Mortgage Terminology Explained

We know the loan process is daunting, and often “mortgage speak” can feel like a different language! That’s why we’ve put together a list of the most common loan terms and their meaning. Of course, you can always ask us and we are more than happy to explain in further detail!

Amortization
The process of gradually paying off a loan over time through scheduled payments. Each payment covers both principal (the loan amount) and interest.

Annual Percentage Rate (APR)
The total yearly cost of a mortgage, expressed as a percentage. APR includes interest as well as any other fees, giving borrowers a more complete picture of their loan's cost.

Appraisal
An evaluation of a property's market value, usually conducted by a licensed appraiser. Lenders require appraisals to ensure the home’s value aligns with the loan amount.

Assumable Mortgage
A type of mortgage that allows a buyer to take over the seller’s existing loan, often with a lower interest rate than current market rates. This requires lender approval and can be advantageous in a rising-rate environment.

Buydown
An arrangement where the seller, buyer, or lender pays to reduce the interest rate on a mortgage for a temporary period or for the life of the loan. A common example is a 2-1 buydown, where the interest rate is lower in the first two years.

Cash-Out Refinance
A refinancing option that replaces an existing mortgage with a new one for a higher loan amount, allowing the borrower to take out the difference in cash. Often used for home improvements, debt consolidation, or other major expenses.

Closing Disclosure (CD)
A document provided to borrowers three business days before closing that outlines the final loan terms, including loan amount, interest rate, monthly payments, and all fees.

Construction Loan
A short-term loan that finances the building or renovation of a home. Typically converts to a permanent mortgage once construction is complete.

Conventional Loan
A type of mortgage not backed by a government agency, such as the FHA or VA. Conventional loans often require a higher credit score but offer flexible terms.

Debt-to-Income Ratio (DTI)
The percentage of monthly income that goes toward paying debts. Lenders use DTI to gauge a borrower’s ability to repay the loan.

Deed
A legal document that transfers property ownership from one party to another. The deed is recorded with local authorities after closing.

Down Payment
The upfront amount paid by a buyer, typically between 3-20% of the home’s purchase price. Larger down payments can lead to better loan terms.

Earnest Money
A deposit made by a buyer to show their serious intent to purchase a property. Earnest money is credited toward the down payment if the sale goes through.

Escrow
A neutral third-party account where funds are held to cover property taxes, insurance, and other home-related expenses. Monthly mortgage payments often include escrow contributions.

Equity
The portion of the property’s value that the homeowner owns outright. Equity increases over time as the mortgage balance decreases and property values rise.

Fixed-Rate Mortgage
A loan with an interest rate that remains the same throughout the life of the loan, providing stable monthly payments.

Foreclosure
The legal process by which a lender takes possession of a property if the borrower fails to make mortgage payments.

Interest Rate
The cost of borrowing money, expressed as a percentage of the loan. Lower interest rates generally reduce monthly payments and total loan costs.

Jumbo Loan
A loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans typically have stricter credit requirements and higher interest rates.

Loan Estimate (LE)
A document provided by lenders outlining the estimated interest rate, monthly payments, and closing costs for a mortgage. Lenders must provide this within three days of receiving a loan application.

Loan-to-Value Ratio (LTV)
A percentage that shows the loan amount relative to the home’s appraised value. Higher LTV ratios typically require mortgage insurance.

Mortgage Insurance (PMI)
Insurance required for certain loans when the down payment is less than 20%. PMI protects the lender if the borrower defaults but can often be canceled once enough equity is built.

Mortgage Note
A legal document that outlines the terms of the mortgage, including the loan amount, interest rate, and repayment schedule. The borrower signs the note at closing.

Origination Fee
A fee charged by lenders to process a loan application, usually expressed as a percentage of the loan amount.

Points
Optional fees paid at closing to lower the loan’s interest rate. One point equals 1% of the loan amount. Paying points can reduce monthly payments over the life of the loan.

Pre-Approval
A lender's conditional approval based on a borrower’s income, credit, and debt. Pre-approval strengthens a buyer’s offer by showing they are likely to secure financing.

Principal
The original amount borrowed or remaining loan balance. Monthly payments go toward reducing both the principal and interest.

Private Mortgage Insurance (PMI)
Insurance for conventional loans where the down payment is less than 20%. PMI protects the lender in case of default but can often be canceled once enough equity is built.

Rate Lock
An agreement to "lock in" a certain interest rate for a specified period, typically 30-60 days. A rate lock protects borrowers from rate increases before closing.

Refinancing
Replacing an existing mortgage with a new one, usually to take advantage of lower interest rates, change loan terms, or access home equity.

Title Insurance
Insurance that protects the buyer and lender from claims against the property, such as liens or ownership disputes. Title insurance is a one-time fee paid at closing.

Underwriting
The process where the lender evaluates a loan application to determine the borrower’s risk level and loan eligibility based on credit, income, and property appraisal.

Variable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on market conditions. ARMs often start with a lower rate than fixed-rate loans but can adjust over time.

VA Loan
A mortgage program for veterans, active-duty service members, and their families, backed by the Department of Veterans Affairs. VA loans often have lower interest rates and do not require a down payment.