Mortgage Glossary A-Z

45 essential mortgage terms explained in plain English. Bookmark this page and reference it anytime you encounter unfamiliar terminology during the home-buying process.

A B C D E F H I J L M N O P R S T U V

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 (3, 5, 7, or 10 years) before adjusting annually.
Amortization: The process of paying off a loan through regular monthly payments over a set period. Early payments are mostly interest; later payments are mostly principal. An amortization schedule shows the breakdown of each payment.
Annual Percentage Rate (APR): The total yearly cost of borrowing money, expressed as a percentage. APR includes the interest rate plus lender fees, mortgage insurance, and certain closing costs, giving a more complete picture of loan cost than the interest rate alone.
Appraisal: A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals to ensure the property is worth the loan amount.

B

Balloon Mortgage: A mortgage with a large lump-sum payment due at the end of the loan term. Monthly payments may be calculated on a longer amortization schedule, but the full remaining balance becomes due at a specified date.
Basis Point: One one-hundredth of a percentage point (0.01%). Used in finance to describe small changes in interest rates. A rate increase from 6.50% to 6.75% is a change of 25 basis points.

C

Closing: The final step in a real estate transaction where ownership transfers from seller to buyer. At closing, you sign the mortgage documents, pay closing costs, and receive the keys to the property.
Closing Costs: Fees and expenses paid at closing, above and beyond the down payment. Typically 2% to 5% of the loan amount, including lender fees, title insurance, appraisal, escrow deposits, and prepaid items.
Closing Disclosure (CD): A standardized five-page document that provides final details about your mortgage loan, including terms, projected payments, and closing costs. By law, you must receive it at least three business days before closing.
Conforming Loan: A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan amounts. For 2025, the conforming loan limit is $806,500 in most areas.
Conventional Loan: A mortgage not insured or guaranteed by a government agency (FHA, VA, or USDA). Conventional loans are originated and funded by private lenders and are the most common loan type.
Credit Score: A numerical score (300-850) that represents your creditworthiness, based on your payment history, debts, length of credit history, credit mix, and new inquiries. Most mortgage lenders use FICO scores.

D

Debt-to-Income Ratio (DTI): The percentage of your gross monthly income that goes toward monthly debt payments. Front-end DTI includes housing costs only; back-end DTI includes all debts. Most lenders prefer back-end DTI below 43%.
Deed of Trust: A legal document that gives the lender a security interest in the property. Similar to a mortgage, it allows the lender to foreclose if the borrower defaults. Used in many states instead of a traditional mortgage document.
Discount Points: Prepaid interest paid at closing to reduce your mortgage interest rate. Each point costs 1% of the loan amount and typically reduces the rate by about 0.25%.
Down Payment: The upfront cash you contribute toward the purchase price of a home. Requirements vary by loan type: conventional (3-20%), FHA (3.5%), VA and USDA (0%).
DSCR (Debt Service Coverage Ratio): A metric used primarily for investment property loans that compares the property's net operating income to its debt payments. A DSCR above 1.0 means the property generates enough income to cover the mortgage.

E

Earnest Money: A good-faith deposit made by the buyer when submitting an offer on a home, typically 1% to 3% of the purchase price. It is held in escrow and applied to your closing costs or down payment at closing.
Equity: The difference between your home's current market value and the amount you owe on your mortgage. Equity increases as you pay down the loan and as the property appreciates in value.
Escrow: An account managed by your mortgage servicer that holds funds for property taxes and homeowners insurance. A portion of each monthly payment goes into escrow, and the servicer pays these bills when due.

F

FHA Loan: A mortgage insured by the Federal Housing Administration, designed for borrowers with lower credit scores or smaller down payments. FHA loans require an upfront and annual mortgage insurance premium (MIP).
Fixed-Rate Mortgage: A mortgage with an interest rate that remains the same for the entire loan term. Monthly principal and interest payments never change, providing payment predictability.
Flood Insurance: Insurance required for properties in FEMA-designated flood zones. Standard homeowners insurance does not cover flood damage. Premiums vary based on flood risk and property characteristics.

H

HELOC (Home Equity Line of Credit): A revolving line of credit secured by your home equity. Functions like a credit card with a draw period (typically 10 years) and a repayment period (typically 20 years).
HOA (Homeowners Association): An organization that manages a residential community, condominium, or planned development. HOA fees cover shared amenities, maintenance, and insurance for common areas.

I

Interest Rate: The percentage charged by the lender for borrowing money, expressed as an annual rate. It determines the cost of the loan and directly affects your monthly payment.

J

Jumbo Loan: A mortgage that exceeds the conforming loan limit ($806,500 in most areas for 2025). Jumbo loans typically require higher credit scores, larger down payments, and have slightly higher interest rates.

L

Loan Estimate (LE): A standardized three-page document that outlines your loan terms, projected payments, and estimated closing costs. Lenders must provide it within three business days of receiving your application.
Loan-to-Value Ratio (LTV): The ratio of your mortgage amount to the appraised value of the property. A $320,000 loan on a $400,000 home is 80% LTV. LTV affects PMI requirements, interest rates, and loan eligibility.

M

Mortgage Insurance: Insurance that protects the lender if you default. Required on conventional loans with less than 20% down (PMI) and on all FHA loans (MIP). PMI can be cancelled; FHA MIP usually cannot.

N

NMLS (Nationwide Multistate Licensing System): A licensing and registration system for mortgage loan originators and companies. Every licensed loan officer and mortgage company has a unique NMLS number.

O

Origination Fee: A fee charged by the lender for processing and underwriting your mortgage application. Typically 0.5% to 1% of the loan amount.

P

PITI: An acronym for the four components of a typical monthly mortgage payment: Principal, Interest, Taxes, and Insurance.
Pre-Approval: A lender's conditional commitment to lend you a specific amount based on a review of your credit, income, and assets. Stronger than pre-qualification and signals to sellers that you are a serious, qualified buyer.
Pre-Qualification: A preliminary 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 amount of money borrowed, or the remaining balance owed on a loan. Each monthly payment includes a portion that reduces the principal balance.
Private Mortgage Insurance (PMI): Insurance required on conventional loans when the down payment is less than 20%. PMI protects the lender and can be cancelled once you reach 80% LTV.

R

Rate Lock: An agreement between you and the lender to guarantee a specific interest rate for a set period (typically 30-60 days) while your loan is processed. Protects you from rate increases during that period.
Refinance: The process of replacing an existing mortgage with a new one, typically to secure a lower interest rate, change the loan term, or convert equity to cash (cash-out refinance).

S

Second Mortgage: An additional loan taken against a property that already has a first mortgage. Includes home equity loans and HELOCs. Second mortgages have higher interest rates because they are repaid after the first mortgage in a foreclosure.

T

Title Insurance: Insurance that protects the buyer and/or lender against claims or disputes over property ownership. A title search is conducted before closing, and title insurance covers any issues that may arise later.

U

Underwriting: The process by which a lender evaluates your creditworthiness and the property to determine whether to approve your mortgage. The underwriter reviews your credit, income, assets, and the appraisal.
USDA Loan: A zero-down mortgage program backed by the U.S. Department of Agriculture for income-eligible buyers in designated rural and suburban areas.

V

VA Loan: A mortgage program guaranteed by the Department of Veterans Affairs for eligible military service members, veterans, and surviving spouses. Offers zero down payment, no PMI, and competitive interest rates.
Verification of Employment (VOE): A process by which the lender contacts your employer to confirm your position, salary, and employment status. Required during underwriting and sometimes again just before closing.

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