Mortgage Glossary

Adjustable-Rate Mortgage

A mortgage with an interest rate that starts fixed for an initial period of 5, 7, or 10 years, then adjusts periodically based on a market index plus a lender margin.

Amortization

The process of paying off a mortgage through scheduled monthly payments that cover both principal and interest, with early payments mostly interest and later payments mostly principal.

Amortization Schedule

A detailed table showing every scheduled mortgage payment over the loan's life, breaking each into principal and interest portions with the remaining balance after each payment.

Annual Percentage Rate (APR)

The total yearly cost of a mortgage expressed as a percentage, including the interest rate plus lender fees and points, always equal to or higher than the base interest rate.

Appraisal

A professional assessment of a property's market value by a licensed appraiser, required by your lender to confirm the home is worth the loan amount, typically costing $300–$600.

Assessed Value

The dollar value assigned to your property by the local tax assessor for calculating property taxes, which often differs from market value or appraised value.

C

Investment

Cash-Out Refinance

Replacing your existing mortgage with a new, larger loan and receiving the difference in cash, allowing you to tap home equity for renovations, debt consolidation, or other expenses.

Clear to Close

The final underwriting approval confirming all loan conditions are satisfied and your mortgage is ready for the closing table—typically issued 1–3 days before closing.

Closing

The final step in a real estate transaction where ownership legally transfers, documents are signed, funds are disbursed, and your mortgage becomes active.

Closing Costs

Fees paid at the finalization of a real estate transaction, typically 2%–5% of the loan amount, covering appraisal, title, origination, taxes, insurance, and other settlement charges.

Closing Disclosure

A 5-page document your lender must provide at least 3 business days before closing, detailing your final mortgage terms, monthly payment, and actual closing costs.

Comparable Sales (Comps)

Recently sold similar properties in the same area that appraisers and agents use to determine a home's fair market value, typically 3–6 sales within the past 6 months.

Construction Loan

A short-term loan that finances the building of a new home, with funds disbursed in stages during construction, typically converting to a standard mortgage once the home is complete.

Conventional Loan

A mortgage not insured or guaranteed by a federal agency, typically requiring a credit score of 620 or higher and a minimum 3% down payment, backed by Fannie Mae or Freddie Mac.

Credit Score

A 3-digit number ranging from 300 to 850, calculated from your credit history, that lenders use to gauge repayment likelihood — most mortgages require a minimum of 580–620.

D

Credit & Qualification

Debt-to-Income Ratio (DTI)

The percentage of your gross monthly income that goes toward debt payments — most mortgage lenders cap DTI at 43%–50%, making it a key qualification benchmark.

Deed of Trust

A legal document used in many states instead of a mortgage, involving three parties — borrower, lender, and a neutral trustee who holds title to the property until the loan is fully repaid.

Discount Points

Upfront fees paid at closing to lower your mortgage interest rate, where each point costs 1% of the loan amount and typically reduces the rate by approximately 0.25%.

Down Payment

The upfront cash you pay toward a home's purchase price, ranging from 0% (VA/USDA) to 3% (conventional) to 3.5% (FHA) to 20%+ to avoid private mortgage insurance.

DSCR Loan (Debt Service Coverage Ratio)

An investment property loan where qualification is based on the property's rental income rather than your personal income, with most lenders requiring a DSCR of 1.0 to 1.25 or higher.

E

Earnest Money

A buyer's good-faith deposit, typically 1%–3% of the purchase price, submitted with an offer and held in escrow to demonstrate serious intent to purchase.

Escrow

An account managed by your lender that holds a portion of each monthly mortgage payment to cover property taxes and homeowners insurance when they come due.

F

FHA Loan

A government-backed mortgage insured by the Federal Housing Administration, allowing credit scores as low as 580 with 3.5% down, designed for first-time and moderate-income buyers.

Fixed-Rate Mortgage

A home loan with an interest rate that remains the same for the entire loan term, providing predictable monthly payments over 15, 20, or 30 years.

Flood Insurance

A separate policy required for homes in FEMA-designated flood zones, available through the NFIP or private insurers, averaging $700–$1,500 per year.

Funding

The process where the lender disburses the loan amount to the closing agent after all documents are signed and conditions are met, completing the financial transaction.

G

Credit & Qualification

Gift Funds

Money from a family member or approved source used toward your down payment or closing costs, requiring a signed gift letter confirming no repayment is expected.

H

Property & Valuation

Home Equity

The difference between your home's current market value and your remaining mortgage balance — a $400,000 home with $250,000 owed equals $150,000 in equity.

Home Inspection

A thorough examination of a property's condition by a licensed inspector, covering structure, systems, and safety, typically costing $300–$500 before you finalize the purchase.

Homeowners Insurance

A policy covering your home against damage from fire, theft, and storms, required by all mortgage lenders, typically costing $1,000–$3,000+ per year depending on location and coverage.

House Hacking

A strategy where you live in one unit of a multi-unit property and rent out the others to offset or fully cover your mortgage payment, reducing your housing cost significantly.

I

Credit & Qualification

Income Verification

The process of confirming your earnings through pay stubs, W-2s, tax returns, or bank statements, required by lenders to ensure you can afford the mortgage payment.

Interest Rate

The percentage a lender charges annually for borrowing money, typically ranging from 6% to 8% on a 30-year mortgage, determining how much you pay in interest over the loan's life.

Interest-Only Mortgage

A loan where you pay only interest for a set period of 5 to 10 years, after which monthly payments increase to include both principal and interest for the remaining term.

J

Jumbo Loan

A mortgage exceeding the conforming loan limits set by the FHFA, typically requiring a credit score of 700+, a larger down payment of 10%-20%, and significant cash reserves.

L

Legal & Compliance

Lien

A legal claim against your property used as collateral for a debt — your mortgage creates a lien that must be paid off before the property can be sold or transferred free and clear.

Loan Estimate

A standardized 3-page document your lender must provide within 3 business days of application, detailing your estimated interest rate, monthly payment, and closing costs.

Loan-to-Value Ratio (LTV)

The ratio of your mortgage amount to the home's appraised value, expressed as a percentage — 80% LTV means you're borrowing 80% and putting 20% down.

M

Mortgage Insurance Premium (MIP)

Insurance required on all FHA loans consisting of a 1.75% upfront premium and an annual premium of 0.45%–1.05% of the loan balance paid monthly.

O

Origination Fee

A charge from your lender for processing a new mortgage application, typically 0.5%–1% of the loan amount, covering underwriting, document preparation, and administrative costs.

P

Process & Procedures

Pre-Approval

A lender's conditional commitment to lend you a specific amount based on verified income, assets, credit history, and employment—stronger than a pre-qualification.

Pre-Qualification

An informal estimate of how much you may be able to borrow based on self-reported income, assets, and debts—without a credit check or income verification.

Prepaid Items

Costs paid at closing that cover future expenses such as homeowners insurance premiums, property taxes, and per-diem mortgage interest through the end of the closing month.

Principal

The original amount you borrow for a mortgage or the remaining loan balance at any point, separate from interest — each monthly payment reduces the principal while the rest covers interest.

Private Mortgage Insurance (PMI)

A monthly insurance premium on conventional loans when your down payment is less than 20%, protecting the lender against default, typically costing 0.5%–1.5% of the loan amount annually.

R

Process & Procedures

Rate Lock

A lender's guarantee to hold a specific interest rate for a set period—typically 30 to 60 days—while your mortgage application is processed and closed.

Reserves

Savings or liquid assets you must have left after closing, measured in months of mortgage payments — lenders often require 2–6 months of reserves for approval.

RESPA (Real Estate Settlement Procedures Act)

A federal law enacted in 1974 requiring lenders to disclose all settlement costs, prohibiting kickbacks and referral fees, and limiting escrow account requirements for homebuyers.

Reverse Mortgage

A loan for homeowners aged 62 and older that converts home equity into cash without requiring monthly mortgage payments, repaid when the borrower sells, moves out, or passes away.

T

Title Insurance

A one-time insurance policy purchased at closing that protects the lender or homeowner against financial loss from title defects, liens, or ownership disputes.

TRID (TILA-RESPA Integrated Disclosure)

Federal rules effective since 2015 that combined Truth in Lending and RESPA disclosures into two standardized forms — the Loan Estimate and Closing Disclosure — simplifying mortgage paperwork.

U

Process & Procedures

Underwriting

The process where a lender evaluates your creditworthiness, income, assets, and the property value to decide whether to approve your mortgage application.

USDA Loan

A zero-down-payment mortgage backed by the U.S. Department of Agriculture for eligible buyers in designated rural and suburban areas with household income at or below 115% of area median income.

V