Mortgage Glossary
Understand mortgage terminology with our comprehensive glossary of terms
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on market conditions. Typically starts with a lower fixed rate for a set period, then adjusts annually.
Amortization
The process of paying off a debt over time through regular payments. Each payment covers both principal and interest, with the interest portion decreasing over time.
Amortization Schedule
A table showing each periodic payment on a loan over time. Each payment is broken down into the amount going toward interest and the amount applied to principal.
Annual Percentage Rate (APR)
The annual cost of a loan including interest rate and additional fees, expressed as a percentage. APR provides a more complete picture of loan cost than interest rate alone.
Appraisal
A professional assessment of a property's market value, typically required by lenders before approving a mortgage. The appraisal protects both the buyer and lender.
Biweekly Payments
Making half of your monthly mortgage payment every two weeks instead of one full payment monthly. Results in 26 half-payments (13 full payments) per year, paying off the loan faster.
Break-Even Point
The point at which the savings from refinancing equal the costs of refinancing. Used to determine if refinancing makes financial sense.
Closing Costs
Fees and expenses paid at the closing of a real estate transaction. Typically includes appraisal fees, title insurance, attorney fees, and loan origination fees.
Conventional Loan
A mortgage not insured or guaranteed by the federal government. Typically requires a higher down payment and credit score than government-backed loans.
Debt-to-Income Ratio (DTI)
The percentage of monthly gross income that goes toward paying debts. Lenders use DTI to assess borrowing capacity, typically preferring ratios below 43%.
Down Payment
The initial upfront payment made when purchasing a home, expressed as a percentage of the purchase price. Conventional loans typically require 5-20% down.
Equity
The difference between your home's market value and the amount you owe on your mortgage. Equity increases as you pay down principal and/or property value appreciates.
Escrow
An account held by the lender to pay property taxes and insurance on behalf of the borrower. Monthly mortgage payments often include escrow amounts.
Extra Payments
Additional amounts paid toward your mortgage principal beyond the required monthly payment. Extra payments reduce total interest paid and shorten loan term.
FHA Loan
A mortgage insured by the Federal Housing Administration. Designed for low-to-moderate income borrowers, requiring lower down payments and credit scores.
Fixed-Rate Mortgage
A mortgage with an interest rate that remains constant throughout the entire loan term. Provides payment stability and predictability.
Foreclosure
The legal process by which a lender takes control of a property when the borrower fails to make mortgage payments. Results in loss of homeownership.
Home Equity Line of Credit (HELOC)
A revolving credit line secured by your home equity. Allows borrowing up to a certain limit and repaying over time, similar to a credit card.
Interest Rate
The percentage of the loan amount charged by the lender for borrowing money. Does not include fees or other charges (see APR for total cost).
Loan-to-Value Ratio (LTV)
The ratio of the mortgage amount to the appraised value of the property. Lower LTV ratios typically qualify for better interest rates and terms.
Mortgage Insurance Premium (MIP)
Insurance required on FHA loans to protect the lender against default. Includes both upfront and annual premiums, with different removal rules than PMI.
Origination Fee
A fee charged by the lender for processing a new loan application. Typically ranges from 0.5% to 1% of the loan amount.
PITI
Acronym for Principal, Interest, Taxes, and Insurance - the four components of a monthly mortgage payment when escrow is included.
Points
Fees paid to the lender at closing to reduce the interest rate. One point equals 1% of the loan amount. Also called discount points.
Pre-Approval
A lender's conditional commitment to loan a specific amount based on preliminary review of credit and finances. Stronger than pre-qualification.
Prepayment Penalty
A fee charged by some lenders if you pay off your mortgage early. Less common in recent years but important to check in loan terms.
Principal
The amount of money borrowed or the remaining balance on a loan, excluding interest. Each payment reduces the principal balance.
Private Mortgage Insurance (PMI)
Insurance required on conventional loans when down payment is less than 20%. Protects the lender against default and can be removed at 20% equity.
Rate Lock
An agreement between borrower and lender that guarantees a specific interest rate for a certain period while the loan is processed.
Refinancing
Replacing an existing mortgage with a new loan, typically to obtain better terms, lower interest rate, or access home equity.
Title Insurance
Insurance that protects the lender and/or owner against losses arising from disputes over property ownership.
Underwriting
The process lenders use to assess the risk of lending to a borrower. Includes verifying income, assets, debt, and property value.
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans, service members, and their spouses. Often requires no down payment.
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