Mortgage Glossary
Definitions for essential mortgage and real estate terms to help you navigate the home loan process with confidence.
A
- Adjustable Rate Mortgage (ARM)
- A mortgage with an interest rate that changes periodically based on an index. ARMs typically start with a lower fixed rate for an initial period (such as 5, 7, or 10 years) and then adjust annually. Rate changes are subject to caps that limit how much the rate can increase at each adjustment and over the life of the loan.
- Amortization
- The process of paying off a loan through regular monthly payments over time. Each payment is split between principal (the loan balance) and interest. In the early years, a larger portion goes toward interest; as the loan matures, more of each payment is applied to the principal.
- Annual Percentage Rate (APR)
- The total annual cost of a mortgage expressed as a percentage. APR includes not only the interest rate but also points, broker fees, and certain other charges, giving borrowers a more complete picture of the true cost of borrowing compared to the interest rate alone.
- Appraisal
- A professional evaluation of a property's market value conducted by a licensed appraiser. Lenders require an appraisal to ensure the property is worth at least the amount being borrowed. The appraiser considers the property's condition, size, location, and comparable recent sales in the area.
- Assessed Value
- The value assigned to a property by a local government tax assessor for the purpose of calculating property taxes. Assessed value may differ from the appraised or market value of the property and is typically updated on a regular basis.
B
- Balloon Mortgage
- A mortgage with relatively low monthly payments for a fixed period (usually 5 to 7 years), after which the entire remaining balance becomes due in one lump-sum payment. Balloon mortgages may offer lower initial rates but carry the risk of a large payment at the end of the term.
C
- Cap Limits
- Restrictions on how much the interest rate or monthly payment on an adjustable-rate mortgage can change. Caps typically include an initial adjustment cap (the maximum the rate can change at the first adjustment), a periodic cap (the maximum change at each subsequent adjustment), and a lifetime cap (the maximum total increase over the life of the loan).
- Cash to Close
- The total amount of money a buyer needs to bring to the closing table. This includes the down payment, closing costs, prepaid items (such as property taxes and insurance), and any other fees, minus any credits from the seller or lender.
- Collateral
- An asset pledged as security for a loan. In a mortgage, the property being purchased serves as collateral. If the borrower fails to repay the loan, the lender has the right to take possession of the property through foreclosure.
- Conventional Mortgage
- A home loan that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. Conventional mortgages typically require higher credit scores and larger down payments than government-backed loans but may offer more flexible terms and lower overall costs for well-qualified borrowers.
D
- Deed
- A legal document that transfers ownership of real property from one party to another. The deed is recorded with the county and serves as the official record of property ownership.
- Deed of Trust
- A legal document used in some states instead of a mortgage. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds legal title to the property until the loan is paid in full.
- Default
- The failure to fulfill the terms of a loan agreement, most commonly by missing scheduled mortgage payments. Defaulting on a mortgage can lead to late fees, damage to your credit score, and ultimately foreclosure if the situation is not resolved.
E
- Earnest Money Agreement
- A deposit made by a buyer to demonstrate serious intent to purchase a property. Earnest money is typically held in an escrow account and applied toward the down payment or closing costs at closing. If the buyer backs out without a valid reason, the seller may keep the earnest money.
- Easement
- A legal right to use another person's land for a specific purpose, such as access to a road or utility lines. Easements are recorded on the property's title and transfer with the property when it is sold.
- Equity
- The difference between a property's current market value and the outstanding balance on the mortgage. Equity increases as you pay down your loan and as the property appreciates in value. Homeowners can borrow against their equity through home equity loans or lines of credit.
- Escrow
- An account held by a third party (often the lender or a title company) that collects and distributes funds for specific purposes. In a mortgage, escrow accounts are commonly used to hold funds for property tax and homeowners insurance payments, which the lender pays on your behalf from the account.
F
- First Mortgage
- The primary loan secured by a property, which takes priority over any other liens or mortgages. In the event of foreclosure, the first mortgage is paid off before any secondary loans (such as a home equity loan).
- Fixed Interest Rate
- An interest rate that remains the same for the entire term of the loan. Fixed rates provide predictable monthly payments and protection against rising interest rates, making them a popular choice for long-term homeowners.
- Foreclosure
- The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments. Foreclosure results in the loss of the home and significant damage to the borrower's credit. It is important to contact your lender early if you are having difficulty making payments to explore alternatives.
G
- Gift Letter
- A written statement from a family member or other approved donor confirming that funds given to a borrower for a down payment are a gift and do not need to be repaid. Lenders require gift letters to verify that the funds are not an additional loan that would increase the borrower's debt.
- Gross Monthly Income
- Your total monthly income before taxes, deductions, and other withholdings. Lenders use gross monthly income to calculate debt-to-income ratios when determining how much you can afford to borrow.
H
- Hazard Insurance
- Insurance that protects the property owner and lender against losses caused by physical damage to the property from events such as fire, wind, hail, or other covered hazards. Hazard insurance is typically a component of a homeowners insurance policy and is required by mortgage lenders.
- Home Equity Line of Credit (HELOC)
- A revolving line of credit secured by the equity in your home. A HELOC works similarly to a credit card — you can borrow up to a set limit, repay, and borrow again during the draw period. HELOCs typically have variable interest rates and are often used for home improvements, debt consolidation, or major expenses.
I
- Index
- A benchmark interest rate used to calculate the adjustable rate on an ARM. Common indices include the Secured Overnight Financing Rate (SOFR) and the Constant Maturity Treasury (CMT). The lender adds a margin (a fixed percentage) to the index to determine your adjusted interest rate.
J
- Jumbo Loan
- A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be sold to these government-sponsored enterprises, they typically carry higher interest rates and require larger down payments, higher credit scores, and more cash reserves.
L
- Legal Description
- A formal description of a property's boundaries and location as recorded in public records. Unlike a street address, a legal description precisely identifies the property using methods such as metes and bounds, lot and block numbers, or government surveys.
- Lien
- A legal claim against a property that must be satisfied before the property can be sold or refinanced. A mortgage is a type of lien. Other liens can result from unpaid taxes, contractor work, or court judgments.
- Loan-to-Value Ratio (LTV)
- The ratio of the mortgage loan amount to the appraised value of the property, expressed as a percentage. For example, a $180,000 loan on a $200,000 property results in a 90% LTV. Lower LTV ratios generally mean better loan terms, and an LTV above 80% typically requires private mortgage insurance (PMI).
M
- Monthly Payment
- The amount paid each month toward a mortgage. A typical monthly mortgage payment includes principal, interest, property taxes, and homeowners insurance (commonly referred to as PITI). If applicable, it may also include private mortgage insurance (PMI) and homeowners association (HOA) dues.
- Mortgage
- A loan used to purchase real estate, where the property itself serves as collateral. The borrower agrees to repay the loan over a set period (typically 15 or 30 years) with regular monthly payments that include principal and interest.
O
- Origination Fee
- A fee charged by the lender for processing and underwriting a new loan. Origination fees are typically expressed as a percentage of the loan amount (often around 0.5% to 1%) and are paid at closing.
P
- PITI Reserves
- Cash reserves that a borrower has available after closing, measured in months of principal, interest, taxes, and insurance (PITI) payments. Many lenders require borrowers to have two to six months of PITI reserves to ensure they can continue making payments in the event of a financial disruption.
- Private Mortgage Insurance (PMI)
- Insurance that protects the lender if the borrower defaults on a conventional mortgage with a down payment of less than 20%. PMI is typically added to the monthly mortgage payment and can be removed once the borrower reaches 20% equity in the home.
- Purchase Contract
- A legally binding agreement between a buyer and seller that outlines the terms and conditions of a real estate transaction, including the purchase price, contingencies, closing date, and responsibilities of each party.
Q
- Qualifying Ratios
- Calculations used by lenders to determine how much a borrower can afford. The two main ratios are the front-end ratio (monthly housing costs divided by gross monthly income) and the back-end ratio (total monthly debt payments divided by gross monthly income). Most lenders look for a front-end ratio of 28% or less and a back-end ratio of 36% to 43% or less.
R
- Rate Lock
- A commitment from a lender to hold a specific interest rate for a set period while your loan application is being processed. Rate locks protect borrowers from interest rate increases during the time between application and closing, typically lasting 30 to 60 days.
T
- Title Insurance
- Insurance that protects the buyer and lender against financial loss due to defects in the property's title, such as liens, encumbrances, or ownership disputes that were not discovered during the title search. There are two types: lender's title insurance (required by the lender) and owner's title insurance (optional but recommended).
- Truth in Lending Act (TILA)
- A federal law that requires lenders to disclose key terms and costs of a loan to borrowers before they commit. TILA disclosures include the annual percentage rate (APR), total finance charges, payment schedule, and total amount to be repaid, allowing borrowers to compare offers from different lenders.
U
- Underwriting
- The process by which a lender evaluates a borrower's creditworthiness and the risk of making a loan. During underwriting, the lender reviews the borrower's credit history, income, assets, debts, and the property's appraisal to determine whether to approve the loan and under what terms.
V
- VA Loan
- A mortgage loan 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 requirement, no private mortgage insurance, and competitive interest rates.
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