Mortgage Glossary: 100+ Terms Every Home Buyer Should Know

This mortgage glossary explains common terms in plain English. From APR (the true cost of borrowing including fees) to underwriting (the lender’s approval process), understanding these terms helps you navigate the home buying process confidently. Bookmark this page and reference it when reviewing loan documents or talking with lenders.

A

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a market index. ARMs typically start with a lower rate that adjusts after an initial fixed period (5, 7 or 10 years).

Amortization

The process of paying off a loan through regular payments that cover both principal and interest. Early payments are mostly interest; later payments are mostly principal.

Annual Percentage Rate (APR)

The total cost of borrowing expressed as a yearly rate, including interest plus fees. APR is higher than the interest rate and helps compare loan offers.

Appraisal

A professional opinion of a property’s market value, required by lenders to ensure the home is worth the loan amount. Typically costs $400-$700.

Appreciation

An increase in a property’s value over time due to market conditions, improvements or inflation.

Asset

Something of value you own. Lenders review assets to verify you have funds for down payment, closing costs and reserves.

Assumable Mortgage

A loan that can be transferred to a new buyer, who takes over the existing rate and terms. FHA, VA and USDA loans are typically assumable.

B

Balloon Mortgage

A loan with a large lump-sum payment due at the end of the term. Not common for residential mortgages today.

Basis Point

One-hundredth of a percentage point (0.01%). 50 basis points = 0.50%.

Bridge Loan

Short-term financing used between selling one home and buying another. Higher rates and fees than permanent financing.

Broker (Mortgage)

A professional who shops multiple lenders on your behalf to find the best loan terms. Brokers don’t lend directly.

Buydown

Paying points upfront to reduce the interest rate, either permanently or temporarily.

C

Cap

A limit on how much an ARM rate can change. Initial cap limits the first adjustment; periodic cap limits each subsequent adjustment; lifetime cap limits total change.

Cash Reserves

Liquid assets remaining after closing, required by some loan programs. Typically measured in months of mortgage payments.

Cash-Out Refinance

Replacing your current mortgage with a larger loan and receiving the difference in cash.

Clear to Close (CTC)

Final approval from the underwriter indicating all conditions are met and the loan can close.

Closing

The final step in a home purchase where documents are signed, funds are transferred and ownership changes.

Closing Costs

Fees paid at closing for services like origination, appraisal, title insurance and recording. Typically 2-5% of the loan amount.

Closing Disclosure (CD)

A five-page document listing final loan terms, monthly payment and closing costs. Must be provided at least 3 business days before closing.

Collateral

Property pledged as security for a loan. Your home is collateral for your mortgage.

Commission

Payment to real estate agents for their services, typically 5-6% of the sale price, paid by the seller.

Commitment Letter

A lender’s written promise to provide a mortgage under specified terms, subject to certain conditions.

Comparable Sales (Comps)

Recently sold properties similar to the subject property, used to determine market value.

Conditional Approval

Loan approval pending satisfaction of specific conditions, like additional documentation or explanations.

Conforming Loan

A mortgage that meets Fannie Mae or Freddie Mac guidelines and loan limits ($766,550 in most areas for 2024).

Contingency

A condition in a purchase contract that must be met for the sale to proceed. Common contingencies include inspection, financing and appraisal.

Conventional Loan

A mortgage not insured by a government agency. May be conforming (meets Fannie/Freddie guidelines) or non-conforming.

Credit Report

A detailed record of your borrowing history, including accounts, payment history and inquiries.

Credit Score

A three-digit number (300-850) representing your creditworthiness. Higher scores get better mortgage rates.

D

Debt-to-Income Ratio (DTI)

Your monthly debt payments divided by gross monthly income. Most mortgages require DTI under 43-45%.

Deed

A legal document transferring property ownership from seller to buyer.

Deed of Trust

In some states, the security instrument giving the lender a security interest in the property. Similar to a mortgage.

Default

Failure to meet loan obligations, typically meaning missed payments. Can lead to foreclosure.

Delinquency

Being behind on mortgage payments. 30+ days delinquent is reported to credit bureaus.

Depreciation

A decrease in property value or, for tax purposes, the deduction for wear and tear on rental property.

Discount Points

Fees paid to the lender at closing to reduce the interest rate. One point equals 1% of the loan amount.

Down Payment

The portion of the purchase price paid upfront, not financed. Ranges from 0% (VA, USDA) to 20%+.

Due-on-Sale Clause

A provision requiring full loan repayment when the property is sold. Makes most conventional loans non-assumable.

E

Earnest Money

A good-faith deposit submitted with a purchase offer to show you’re serious about buying. Typically 1-3% of purchase price.

Encumbrance

A claim or lien against a property, like a mortgage, easement or unpaid taxes.

Equity

The difference between your home’s value and what you owe. Your ownership stake in the property.

Escrow

An account held by a third party. Can refer to: (1) earnest money held during transaction, or (2) funds collected monthly for taxes and insurance.

Escrow Account

An account managed by your mortgage servicer to pay property taxes and insurance on your behalf.

Escrow Analysis

Annual review of your escrow account to ensure adequate funds. May result in payment increase or decrease.

F

Fannie Mae

Federal National Mortgage Association. A government-sponsored enterprise that buys conforming loans from lenders.

FHA Loan

A mortgage insured by the Federal Housing Administration, allowing lower down payments and credit scores.

Fixed-Rate Mortgage

A loan with an interest rate that never changes throughout the term.

Float

Choosing not to lock your interest rate, allowing it to change with market conditions until you decide to lock.

Flood Insurance

Insurance protecting against flood damage, required for properties in FEMA-designated flood zones.

Forbearance

A temporary reduction or suspension of mortgage payments during financial hardship.

Foreclosure

The legal process by which a lender takes ownership of a property after the borrower defaults.

Freddie Mac

Federal Home Loan Mortgage Corporation. A government-sponsored enterprise that buys conforming loans from lenders.

Front-End Ratio

Your housing costs (PITI) divided by gross monthly income. Some programs cap this at 28-31%.

Funding Fee

A one-time fee on VA loans (2.15% for first use) that helps fund the VA loan program.

G

Gift Funds

Money given to you for down payment or closing costs, usually from family. Requires a gift letter.

Gift Letter

A document stating that gift funds are a true gift with no expectation of repayment.

Good Faith Estimate (GFE)

Replaced by the Loan Estimate in 2015. Was a document showing estimated closing costs.

Grace Period

Time after the due date when payment can be made without penalty. Most mortgages have a 15-day grace period.

Gross Income

Your total income before taxes and deductions. Used for DTI calculations.

H

HELOC (Home Equity Line of Credit)

A revolving line of credit secured by your home equity, allowing you to borrow as needed.

Home Equity Loan

A lump-sum loan secured by your home equity with a fixed rate and payment.

Homeowners Association (HOA)

An organization in a planned community that sets rules and collects fees for common area maintenance.

Homeowners Insurance

Insurance protecting your home against damage from fire, storms, theft and other covered perils.

HUD

U.S. Department of Housing and Urban Development, which oversees FHA and housing policy.

HUD-1

Former closing document replaced by the Closing Disclosure in 2015.

I

Index

A benchmark rate used to calculate ARM adjustments. Common indexes include SOFR and Treasury rates.

Inspection

A professional examination of a property’s condition, typically $300-$500 paid by the buyer.

Interest

The cost of borrowing money, expressed as a percentage of the loan amount.

Interest-Only Loan

A loan where you pay only interest for an initial period, with principal payments starting later.

Interest Rate

The percentage charged for borrowing, used to calculate your monthly interest payment.

J

Joint Tenancy

A form of property ownership where multiple owners have equal rights, with survivorship (property passes to surviving owner upon death).

Jumbo Loan

A mortgage exceeding conforming loan limits, requiring stricter qualification and often higher rates.

L

Lender

The financial institution providing the mortgage funds.

Lien

A legal claim against property as security for debt. Your mortgage is a lien on your home.

Loan Estimate (LE)

A three-page document showing estimated loan terms, payment and closing costs. Must be provided within 3 business days of application.

Loan Modification

A permanent change to loan terms (rate, term, principal) to make payments more affordable.

Loan Officer

A lender representative who helps borrowers through the mortgage application process.

Loan-to-Value Ratio (LTV)

The loan amount divided by the property value, expressed as a percentage. 80% LTV means 20% down payment.

Lock (Rate Lock)

An agreement guaranteeing a specific interest rate for a set period, typically 30-60 days.

M

Margin

The amount added to an ARM’s index to determine your interest rate. If index is 5% and margin is 2.5%, your rate is 7.5%.

Market Value

The price a property would likely sell for under normal conditions.

Maturity

The date when a loan must be fully repaid.

MIP (Mortgage Insurance Premium)

Insurance required on FHA loans, including an upfront premium (1.75%) and annual premium (0.55%).

Mortgage

A loan secured by real property, giving the lender a claim on the property if you don’t repay.

Mortgage Broker

A professional who shops multiple lenders to find the best loan terms for borrowers.

Mortgage Insurance

Insurance protecting the lender against borrower default. Required when down payment is less than 20%.

N

Negative Amortization

When your payment doesn’t cover the interest due, causing your balance to increase rather than decrease.

Non-Conforming Loan

A mortgage that doesn’t meet Fannie Mae or Freddie Mac guidelines. Includes jumbo loans and some specialty products.

Non-QM Loan

Non-qualified mortgage that doesn’t meet Consumer Financial Protection Bureau ability-to-repay rules. More flexible but often higher rates.

Note (Promissory Note)

The legal document containing your promise to repay the loan under specified terms.

O

Origination Fee

A fee charged by the lender for processing your loan application, typically 0.5-1% of the loan amount.

Owner-Occupied

Property used as the owner’s primary residence, qualifying for better rates than investment property.

P

PITI

Principal, Interest, Taxes and Insurance—the components of your total monthly housing payment.

PMI (Private Mortgage Insurance)

Insurance required on conventional loans with less than 20% down payment. Protects the lender against default.

Points (Discount Points)

Fees paid upfront to reduce your interest rate. One point equals 1% of the loan amount.

Pre-Approval

A lender’s conditional commitment to lend, based on verified income, assets and credit.

Prepaid Interest

Interest paid at closing covering the period from closing date to the end of that month.

Prepayment Penalty

A fee charged for paying off a loan early. Rare on residential mortgages today.

Pre-Qualification

An informal estimate of what you might qualify for, based on self-reported information. Less reliable than pre-approval.

Principal

The original loan amount, or the portion of your payment that reduces the loan balance.

Private Mortgage Insurance (PMI)

Insurance on conventional loans required when down payment is less than 20%. Can be removed at 20% equity.

Q

Qualification

The process of determining whether you meet the requirements for a loan.

Quitclaim Deed

A deed transferring ownership without guarantees about the title. Often used between family members.

R

Rate Lock

An agreement guaranteeing your interest rate for a specific period, protecting against rate increases.

Ratios

See Debt-to-Income Ratio and Loan-to-Value Ratio.

Real Estate Agent

A licensed professional who helps buyers and sellers with property transactions.

Realtor

A real estate agent who is a member of the National Association of Realtors.

Recast

Recalculating your monthly payment after making a large principal payment, resulting in lower payments.

Recording

Filing documents with the county recorder to make ownership and liens part of the public record.

Refinance

Replacing your existing mortgage with a new loan, typically to get a better rate or access equity.

Reserves

Liquid assets remaining after closing. Some loans require 2-6 months of payments in reserves.

Rescission

The right to cancel certain transactions within 3 business days. Applies to refinances on primary residences.

S

Second Mortgage

A loan secured by your home that’s subordinate to your first mortgage. Includes home equity loans and HELOCs.

Seller Concessions

Contributions from the seller toward buyer’s closing costs, limited by loan type.

Servicer

The company that collects your mortgage payments and manages your escrow account.

Settlement

Another term for closing.

Short Sale

Selling a property for less than the mortgage balance with lender approval, to avoid foreclosure.

SOFR

Secured Overnight Financing Rate, a common index used for ARM adjustments.

Subordination

Establishing the priority of liens on a property. First mortgages have priority over second mortgages.

Survey

A measurement of property boundaries, sometimes required for home purchases.

T

Term

The length of time to repay a loan. Common terms are 15 and 30 years.

Title

Legal ownership of property.

Title Insurance

Insurance protecting against losses from defects in title, like unknown liens or ownership disputes.

Title Search

Research of public records to verify ownership history and identify any liens or claims.

Transfer Tax

A tax charged when property ownership changes, varying by location.

Truth in Lending Act (TILA)

Federal law requiring lenders to disclose loan terms and costs to borrowers.

U

Underwriting

The process of evaluating a loan application to determine whether to approve it.

Underwriter

The person who reviews loan applications and makes approval decisions.

USDA Loan

A mortgage guaranteed by the U.S. Department of Agriculture for rural and suburban properties, allowing zero down payment.

V

VA Loan

A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans and military members, allowing zero down payment.

Variable Rate

An interest rate that changes periodically. Same as adjustable rate.

Verification of Employment (VOE)

Confirmation from your employer of your job status, title and income.

W

Walk-Through

A final inspection of the property before closing to verify condition.

Warranty Deed

A deed guaranteeing clear title and the seller’s right to transfer ownership.

Wire Transfer

Electronic transfer of funds, commonly used for closing costs and down payment.