Glossary of Terms

Mortgage Terms Explained

Adjustable-Rate Mortgage (ARM)

A loan whose interest rate is fixed for an initial period and then adjusts periodically based on an index plus a margin.

Amortization

Paying off a loan with regular payments over time so that each payment covers interest due plus part of the principal.

Annual Percentage Rate (APR)

The yearly cost of a loan including interest and certain fees, expressed as a percentage. Useful for comparing loan offers.

Appraisal

A professional estimate of a property's market value, usually required by the lender.

Cash-Out Refinance

A refinance for more than you currently owe, with the difference paid to you in cash.

Closing Costs

Fees and expenses paid at closing, such as lender fees, title insurance, appraisal, recording fees and prepaid items.

Closing Disclosure

A five-page form you receive at least three business days before closing that lists your final loan terms and costs.

Conventional Loan

A mortgage that is not insured or guaranteed by a government agency such as FHA.

Credit Score

A number summarizing your credit history that lenders use to evaluate risk and set pricing.

Debt-to-Income Ratio (DTI)

Your monthly debt payments divided by your gross monthly income.

Discount Points

Fees paid up front to lower your interest rate. One point equals 1% of the loan amount.

Down Payment

The portion of the purchase price you pay in cash rather than borrow.

Earnest Money

A deposit made with a purchase offer to show good faith, usually applied toward the down payment or closing costs.

Equity

The difference between your home's value and what you owe on it.

Escrow Account

An account the loan servicer uses to collect and pay property taxes and insurance on your behalf.

FHA Loan

A mortgage insured by the Federal Housing Administration, featuring low down payments and flexible credit guidelines.

Fixed-Rate Mortgage

A loan whose interest rate stays the same for the entire term.

Jumbo Loan

A loan larger than the conforming loan limits set for Fannie Mae and Freddie Mac.

Loan Estimate

A standardized three-page form provided within three business days of applying that outlines estimated loan terms and costs.

Loan-to-Value Ratio (LTV)

The loan amount divided by the property's appraised value or purchase price, whichever is lower.

Mortgage Insurance (PMI / MIP)

Insurance that protects the lender if the borrower defaults. PMI applies to conventional loans; MIP applies to FHA loans.

Pre-Approval

A lender's conditional commitment to lend a specific amount after reviewing your credit, income and assets.

Pre-Qualification

An informal estimate of how much you may be able to borrow based on information you provide.

Principal

The amount borrowed, or the remaining balance of the loan not including interest.

Rate Lock

A lender's commitment to hold a specific interest rate for a set period while your loan is processed.

Refinance

Replacing your existing mortgage with a new one, typically to change the rate, term or to take cash out.

Title Insurance

Insurance that protects the lender (and optionally the owner) against problems with the property's title.

Underwriting

The lender's process of reviewing your application, documents and the property to decide whether to approve the loan.