Mortgage Glossary
Understanding mortgage terminology is key to making informed decisions. Browse our comprehensive glossary of mortgage and financial terms.
Showing 54 of 54 terms
Amortization
PaymentDefinition
The process of paying off a loan over time through regular payments. Each payment includes both principal and interest, with the proportion of principal increasing over time.
Example
A 30-year fixed mortgage amortizes over 360 monthly payments.
Annual Percentage Rate (APR)
CostsDefinition
The total cost of borrowing expressed as a yearly rate, including interest and other loan costs such as broker fees, discount points, and some closing costs.
Example
An APR of 4.5% includes both the interest rate and loan fees.
Appraisal
ProcessDefinition
A professional assessment of a property's market value, typically required by lenders before approving a mortgage loan.
Example
The appraisal valued the home at $350,000, which determined the maximum loan amount.
Balloon Payment
PaymentDefinition
A large final payment due at the end of a loan term, often used in balloon mortgages where regular payments are lower but a significant amount is due at maturity.
Example
A 5-year balloon mortgage might have low monthly payments but require a $200,000 balloon payment at the end.
Closing Costs
CostsDefinition
Fees and expenses paid at the closing of a real estate transaction, including loan origination fees, title insurance, appraisal fees, and other charges.
Example
Closing costs typically range from 2% to 5% of the loan amount.
Credit Score
BasicDefinition
A numerical representation of a borrower's creditworthiness based on their credit history, ranging from 300 to 850. Higher scores typically result in better loan terms.
Example
A credit score of 750 or higher usually qualifies for the best mortgage rates.
Debt-to-Income Ratio (DTI)
BasicDefinition
A measure of a borrower's monthly debt payments compared to their gross monthly income, expressed as a percentage. Lenders use this to assess loan eligibility.
Example
A DTI ratio of 36% means monthly debt payments equal 36% of gross monthly income.
Down Payment
BasicDefinition
The initial payment made when purchasing a home, typically expressed as a percentage of the purchase price. The remaining amount is financed through a mortgage.
Example
A 20% down payment on a $300,000 home would be $60,000.
Escrow Account
PaymentDefinition
An account held by the lender to collect and pay property taxes and insurance premiums on behalf of the borrower.
Example
Monthly escrow payments ensure property taxes are paid on time.
Fixed-Rate Mortgage
LoanDefinition
A mortgage loan with an interest rate that remains constant throughout the entire loan term, providing predictable monthly payments.
Example
A 30-year fixed-rate mortgage at 4% will have the same interest rate for all 360 payments.
Homeowners Insurance
InsuranceDefinition
Insurance that protects the homeowner against damage to the property and liability for injuries or property damage to others.
Example
Homeowners insurance typically covers fire, theft, and natural disasters.
Interest Rate
BasicDefinition
The percentage of the loan amount charged by the lender for borrowing money, expressed as an annual rate.
Example
A 4.5% interest rate means you pay 4.5% of the loan balance in interest annually.
Loan-to-Value Ratio (LTV)
BasicDefinition
The ratio of the loan amount to the appraised value or purchase price of the property, expressed as a percentage.
Example
An 80% LTV means the loan amount is 80% of the home's value.
Mortgage Insurance
InsuranceDefinition
Insurance that protects the lender if the borrower defaults on the loan, typically required when the down payment is less than 20%.
Example
Private Mortgage Insurance (PMI) is required for conventional loans with less than 20% down.
Origination Fee
CostsDefinition
A fee charged by the lender for processing a new loan application, typically expressed as a percentage of the loan amount.
Example
A 1% origination fee on a $200,000 loan would cost $2,000.
Points
CostsDefinition
Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point equals 1% of the loan amount.
Example
Paying 2 points on a $200,000 loan costs $4,000 but reduces the interest rate.
Principal
BasicDefinition
The original amount borrowed, not including interest. Each mortgage payment includes both principal and interest.
Example
On a $200,000 loan, the principal is $200,000 initially.
Private Mortgage Insurance (PMI)
InsuranceDefinition
Insurance that protects the lender if the borrower defaults, required for conventional loans with less than 20% down payment.
Example
PMI typically costs 0.5% to 1% of the loan amount annually.
Refinancing
ProcessDefinition
The process of replacing an existing mortgage with a new loan, typically to obtain better terms, lower rates, or access equity.
Example
Refinancing from a 5% rate to 3.5% can save hundreds of dollars monthly.
Title Insurance
InsuranceDefinition
Insurance that protects the lender and homeowner against losses from defects in the title to the property.
Example
Title insurance protects against claims from previous owners or liens.
Underwriting
ProcessDefinition
The process lenders use to assess the risk of lending money to a borrower, including reviewing credit, income, and property information.
Example
During underwriting, the lender verifies income, employment, and credit history.
Variable-Rate Mortgage
LoanDefinition
A mortgage with an interest rate that can change over time based on market conditions, also known as an adjustable-rate mortgage (ARM).
Example
A 5/1 ARM has a fixed rate for 5 years, then adjusts annually.
Pre-approval
ProcessDefinition
A preliminary evaluation by a lender indicating how much money a borrower can borrow, based on income, credit, and other factors.
Example
Getting pre-approved helps determine your home buying budget.
Pre-qualification
ProcessDefinition
An informal assessment of a borrower's financial situation to estimate how much they might be able to borrow.
Example
Pre-qualification is less thorough than pre-approval but gives a general idea.
Conventional Loan
LoanDefinition
A mortgage loan not guaranteed or insured by the federal government, typically requiring higher credit scores and down payments.
Example
Conventional loans often require 20% down to avoid PMI.
FHA Loan
LoanDefinition
A government-backed mortgage insured by the Federal Housing Administration, allowing lower down payments and credit scores.
Example
FHA loans allow down payments as low as 3.5% with a 580 credit score.
VA Loan
LoanDefinition
A government-backed mortgage guaranteed by the Department of Veterans Affairs, available to eligible veterans and service members.
Example
VA loans often require no down payment and have competitive rates.
USDA Loan
LoanDefinition
A government-backed mortgage guaranteed by the U.S. Department of Agriculture, designed for rural homebuyers with low to moderate incomes.
Example
USDA loans offer 100% financing for eligible rural properties.
Jumbo Loan
LoanDefinition
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac, typically requiring higher down payments and credit scores.
Example
Jumbo loans are used for high-value properties exceeding $647,200 in most areas.
Conforming Loan
LoanDefinition
A mortgage that meets the loan limits and guidelines set by Fannie Mae and Freddie Mac, typically offering better rates and terms.
Example
Conforming loans have limits of $647,200 for single-family homes in most areas.
Interest-Only Mortgage
PaymentDefinition
A mortgage where the borrower pays only interest for a specified period, after which payments include both principal and interest.
Example
An interest-only mortgage might require only interest payments for the first 10 years.
Reverse Mortgage
AdvancedDefinition
A loan available to homeowners 62 and older that allows them to convert home equity into cash, with no monthly payments required.
Example
Reverse mortgages are repaid when the homeowner sells, moves, or passes away.
Bridge Loan
AdvancedDefinition
A short-term loan used to finance the purchase of a new home before selling the current home.
Example
Bridge loans help homeowners buy a new home while waiting to sell their current one.
Assumable Mortgage
AdvancedDefinition
A mortgage that can be transferred from the current borrower to a new borrower, typically with the same terms and conditions.
Example
FHA and VA loans are often assumable, which can be attractive to buyers.
Bi-weekly Payment
PaymentDefinition
A payment schedule where half the monthly payment is made every two weeks, resulting in 26 payments per year instead of 12.
Example
Bi-weekly payments can reduce a 30-year loan to about 25 years.
Acceleration Clause
AdvancedDefinition
A provision in a mortgage that allows the lender to demand full payment of the loan if the borrower defaults on payments.
Example
Acceleration clauses protect lenders by allowing them to foreclose if payments are missed.
Prepayment Penalty
CostsDefinition
A fee charged by some lenders if the borrower pays off the loan early, designed to compensate for lost interest income.
Example
Prepayment penalties might apply if you refinance or sell within the first 3-5 years.
Lock-in Period
ProcessDefinition
A specified time during which the lender guarantees a particular interest rate, protecting the borrower from rate increases.
Example
A 30-day lock-in period ensures your rate won't change for 30 days.
Rate Lock
ProcessDefinition
An agreement between the borrower and lender that guarantees a specific interest rate for a set period, typically 15-60 days.
Example
Rate locks protect borrowers from rising interest rates during the loan process.
Good Faith Estimate (GFE)
ProcessDefinition
A document that provides an estimate of the fees and costs associated with a mortgage loan, required by law to be provided within 3 days of application.
Example
The GFE helps borrowers compare loan offers from different lenders.
Truth in Lending Disclosure
ProcessDefinition
A document that discloses the total cost of credit, including the APR and finance charges, required by federal law.
Example
The Truth in Lending disclosure helps borrowers understand the true cost of borrowing.
HUD-1 Settlement Statement
ProcessDefinition
A document that itemizes all costs and fees in a real estate transaction, provided to the borrower at closing.
Example
The HUD-1 shows all closing costs and how the money flows in the transaction.
Earnest Money
ProcessDefinition
A deposit made by the buyer to show serious intent to purchase a property, typically held in escrow until closing.
Example
Earnest money of $5,000 shows the seller you're serious about buying.
Contingency
ProcessDefinition
A condition that must be met for a real estate contract to be binding, such as financing approval or home inspection.
Example
A financing contingency allows the buyer to back out if they can't get a loan.
Home Inspection
ProcessDefinition
A professional examination of a property's condition, typically conducted by a licensed inspector before purchase.
Example
A home inspection can reveal hidden problems that affect the property's value.
Appraisal Contingency
ProcessDefinition
A condition in a purchase contract that allows the buyer to back out if the property doesn't appraise for the purchase price.
Example
An appraisal contingency protects buyers from overpaying for a property.
Closing Disclosure
ProcessDefinition
A document that provides the final details of a mortgage loan, including the exact costs and fees, provided 3 days before closing.
Example
The Closing Disclosure allows borrowers to review final terms before signing.
Escrow
ProcessDefinition
A neutral third party that holds funds and documents during a real estate transaction until all conditions are met.
Example
Escrow ensures both buyer and seller fulfill their obligations before closing.
Recording
ProcessDefinition
The process of filing documents with the county recorder's office to make them part of the public record.
Example
The mortgage and deed are recorded to establish legal ownership and liens.
Chain of Title
AdvancedDefinition
The history of ownership transfers for a property, showing how title has passed from one owner to the next.
Example
A clear chain of title is essential for establishing legal ownership.
Lien
AdvancedDefinition
A legal claim against a property that must be paid when the property is sold, such as a mortgage, tax lien, or judgment.
Example
A mortgage creates a lien that gives the lender the right to foreclose if payments are missed.
Foreclosure
AdvancedDefinition
The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments.
Example
Foreclosure typically begins after 3-6 months of missed payments.
Short Sale
AdvancedDefinition
A sale of property for less than the amount owed on the mortgage, requiring lender approval.
Example
Short sales allow homeowners to avoid foreclosure when they can't afford their mortgage.
Deed in Lieu
AdvancedDefinition
A voluntary transfer of property ownership to the lender to avoid foreclosure, typically when the borrower can't afford the mortgage.
Example
A deed in lieu is often a last resort to avoid foreclosure proceedings.
Quick Reference
Basic Terms
Essential mortgage concepts
Costs & Fees
Understanding loan expenses
Insurance
Protection and coverage terms
Process Terms
Steps in the mortgage process
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