Mortgage Glossary
67+ terms defined in plain language. Search for a term or browse alphabetically.
A
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on a benchmark index. ARMs typically start with a lower fixed rate for an initial period (such as 5 or 7 years), then adjust annually. The rate adjustment is subject to caps that limit how much it can change per period and over the life of the loan.
Amortization
The process of paying off a loan through regular installments over time, where each payment covers both principal and interest. In the early years of a mortgage, most of each payment goes toward interest; over time, a larger share goes toward reducing the principal balance.
Annual Percentage Rate (APR)
The total yearly cost of a mortgage expressed as a percentage, including the interest rate plus other charges such as origination fees and discount points. APR provides a more complete picture of borrowing costs than the interest rate alone, making it easier to compare loan offers from different lenders.
Appraisal
A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals before approving a mortgage to ensure the property is worth at least the loan amount. The appraiser considers the home's condition, comparable recent sales, and local market conditions.
Assumable Mortgage
A mortgage that allows a homebuyer to take over the seller's existing loan, including its interest rate and remaining term. FHA, VA, and USDA loans are typically assumable, which can be advantageous when the existing rate is lower than current market rates.
B
Balloon Mortgage
A mortgage with relatively low monthly payments for a set period, after which the entire remaining balance becomes due in one large lump-sum payment. Balloon mortgages are less common for primary residences because they carry significant risk if the borrower cannot refinance or pay the balance when the balloon payment comes due.
Basis Point
A unit of measurement equal to one-hundredth of a percentage point (0.01%). Basis points are commonly used in finance to describe changes in interest rates. For example, a rate increase from 6.50% to 6.75% is a change of 25 basis points.
Bridge Loan
A short-term loan used to bridge the gap between buying a new home and selling your current one. Bridge loans typically carry higher interest rates and are meant to be repaid quickly, usually within 6 to 12 months. They can help buyers make non-contingent offers when they haven't yet sold their existing property.
Buydown
A financing arrangement where the borrower or seller pays an upfront fee to reduce the mortgage interest rate, either temporarily or permanently. A common example is a 2-1 buydown, where the rate is reduced by 2% in the first year and 1% in the second year before settling at the full rate.
C
Cap
A limit on how much the interest rate or monthly payment can change on an adjustable-rate mortgage. Caps typically include a per-adjustment cap (limits each rate change), a lifetime cap (limits total change over the loan), and sometimes a payment cap. These protections help borrowers manage risk with variable-rate loans.
Cash-Out Refinance
A type of refinancing where the new mortgage is larger than the existing one, allowing the homeowner to receive the difference in cash. Homeowners often use cash-out refinancing to access their home equity for major expenses such as home improvements, debt consolidation, or education costs.
Closing Costs
Fees and expenses paid at the closing of a real estate transaction, beyond the purchase price of the property. Closing costs typically range from 2% to 5% of the loan amount and may include appraisal fees, title insurance, origination fees, attorney fees, and prepaid items like property taxes and homeowners insurance.
Closing Disclosure
A five-page form that provides the final details of your mortgage loan, including the loan terms, projected monthly payments, and closing costs. Lenders are required to provide this document at least three business days before closing so borrowers can review the terms and compare them to the Loan Estimate.
Conforming Loan
A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan limits that are updated annually. For 2026, the conforming loan limit is $832,750 in most areas. Conforming loans generally offer lower interest rates than non-conforming loans because they can be sold on the secondary market, reducing risk for lenders.
Conventional Loan
A mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. Conventional loans can be conforming or non-conforming and typically require higher credit scores and larger down payments than government-backed loans, but they may offer more flexible terms.
Credit Score
A numerical rating, typically ranging from 300 to 850, that represents your creditworthiness based on your credit history. Mortgage lenders use credit scores to assess the risk of lending to you; higher scores generally qualify for lower interest rates and better loan terms. FICO scores are the most commonly used model in mortgage lending.
D
Debt-to-Income Ratio (DTI)
A percentage that compares your total monthly debt payments to your gross monthly income. Lenders use DTI to evaluate your ability to manage monthly payments and repay a mortgage. Most lenders prefer a DTI below 43%, though some loan programs allow higher ratios with compensating factors.
Deed of Trust
A legal document used in many states instead of a traditional mortgage that involves three parties: the borrower, the lender, and a neutral trustee. The trustee holds legal title to the property as security for the loan until the borrower repays the debt in full.
Default
The failure to meet the legal obligations of a mortgage, most commonly by missing scheduled payments. Defaulting on a mortgage can lead to foreclosure proceedings, significant damage to your credit score, and the eventual loss of the property.
Discount Points
Upfront fees paid to the lender at closing in exchange for a lower interest rate on the mortgage. One discount point typically costs 1% of the loan amount and reduces the interest rate by about 0.25%, though the exact reduction varies. Paying points can save money over the life of the loan if you plan to stay in the home long enough to recoup the upfront cost.
Down Payment
The portion of a home's purchase price that the buyer pays upfront rather than financing through a mortgage. Down payment requirements vary by loan type: conventional loans may require as little as 3%, FHA loans require 3.5%, and VA and USDA loans may require no down payment at all. A larger down payment reduces your loan amount and may eliminate the need for mortgage insurance.
E
Earnest Money
A deposit made by a buyer when submitting an offer on a home to demonstrate serious intent to purchase. Earnest money is typically 1% to 3% of the purchase price and is held in an escrow account. If the sale goes through, the deposit is applied toward the down payment or closing costs; if the buyer backs out without a valid contingency, they may forfeit the deposit.
Equity
The difference between your home's current market value and the amount you still owe on your mortgage. Equity builds over time as you make mortgage payments and as the property appreciates in value. Homeowners can access their equity through cash-out refinancing, home equity loans, or a home equity line of credit.
Escrow
An arrangement where a neutral third party holds funds or documents on behalf of the parties in a transaction. In mortgage lending, escrow serves two purposes: holding earnest money during the home purchase process, and collecting monthly payments for property taxes and homeowners insurance that the lender pays on your behalf.
F
Fannie Mae
The Federal National Mortgage Association (FNMA), a government-sponsored enterprise that purchases mortgages from lenders and packages them into mortgage-backed securities. Fannie Mae helps maintain liquidity in the mortgage market, making it easier for lenders to offer affordable home loans to a broader range of borrowers.
FHA Loan
A mortgage insured by the Federal Housing Administration that is designed for borrowers who may not qualify for conventional financing. FHA loans offer lower down payment requirements (as low as 3.5%), more flexible credit score standards, and allow higher debt-to-income ratios. Borrowers must pay a mortgage insurance premium (MIP) for the life of the loan if the down payment is less than 10%. With 10% or more down, MIP can be removed after 11 years.
Fixed-Rate Mortgage
A mortgage with an interest rate that remains the same for the entire term of the loan, providing predictable monthly payments. Fixed-rate mortgages are the most popular type of home loan in the United States, with 15-year and 30-year terms being the most common options.
Float Down
A feature offered by some lenders that allows borrowers to reduce their locked-in interest rate if market rates drop before closing. Float-down options typically come with specific conditions, such as a minimum rate decrease required to trigger the adjustment, and may involve an additional fee.
Forbearance
An agreement between the lender and borrower to temporarily reduce or suspend mortgage payments during a period of financial hardship. Forbearance does not erase the debt; the missed payments must eventually be repaid through a repayment plan, loan modification, or other arrangement. It is an alternative to default and foreclosure.
Foreclosure
The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments as agreed. Foreclosure proceedings vary by state and can take several months to over a year. It results in the loss of the home and severe damage to the borrower's credit that can last for seven years or more.
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), a government-sponsored enterprise that buys mortgages from lenders, pools them into securities, and sells them to investors. Together with Fannie Mae, Freddie Mac plays a vital role in keeping the mortgage market liquid and helping maintain affordable lending rates.
G
Good Faith Estimate
A document that was formerly required under RESPA to provide borrowers with an estimate of closing costs. The Good Faith Estimate was replaced by the Loan Estimate form in 2015 as part of the TILA-RESPA Integrated Disclosure (TRID) rules, which combined and simplified mortgage disclosures for consumers.
H
Home Equity Line of Credit (HELOC)
A revolving line of credit secured by the equity in your home, similar to a credit card. A HELOC has a draw period (typically 10 years) during which you can borrow and repay as needed, followed by a repayment period. Interest rates are usually variable, and you only pay interest on the amount you actually borrow.
Home Equity Loan
A loan that allows homeowners to borrow against the equity in their property, receiving a lump sum with a fixed interest rate and set repayment schedule. Unlike a HELOC, a home equity loan provides all the funds at once and has predictable monthly payments, making it suitable for one-time large expenses.
Homeowners Association (HOA)
An organization in a planned community or condominium that establishes and enforces rules and collects monthly or annual fees from homeowners. HOA fees cover shared expenses such as common area maintenance, amenities, and sometimes exterior maintenance or insurance. Lenders factor HOA fees into affordability calculations.
Homeowners Insurance
Insurance that protects your home and personal property against damage from covered events such as fire, theft, and certain natural disasters. Mortgage lenders require homeowners insurance as a condition of the loan to protect their investment. The cost is often included in your monthly escrow payment alongside property taxes.
HUD
The U.S. Department of Housing and Urban Development, a federal agency responsible for national housing policy and programs. HUD oversees the Federal Housing Administration (FHA), enforces fair housing laws, and provides resources for homebuyers, renters, and the homeless.
I
Interest Rate
The percentage charged by a lender for borrowing money, expressed as an annual rate. Your mortgage interest rate determines how much you pay in interest over the life of the loan. Rates are influenced by economic conditions, the Federal Reserve's monetary policy, your credit profile, and the loan type.
J
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). For 2026, any loan above $832,750 in most areas is considered jumbo. Because jumbo loans cannot be purchased by Fannie Mae or Freddie Mac, they carry more risk for lenders and typically require higher credit scores, larger down payments, and may have slightly higher interest rates.
L
Lien
A legal claim against a property that serves as security for a debt or obligation. A mortgage creates a lien on the property, giving the lender the right to seize the property through foreclosure if the borrower defaults. Other types of liens include tax liens, mechanic's liens, and judgment liens.
Loan Estimate
A standardized three-page form that lenders must provide within three business days of receiving a mortgage application. The Loan Estimate details the estimated interest rate, monthly payment, closing costs, and other key terms of the loan. It replaced the Good Faith Estimate and initial Truth in Lending disclosure in 2015.
Loan Modification
A permanent change to one or more terms of an existing mortgage to make payments more affordable. Modifications may involve reducing the interest rate, extending the loan term, or forgiving a portion of the principal balance. Borrowers typically must demonstrate financial hardship to qualify.
Loan-to-Value Ratio (LTV)
A ratio calculated by dividing the mortgage amount by the appraised value of the property. LTV is a key factor lenders use to assess risk; a higher LTV means the borrower has less equity and may need to pay for private mortgage insurance. For example, a $180,000 loan on a $200,000 home results in a 90% LTV.
Lock-In
An agreement between the borrower and lender that guarantees a specific interest rate for a set period while the loan is being processed. Also called a rate lock, this protects the borrower from rate increases during the application and closing process. Lock periods typically range from 30 to 60 days.
M
Mortgage-Backed Security (MBS)
An investment product created by pooling together a collection of mortgages and selling shares to investors. MBS enable lenders to free up capital to make more loans. The performance of MBS is closely tied to the housing market and interest rates, and these securities play a significant role in determining mortgage rates.
Mortgage Broker
A licensed professional who acts as an intermediary between borrowers and multiple lenders to find the best loan terms. Unlike a loan officer who works for a single bank, a mortgage broker can shop your application across many lenders and may be able to access rates and programs not available directly to consumers.
Mortgage Insurance Premium (MIP)
The insurance premium required on FHA loans that protects the lender against losses if the borrower defaults. MIP consists of an upfront premium (typically 1.75% of the loan amount) paid at closing and an annual premium divided into monthly payments. Unlike conventional PMI, MIP on most FHA loans cannot be canceled and lasts the life of the loan.
O
Origination Fee
A fee charged by the lender for processing a new mortgage application, typically ranging from 0.5% to 1% of the loan amount. The origination fee covers the lender's administrative costs including underwriting, document preparation, and funding the loan. This fee is disclosed on the Loan Estimate and Closing Disclosure.
P
PITI
An acronym for Principal, Interest, Taxes, and Insurance, which together make up the total monthly housing payment for most homeowners. Lenders use PITI when calculating affordability and debt-to-income ratios. The taxes and insurance portions are often collected through an escrow account managed by the loan servicer.
PMI
See Private Mortgage Insurance.
Points
Fees paid to a lender, expressed as a percentage of the loan amount. Points come in two forms: discount points, which are prepaid interest used to lower the rate, and origination points, which cover the lender's loan processing costs. One point equals 1% of the loan amount.
Pre-Approval
A conditional commitment from a lender indicating how much you can borrow based on a thorough review of your financial information, including income verification, credit check, and asset documentation. Pre-approval carries more weight than pre-qualification and signals to sellers that you are a serious and qualified buyer.
Pre-Qualification
An initial assessment by a lender of how much you may be able to borrow, typically based on self-reported financial information. Pre-qualification is less rigorous than pre-approval and does not involve verification of your income, assets, or credit history. It provides a general estimate useful for budgeting purposes.
Prepayment Penalty
A fee charged by some lenders if you pay off your mortgage early, either through refinancing or selling the property before a specified date. Prepayment penalties have become less common in recent years due to regulatory changes. It is important to check whether your loan includes this provision before signing.
Principal
The outstanding balance of a mortgage, not including interest or other charges. Each monthly mortgage payment is split between principal and interest. Reducing the principal builds equity in your home. Making extra payments toward principal can significantly reduce the total interest paid and shorten the loan term.
Private Mortgage Insurance
Insurance that protects the lender if a borrower defaults on a conventional mortgage with a down payment of less than 20%. PMI is paid by the borrower as a monthly premium added to the mortgage payment. Unlike FHA mortgage insurance, conventional PMI can be canceled once the loan-to-value ratio reaches 80% or lower.
R
Rate Lock
A commitment from a lender to hold a specific interest rate for a defined period, typically 30 to 60 days, while your mortgage application is processed. Rate locks protect borrowers from rate increases during the closing period. If rates drop, some lenders offer a float-down option to secure the lower rate.
Refinance
The process of replacing an existing mortgage with a new loan, typically to obtain a lower interest rate, change the loan term, or access home equity. Refinancing involves closing costs similar to the original mortgage, so borrowers should calculate the break-even point to determine if refinancing makes financial sense.
RESPA
The Real Estate Settlement Procedures Act, a federal law that requires lenders, mortgage brokers, and servicers to provide borrowers with disclosures about the nature and costs of the real estate settlement process. RESPA prohibits kickbacks and referral fees that could increase costs, and it limits the amount lenders can require for escrow accounts.
Reverse Mortgage
A loan available to homeowners aged 62 and older that allows them to convert a portion of their home equity into cash without selling the home or making monthly payments. The loan is repaid when the borrower sells the home, moves out permanently, or passes away. The most common type is the FHA-insured Home Equity Conversion Mortgage (HECM).
S
Second Mortgage
A loan taken out using your home as collateral while the original mortgage is still in place. Second mortgages are subordinate to the first mortgage, meaning the first lender gets paid first in the event of foreclosure. Home equity loans and HELOCs are common forms of second mortgages.
T
Title Insurance
Insurance that protects the buyer and lender against financial loss from defects in the title to a property, such as liens, encumbrances, or ownership disputes. Title insurance is typically required by lenders, and there are two types: a lender's policy (required) and an owner's policy (optional but recommended). The premium is usually a one-time payment made at closing.
Title Search
An examination of public records to verify the legal ownership of a property and identify any claims, liens, or other encumbrances against it. A title search is conducted before closing to ensure the seller has the legal right to transfer ownership and that the buyer will receive a clear title.
Truth in Lending (TILA)
A federal law that requires lenders to clearly disclose the terms and costs of a loan, including the annual percentage rate, total finance charges, and payment schedule. TILA is designed to help consumers compare different loan offers and make informed borrowing decisions. It is enforced by the Consumer Financial Protection Bureau (CFPB).
U
Underwriting
The process by which a lender evaluates the risk of issuing a mortgage to a borrower. During underwriting, the lender verifies your income, assets, debts, credit history, and the property's value and condition. The underwriter ultimately decides whether to approve, deny, or conditionally approve the loan application.
USDA Loan
A mortgage program backed by the U.S. Department of Agriculture that offers zero-down-payment financing to eligible borrowers purchasing homes in designated rural and suburban areas. USDA loans have income limits and property location requirements, but they provide competitive interest rates and reduced mortgage insurance costs compared to FHA loans.
V
VA Loan
A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, and certain surviving spouses. VA loans offer significant benefits including no down payment, no private mortgage insurance, competitive interest rates, and limited closing costs.
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