34 terms
A
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on a market index. ARMs typically start with a lower fixed rate for an initial period (e.g., 5 years) before adjusting annually.
Amortization
The process of gradually paying off a loan through regular payments over time. Each payment covers both principal and interest, with early payments weighted heavily toward interest.
Annual Percentage Rate (APR)
The true yearly cost of borrowing, expressed as a percentage. APR includes the interest rate plus other loan costs such as origination fees, making it a better comparison tool than the interest rate alone.
Appraisal
A professional estimate of a property's market value, ordered by the lender and conducted by a licensed appraiser. Lenders use the appraisal to confirm the home is worth the amount being borrowed.
C
Closing Costs
Fees and expenses paid at the close of a real estate transaction, typically ranging from 2%–5% of the loan amount. These include lender fees, title insurance, appraisal, and prepaid expenses like taxes and insurance.
Closing Disclosure
A final document provided 3 business days before closing that details all loan terms, monthly payments, and closing costs. It should closely match the Loan Estimate provided at application.
Conforming Loan
A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits. The FHFA sets the baseline limit each year; for 2026 it is $832,750 in most of the U.S. (higher in designated high-cost areas). Conforming loans typically have lower rates than jumbo loans.
Conventional Loan
A mortgage not backed by a government agency (unlike FHA, VA, or USDA loans). Conventional loans typically require stronger credit and a larger down payment but offer more flexibility.
D
Debt-to-Income Ratio (DTI)
A measure of your monthly debt obligations relative to your gross monthly income. Lenders use two DTI ratios: front-end (housing costs only, ideally below 28%) and back-end (all debts, ideally below 43%).
Discount Points
Upfront fees paid to the lender at closing to reduce your interest rate. One point equals 1% of the loan amount and typically lowers the rate by about 0.25%.
Down Payment
The upfront cash payment you make toward the purchase price of a home. A larger down payment reduces your loan amount, lowers your monthly payment, and can eliminate the need for private mortgage insurance (PMI).
E
Earnest Money
A deposit made by the buyer to demonstrate serious intent to purchase a home. Typically 1%–3% of the purchase price, it is applied toward the down payment or closing costs at settlement.
Equity
The portion of the home's value that you actually own, calculated as the current market value minus the remaining loan balance. Equity grows as you pay down principal and as home values appreciate.
Escrow
A neutral third-party account that holds funds for property taxes and homeowners insurance. Your lender collects a portion monthly, then pays the bills on your behalf when due.
F
FHA Loan
A mortgage insured by the Federal Housing Administration that allows lower credit scores and down payments as low as 3.5%. FHA loans require both upfront and annual mortgage insurance premiums (MIP).
Fixed-Rate Mortgage
A mortgage with an interest rate that remains constant for the entire loan term. Monthly principal and interest payments never change, providing predictable budgeting over the life of the loan.
Foreclosure
The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments. Foreclosure severely damages credit and can result in loss of the home.
G
Good Faith Estimate (GFE)
A former standard document replaced by the Loan Estimate in 2015. It provided an estimate of closing costs. The modern Loan Estimate serves the same purpose with a standardized format across all lenders.
H
Home Equity Line of Credit (HELOC)
A revolving line of credit secured by your home's equity, similar to a credit card. You can draw, repay, and redraw during the draw period, typically 10 years, followed by a repayment period.
Homeowners Insurance
Insurance that covers damage to your home and belongings from events like fire, theft, and storms. Lenders require homeowners insurance as a condition of the mortgage.
I
Interest Rate
The percentage of the loan amount charged annually by the lender for borrowing money. Unlike APR, it does not include other fees. Your interest rate is determined by market conditions, your credit profile, and loan type.
J
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans typically require higher credit scores, larger down payments, and carry higher interest rates.
L
Loan Estimate
A standardized 3-page document provided within 3 business days of application that outlines your loan terms, projected payments, and estimated closing costs. Use it to compare offers from multiple lenders.
Loan-to-Value Ratio (LTV)
The ratio of your loan amount to the appraised value of the home, expressed as a percentage. An LTV above 80% typically requires PMI. Lower LTV means less risk for the lender and may result in a better rate.
M
Mortgage Insurance Premium (MIP)
Insurance required on all FHA loans, paid as an upfront fee (1.75% of the loan) and an annual premium (0.15%–0.75%, depending on loan term, loan amount, and LTV). Unlike conventional PMI, FHA MIP typically lasts the life of the loan if the down payment is below 10%.
O
Origination Fee
A fee charged by the lender for processing your loan application, typically 0.5%–1% of the loan amount. It may appear as a flat fee or as origination points and is negotiable.
P
Pre-Approval
A lender's conditional commitment to lend a specific amount based on a review of your financial documents. Pre-approval is stronger than pre-qualification and shows sellers you are a serious, qualified buyer.
Principal
The original loan amount borrowed, or the remaining balance owed excluding interest. Each mortgage payment reduces the principal balance, building equity over time.
Private Mortgage Insurance (PMI)
Insurance required on conventional loans when the down payment is less than 20%. PMI protects the lender, not you, and costs roughly 0.4%–0.8% of the loan per year for many borrowers (Freddie Mac estimates $30–$70 a month per $100,000 borrowed), and more with lower credit scores or smaller down payments. You can request cancellation at 80% of the original home value, and lenders must cancel it automatically at 78%.
R
Rate Lock
A lender's guarantee that your interest rate will not change for a specified period (typically 30–60 days) while your loan is being processed. Rate locks protect you from rising rates between application and closing.
Refinance
Replacing an existing mortgage with a new one, typically to obtain a lower interest rate, reduce the monthly payment, shorten the loan term, or access home equity through a cash-out refinance.
T
Title Insurance
Insurance that protects against loss from disputes over property ownership, unpaid liens, or title defects. Lenders require a lender's title policy. An owner's title policy is optional but recommended.
U
Underwriting
The process by which a lender evaluates the risk of lending money to a borrower. The underwriter reviews income, assets, credit, and the property appraisal before approving or denying the loan.
V
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 mortgage insurance.