Mortgage Glossary
Understanding mortgage terminology is essential when navigating the home buying or refinancing process. Below is a comprehensive Glossary of Mortgage Terms to help you make informed decisions and feel confident throughout your homeownership journey.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on market conditions. Typically starts with a fixed rate for a set period before adjusting annually.
Amortization
The process of gradually paying off a loan through scheduled payments over time, which include both principal and interest.
Annual Percentage Rate (APR)
The total yearly cost of a loan, including the interest rate and any additional fees, expressed as a percentage.
Appraisal
An evaluation of a property’s market value by a licensed appraiser, required by lenders to determine the loan amount.
Closing Costs
Fees and expenses paid at the closing of a mortgage transaction, including lender fees, title insurance, and escrow costs.
Debt-to-Income (DTI) Ratio
A financial metric used by lenders to determine a borrower’s ability to repay a loan, calculated by dividing monthly debt payments by gross monthly income.
Down Payment
The upfront payment made when purchasing a home, typically expressed as a percentage of the total purchase price.
Equity
The difference between the home’s market value and the outstanding mortgage balance. As homeowners pay down their mortgage, equity increases.
Escrow
An account managed by a third party where funds are held for property taxes, homeowners insurance, and other costs until they are due.
Fixed-Rate Mortgage
A home loan with a constant interest rate and predictable monthly payments for the entire loan term.
Homeowners Insurance
A policy that protects homeowners from financial loss due to damage, theft, or liability, required by lenders for mortgage approval.
Loan Estimate
A document provided by lenders outlining the estimated costs, interest rate, monthly payment, and loan terms before finalizing a mortgage.
Loan-to-Value (LTV) Ratio
A ratio comparing the loan amount to the appraised value of a home, used by lenders to assess risk.
Mortgage Insurance (PMI/MIP)
Insurance required for loans with down payments below 20% to protect lenders in case of borrower default. Private Mortgage Insurance (PMI) applies to conventional loans, while Mortgage Insurance Premium (MIP) is used for FHA loans.
Pre-Approval
A lender’s conditional approval stating how much a borrower qualifies for based on income, credit, and financial details, strengthening a buyer’s offer.
Principal
The original loan amount borrowed before interest is applied.
Refinancing
Replacing an existing mortgage with a new loan, often to secure a lower interest rate, change loan terms, or access home equity.
Underwriting
The lender’s review process to assess a borrower’s creditworthiness and determine loan approval based on financial history and risk factors.