Definitions of common mortgage terms explained in plain language.
A mortgage with an interest rate that changes periodically based on a benchmark index. Typically starts with a lower fixed rate for an initial period (e.g., 5 years), then adjusts annually.
The process of paying off a loan through regular scheduled payments of principal and interest over a set period. Early payments are mostly interest; later payments are mostly principal.
The total yearly cost of borrowing expressed as a percentage. Includes the interest rate plus fees and other charges, giving a more complete picture of loan cost than the interest rate alone.
A professional assessment of a property's market value conducted by a licensed appraiser. Required by lenders to ensure the property is worth the loan amount.
A mortgage that allows a buyer to take over the seller's existing loan terms, including interest rate and remaining balance, subject to lender approval.
One hundredth of a percentage point (0.01%). Used to measure small changes in interest rates. For example, a rate change from 6.50% to 6.75% is a 25 basis point increase.
A short-term loan used to bridge the gap between buying a new property and selling an existing one. Typically has higher interest rates and shorter terms.
A financing technique where the borrower pays an upfront fee (discount points) to reduce the interest rate for the initial years or the entire loan term.
Refinancing a mortgage for more than the current balance, with the difference paid to the borrower in cash. Used to access home equity for renovations, debt consolidation, or other purposes.
Fees and expenses paid at the closing of a real estate transaction, typically 2-5% of the loan amount. Includes appraisal, title insurance, origination fees, attorney fees, and prepaid items.
A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan limits. Conforming loans typically offer lower interest rates than non-conforming (jumbo) loans.
A mortgage loan not insured or guaranteed by a government agency (FHA, VA, or USDA). May require private mortgage insurance (PMI) if the down payment is less than 20%.
The percentage of monthly gross income that goes toward paying debts. Calculated by dividing total monthly debt payments by gross monthly income. Most lenders prefer a DTI of 43% or lower.
A legal document that secures a real estate transaction. Similar to a mortgage, it involves three parties: the borrower, the lender, and a trustee who holds the title until the loan is paid off.
Prepaid interest paid at closing to lower the mortgage interest rate. One point costs 1% of the loan amount and typically reduces the rate by approximately 0.25%.
The upfront cash payment made by the buyer toward the purchase price of a home. The remainder is financed through a mortgage. Can range from 0% (VA/USDA) to 20% or more.
A deposit made by a buyer to demonstrate serious intent to purchase a property. Typically 1-3% of the purchase price, held in escrow and applied toward closing costs or down payment.
The difference between a property's current market value and the outstanding mortgage balance. Equity increases as you pay down the loan and/or the property appreciates in value.
An account held by a third party (often the lender) where funds are deposited for property taxes, homeowners insurance, and mortgage insurance. Monthly escrow payments are included in the mortgage payment.
A mortgage insured by the Federal Housing Administration, designed for borrowers with lower credit scores or smaller down payments. Requires mortgage insurance premium (MIP) for the life of the loan.
A mortgage with an interest rate that remains the same for the entire loan term. Provides predictable monthly payments. Available in various terms, commonly 15 and 30 years.
A temporary agreement with the lender to reduce or pause mortgage payments during a period of financial hardship. The missed payments must eventually be repaid.
Now replaced by the Loan Estimate, this was a document provided by lenders outlining estimated closing costs, loan terms, and monthly payments within three days of application.
Home Equity Line of Credit. A revolving credit line secured by your home's equity. Works like a credit card with a draw period (typically 10 years) and repayment period (typically 20 years).
Insurance that protects against damage to your home and personal property from covered events like fire, theft, and natural disasters. Required by mortgage lenders.
A lender's guarantee that a specific interest rate will be available to the borrower for a set period, typically 30-60 days, protecting against rate increases during the loan process.
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Typically requires a higher credit score, larger down payment, and may have higher interest rates.
A standardized three-page document provided within three business days of application that details estimated interest rate, monthly payment, closing costs, and other loan terms.
The ratio of the mortgage amount to the appraised value of the property, expressed as a percentage. An LTV of 80% or less typically avoids the need for PMI on conventional loans.
Insurance that protects the lender if the borrower defaults. Required on conventional loans with less than 20% down (PMI) and on all FHA loans (MIP). Can be cancelled on conventional loans when equity reaches 20%.
Nationwide Multistate Licensing System. A centralized registry for mortgage loan originators and companies. Every licensed mortgage professional has a unique NMLS number for identification.
A lender's conditional commitment to lend a specific amount based on verified income, assets, credit, and employment. Stronger than pre-qualification and shows sellers you're a serious buyer.
An informal estimate of how much a borrower may be eligible to borrow based on self-reported financial information. Less rigorous than pre-approval but useful for initial planning.
The original amount of money borrowed, not including interest. As you make payments, the principal balance decreases. Monthly payments cover both principal and interest.
Insurance required on conventional loans when the down payment is less than 20%. Protects the lender against default. Can be removed once the loan-to-value ratio reaches 78-80%.
See Interest Rate Lock. A commitment from a lender to hold a specific interest rate for a defined period while the loan application is processed.
The process of replacing an existing mortgage with a new one, typically to obtain a lower interest rate, change the loan term, switch from ARM to fixed rate, or access home equity.
Insurance that protects against losses from defects in title, such as unknown liens, encumbrances, or ownership disputes. Lender's title insurance is required; owner's title insurance is optional but recommended.
Federal law requiring lenders to provide standardized disclosures about loan terms and costs, including APR, total cost of the loan, and payment schedule, enabling borrowers to compare offers.
The process by which a lender evaluates the risk of making a mortgage loan by reviewing the borrower's credit, income, assets, and the property's value to determine loan approval.
A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. Features include zero down payment and no PMI requirement.