage payment. Prepaid interest is collected at closing and depends on the closing date and loan amount.
Prepayment Penalty
A fee charged by some lenders if you pay off your mortgage early. Many loans no longer include prepayment penalties, but it's important to check before signing.
Primary Residence
The home where you live most of the time, as opposed to a second home or investment property. Primary residences typically qualify for the best mortgage rates and terms.
Principal
The original amount borrowed on a mortgage, not including interest. Each monthly payment reduces the principal balance, building equity in the home.
Private Lender
An individual or non-institutional investor who provides mortgage loans outside traditional banking channels. Private lenders may offer more flexible terms but often charge higher interest rates.
Property Tax
An annual tax levied by local governments based on the assessed value of real estate. Property taxes fund schools, roads, and local services, and are typically included in monthly mortgage payments.
Purchase Agreement
A legally binding contract between a buyer and seller outlining the terms of a real estate transaction. The agreement includes the purchase price, contingencies, and closing date.
Qualifying Ratios
Calculations used by lenders to determine a borrower's ability to repay a loan. The two main ratios are the housing expense ratio (front-end) and the total debt-to-income ratio (back-end).
Quitclaim Deed
A legal document that transfers whatever ownership interest the grantor has in a property without guaranteeing clear title. Quitclaim deeds are often used between family members or to clear title issues.
Rate Cap
A limit on how much the interest rate can increase on an adjustable-rate mortgage. Rate caps can apply to individual adjustment periods or the life of the loan.
Rate Lock
An agreement that guarantees a specific interest rate for a set period while your mortgage application is processed. Rate locks typically last 30-60 days and may require a fee to extend.
Real Estate Agent
A licensed professional who helps buyers and sellers navigate real estate transactions. Agents assist with pricing, marketing, negotiations, and coordinating the closing process.
Real Estate Owned (REO)
Property owned by a lender, typically acquired through foreclosure. REO properties are often sold at a discount but may require repairs and are sold as-is.
Refinancing
Replacing an existing mortgage with a new loan, typically to secure a lower interest rate, change loan terms, or access home equity. Refinancing involves closing costs similar to the original purchase.
Reverse Mortgage
A loan available to homeowners 62 and older that converts home equity into cash without monthly payments. The loan is repaid when the borrower sells, moves out, or passes away.
Second Mortgage
An additional loan secured by a property that already has a first mortgage. Second mortgages are subordinate to the first mortgage and typically have higher interest rates.
Seller Concessions
Contributions from the seller to pay some of the buyer's closing costs. Seller concessions make homes more affordable for buyers but have limits based on loan type and down payment.
Short Sale
A sale of a property for less than the amount owed on the mortgage, with lender approval. Short sales help borrowers avoid foreclosure but still impact credit scores.
Subordination
The process of changing the priority ranking of liens on a property. Subordination is typically required when refinancing to ensure the new mortgage becomes the primary lien.
Survey
A professional measurement and mapping of a property's boundaries, structures, and features. Surveys identify easements, encroachments, and ensure accurate property descriptions.
Title
Legal ownership of a property, evidenced by a deed. A clear title means there are no liens or claims against the property that could affect ownership.
Title Company
A company that examines property titles, issues title insurance, and often conducts the closing. Title companies ensure the seller has the legal right to transfer ownership.
Title Insurance
Insurance that protects the lender and/or buyer against losses from title defects, liens, or ownership disputes. Lender's title insurance is required; owner's title insurance is optional but recommended.
Title Search
An examination of public records to verify property ownership and identify any liens, encumbrances, or claims. Title searches are conducted before closing to ensure clear title.
Transfer Tax
A tax imposed by state or local governments when real estate changes ownership. Transfer taxes are typically paid at closing and vary by location.
Truth in Lending Act (TILA)
A federal law requiring lenders to disclose the terms and costs of credit to borrowers. TILA ensures borrowers can compare loan offers and understand their obligations.
Underwriting
The process by which a lender evaluates the risk of lending to a borrower. Underwriters verify income, assets, credit, and property value to determine loan approval.
Underwater Mortgage
A mortgage where the outstanding balance exceeds the property's current market value. Being underwater makes it difficult to sell or refinance without bringing cash to closing.
USDA Loan
A mortgage guaranteed by the U.S. Department of Agriculture for rural and suburban homebuyers. USDA loans offer zero down payment and competitive rates for eligible borrowers in designated areas.
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans, and surviving spouses. VA loans offer no down payment, no PMI, and competitive interest rates.
Variable Rate
An interest rate that changes over time based on market conditions. Variable-rate mortgages, also called adjustable-rate mortgages, typically start with lower rates that adjust periodically.
Verification of Employment (VOE)
A document from an employer confirming a borrower's employment status, income, and tenure. Lenders require VOE to verify income stated on the mortgage application.
Walk-Through
A final inspection of a property by the buyer before closing to verify the home's condition. Walk-throughs ensure repairs have been made and the property is in the agreed-upon condition.
Warranty Deed
A deed that guarantees the seller holds clear title to the property and has the right to sell it. Warranty deeds provide the buyer with the greatest protection against title issues.
Wraparound Mortgage
A secondary financing option where a new mortgage wraps around an existing mortgage. The seller continues making payments on the original loan while receiving payments from the buyer on the wraparound loan.
Yield Spread Premium (YSP)
Compensation paid by a lender to a mortgage broker for delivering a loan with an above-market interest rate. YSP allows borrowers to reduce upfront costs in exchange for a higher rate.
Zoning
Local regulations that control how property can be used, including residential, commercial, or industrial purposes. Zoning laws affect what can be built or modified on a property.