Mortgage Glossary

The process of paying off a mortgage through regular monthly payments of principal and interest over the loan term. In the early years, most of each payment goes toward interest. As the loan matures, a larger portion goes to principal. A 30-year amortization schedule shows exactly how each payment is split between principal and interest.

The total annual cost of a mortgage expressed as a percentage, including the interest rate plus lender fees, points, mortgage insurance, and other charges. APR is always higher than the interest rate and provides a more accurate comparison between loan offers. Federal law (TILA) requires lenders to disclose APR.

A professional assessment of a property's market value conducted by a licensed appraiser. Mortgage lenders require an appraisal before approving a loan to ensure the property is worth the amount being financed. If the appraisal comes in low, the buyer may need to renegotiate, increase the down payment, or cancel the purchase.

A mortgage with an interest rate that starts with a fixed period (typically 5, 7, or 10 years) and then adjusts periodically based on a benchmark index plus a set margin. After the initial fixed period, the rate can move up or down annually, subject to caps that limit changes at each adjustment and over the loan's lifetime. ARMs offer lower initial rates than fixed-rate mortgages but carry uncertainty about future payments.

The dollar value assigned to a property by a local tax assessor for the purpose of calculating property taxes. Assessed value is often different from market value or appraised value. Some jurisdictions assess at full market value while others use a percentage (e.g., 80% of market value). Property owners can appeal their assessed value if they believe it is inaccurate, potentially lowering their tax bill.

A short-term loan (typically 6-12 months) used to bridge the gap between buying a new home and selling your current one. Bridge loans allow you to use the equity in your current home as a down payment on a new purchase before your old home sells. They carry higher interest rates (typically 2-4% above standard mortgage rates) and origination fees due to the short-term, higher-risk nature of the loan.

A financing technique where the seller, builder, or buyer pays an upfront fee to temporarily reduce the mortgage interest rate during the first few years of the loan. A 2-1 buydown, for example, lowers the rate by 2% in year one and 1% in year two before reverting to the full rate. This makes initial payments more affordable and is common in new construction where builders use buydowns as a sales incentive.

Fees and expenses paid at the finalization of a real estate transaction, typically ranging from 2-5% of the loan amount. Common closing costs include origination fees, title insurance, appraisal fees, attorney fees, recording fees, prepaid taxes, and homeowners insurance. Buyers can sometimes negotiate for the seller to cover some closing costs.

A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan amounts ($766,550 in most areas for 2026). Conforming loans typically offer the best interest rates because they can be sold on the secondary market. Loans exceeding conforming limits are called jumbo or non-conforming loans.

The liquid assets a borrower has remaining after the down payment and closing costs are paid. Lenders typically require 2-6 months of mortgage payments (PITI) in reserves for conventional loans, and 6-12 months for jumbo loans. Reserves demonstrate financial stability and the ability to continue making payments if income is disrupted. Acceptable reserves include checking, savings, retirement accounts, and investment portfolios.

A five-page standardized form that itemizes all the final details of your mortgage loan, including the exact interest rate, monthly payment, closing costs, and total cost over the life of the loan. Federal law (TILA-RESPA) requires lenders to deliver the Closing Disclosure at least three business days before closing. Compare it carefully to your Loan Estimate to identify any unexpected changes.

An additional person who applies for and shares responsibility for a mortgage loan with the primary borrower. A co-borrower's income, assets, and credit are considered in the qualification process, potentially allowing for a larger loan or better terms. Both the primary borrower and co-borrower are equally responsible for the debt. Common co-borrowers include spouses, partners, and family members.

A type of construction financing that automatically converts from a construction loan into a permanent mortgage upon completion of building. This single-close approach saves on closing costs compared to getting two separate loans (construction and permanent). You lock in your permanent rate at the start, and during construction you pay interest only on disbursed funds. Also known as a single-close construction loan.

A home loan that is not insured or guaranteed by a government agency (unlike FHA, VA, or USDA loans). Conventional mortgages are originated and serviced by private lenders and conform to guidelines set by Fannie Mae and Freddie Mac. They typically require higher credit scores (620+) and down payments (3-20%) than government loans but offer more flexibility in loan amounts, property types, and no upfront mortgage insurance premiums.

The percentage of your gross monthly income that goes toward debt payments, including the proposed mortgage, credit cards, car loans, student loans, and other obligations. Most lenders require a maximum DTI of 43-50%. Lower DTI ratios improve your chances of approval and may qualify you for better rates.

A legal document used in many states instead of a mortgage that involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds the property title until the loan is repaid. The trustee has the power to sell the property through a non-judicial foreclosure if the borrower defaults.

Prepaid interest paid at closing to lower the mortgage interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%. On a $350,000 loan, one point costs $3,500. Points make sense if you plan to keep the loan long enough to recoup the upfront cost through monthly savings, usually 4-7 years (the break-even point).

The upfront portion of the home's purchase price paid in cash by the buyer. Conventional loans require as little as 3% down, FHA loans 3.5%, while VA and USDA loans offer 0% down options. Putting 20% or more down eliminates the need for private mortgage insurance (PMI), reducing monthly costs significantly.

The failure to meet the legal obligations of a mortgage, most commonly by missing monthly payments. Default typically occurs after 90 days (three missed payments). Once in default, the lender can begin foreclosure proceedings. Before reaching default, most servicers offer loss mitigation options such as forbearance, loan modification, or repayment plans. Default severely damages credit scores and can remain on credit reports for up to 7 years.

A good-faith deposit made by the buyer when submitting an offer on a home, typically 1-3% of the purchase price. Earnest money shows the seller you are serious and is held in escrow until closing, when it is applied toward the down payment or closing costs. Contingencies in the purchase contract protect the buyer's earnest money if certain conditions are not met.

The difference between your home's current market value and the remaining mortgage balance. Equity builds as you make payments and as the home appreciates in value. Homeowners can access equity through home equity loans, HELOCs, or cash-out refinancing. Negative equity (being "underwater") occurs when the mortgage balance exceeds the home's value.

A neutral third-party account that holds funds during the home purchase process and, after closing, collects portions of monthly mortgage payments to pay property taxes and homeowners insurance on the borrower's behalf. Escrow protects both the lender and borrower by ensuring taxes and insurance are paid on time. Most lenders require escrow accounts.

The Federal National Mortgage Association (Fannie Mae) is a government-sponsored enterprise that purchases and securitizes mortgages from lenders, providing liquidity to the housing market. Fannie Mae sets guidelines for conforming loans including credit score requirements, DTI limits, and documentation standards. It does not directly lend to consumers.

A mortgage with an interest rate that remains constant for the entire loan term, providing predictable monthly principal and interest payments. Available in 10, 15, 20, 25, and 30-year terms. The most popular choice for homebuyers, with 30-year fixed loans accounting for over 70% of all mortgages originated.

The legal process by which a lender seizes and sells a property when the borrower fails to make mortgage payments. Foreclosure timelines vary by state (judicial vs. non-judicial) from 6 months to over 2 years. A foreclosure severely impacts credit scores (drops of 100-150+ points) and remains on credit reports for 7 years.

The Federal Home Loan Mortgage Corporation (Freddie Mac) is a government-sponsored enterprise, similar to Fannie Mae, that purchases mortgages from lenders and packages them into mortgage-backed securities. Together with Fannie Mae, Freddie Mac supports the majority of the US mortgage market and establishes conforming loan standards.

A mortgage insured by the Federal Housing Administration (FHA), designed for borrowers with lower credit scores or limited down payments. FHA loans allow credit scores as low as 500 (with 10% down) or 580 (with 3.5% down). They require both an upfront mortgage insurance premium (MIP) of 1.75% and an annual MIP of 0.55%. FHA loans have maximum loan limits that vary by county, ranging from $472,030 to $1,149,825 for single-family homes in 2026.

A historical document that lenders were required to provide showing estimated closing costs for a mortgage. The Good Faith Estimate (GFE) was replaced by the Loan Estimate form in 2015 under the TILA-RESPA Integrated Disclosure (TRID) rules. The newer Loan Estimate provides more standardized and transparent cost information, making it easier to compare offers from multiple lenders.

A second mortgage that allows homeowners to borrow against their equity in a lump sum at a fixed interest rate. Home equity loans are commonly used for home improvements, debt consolidation, or large expenses. Lenders typically allow borrowing up to 80-85% of the home's value minus the existing mortgage balance. Interest may be tax-deductible if used for home improvements.

Insurance that protects against damage to the home, personal liability, and loss of personal property. Mortgage lenders require homeowners insurance as a condition of the loan. Standard policies cover fire, wind, theft, and liability but typically exclude floods and earthquakes, which require separate coverage. Average annual cost is $1,200-$3,000 depending on location and coverage.

A Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home's equity, functioning similarly to a credit card. During the draw period (typically 10 years), you can borrow, repay, and re-borrow up to your credit limit, paying interest only on the outstanding balance. After the draw period, the repayment period begins (typically 10-20 years) and you can no longer draw funds. HELOC rates are typically variable, based on the prime rate.

A thorough examination of a property's condition performed by a licensed inspector before purchase. The inspection covers the structure, roof, foundation, electrical, plumbing, HVAC, and other major systems. A typical home inspection costs $300-$500 and takes 2-4 hours. While not required by lenders, a home inspection is strongly recommended and can reveal costly problems that may affect your purchase decision or negotiating position.

The cost of borrowing money, expressed as a percentage of the loan amount charged annually. Mortgage interest rates are influenced by the Federal Reserve, bond markets, inflation, credit score, down payment, loan type, and loan term. Even small rate differences significantly impact total costs — a 0.5% rate difference on a $350,000 30-year loan changes total interest by roughly $38,000.

A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency ($766,550 in most areas for 2026). Jumbo loans are not eligible for purchase by Fannie Mae or Freddie Mac, so they carry slightly higher rates and stricter qualification requirements including higher credit scores (700+), larger down payments (10-20%), and more cash reserves.

A standardized three-page document that lenders must provide within three business days of receiving a mortgage application. It details the estimated interest rate, monthly payment, closing costs, and other loan terms. The Loan Estimate allows consumers to compare offers from different lenders on an apples-to-apples basis. It replaced the older Good Faith Estimate (GFE) form.

The ratio of the mortgage amount to the appraised property value, expressed as a percentage. An LTV of 80% means you are borrowing 80% of the home's value (20% down payment). Higher LTV ratios (above 80%) typically require private mortgage insurance. LTV is a key factor in loan approval, interest rates, and PMI requirements.

A legal claim or hold on a property as security for a debt or obligation. A mortgage creates a voluntary lien on the property. Other types of liens include tax liens (from unpaid property taxes), mechanic's liens (from unpaid contractors), and judgment liens (from court judgments). Liens must be cleared before a property can be sold with a clean title. Title insurance protects against undisclosed liens.

A permanent change to one or more terms of an existing mortgage to make payments more affordable and prevent foreclosure. Modifications may reduce the interest rate, extend the loan term, reduce the principal balance, or change the loan from an ARM to a fixed rate. Borrowers must typically demonstrate financial hardship to qualify. Unlike refinancing, a modification does not replace the existing loan with a new one.

The mortgage insurance required on FHA loans, consisting of an upfront premium (1.75% of the loan amount, usually financed into the loan) and an annual premium (0.55% for most borrowers, paid monthly). Unlike conventional PMI, FHA MIP lasts for the life of the loan if you put less than 10% down. With 10%+ down, MIP is removed after 11 years.

An intermediary who connects borrowers with lenders but does not directly fund loans. Brokers shop multiple lenders to find the best rates and terms for the borrower's situation. They are paid a commission (typically 1-2% of the loan amount) by either the lender or borrower. Using a broker can provide access to a wider range of loan products and potentially better rates than going directly to a single bank or lender.

A mortgage that does not meet the guidelines set by Fannie Mae and Freddie Mac for purchase on the secondary market. Non-conforming loans include jumbo loans (exceeding conforming limits), loans with non-traditional documentation, and loans for unique property types. Because they cannot be sold to GSEs, non-conforming loans may carry higher interest rates and stricter qualification requirements, though the gap has narrowed significantly.

A fee charged by the lender for processing and underwriting the mortgage, typically 0.5-1% of the loan amount. On a $350,000 loan, the origination fee might be $1,750-$3,500. Some lenders advertise "no origination fee" loans but compensate with a slightly higher interest rate. The origination fee is disclosed on the Loan Estimate.

An acronym for the four components of a total monthly mortgage payment: Principal, Interest, Taxes, and Insurance. Lenders use PITI to determine affordability and calculate debt-to-income ratios. On a $350,000 home with 10% down, typical PITI might be: Principal + Interest ($2,100) + Taxes ($290) + Insurance ($125) = approximately $2,515/month.

A lender's written commitment to fund a mortgage up to a specific amount based on a review of the borrower's credit, income, assets, and debt. Preapproval involves a hard credit pull and is stronger than prequalification. Most sellers require a preapproval letter with purchase offers. Preapproval is typically valid for 60-90 days.

An informal estimate of how much you may be able to borrow based on self-reported financial information. Prequalification typically does not involve a credit check and is not a commitment to lend. It gives buyers a general price range for home shopping but carries less weight with sellers than a formal preapproval.

The original amount of money borrowed for a mortgage, not including interest. As you make monthly payments, a portion goes toward reducing the principal balance. In the early years of a mortgage, most of each payment goes to interest. Making extra principal payments can significantly reduce the total interest paid and shorten the loan term.

Insurance required by conventional lenders when the down payment is less than 20% of the home's purchase price. PMI protects the lender (not the borrower) against default. PMI typically costs 0.5-1.5% of the loan amount annually ($145-$435/month on a $350,000 loan). PMI can be removed once the LTV reaches 80% (20% equity), and automatically terminates at 78% LTV.

An annual tax levied by local governments based on the assessed value of real property. Property tax rates vary dramatically by location, from 0.28% (Hawaii) to 2.47% (New Jersey) of the home's assessed value. Property taxes are typically collected monthly through escrow and can change annually based on reassessments and tax rate changes.

The process of replacing an existing mortgage with a new one, typically to secure a lower interest rate, change the loan term, switch from an ARM to a fixed rate, or access home equity (cash-out refinance). Refinancing involves closing costs of 2-5% of the loan amount. A general rule is that refinancing makes sense when rates drop at least 0.5-0.75% below your current rate.

A lender's guarantee that a specific interest rate will be held for a set period, protecting the borrower from rate increases during the loan processing period. Standard rate locks are 30-60 days and are typically free. Extended locks (75-120 days) may carry a small fee. If rates drop during the lock period, some lenders offer float-down options that allow you to take advantage of the lower rate for a fee.

A loan available to homeowners aged 62 or older that converts home equity into cash payments without requiring monthly mortgage payments. The most common type, the Home Equity Conversion Mortgage (HECM), is insured by the FHA. The loan balance grows over time as interest accrues, and repayment is required when the homeowner sells, moves permanently, or passes away. The borrower must maintain property taxes, insurance, and home maintenance.

The market where existing mortgages are bought and sold between lenders, investors, and government-sponsored enterprises like Fannie Mae and Freddie Mac. The secondary market provides liquidity to mortgage lenders, allowing them to originate new loans. It also influences interest rates, as investors demand varies based on economic conditions.

A sale of a property for less than the outstanding mortgage balance, with the lender's approval. Homeowners pursue short sales to avoid foreclosure when they cannot make payments and owe more than the home is worth. Short sales impact credit scores less severely than foreclosures (50-100 point drop vs 100-150+) and have a shorter waiting period before obtaining a new mortgage.

Insurance that protects against financial loss from defects in the title to a property, such as liens, encumbrances, or ownership disputes. Lender's title insurance is required by all mortgage lenders. Owner's title insurance is optional but strongly recommended. Title insurance is a one-time fee paid at closing, typically $500-$3,500 depending on the property value.

The legal right to own, use, and dispose of a property. A title search examines public records to confirm the seller has clear ownership and the right to transfer the property, and to identify any liens, easements, or encumbrances. A clear title (also called a clean or marketable title) is required to close a real estate transaction. Title insurance protects against any defects in the title that were not discovered during the search.

The process by which a lender evaluates a mortgage application to determine the risk of lending. Underwriters verify income, assets, credit history, employment, and the property appraisal. The underwriting process typically takes 2-4 weeks. Common outcomes are approved, approved with conditions, suspended (needing more documentation), or denied.

A one-time fee paid to the Department of Veterans Affairs on VA loans that helps fund the VA loan program for future veterans. The fee ranges from 1.25% to 3.3% of the loan amount depending on down payment size and whether it is the borrower's first VA loan. The funding fee can be rolled into the loan balance. Veterans receiving VA disability compensation and surviving spouses of veterans who died in service are exempt from the fee.