Mortgage glossary

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, 7 or 10 years), then adjust annually. The adjustment is tied to an index (like SOFR) plus a fixed margin set by the lender.

The process of gradually paying off a loan through scheduled payments that cover both principal and interest. In the early years of a mortgage, most of each payment goes toward interest; over time, the principal portion increases. A fully amortizing loan is paid off entirely by the end of the term.

The true annual cost of borrowing, expressed as a percentage. APR includes the interest rate plus most lender fees (origination, points, mortgage broker fees), making it more useful than the rate alone for comparing loan offers. APR is always equal to or higher than the interest rate.

An independent assessment of a property's market value performed by a licensed appraiser. Lenders require appraisals to confirm the home is worth at least the purchase price before issuing a loan. The borrower typically pays $500–$800 for the appraisal.

The estimated market value of a property as determined by a licensed appraiser. This is distinct from the purchase price (what you agree to pay) or the assessed value (what the county uses to calculate property taxes).

A limit on how much the interest rate on an adjustable-rate mortgage can increase. Caps are typically expressed as three numbers (e.g., 2/2/5): the first cap limits the initial adjustment, the second limits each subsequent adjustment, and the third limits the lifetime maximum increase.

The value a local government assigns to a property for tax purposes. Assessed value is often different from (and usually lower than) market value, and is used to calculate property tax bills.

In mortgage qualifying, assets include cash and anything easily convertible to cash: savings and checking accounts, retirement accounts (at a percentage), investment accounts and the proceeds from another home sale. Lenders verify assets to confirm you have enough for the down payment, closing costs and reserves.

A mortgage with payments based on a long amortization period (such as 30 years) but with the full remaining balance due after a shorter term (such as 5 or 7 years). Balloon mortgages were once common but are rare today in residential lending.

One one-hundredth of a percentage point (0.01%). Used in finance and mortgage markets to describe rate changes precisely. A rate increase from 6.50% to 6.75% is a 25 basis point increase.

A financing arrangement where upfront funds are paid — either by the buyer, seller or builder — to temporarily or permanently reduce the mortgage interest rate. A 2-1 buydown reduces the rate by 2% in year one and 1% in year two, then returns to the full note rate. A permanent buydown uses discount points.

A refinance that replaces your existing mortgage with a larger loan, with the difference paid to you in cash at closing. Typically limited to 80% LTV on conventional loans. Used to access home equity for home improvements, debt consolidation or other purposes.

The complete historical record of ownership transfers for a property. A clean chain of title means ownership has passed through an unbroken sequence of documented transfers. A title search examines the chain of title to identify any gaps, disputes or encumbrances.

The final approval from the lender's underwriting department confirming that all conditions have been satisfied and the loan is ready to fund. Once you receive CTC, closing can be scheduled.

The final step in a real estate transaction where ownership transfers from seller to buyer. Buyers sign loan documents, pay closing costs and receive the keys. For refinances, closing involves signing new loan documents; there is a 3-business-day right of rescission before funds disburse.

The fees and expenses paid at closing beyond the purchase price. For buyers, these typically include lender fees (origination, underwriting), third-party fees (appraisal, title search, title insurance) and prepaids (homeowner's insurance, property taxes, prepaid interest). Generally 2–5% of the loan amount.

A five-page standardized form that details the final terms of your loan, including the interest rate, monthly payment, and all closing costs. Lenders must provide the CD at least three business days before closing. Compare it carefully to your Loan Estimate.

A mortgage that meets the loan limits and underwriting standards set by Fannie Mae and Freddie Mac, allowing them to purchase the loan on the secondary market. The conforming loan limit for 2024 is $766,550 in most areas and higher in designated high-cost markets.

A mortgage not insured or guaranteed by a federal government agency (unlike FHA, VA or USDA loans). Most conventional loans follow Fannie Mae or Freddie Mac guidelines and are sold into the secondary market. They typically require a higher credit score but allow PMI to be canceled.

A numerical summary of your creditworthiness, based on your credit history. FICO scores range from 300 to 850. Mortgage lenders pull scores from all three bureaus (Equifax, Experian, TransUnion) and typically use the middle score. Higher scores result in lower rates; most conventional loans require 620+.

Your total monthly debt obligations divided by your gross monthly income, expressed as a percentage. Lenders use two DTI ratios: front-end (housing costs only) and back-end (all debts). Most conventional loans require a back-end DTI of 43–45% or lower; FHA allows up to 57% with compensating factors.

The legal document that transfers ownership of real property from one party to another. The deed is recorded with the county to create a public record of ownership.

A legal document used in some states (instead of a mortgage) that gives the lender a security interest in the property as collateral for the loan. In a deed of trust, a neutral third party (the trustee) holds the title on behalf of the lender until the loan is paid off.

Failure to meet the obligations of a loan — most commonly, missing mortgage payments. After a defined number of missed payments, the lender can begin foreclosure proceedings.

Upfront fees paid to permanently reduce the mortgage interest rate. One point equals 1% of the loan amount. Typically, one point reduces the rate by approximately 0.25%, though the exact reduction varies. Paying points makes sense if you plan to stay long enough to recoup the upfront cost through lower monthly payments.

The portion of the purchase price paid in cash by the buyer at closing. The difference between the purchase price and the loan amount. Down payment minimums vary by loan type: 3–5% conventional, 3.5% FHA, 0% VA and USDA.

The time period after a purchase contract is signed during which the buyer can investigate the property, arrange financing and negotiate repairs. The buyer can typically cancel for any reason during this period (subject to earnest money rules in the contract).

A deposit made by the buyer when submitting a purchase offer, demonstrating serious intent. Typically 1–3% of the purchase price. Applied toward the down payment or closing costs at closing. May be forfeited if the buyer defaults without a valid contract contingency.

The portion of a property's value that you own outright — the current market value minus the outstanding loan balance. Equity increases as you pay down the principal and/or as the property value appreciates.

An arrangement where a neutral third party (escrow or title company) holds funds and documents during a real estate transaction until all conditions are met and the transaction is complete.

An account maintained by your mortgage servicer to collect and pay your property taxes and homeowner's insurance. A portion of each monthly payment goes into this account; the servicer disburses funds when tax and insurance bills come due.

The Federal National Mortgage Association — a government-sponsored enterprise (GSE) that buys conforming mortgages from lenders, packages them into mortgage-backed securities and sells them to investors. This process replenishes lenders' capital so they can issue new loans.

A mortgage insured by the Federal Housing Administration. FHA loans accept lower credit scores (as low as 580) and smaller down payments (3.5%) than conventional loans but require mortgage insurance premiums (MIP) for the life of the loan in most cases.

A mortgage with an interest rate that remains constant for the entire loan term. The principal and interest portion of your payment never changes, though the escrow portion (taxes and insurance) can vary. The most common U.S. mortgage product.

The legal process by which a lender takes possession of a property after the borrower defaults on the mortgage. The process and timeline vary by state. Foreclosure typically begins after 3–6 months of missed payments.

The Federal Home Loan Mortgage Corporation — a government-sponsored enterprise (GSE) that purchases conforming mortgages from lenders to support liquidity in the secondary mortgage market. Operates similarly to Fannie Mae.

A credit check that occurs when you apply for new credit, such as a mortgage. Hard inquiries can temporarily lower your credit score. Multiple mortgage inquiries within a 45-day window count as a single inquiry under FICO's rate-shopping rules.

An organization that manages shared areas and enforces rules in a community, condominium or planned development. HOA dues are included in your DTI calculation and can significantly affect what you can qualify for.

A revolving line of credit secured by your home equity, similar to a credit card. HELOCs typically have variable interest rates and a draw period (often 10 years) followed by a repayment period. Interest-only payments are common during the draw period.

Insurance that covers damage to your home's structure, your personal property and liability for injuries on your property. Required by virtually all lenders. The annual premium is typically collected and paid through your escrow account.

A market-based reference rate used to calculate adjustments to adjustable-rate mortgages. Common indexes include SOFR (Secured Overnight Financing Rate). The new rate on an ARM is the index rate plus the lender's margin.

The annual cost of borrowing the principal, expressed as a percentage of the loan balance. Distinct from APR, which includes fees. Your interest rate determines the interest portion of each monthly payment.

A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac ($766,550 in most areas for 2024). Jumbo loans are held on the lender's balance sheet (not sold to the GSEs) and typically require higher credit scores, larger down payments and stronger reserves.

A credit from the lender that offsets closing costs in exchange for accepting a slightly higher interest rate. The opposite of paying discount points. Useful if you're short on cash at closing or plan to sell or refinance within a few years.

A legal claim against a property, typically as security for a debt. A mortgage is a voluntary lien. Property tax liens and mechanic's liens are involuntary. Liens must generally be paid off before a property can be sold.

A standardized three-page form that lenders must provide within three business days of a mortgage application. It shows the loan terms, projected monthly payment and estimated closing costs, allowing borrowers to compare offers from different lenders.

The loan amount divided by the property's appraised value, expressed as a percentage. A $300,000 loan on a $375,000 home is 80% LTV. Higher LTV means more risk for the lender and typically results in a higher rate and/or PMI requirement.

The length of time a rate lock is valid — typically 30, 45 or 60 days. Longer lock periods usually cost more. If your loan doesn't close before the lock expires, you may need to pay an extension fee or accept the current market rate.

A fixed percentage added to the index rate to determine the interest rate on an adjustable-rate mortgage. The margin is set in the loan agreement and never changes. If the index is 4.0% and the margin is 2.5%, the ARM rate is 6.5%.

A loan used to purchase real property, with the property serving as collateral. Also refers to the legal document that pledges the property as security for the loan. In common usage, "mortgage" refers to the entire loan transaction.

Insurance required on FHA loans. Includes an upfront MIP of 1.75% of the loan (added to the balance) and an annual MIP of 0.55–1.05% divided monthly. Unlike PMI on conventional loans, FHA MIP typically lasts for the life of the loan if the down payment is less than 10%.

Investment securities backed by pools of mortgage loans. Most conforming mortgages are sold by lenders and packaged into MBS, which are then sold to investors. Demand for MBS directly affects mortgage rates — higher demand pushes rates lower.

A fee charged by the lender for processing and underwriting the loan, typically 0.5–1% of the loan amount. Can also be expressed as points. This fee appears in Section A of the Loan Estimate and cannot increase between the LE and the Closing Disclosure.

An acronym for the four components of a mortgage payment: Principal, Interest, Taxes (property) and Insurance (homeowner's). Your PITI is what lenders use to calculate your housing expense for DTI purposes. If you have PMI or HOA dues, those are sometimes added to make it PITIA.

See Discount Points. Also used to refer to the origination fee — "lender points" — though these are distinct. Discount points reduce your rate; origination points are a fee for making the loan.

A written commitment from a lender to issue a mortgage up to a specified amount, based on a hard credit pull and verification of income and assets. A pre-approval is stronger than a pre-qualification and is typically required when making offers in competitive markets.

An estimate of how much you might be able to borrow, based on self-reported income, assets and debts. No documentation is verified and no hard credit inquiry is made. Useful for early planning but carries much less weight than a pre-approval.

A fee charged if you pay off your mortgage early — through refinancing, selling or extra payments. Rare in modern residential mortgages but still appears in some loan types. Always ask whether a loan has a prepayment penalty before signing.

The home where you live most of the time. Mortgage rates and qualification requirements are most favorable for primary residences, compared to second homes or investment properties.

The original amount borrowed, or the remaining balance owed. When you make a mortgage payment, a portion goes to interest and a portion reduces the principal balance. Early in a loan, most of the payment is interest; over time, more goes to principal.

Insurance required on conventional loans when the down payment is less than 20%. Protects the lender (not the borrower) in case of default. Typically costs 0.5–1.5% of the loan per year. Can be canceled when the loan balance reaches 80% of the original purchase price.

The legal document you sign at closing that is your personal promise to repay the mortgage loan. It specifies the loan amount, interest rate, payment terms and consequences of default. The deed of trust or mortgage pledges the property as collateral for this promise.

A tax levied by local government on real property, based on the assessed value. Property taxes are paid through your escrow account (if you have one) and are included in your PITI payment. Rates vary widely by location and can significantly affect the true cost of homeownership.

An agreement with a lender guaranteeing a specific interest rate for a defined period, typically 30–60 days. Protects you from rate increases while your loan is in process. Most lenders charge a fee to extend a lock if closing is delayed.

Replacing an existing mortgage with a new loan — typically to get a lower interest rate, change the loan term, switch from an ARM to a fixed rate, or access equity (cash-out refinance). The existing loan is paid off by the new one at closing.

Cash or liquid assets remaining after closing, expressed as months of mortgage payments. Lenders may require 2–12 months of reserves depending on the loan type, borrower profile and property type. Reserves demonstrate financial resilience.

The Real Estate Settlement Procedures Act — a federal law that governs mortgage transactions. RESPA requires the Loan Estimate and Closing Disclosure, limits escrow account balances, prohibits kickbacks between settlement service providers and gives borrowers the right to compare fees.

The legal right to cancel a refinance of a primary residence within three business days of closing. Applies to refinances (not purchases). After the rescission period, the lender funds the new loan and pays off the old one.

A loan secured by a property that already has a first mortgage. Second mortgages include home equity loans and HELOCs. In foreclosure, the first mortgage is paid before the second, making second mortgages riskier and typically carrying higher rates.

The company that manages your mortgage after it's funded — collecting payments, managing the escrow account, handling forbearance or modification requests and, if necessary, initiating foreclosure. Your servicer may be different from the lender that originated your loan.

A sale of a property for less than the amount owed on the mortgage, with the lender's approval. An alternative to foreclosure when the borrower can no longer afford the payments and the home's value has declined below the loan balance.

The legal ownership right to a property. "Having title" means you own the property. Title must be clear (free of liens, claims or disputes) for a sale or refinance to proceed.

Insurance that protects against losses from title defects — including forgeries, undiscovered liens, survey errors or ownership disputes — that existed before you purchased the property. Lender's title insurance (required) protects the lender; owner's title insurance (optional but recommended) protects the buyer.

A review of public records to trace the ownership history of a property and identify any liens, encumbrances or other title defects. Conducted by a title company or attorney before closing. Part of the closing cost.

A federal law requiring lenders to clearly disclose the terms of a loan, including the APR, total interest paid and other costs, so borrowers can make informed comparisons. TILA is enforced through the Loan Estimate and Closing Disclosure.

The process by which a lender evaluates a loan application to determine risk and decide whether to approve it. The underwriter reviews the borrower's income, assets, credit and the property to ensure all guidelines are met.

A mortgage guaranteed by the U.S. Department of Agriculture for eligible borrowers purchasing homes in qualifying rural and suburban areas. USDA loans offer 0% down payment and competitive rates, with income limits and property eligibility requirements.

A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans, active-duty service members and surviving spouses. VA loans offer 0% down payment, no PMI and competitive rates. A funding fee (1.25–3.3%) applies but may be waived for veterans with service-connected disabilities.