Mortgage Glossary
Comprehensive definitions of mortgage terms, home buying concepts, and real estate jargon. Find clear explanations for everything from APR to underwriting.
A
Ability-to-Repay rule
The ability-to-repay rule requires lenders to confirm that you can afford to repay a loan before they issue it. They check your income, assets, and credit to ensure you can handle the payments.
Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage, or ARM, has an interest rate that changes over time. It starts with a fixed rate, and after that, the rate can go up or down based on market conditions.
Amortization
Loan amortization is how your mortgage payments are divided between paying off the loan's principal and interest over time. Early on, more of your payment goes to interest, and later, more goes toward the principal.
Annual Percentage Rate (APR)
The annual percentage rate, or APR, is the total cost of borrowing money. It includes the interest rate plus any additional lender fees, giving you a more complete picture of the loan’s cost.
Appraisal
An appraisal is a professional estimate of a home's market value. Lenders require this to ensure the loan amount is not more than the home is actually worth.
Appreciation
Home appreciation is when a property's value goes up over time. As a home appreciates, the homeowner's equity in the property grows.
Assessed value
The assessed value is a home's value as determined by a local government for the purpose of calculating property taxes. It’s often different from the market value.
Assets
Assets are anything you own that has a monetary value, such as cash, investments, real estate, or other valuable possessions.
Automatic payment
An automatic payment is a scheduled withdrawal from your bank account to cover a monthly bill, like a mortgage. It's a convenient way to ensure on-time payments.
B
Balloon loan
A balloon loan is a type of mortgage with a large lump sum payment, called a balloon payment, due at the end of the loan term. This type of loan is considered non-traditional.
Biweekly payment
A biweekly payment plan involves making a mortgage payment every two weeks instead of once a month. This results in one extra full payment per year, helping you pay off your loan faster.
Break-even point
The break-even point is the moment when the money you've saved from a lower interest rate equals the upfront cost of getting that rate. This helps you determine if a particular financial decision, like buying mortgage points, is worthwhile.
Bridge loan
A bridge loan is a short-term loan used to bridge the gap between buying a new house and selling your old one. These are typically short-term loans.
Broker
A real estate broker is a licensed professional who oversees real estate transactions. They ensure all legal requirements are met, paperwork is correct, and funds are distributed properly.
Buydown
A buydown is a way to lower your mortgage's interest rate. You pay an upfront fee at closing, which reduces your rate and saves you money over the life of the loan.
C
Cash to close
Cash to close is the total amount of money you must pay on the day of closing. It includes your down payment and all closing costs.
Cash-out refinance
A cash-out refinance is a way to borrow against your home's equity. You replace your current mortgage with a larger one and receive the difference in cash, all while keeping a single monthly payment.
Closing
Closing is the final stage of buying a home. It's when you sign the legal documents and transfer the funds to officially take ownership of the property.
Closing costs
Closing costs are the fees you pay to a lender to finalize your mortgage. These typically range from 3% to 6% of the loan amount and cover things like appraisal fees, title insurance, and other administrative expenses.
Closing Disclosure
A Closing Disclosure is a five-page document that provides the final details of your loan. It lists your interest rate, monthly payment, and all closing costs, and you must receive it at least three business days before closing.
Co-borrower
A co-borrower is a person who applies for a mortgage with you. Both of you are legally responsible for repaying the loan, and you typically both have ownership of the home.
Co-signer
A co-signer is a person who signs a loan agreement with you and agrees to be responsible for the debt. While they share the legal obligation to repay the loan, they usually don't have ownership of the property.
Collateral
Collateral is an asset that is pledged to a lender to secure a loan. For a mortgage, the home itself serves as collateral, meaning the lender can seize the property if you fail to make payments.
Construction loan
A construction loan is a short-term loan to cover the costs of building a new home. Once the house is complete, the loan is typically paid off with a traditional, long-term mortgage.
Contingency
A contingency is a condition in a home purchase agreement that must be met for the sale to go through. If the condition isn't met, the buyer can back out of the deal.
Conventional loan
A conventional loan is a mortgage not guaranteed or insured by a government agency. These loans typically have stricter qualification requirements for borrowers compared to government-backed loans.
Credit report
A credit report is a detailed summary of your financial history. It includes information on all your loans, credit accounts, and payment history, which lenders use to assess your creditworthiness.
Credit score
A credit score is a three-digit number that represents your creditworthiness. It's based on your credit history, and a higher score indicates a lower risk to lenders, making it easier to get approved for a loan.
D
Debt-to-income ratio (DTI)
Your debt-to-income ratio, or DTI, is a number that compares your total monthly debt payments to your gross monthly income. Lenders use it to see if you can afford a new loan, and a high DTI can make it harder to qualify.
Deed
A deed is a legal document that proves ownership of a property. It's the official record that you have title to the home.
Deed in lieu of foreclosure
A deed in lieu of foreclosure is when you voluntarily transfer your property's deed to the lender to avoid the foreclosure process. This can be less damaging to your credit than a full foreclosure.
Deed of trust
A deed of trust is a legal agreement used in some states to secure a mortgage. It involves a third party that holds the property title until the loan is fully repaid.
Demand feature
A demand feature is a clause in a loan agreement that allows the lender to demand immediate repayment of the entire loan balance. This is rare in mortgages but can be found in some loan types.
Down payment
A down payment is the initial payment you make toward the purchase of a home. It's a percentage of the home's price, paid at closing, and reduces the total amount you need to borrow.
E
Earnest money deposit
An earnest money deposit is a sum of money you give to a seller when you make an offer on a home. It shows you're serious about the purchase and is credited toward your down payment if the sale is completed.
Encumbrance
An encumbrance is a claim or charge on a property that affects its title and limits how the owner can use it. Examples include liens, easements, or zoning laws.
Equity
Home equity is the portion of your home's value that you actually own. It's calculated by subtracting your remaining mortgage balance from the home’s current market value.
Escrow
An escrow account is a third-party account where a lender holds funds to pay for your property taxes and homeowners insurance. A portion of your monthly mortgage payment goes into this account to cover these bills.
F
Fair market value (FMV)
Fair market value is the price a property would sell for on the open market, with a willing buyer and seller. This is a common term used in real estate transactions.
Fannie Mae
Fannie Mae is a government-sponsored enterprise that buys mortgages from lenders. This helps keep the housing market stable and ensures there is enough money for more home loans.
Federal Housing Administration (FHA)
The Federal Housing Administration, or FHA, is a government agency that insures FHA loans. By backing these loans, the FHA makes it possible for lenders to offer mortgages to a wider range of borrowers with lower down payments.
FHA mortgage insurance premiums (MIP)
FHA mortgage insurance premiums, or MIP, are required for all FHA loans. There's an upfront premium paid at closing, plus an annual premium that is added to your monthly payments.
FHA mortgage limits
FHA mortgage limits are the maximum loan amounts you can borrow with an FHA loan. These limits are set by the government and vary by location.
Finance charge
A finance charge is a fee you pay to a lender for the cost of borrowing money. It can be a flat fee or a percentage of the loan amount, and it’s meant to offset the lender's risk.
Fixed-rate mortgage
A fixed-rate mortgage is a home loan where the interest rate remains the same for the entire life of the loan. This provides predictable and stable monthly payments.
Floating rate
A floating rate is an interest rate that changes over time based on market conditions. This is another name for a variable or adjustable-rate mortgage.
Forbearance
Mortgage forbearance is a temporary pause or reduction in your mortgage payments. It can provide relief during financial hardship, but the missed payments must be repaid later.
Force-placed insurance
Force-placed insurance is an insurance policy a lender buys for your home if your homeowners insurance lapses. This insurance protects the lender's interest, but it is typically more expensive than what you could get yourself.
Foreclosure
Foreclosure is a legal process where a lender takes possession of a property when the homeowner fails to make their mortgage payments. It is the bank's way of recovering the money they are owed.
Freddie Mac
Freddie Mac is a government-sponsored enterprise that buys mortgages from lenders, particularly smaller ones. This helps provide funds to the market so that more people can get home loans.
G
Good Faith Estimate
The Good Faith Estimate was a form that gave borrowers an estimate of their mortgage costs. It was replaced by the Loan Estimate form in 2015.
Government recording charges
Government recording charges are fees paid to local and state governments to record the legal documents of a home sale, such as the deed and mortgage.
H
Higher-priced mortgage loan
A higher-priced mortgage loan is a mortgage where the APR is significantly higher than the average rate for a similar loan. These loans are subject to special regulatory requirements and are typically offered to borrowers with a higher risk profile.
Home equity line of credit (HELOC)
A HELOC, or home equity line of credit, allows you to borrow against your home's equity as needed. It works like a credit card, giving you a line of credit you can draw from during a set period, and it uses your home as collateral.
Home equity loan
A home equity loan is a way to borrow against your home's equity. You receive a lump sum of cash upfront and pay it back with fixed monthly payments, essentially a second mortgage on your home.
Home inspection
A home inspection is a professional examination of a property's condition. An inspector checks the home's structure, systems, and appliances and provides a report detailing any issues or necessary repairs.
Homeowners association (HOA)
A homeowners association, or HOA, is a private organization that manages a residential community. HOAs enforce rules for homeowners and charge fees to maintain shared areas and services.
Homeowners insurance
Homeowners insurance is a policy that protects your home against damage from a variety of events, such as fires or natural disasters. Lenders require this insurance to protect their investment in your property.
HUD (Housing and Urban Development)
HUD, or the U.S. Department of Housing and Urban Development, is a government agency that works to provide fair and affordable housing. They help make homeownership accessible and fight against housing discrimination.
I
Initial adjustment cap
An initial adjustment cap is a limit on how much an interest rate can increase during the very first adjustment period of an adjustable-rate mortgage.
Interest rate
The interest rate is the percentage a lender charges you to borrow money for a mortgage. This rate can be fixed, staying the same for the life of the loan, or variable, meaning it can change.
Interest rate cap
An interest rate cap is a limit on how high or low the interest rate on an adjustable-rate mortgage can go. It protects you from extreme rate fluctuations.
Investment Property
An investment property is real estate purchased with the goal of generating income, either through rent or by selling it later for a profit.
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L
Lien
A lien is a legal claim against a property. It serves as collateral for a debt, giving the lienholder the right to seize the property if the debt is not repaid.
Lifetime adjustment cap
A lifetime adjustment cap is the maximum amount an interest rate can increase or decrease over the entire life of an adjustable-rate mortgage.
Loan assumption
Loan assumption is when a buyer takes over the seller's existing mortgage. This allows them to avoid getting a new loan and can be beneficial if the seller's interest rate is lower than the current market rates.
Loan deferment
Loan deferment allows you to temporarily postpone or move missed mortgage payments to the end of your loan term. You must demonstrate financial hardship to qualify.
Loan Estimate
A Loan Estimate is a standardized form that provides an estimate of the key terms and costs of a mortgage. It details your interest rate, monthly payment, and all closing costs.
Loan modification
A loan modification is a permanent change to your original mortgage terms, such as the interest rate or loan term. It's a way for lenders to help borrowers who are struggling to make payments.
Loan origination
Loan origination is the entire process of a lender creating and issuing a new mortgage. This includes everything from the initial application to underwriting and funding the loan.
Loan term
A loan term is the length of time you have to repay a loan, as specified in the loan agreement. Common mortgage loan terms are 15 or 30 years.
Loan-to-value ratio (LTV)
The loan-to-value ratio, or LTV, is a number that compares the amount of your mortgage to the appraised value of the home. A higher LTV, typically over 80%, may require you to pay private mortgage insurance.
Loss mitigation
Loss mitigation is the process where a lender works with a borrower who is having trouble making mortgage payments. This can include options like loan modifications, forbearance, or deferment to help the borrower avoid foreclosure.
M
Manufactured home
A manufactured home is a type of housing built in a factory to federal standards and then transported to a home site. These homes are sometimes called mobile homes or prefabricated homes.
Mortgage
A mortgage is a loan used to buy a home. It's a legal agreement where the home serves as collateral, and the borrower repays the loan amount plus interest over a set period.
Mortgage insurance
Mortgage insurance is a policy that protects the lender in case a borrower defaults on their loan. It's often required if you make a down payment of less than 20%.
Mortgage lender
A mortgage lender is a financial institution that provides home loans. They assess your financial situation and offer you a mortgage to buy a home.
Mortgage points
Mortgage points are an upfront fee you can pay to a lender in exchange for a lower interest rate on your mortgage. One point is equal to 1% of the loan amount.
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O
Owner financing
Owner financing is when the seller of a property acts as the lender to the buyer. This arrangement is an alternative to a traditional mortgage from a bank or other financial institution.
Owner-occupied
An owner-occupied property is a home where the owner lives full time. In real estate, this typically means a borrower lives in the home they are financing.
P
Partial claim
A partial claim is a loss mitigation option for FHA loan borrowers in which a lender pays off your past-due amount and adds it as a non-interest-bearing lien on your home. This is paid off when you sell or refinance.
Payoff amount
The payoff amount is the total sum of money required to completely pay off a mortgage. It includes the remaining principal, any accrued interest, and other fees.
Permanent Change of Station (PCS) orders
Permanent Change of Station, or PCS, orders are official directives for military personnel to relocate to a new duty station. These orders often come with specific guidelines and can impact a home loan.
Preapproval
Mortgage preapproval is a conditional commitment from a lender to give you a loan up to a specific amount. It involves a detailed review of your finances and gives you a clear idea of what you can afford when shopping for a home.
Prepaid interest charges
Prepaid interest is the interest on your mortgage that you pay at closing. It covers the time between your closing date and the end of the month.
Prepayment penalty
A prepayment penalty is a fee a lender charges if you pay off your mortgage before a certain time. This is a clause you should be aware of when you get your loan.
Prequalification
Prequalification is a quick, initial estimate from a lender about how much you could borrow. It's based on a brief review of your financial information and is not as reliable as a preapproval.
Prime rate
The prime rate is a benchmark interest rate that banks use to set their lending rates. It’s generally the lowest rate offered to borrowers with the best credit.
Principal
The principal is the original amount of money you borrow for a loan. Your monthly payments go toward reducing this balance, along with paying the interest.
Principal, interest, taxes, and insurance (PITI)
PITI is an acronym that stands for Principal, Interest, Taxes, and Insurance. These four components make up your total monthly mortgage payment and are used by lenders to assess your ability to repay the loan.
Private mortgage insurance (PMI)
Private mortgage insurance, or PMI, is a policy that protects the lender in case you default on a conventional loan. It's required if your down payment is less than 20% of the home's value.
Property taxes
Property taxes are taxes paid to local governments based on a home’s assessed value. They are used to fund public services like schools, police, and roads.
Purchase agreement
A purchase agreement is a legally binding contract that outlines the terms and conditions of a home sale. It is negotiated between the buyer and the seller.
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Rate lock
A rate lock is a guarantee from a lender that your mortgage interest rate will not change between the time of your application and closing. This protects you if market rates rise.
Real estate agent
A real estate agent is a licensed professional who helps buyers and sellers navigate a home sale. They represent their client’s interests and handle the negotiations and paperwork.
Real Estate Settlement Procedure Act (RESPA)
RESPA is a federal law that requires lenders to provide borrowers with clear and complete information about the costs of a mortgage. This helps protect consumers from hidden fees and surprises.
Refinance
To refinance is to replace your existing mortgage with a new one. People refinance to get a lower interest rate, change their loan term, or convert their home equity into cash.
Repayment period
The repayment period is the length of time you have to repay a loan. For a mortgage, it's the full loan term. For a HELOC, it's the period after the draw period ends, when you can no longer borrow money.
Reverse mortgage
A reverse mortgage is a loan for older homeowners that allows them to borrow against their home’s equity. The lender pays the homeowner, increasing the loan balance, and the loan is repaid when the homeowner sells the home or passes away.
Right of first refusal (ROFR)
The right of first refusal is a legal right that gives a person the chance to purchase a property before it is offered to anyone else. It is often found in rental agreements.
Right of rescission
The right of rescission is a federal law that allows a homeowner to cancel certain types of refinance loans within three business days after closing.
S
Second mortgage
A second mortgage is a loan taken out against a home that already has a mortgage. It uses the home's equity as collateral and gives you access to a lump sum or a line of credit.
Secured Overnight Financing Rate (SOFR)
SOFR is a benchmark interest rate used by banks to determine the cost of overnight borrowing. It replaced LIBOR as the standard rate for many variable-rate loans.
Security interest
A security interest is a legal right given to a lender that allows them to take and sell a property if the borrower fails to repay the loan. This is what makes a mortgage a secured loan.
Seller concessions
Seller concessions are when a seller agrees to pay some of a buyer's closing costs. This is often a part of a negotiation to make a deal more attractive to a buyer.
Seller financing
Seller financing is a home sale where the seller acts as the lender and the buyer makes payments directly to them. This is an alternative to a traditional mortgage from a bank.
Servicer
A mortgage servicer is the company that manages the daily tasks of your mortgage after closing. They handle your payments, escrow account, and customer service for your loan.
Shared appreciation mortgage (SAM)
A shared appreciation mortgage, or SAM, is a loan where the lender gets a percentage of the home's appreciation in exchange for a lower interest rate or other upfront benefits.
Short sale
A short sale is when a homeowner sells a property for less than the amount they owe on the mortgage. The lender agrees to this to avoid the foreclosure process and its associated costs.
Subprime mortgage
A subprime mortgage is a loan offered to borrowers with a low credit score or poor credit history. These loans often have higher interest rates and fees because they are considered to be high-risk.
Survey
A survey, or land survey, is a professional drawing of a property's boundaries and features. It's often required by lenders to ensure the property is accurately represented.
T
Title
A title is a legal document that proves ownership of a property. It shows a complete history of the home, including all past owners and any liens.
Title insurance
Title insurance is a policy that protects a homeowner and their lender from financial loss due to defects in a property's title. You pay a single premium at closing for coverage for as long as you own the home.
Title service fees
Title service fees are a part of your closing costs. These fees cover the cost of a title search and the title insurance policy for your lender.
Truth in Lending Act (TILA)
The Truth in Lending Act, or TILA, is a federal law that protects consumers by requiring lenders to clearly disclose all the terms and costs of a loan. This prevents predatory lending practices.
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U.S. Department of Agriculture (USDA) loan
A USDA loan is a government-backed mortgage for low- to middle-income borrowers in eligible rural areas. It often allows for no down payment and has competitive interest rates.
Underwriting
Underwriting is the process where a lender verifies your financial information and the property's value before approving a loan. The underwriter makes sure you meet all the loan requirements.
Unsecured loan
An unsecured loan is a loan that is not backed by collateral. In contrast, a secured loan, like a mortgage, uses an asset, such as a home, to guarantee the loan.
Up-front costs
Up-front costs are the expenses you must pay at the beginning of a transaction, such as closing costs and a down payment when buying a home.
V
Verified Approval Letter (VAL)
A Verified Approval Letter is a mortgage preapproval from a lender who has thoroughly verified your credit and financial information. It gives sellers confidence that your offer is strong.
Veterans Affairs (VA) loan
A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs. It's a special loan for active-duty military, veterans, and eligible spouses, which often allows for no down payment.
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10/1 Adjustable-rate mortgage
A 10/1 ARM is a mortgage where the interest rate stays the same for the first 10 years. After this period, the rate can change once a year.
5/1 Adjustable-rate mortgage
A 5/1 adjustable-rate mortgage (ARM) has a fixed interest rate for the first 5 years. After that, the rate can change once a year for the rest of the loan term.
5/6 Adjustable-rate mortgage
A 5/6 ARM is a home loan with a fixed interest rate for the first 5 years. After that, the rate changes every six months for the rest of the loan period.
7/1 Adjustable-rate mortgage
A 7/1 ARM is a mortgage with an initial fixed interest rate for 7 years. Afterward, the rate changes once per year for the remainder of the loan.
7/6 Adjustable-rate mortgage
A 7/6 ARM provides a fixed, lower interest rate for the first 7 years. Following this, the interest rate changes every 6 months based on the market.
