Mortgage Glossary: 100 Terms in Plain English

Loan basics

Amortization: How a fixed payment pays off a loan: mostly interest at first, mostly principal later.
Annual percentage rate (APR): The yearly cost of a loan with points and lender fees folded into the interest rate.
Principal: The amount you borrowed and still owe, separate from the interest charged on it.
Interest rate: The yearly cost of borrowing, charged monthly on the balance you still owe.
Loan term: How long you have to repay a mortgage, and how that trades payment size against total interest.
Fixed-rate mortgage: A home loan whose interest rate is set at closing and never changes.
Adjustable-rate mortgage (ARM): A home loan whose rate is fixed for a few years, then resets with an index plus a margin.
Index (ARM): The market benchmark an adjustable-rate mortgage follows when its rate resets.
Margin (ARM): The fixed percentage points a lender adds to the index to set an adjustable rate.
Rate caps: Limits on how far an ARM’s rate can move at each reset and over the life of the loan.
Balloon payment: A large one-time payment due at the end of a loan whose regular payments didn’t pay it off.
Interest-only loan: A loan where early payments cover only interest, so the balance doesn’t go down at first.
Mortgage recast: Re-figuring the payment on your existing loan after a large principal payment.
Prepayment penalty: A fee some lenders charge if you pay off all or a large part of the loan early.
Assumable mortgage: A home loan a buyer can take over from the seller, keeping its rate and remaining term.
Due-on-sale clause: A loan clause letting the lender call the full balance due if the home is sold or transferred.

Monthly costs and insurance

PITI: Principal, interest, taxes and insurance: the four basic parts of a mortgage payment.
Escrow account: An account your servicer funds from each payment to pay property taxes and insurance.
Property tax: A local tax on your home’s assessed value, usually paid through your mortgage escrow account.
Homestead exemption: A state or local property tax break on the home you own and live in as your main residence.
Homeowners insurance: Insurance that pays for damage to your home and belongings; required by mortgage lenders.
Flood insurance: Coverage for flood damage, required in high-risk flood zones on government-backed mortgages.
Private mortgage insurance (PMI): Insurance on a conventional loan with less than 20% down that protects the lender, not you.
Mortgage insurance premium (MIP): The mortgage insurance on FHA loans: an upfront premium plus an annual premium paid monthly.
Upfront mortgage insurance premium (UFMIP): FHA’s one-time mortgage insurance charge, paid at closing or added to the loan.
VA funding fee: A one-time fee on most VA-backed loans, in place of monthly mortgage insurance.
HOA dues: Fees a homeowners or condo association charges owners for shared upkeep and services.

Closing costs

Closing costs: Lender fees, third-party services, taxes and prepaids you pay at closing, on top of the down payment.
Cash to close: Down payment plus closing costs, minus your deposit and credits: the amount you bring to closing.
Earnest money: The good-faith deposit paid with a purchase contract, credited to you at closing.
Origination fee: The lender’s charge for processing, underwriting and funding your loan, shown in section A.
Discount points: An upfront fee paid to the lender at closing to buy a lower interest rate.
Lender credit: Money from the lender toward closing costs, in exchange for a higher interest rate.
Prepaid items: Interest, insurance and taxes paid at closing ahead of their due dates (section F of the Loan Estimate).
Title insurance: Insurance against title problems from before your purchase; lenders require their own policy.
Recording fee: The government charge to record your deed and mortgage in the public land records.
Transfer tax: A state or local tax on a home sale, based on the price and collected when the deed is recorded.
Mortgage recording tax: A state tax on the amount borrowed, collected when the mortgage or deed of trust is recorded.
Seller concessions: Closing costs a seller pays for the buyer, capped by the loan program and down payment.
Appraisal: An independent written opinion of a home’s value that the lender uses to set the loan.
Home inspection: An inspector’s review of the home’s condition, ordered by you before closing.

Qualifying for a loan

Debt-to-income ratio (DTI): Monthly debt payments, including the new mortgage, divided by gross monthly income.
Housing ratio (front-end ratio): Your full monthly housing payment divided by gross monthly income; FHA and USDA set limits on it.
Credit score: A number predicting how likely you are to repay on time; it shapes approval, rate and mortgage insurance.
Loan-to-value ratio (LTV): Your loan amount divided by the home’s value; it drives mortgage insurance and pricing.
Combined loan-to-value (CLTV): All loans secured by a home, first mortgage plus seconds, divided by its value.
Down payment: The part of the price you pay upfront; minimums run from zero on VA and USDA loans.
Gift letter: A donor’s signed statement that money toward your home is a gift that needn’t be repaid.
Reserves: Savings left after closing, measured in months of the new mortgage payment.
Residual income: Monthly income left after housing, debts and taxes; VA loans require a regional minimum.
Underwriting: The lender’s review of your finances and the property before it approves the loan.
Automated underwriting: Software such as Fannie Mae’s DU that evaluates a loan file and returns a recommendation.
Manual underwriting: A human underwriter’s review using written guidelines, usually with stricter limits.
Pre-qualification: A lender’s early estimate of how much you might borrow, often based on self-reported figures.
Pre-approval: A lender’s letter, based on a credit check and documents, saying how much you’re likely to qualify for.

Loan types and programs

Conventional loan: A mortgage with no government insurance or guarantee; most follow Fannie Mae and Freddie Mac rules.
Conforming loan: A conventional loan within the FHFA limit that meets Fannie Mae or Freddie Mac rules.
Conforming loan limit: The largest loan Fannie Mae and Freddie Mac may buy, reset by FHFA every year.
Jumbo loan: A mortgage above the conforming limit, priced and underwritten by each lender’s own rules.
FHA loan: A mortgage insured by the FHA: low down payment and flexible credit, paid for with mortgage insurance.
VA loan: A VA-guaranteed home loan: often no down payment and no monthly mortgage insurance.
VA entitlement: How much the VA guarantees for you, and why it decides whether a VA loan needs a down payment.
USDA loan: A USDA-guaranteed mortgage with no down payment, limited to eligible areas and incomes.
HomeReady: Fannie Mae’s low-down-payment loan for buyers earning up to a set share of area median income.
Home Possible: Freddie Mac’s low-down-payment loan for low- and moderate-income buyers of a primary home.
Qualified Mortgage (QM): A loan within federal limits on features, term and fees, so the lender is presumed to have checked you can repay.
Non-QM loan: A mortgage outside the Qualified Mortgage rules: bank-statement, interest-only and other specialty loans.
Ability-to-repay rule: Federal rule requiring lenders to verify income, debts and credit before making most home loans.
DSCR loan: An investor mortgage that qualifies a rental on rent ÷ payment rather than your personal income.
Reverse mortgage (HECM): A loan for older homeowners that needs no monthly payment and is repaid when the home is sold or left.
Down-payment assistance: Grants and second loans from housing agencies and nonprofits that cover a down payment or closing costs.
Mortgage credit certificate (MCC): A housing-agency certificate that turns part of your mortgage interest into a federal tax credit.

Refinancing and home equity

Refinance: Paying off your mortgage with a new loan to change the rate, term or loan type, or to take cash out.
Rate-and-term refinance: A refinance that changes the rate or term without taking out equity; Fannie Mae calls it limited cash-out.
Cash-out refinance: A new, larger first mortgage that pays off the old one and hands you the difference in cash.
Streamline refinance: A low-paperwork refinance from one FHA, VA or USDA loan into another of the same kind.
IRRRL (VA streamline): The VA streamline refinance: a lower-rate VA loan replacing your current one, with rules set by law.
Break-even point: How many months of savings it takes to earn back a refinance’s closing costs.
Home equity: Your home’s market value minus all loans secured by it — the stake you can sell or borrow against.
Home equity loan: A lump-sum second mortgage, usually at a fixed rate, repaid in equal monthly payments.
HELOC: A revolving credit line secured by your home, usually priced at the prime rate plus a margin.
Draw period: The years when a HELOC lets you borrow, often interest-only, before repayment begins.

Process and documents

Loan Estimate: The standard three-page form showing a loan’s rate, payment and closing costs after you apply.
Closing Disclosure: The five-page form with your final loan terms and closing costs, delivered before closing.
Rate lock: A lender’s commitment to hold your interest rate from the offer until closing.
Contingency: A condition in a purchase contract that must be met for the sale to go through.
Closing (settlement): The final step of a purchase or refinance, where you sign the loan and pay closing costs.
Promissory note: The document you sign at closing promising to repay the loan on its stated terms.
Deed of trust: The security document used instead of a mortgage in many states, naming a trustee who can sell on default.
Lien: A legal claim against property that secures a debt and must be cleared before a clean sale.
Mortgage servicer: The company that collects your payments, runs escrow and handles help if you fall behind.
Right of rescission: Your federal right to cancel a refinance, home equity loan or HELOC on your main home shortly after closing.
First-time homebuyer: Usually anyone who hasn’t owned a home recently — former owners can count again.

Rates and agencies

Fannie Mae and Freddie Mac: Congressionally chartered companies that buy conventional mortgages from lenders and set their rules.
Primary Mortgage Market Survey (PMMS): Freddie Mac’s weekly national average of 30-year and 15-year fixed mortgage rates.
Prime rate: The base rate large US banks post, used as the index for many HELOCs.

When payments get hard

Foreclosure: The legal process a lender uses to take back and sell a home after the borrower stops paying.
Forbearance: A temporary pause or reduction in mortgage payments that you repay later.
Loan modification: A permanent change to your loan’s terms, agreed with the servicer, to make payments affordable.
Short sale: Selling your home for less than you owe on the mortgage, with your lender’s approval.

Mortgage glossary

Loan basics

Monthly costs and insurance

Closing costs

Qualifying for a loan

Loan types and programs

Refinancing and home equity

Process and documents

Rates and agencies

When payments get hard