Mortgage Glossary

A

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically after an initial fixed period. Common structures include 5/1, 7/1, and 10/1 ARMs, where the first number is the fixed-rate period in years and the second is how often adjustments occur. Rate changes are tied to a benchmark index such as SOFR plus a lender margin.

Amortization

The process of paying off a loan through scheduled principal and interest payments over time. In the early years of a mortgage, most of each payment goes toward interest; over time, the principal portion grows. An amortization schedule shows the breakdown for every payment over the loan term.

Annual Percentage Rate (APR)

A standardized measure of the total cost of borrowing, expressed as a yearly rate. APR includes the interest rate plus lender fees, discount points, and certain closing costs, making it useful for comparing loan offers from different lenders. APR is always equal to or higher than the stated interest rate.

Appraisal

A professional assessment of a property's market value performed by a licensed appraiser. Lenders require an appraisal before approving a mortgage to ensure the property is worth at least the loan amount. Appraisals typically cost $400 to $700 and consider comparable sales, property condition, and location.

Assumable Mortgage

A mortgage that allows a buyer to take over the seller's existing loan terms, including the interest rate and remaining balance. FHA and VA loans are generally assumable, while most conventional loans are not. In a rising-rate environment, assuming a low-rate loan can save the buyer significant money.

B

Balloon Mortgage

A loan with low monthly payments for a fixed period (often 5 to 7 years) followed by a large lump-sum payment of the remaining balance. Balloon mortgages carry significant risk because the borrower must refinance, sell, or pay the full remaining balance when the balloon payment comes due.

Biweekly Payment

A payment schedule where half the monthly mortgage payment is made every two weeks, resulting in 26 half-payments (or 13 full payments) per year instead of 12. This extra payment each year reduces the loan term by several years and significantly lowers total interest paid.

Bridge Loan

A short-term loan that helps homeowners cover the gap between buying a new home and selling their current one. Bridge loans typically carry higher interest rates and fees, and are designed to be repaid within 6 to 12 months when the existing home sells.

C

Cash-Out Refinance

A refinancing transaction where the new mortgage is larger than the existing one, and the borrower receives the difference in cash. Most lenders cap cash-out refinances at 80% loan-to-value. The funds can be used for any purpose, but the borrower's overall debt increases.

Closing Costs

Fees and expenses paid at settlement when a mortgage transaction is finalized. Closing costs typically range from 2% to 5% of the loan amount and include origination fees, appraisal fees, title insurance, attorney fees, prepaid taxes, and insurance. See our FAQ for a detailed breakdown.

Closing Disclosure

A five-page document that provides final details about the mortgage loan, including the interest rate, monthly payments, closing costs, and loan terms. Lenders must provide this form at least three business days before closing, per CFPB regulations.

Conforming Loan

A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan limits ($766,550 in most areas for 2025). Conforming loans typically carry lower interest rates than non-conforming (jumbo) loans because they can be sold on the secondary market.

Construction Loan

A short-term loan used to finance the building of a new home. Funds are disbursed in stages as construction progresses. Once the home is complete, the construction loan is typically converted to a permanent mortgage through a process called a construction-to-permanent loan.

Conventional Loan

Any mortgage that is not insured or guaranteed by a government agency (FHA, VA, or USDA). Conventional loans are originated and serviced by private lenders and typically require higher credit scores and down payments than government-backed loans, but they offer more flexible terms and no upfront mortgage insurance premiums.

D

Debt-to-Income Ratio (DTI)

The percentage of your gross monthly income that goes toward debt payments, including the proposed mortgage, car loans, student loans, credit card minimums, and other obligations. Most lenders prefer a DTI of 43% or lower, though some loan programs allow up to 50%. DTI is a key factor in mortgage qualification.

Deed of Trust

A legal document used in some states instead of a mortgage to secure a loan against real property. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds the title until the loan is paid off.

Default

Failure to meet the legal obligations of a mortgage, most commonly by missing payments. Default can lead to late fees, credit score damage, and ultimately foreclosure. Most lenders consider a loan in default after 90 days of missed payments.

Discount Points

Prepaid interest paid at closing to reduce the mortgage interest rate. One point equals 1% of the loan amount and typically lowers the rate by about 0.25 percentage points. Points make financial sense if you plan to keep the loan long enough to recoup the upfront cost through monthly savings.

Down Payment

The portion of the home's purchase price paid upfront by the buyer, with the remainder financed by the mortgage. Down payment requirements vary from 0% (VA and USDA loans) to 20% or more for the best conventional loan terms. Use our down payment calculator to plan your savings.

E

Earnest Money

A deposit made by the buyer when submitting a purchase offer, demonstrating serious intent to buy. Earnest money is typically 1% to 3% of the purchase price, held in an escrow account, and applied toward the down payment or closing costs at settlement.

Equity

The difference between your home's current market value and the outstanding mortgage balance. Equity grows as you make principal payments and as the property appreciates. Home equity can be accessed through a cash-out refinance or a HELOC.

Escrow

An account managed by the mortgage servicer that holds funds for property taxes and homeowners insurance. A portion of each monthly payment goes into escrow, and the servicer pays these bills when due. Escrow accounts are required on most loans with less than 20% down.

F

Fannie Mae (FNMA)

The Federal National Mortgage Association, a government-sponsored enterprise that purchases mortgages from lenders, packages them into mortgage-backed securities, and sells them to investors. Fannie Mae sets underwriting guidelines that most conventional lenders follow.

FHA Loan

A mortgage insured by the Federal Housing Administration that allows lower down payments (3.5%) and more flexible credit requirements than conventional loans. FHA loans require both an upfront mortgage insurance premium (1.75% of the loan) and annual premiums. See our FHA calculator.

FICO Score

A credit score developed by the Fair Isaac Corporation, ranging from 300 to 850, that lenders use to assess creditworthiness. Mortgage lenders typically pull scores from all three bureaus (Equifax, Experian, TransUnion) and use the middle score for qualification purposes.

Fixed-Rate Mortgage

A mortgage with an interest rate that remains constant for the entire loan term. The 30-year fixed is the most popular mortgage product in the U.S., offering predictable monthly payments. The 15-year fixed typically carries a lower rate but higher monthly payment.

Flood Insurance

Insurance required by lenders for properties in FEMA-designated flood zones. Standard homeowners insurance does not cover flood damage. Flood insurance is available through the National Flood Insurance Program (NFIP) or private insurers, with annual premiums varying widely by risk zone.

Forbearance

A temporary agreement between a borrower and lender to reduce or suspend mortgage payments during a period of financial hardship. Forbearance does not erase the debt; missed payments must eventually be repaid through a lump sum, repayment plan, or loan modification.

Foreclosure

The legal process by which a lender seizes and sells a property when the borrower fails to make mortgage payments. Foreclosure timelines vary by state (judicial vs. non-judicial) and typically take 6 to 18 months. A foreclosure severely damages the borrower's credit score for up to 7 years.

Freddie Mac (FHLMC)

The Federal Home Loan Mortgage Corporation, a government-sponsored enterprise similar to Fannie Mae. Freddie Mac purchases mortgages from smaller banks and credit unions, securitizes them, and publishes the weekly Primary Mortgage Market Survey (PMMS) tracking national average rates.

G

Good Faith Estimate (GFE)

A document once used to disclose estimated closing costs to borrowers. The GFE was replaced by the Loan Estimate form in October 2015 as part of the TILA-RESPA Integrated Disclosure (TRID) rule. The Loan Estimate provides clearer, more standardized cost disclosures.

H

Home Equity Line of Credit (HELOC)

A revolving line of credit secured by the equity in your home. HELOCs have a draw period (typically 10 years) during which you can borrow and repay funds, followed by a repayment period (typically 20 years). Most HELOCs carry variable interest rates tied to the prime rate. See our HELOC calculator.

Homeowners Association (HOA)

An organization that manages a residential community and collects monthly or annual fees from homeowners for shared amenities, maintenance, and governance. HOA fees typically range from $200 to $500 per month and are an additional cost beyond the mortgage payment.

Homeowners Insurance

Insurance that protects against damage to your property from fire, storms, theft, and liability claims. Lenders require homeowners insurance as a condition of the mortgage. Premiums vary by location, coverage amount, and risk factors, and are typically paid through your escrow account.

I

Interest Rate

The annual cost of borrowing the principal loan amount, expressed as a percentage. The interest rate determines how much you pay the lender for the use of their money, separate from other fees captured in the APR. Rates are influenced by the bond market, inflation, and the borrower's credit profile.

Interest Rate Cap

A limit on how much the interest rate on an adjustable-rate mortgage can change. Caps are expressed as three numbers (e.g., 2/2/5): the initial adjustment cap, periodic adjustment cap, and lifetime cap. For example, a 2/2/5 cap on a 5/1 ARM starting at 5% means the rate cannot exceed 10% over the life of the loan.

J

Jumbo Loan

A mortgage that exceeds the conforming loan limits set by the FHFA. In most counties, the 2025 conforming limit is $766,550 for a single-family home. Jumbo loans cannot be sold to Fannie Mae or Freddie Mac and typically require higher credit scores, larger down payments, and more cash reserves.

L

Lien

A legal claim against a property that serves as security for a debt. A mortgage creates a lien on the home, giving the lender the right to seize the property if the borrower defaults. Properties can have multiple liens, with the first mortgage holding priority over second liens like HELOCs.

Loan Estimate

A standardized three-page document that lenders must provide within three business days of receiving a mortgage application. It details the estimated interest rate, monthly payment, closing costs, and other loan terms, allowing borrowers to compare offers from different lenders.

Loan-to-Value Ratio (LTV)

The ratio of the mortgage amount to the appraised value of the property, expressed as a percentage. An LTV of 80% means you are borrowing 80% of the home's value with 20% down. Higher LTV ratios (above 80%) typically require PMI and may result in higher interest rates.

Lock Period

The number of days a lender guarantees a quoted interest rate, typically 30, 45, or 60 days. Longer lock periods may carry slightly higher rates or fees. If the loan does not close before the lock expires, the borrower may need to pay an extension fee or accept the current market rate.

M

Margin

The fixed percentage added to the index rate to determine the fully adjusted interest rate on an ARM. For example, if the SOFR index is 4.0% and the margin is 2.75%, the adjusted rate would be 6.75%. The margin is set at origination and does not change over the life of the loan.

Mortgage-Backed Security (MBS)

A financial product created by pooling thousands of individual mortgages and selling shares to investors. MBS prices and yields directly influence mortgage rates. When demand for MBS rises, prices go up and yields (and mortgage rates) go down, and vice versa.

Mortgage Broker

A licensed intermediary who shops multiple lenders on behalf of the borrower to find competitive loan terms. Brokers do not lend money directly; they connect borrowers with lenders and earn a commission or fee. Working with a broker can save time and potentially yield better rates.

Mortgage Insurance Premium (MIP)

Insurance required on all FHA loans, consisting of an upfront premium (1.75% of the loan amount, usually financed into the loan) and an annual premium (typically 0.55%) paid monthly. Unlike conventional PMI, FHA MIP cannot be canceled on loans with less than 10% down.

N

No-Closing-Cost Mortgage

A loan where the lender covers closing costs in exchange for a higher interest rate. You save money upfront but pay more over time through a higher monthly payment. This option is best for borrowers who plan to sell or refinance within a few years, before the higher rate outweighs the initial savings.

O

Origination Fee

A charge by the lender for processing and underwriting the mortgage application, typically 0.5% to 1% of the loan amount. Origination fees are negotiable and must be disclosed on the Loan Estimate. Some lenders offer low or zero origination fees but compensate with higher interest rates.

P

PITI

An acronym for Principal, Interest, Taxes, and Insurance, the four components of a standard monthly mortgage payment. Lenders use PITI to calculate housing expense ratios when qualifying borrowers. Use our mortgage calculator to see a full PITI breakdown.

Private Mortgage Insurance (PMI)

Insurance required on conventional loans when the down payment is less than 20% of the home's value. PMI protects the lender against loss if the borrower defaults. Annual premiums range from 0.5% to 1.5% of the loan amount. PMI can be removed once equity reaches 20%. See our PMI calculator.

Pre-Approval

A formal process where a lender verifies your income, assets, employment, and credit, then issues a conditional commitment for a specific loan amount. Pre-approval is stronger than pre-qualification and signals to sellers that you are a serious, vetted buyer.

Prepayment Penalty

A fee charged by some lenders if you pay off the mortgage early, either through refinancing or selling the home. Prepayment penalties are less common today and are prohibited on most government-backed loans (FHA, VA). Always check your loan terms for any prepayment restrictions.

Principal

The original amount of money borrowed, excluding interest. Each mortgage payment includes a portion that reduces the principal balance. In the early years of a loan, the principal portion is small relative to interest, but it grows over time as the balance decreases through amortization.

R

Rate Lock

A lender's guarantee to hold a specific interest rate for a set period while the loan is processed. Rate locks typically last 30 to 60 days. Some lenders offer float-down options that allow you to capture a lower rate if the market improves, usually for an additional fee.

Refinance

Replacing an existing mortgage with a new one, typically to obtain a lower interest rate, change the loan term, or access home equity through a cash-out refinance. Refinancing involves closing costs similar to the original mortgage, so calculating the break-even point is essential. See our refinance calculator.

S

Second Mortgage

An additional loan taken out against a property that already has a first mortgage. Second mortgages include home equity loans and HELOCs. They carry higher interest rates than first mortgages because the second lender is subordinate in the event of default and foreclosure.

Secured Overnight Financing Rate (SOFR)

A benchmark interest rate that replaced LIBOR as the primary index for adjustable-rate mortgages. SOFR is based on overnight transactions in the U.S. Treasury repurchase market and is published daily by the Federal Reserve Bank of New York.

T

Title Insurance

A policy that protects the lender (and optionally the buyer) against claims or defects in the property's title, such as liens, encumbrances, or ownership disputes. Lender's title insurance is required; owner's title insurance is optional but recommended. The policy is a one-time cost paid at closing.

U

Underwriting

The process by which a lender evaluates the risk of lending to a borrower. Underwriters verify income, assets, employment, credit history, and property value to determine whether the loan meets the lender's guidelines. The underwriting phase typically takes 1 to 3 weeks.

USDA Loan

A mortgage guaranteed by the U.S. Department of Agriculture for eligible rural and suburban properties. USDA loans offer zero down payment, competitive rates, and reduced mortgage insurance. Borrowers must meet income limits (typically 115% of area median income) and the property must be in an eligible location.

V

VA Loan

A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses. VA loans offer no down payment, no monthly mortgage insurance, and competitive rates. A one-time funding fee applies but is waived for disabled veterans. See our VA loan calculator.

Y

Yield Spread Premium (YSP)

A payment from a lender to a mortgage broker for originating a loan with an interest rate above the par rate. The higher rate generates extra revenue for the lender, which is shared with the broker. Since 2011, YSP must be disclosed and cannot be combined with upfront broker fees charged to the borrower.