Mortgage Glossary

Adjustable-Rate Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also known as a variable-rate mortgage.

Amortization

The process of paying off a debt over time through regular payments. A portion of each payment goes toward the principal balance and a portion goes toward interest.

Annual Percentage Rate (APR)

The cost of credit expressed as a yearly rate. It includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.

Appraisal

A written estimate of a property's current market value completed by a licensed appraiser, based on recent sales of comparable properties.

Appraisal Contingency

A clause in the purchase contract that allows the buyer to back out or renegotiate if the home's appraised value is lower than the purchase price.

Assessed Value

The value placed on a property by a public tax assessor for the purpose of determining property taxes.

Balloon Payment

A large lump-sum payment due at the end of a balloon mortgage, which has lower payments throughout the life of the loan.

Cash-to-Close

The total amount of money the buyer needs to bring to the closing table, including the down payment, closing costs, and prepaid items.

Closing Costs

Expenses over and above the price of the property incurred by buyers and sellers when transferring ownership. They typically range from 2% to 5% of the purchase price.

Closing Disclosure (CD)

A five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs.

Contingency

A condition that must be met before a contract is legally binding. Common contingencies include home inspections, financing, and appraisals.

Debt-to-Income Ratio (DTI)

A personal finance measure that compares an individual's monthly debt payment to their monthly gross income. Lenders use it to measure your ability to manage monthly payments.

Discount Points

Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point costs 1% of your mortgage amount.

Down Payment

The portion of the home's purchase price that is paid upfront and is not part of the mortgage loan.

Earnest Money Deposit (EMD)

A deposit made to a seller showing the buyer's good faith in a transaction. It is typically held in a trust or escrow account until closing.

Equity

The difference between the current market value of your home and the amount you still owe on your mortgage.

Escrow

An arrangement in which a neutral third party holds legal documents and funds on behalf of a buyer and seller, distributing them according to the buyer's and seller's instructions.

FHA Loan

A mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration (FHA), designed for low-to-moderate-income borrowers.

Fixed-Rate Mortgage

A mortgage in which the interest rate does not change during the entire term of the loan.

Forbearance

A temporary suspension or reduction of your mortgage payments granted by your lender during a period of financial hardship.

Good Faith Estimate (GFE)

An estimate of the fees due at closing for a mortgage loan that must be provided by a lender to a borrower within three days of the lender receiving a completed mortgage application.

Home Equity Line of Credit (HELOC)

A line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt.

Homeowners Association (HOA)

An organization in a subdivision, planned community, or condominium building that makes and enforces rules for the properties and their residents.

Inspection Contingency

A clause in the purchase contract that allows the buyer to have the home inspected and negotiate repairs or walk away if the inspection reveals major issues.

Interest Rate

The cost of borrowing money, expressed as a percentage of the total loan amount.

Jumbo Loan

A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA), typically used for luxury homes.

Loan Estimate (LE)

A three-page form that you receive after applying for a mortgage, detailing the estimated interest rate, monthly payment, and total closing costs.

Loan-to-Value Ratio (LTV)

The ratio of the amount borrowed to the appraised value or sales price of real property expressed as a percentage. A higher LTV typically indicates higher risk for the lender.

Mortgage Broker

An intermediary who brings mortgage borrowers and mortgage lenders together, but does not use their own funds to originate mortgages.

Mortgage Insurance Premium (MIP)

An insurance policy used in FHA loans if your down payment is less than 20%. It protects the lender if you default on the loan.

Multiple Listing Service (MLS)

A database established by cooperating real estate brokers to provide data about properties for sale.

Origination Fee

A fee charged by a lender on entering into a loan agreement to cover the cost of processing the loan.

PITI

An acronym for Principal, Interest, Taxes, and Insurance—the four components of a monthly mortgage payment.

Pre-Approval

An evaluation by a lender that determines the loan amount you qualify for, based on a review of your credit, income, and assets.

Pre-Qualification

An initial evaluation of your creditworthiness to estimate the amount you might be able to borrow, based on self-reported financial information.

Principal

The amount borrowed or remaining unpaid, excluding interest. The part of the monthly payment that reduces the remaining balance of a mortgage.

Private Mortgage Insurance (PMI)

Insurance required for conventional mortgage loans when the borrower's down payment is less than 20%. It protects the lender in case the borrower defaults.

Rate Lock

An agreement between a borrower and a lender that guarantees a specific interest rate for a mortgage, provided the loan closes within a certain timeframe.

Refinancing

The process of replacing an existing mortgage with a new one, usually to obtain a lower interest rate, change the loan term, or tap into home equity.

Title

A legal document evidencing a person's right to or ownership of a property.

Title Insurance

Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.

Underwriting

The process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit and employment history.

VA Loan

A mortgage loan available through a program established by the United States Department of Veterans Affairs, offering $0 down payment options for eligible veterans and service members.

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