Mortgage TermsGlossary
Master mortgage terminology with our comprehensive dictionary. From APR to underwriting, understand every term you encounter.
A mortgage with an interest rate that can change periodically based on market conditions. ARMs typically start with a fixed rate for 5, 7, or 10 years, then adjust annually.
Example:
A 5/1 ARM has a fixed rate for 5 years, then adjusts every year thereafter.
The process of paying off a loan over time through regular payments that include both principal and interest. Early payments are mostly interest; later payments are mostly principal.
Example:
In a 30-year mortgage, your first payment might be 90% interest and 10% principal.
The total cost of borrowing money on an annual basis, expressed as a percentage. APR includes the interest rate plus other fees and costs associated with the loan.
Example:
A loan with 6% interest and $2,000 in fees on a $100,000 loan might have an APR of 6.2%.
A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals to ensure the home is worth at least the loan amount.
Example:
The bank ordered an appraisal before approving your mortgage to confirm the home's value.
Fees and expenses paid at the closing of a real estate transaction. These include loan origination fees, title insurance, appraisal fees, and other charges.
Example:
Typical closing costs range from 2-5% of the home's purchase price.
A numerical representation of your creditworthiness, calculated from your credit history. Higher scores (typically 740+) qualify for better interest rates.
Example:
FICO scores range from 300-850, with 800+ considered excellent.
A percentage that compares your monthly debt payments to your gross monthly income. Lenders use DTI to assess your ability to manage mortgage payments.
Example:
A DTI of 36% means 36% of your income goes toward debt payments.
The initial payment made when purchasing a home, typically 3-20% of the purchase price. A larger down payment reduces the loan amount and may qualify you for better rates.
Example:
A 20% down payment on a $300,000 home would be $60,000.
The portion of your home that you actually own, calculated as the home's current value minus any outstanding mortgage balance.
Example:
If your home is worth $300,000 and you owe $200,000, you have $100,000 in equity.
A third-party account that holds funds for property taxes and homeowners insurance. The lender collects a monthly escrow payment as part of your mortgage.
Example:
Your lender might collect $300/month in escrow for annual property taxes of $3,600.
A mortgage with an interest rate that remains constant throughout the loan term. Your monthly payment for principal and interest stays the same.
Example:
A 30-year fixed-rate mortgage at 6.5% will have the same monthly payment for 30 years.
Insurance that protects your home and belongings from damage or loss. Lenders require homeowners insurance to protect their investment in your property.
Example:
Typical homeowners insurance costs $800-1,500 annually for a single-family home.
The percentage charged by lenders for borrowing money, expressed as an annual rate. This determines how much interest you pay on your loan balance.
Example:
A 6% interest rate on a $200,000 loan means you pay $12,000 in interest annually.
The ratio of your loan amount to the appraised value of the property, expressed as a percentage. Lower LTV ratios often qualify for better rates.
Example:
An $240,000 loan on a $300,000 home has an LTV of 80%.
Insurance that protects the lender if you default on your loan. Private Mortgage Insurance (PMI) is required for loans with less than 20% down.
Example:
PMI typically costs 0.5-1.5% of the loan amount annually.
A lender's conditional commitment to lend you a specific amount based on your financial information. Pre-approval strengthens your offer when buying a home.
Example:
Getting pre-approved shows sellers you're a serious buyer and can close the deal.
The original amount borrowed, not including interest. Each mortgage payment includes a portion that goes toward reducing the principal balance.
Example:
On a $200,000 loan, the principal is the $200,000 you borrowed to buy the home.
Taxes levied by local governments on property ownership. Property taxes are typically paid annually but collected monthly through escrow.
Example:
Property taxes average 1-2% of a home's assessed value annually.
The process of replacing your existing mortgage with a new one, often to get a lower interest rate, change loan terms, or access equity.
Example:
Refinancing from 7% to 5.5% could save you hundreds per month.
The current interest rate available to borrowers with good credit in the broader mortgage market. Market rates fluctuate based on economic conditions, Federal Reserve policy, and investor demand.
Example:
Market rates vary by loan type and credit profile. Check current rates from lenders or use our calculators with real-time FRED data for accurate estimates.
The interest rate at which banks lend money to each other overnight. Set by the Federal Reserve, this rate influences all other interest rates in the economy, including mortgage rates.
Example:
When the Fed raises the federal funds rate, mortgage rates typically increase as well.
A commitment from a lender to hold a specific interest rate for a set period of time (typically 30-60 days) while your loan application is being processed.
Example:
A 45-day rate lock protects you from rate increases during the underwriting process.
Quick Reference
Essential mortgage concepts at a glance.
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Educational Purpose Only: This glossary is for educational purposes only and does not constitute financial advice. Mortgage terms and concepts can vary by location and lender. Consult with qualified mortgage professionals for personalized guidance.