Mortgage Glossary
A
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a home loan that begins with a fixed interest rate for a set period of time, then adjusts periodically based on market conditions. This structure allows borrowers to take advantage of a lower initial rate compared to many fixed-rate mortgages.
After the fixed period—typically 5, 7, or 10 years—the interest rate may change at scheduled intervals. These changes are based on a benchmark index plus a margin, and most ARMs include caps that limit how much your rate can increase over time.
ARMs are often a strong option for buyers who plan to move, refinance, or pay off their loan before the adjustment period becomes a major factor.
Annual Percentage Rate (APR)
Annual Percentage Rate (APR) represents the total cost of borrowing money, expressed as a yearly percentage. It includes not only your interest rate but also certain fees and costs associated with the loan.
Because APR reflects the broader cost of the loan, it’s one of the most effective ways to compare different mortgage offers. Two loans may have the same interest rate but different APRs due to fees.
When evaluating mortgage options, looking at both the interest rate and APR gives you a clearer picture of long-term affordability.
Appraisal
An appraisal is a professional evaluation of a property’s value, conducted by a licensed appraiser. Lenders require appraisals to ensure the home is worth the amount being financed.
If a home appraises lower than the purchase price, it can impact the loan approval or require renegotiation of the sale. In refinancing, the appraisal helps determine how much equity you have.
Appraisals protect both the lender and the borrower by ensuring the loan is based on a realistic market value.
Assets
Assets are items of financial value that you own, such as savings accounts, investments, retirement funds, or other properties. Lenders review your assets during the mortgage process to assess your financial stability.
Having strong assets can improve your loan application by showing you have reserves available for down payments, closing costs, or unexpected expenses.
B
Borrower
The borrower is the individual or individuals who apply for and agree to repay a mortgage loan. Borrowers are responsible for meeting the loan terms, including making monthly payments.
Lenders evaluate borrowers based on income, credit history, debt levels, and assets to determine eligibility and loan terms.
C
Cash-Out Refinance
A cash-out refinance allows you to replace your existing mortgage with a new loan for more than you currently owe, giving you access to the difference in cash. This can be used for renovations, debt consolidation, or other major expenses.
Because it leverages your home’s equity, this option depends on your loan-to-value ratio (LTV) and overall financial profile.
Closing
Closing is the final step in the home buying or refinancing process where all documents are signed, funds are distributed, and ownership is officially transferred.
At closing, you’ll review your loan terms, pay any required closing costs, and finalize the transaction.
Closing Costs
Closing costs are the fees and expenses associated with finalizing your mortgage. These can include lender fees, title insurance, appraisal fees, and taxes.
Typically ranging from 2% to 5% of the home’s purchase price, closing costs are an important part of your total home investment.
Construction Loan
A construction loan is a short-term loan used to finance the building of a home. Funds are released in stages as construction progresses, rather than all at once.
During the build, borrowers often make interest-only payments. Once construction is complete, the loan may convert into a traditional mortgage.
Credit Score
Your credit score is a numerical representation of your creditworthiness based on your financial history. It plays a major role in determining your loan eligibility, interest rate, and terms.
Higher credit scores generally lead to better loan options and lower interest rates.
D
Debt-to-Income Ratio (DTI)
Debt-to-income ratio (DTI) measures how much of your monthly income goes toward debt payments. It’s calculated by dividing your total monthly debt by your gross income.
Lenders use DTI to determine whether you can comfortably afford a mortgage. Lower DTI ratios typically improve your chances of approval.
Down Payment
A down payment is the portion of a home’s purchase price that you pay upfront, with the remaining balance financed through a mortgage.
A larger down payment can reduce your loan amount, improve your loan-to-value ratio (LTV), and potentially eliminate mortgage insurance.
E
Earnest Money
Earnest money is a deposit made when submitting an offer on a home. It shows the seller that you are serious about purchasing the property.
This deposit is typically applied toward your closing costs or down payment if the deal moves forward.
Equity
Equity is the difference between your home’s market value and what you owe on your mortgage. As you make payments or as property values increase, your equity grows.
Home equity can be used strategically through refinancing or other loan options.
Escrow
An escrow account is used by your lender to collect and pay property taxes and homeowners insurance on your behalf.
These costs are included in your monthly mortgage payment, helping ensure they are paid on time.
F
Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains the same for the life of the loan. This provides predictable monthly payments and long-term stability.
Fixed-rate loans are often preferred by buyers who plan to stay in their home for an extended period.
Foreclosure
Foreclosure occurs when a lender takes possession of a property due to missed mortgage payments. The property is typically sold to recover the remaining loan balance.
Avoiding foreclosure involves maintaining communication with your lender if financial difficulties arise
G
Gift Funds
Gift funds are money given by a family member or approved source to help cover a down payment or closing costs. These funds must typically be documented.
H
Home Equity
Home equity represents the portion of your home that you truly own. It increases as you pay down your mortgage or as your home’s value rises.
Home Inspection
A home inspection is an evaluation of a property’s condition conducted before purchase. It identifies potential issues with the structure, systems, or safety of the home.
I
Interest Rate
The interest rate is the cost of borrowing money, expressed as a percentage of your loan amount. It directly impacts your monthly payment and total loan cost.
L
Lender
A lender is the financial institution that provides your mortgage loan. This can include banks, credit unions, or mortgage companies.
Loan Estimate
A loan estimate is a document that outlines the expected terms, payments, and closing costs of your mortgage. It helps you compare loan offers.
Loan Term
The loan term is the length of time you have to repay your mortgage, typically 15, 20, or 30 years. Shorter terms usually mean higher monthly payments but less interest over time.
Loan-to-Value Ratio (LTV)
Loan-to-value ratio compares your loan amount to the value of the home. It’s a key factor in determining loan approval, rates, and whether mortgage insurance is required.
M
Mortgage
A mortgage is a loan used to purchase or refinance a home, with the property serving as collateral.
Mortgage Insurance
Mortgage insurance protects the lender if the borrower defaults. It’s often required when a borrower makes a lower down payment.
Mortgage Rate
A mortgage rate is the interest rate applied to your loan and is a key factor in determining your monthly payment.
O
Origination Fee
An origination fee is a charge from the lender for processing and underwriting your loan. It is typically a percentage of the loan amount.
P
Preapproval
A mortgage preapproval is a lender’s estimate of how much you may be able to borrow based on your financial profile. It strengthens your position when making an offer.
Prequalification
Prequalification is an early estimate of borrowing power based on basic financial information. It is less detailed than a preapproval.
Principal
The principal is the amount of money borrowed for your mortgage, not including interest.
Private Mortgage Insurance (PMI)
PMI is a type of mortgage insurance required when a borrower makes a lower down payment. It protects the lender and is typically included in monthly payments.
R
Rate Lock
A rate lock secures your interest rate for a set period during the mortgage process, protecting you from market fluctuations before closing.
Refinance
Refinancing replaces your existing mortgage with a new one to improve terms, reduce your rate, or access equity.
S
Seller Concessions
Seller concessions are contributions from the seller to help cover a buyer’s closing costs, reducing upfront expenses.
T
Title
The title represents legal ownership of a property.
Title Insurance
Title insurance protects against ownership disputes or claims against your property.
Truth in Lending Act (TILA)
TILA is a federal law requiring lenders to clearly disclose loan terms and costs to borrowers.
U
Underwriting
Underwriting is the process lenders use to evaluate risk and determine whether to approve a mortgage loan.
V
VA Loan
A VA loan is a government-backed mortgage available to eligible veterans and service members, often with favorable terms.
Z
Zero-Down Loan
A zero-down loan allows qualified buyers to purchase a home without a down payment, depending on eligibility and program guidelines.
