Learn/Glossary
07 · Glossary
Mortgage Glossary
No one should sign what they cannot read. Here are the words that come up in a mortgage, defined the way we would explain them out loud — short, clear and free of jargon. Keep this tab open while you read the guides.
Adjustable-Rate Mortgage (ARM)
A loan whose interest rate is fixed for an initial period and then adjusts periodically with the market. ARMs often start lower than fixed loans, trading early savings for later uncertainty.
Amortization
The schedule by which a loan is paid off over time. Early payments are mostly interest; later payments are mostly principal, even though the total payment stays level.
Annual Percentage Rate (APR)
A broader measure of borrowing cost than the interest rate alone, folding in certain fees to express an annual percentage. Useful for comparing offers, if you check what each includes.
Appraisal
An independent professional estimate of a property’s market value, ordered by the lender to confirm the home is worth the loan amount.
Appreciation
The increase in a property’s value over time. On a financed home, appreciation applies to the full value while you only invested the down payment — the quiet power of leverage.
Assumable Loan
A mortgage a future buyer can take over, inheriting its rate and terms. FHA and VA loans are often assumable, which becomes valuable when rates have risen.
Balloon Payment
A large lump sum due at the end of certain loans whose regular payments did not fully pay down the balance. Know it is coming and plan the exit.
Bank-Statement Loan
A program that qualifies self-employed borrowers on their actual deposits over 12 to 24 months rather than their tax returns, which often understate real income.
Borrower
The person who receives and is responsible for repaying the loan. A co-borrower shares that responsibility and whose income and credit are also considered.
Bridge Loan
Short-term financing that lets you buy a new home before selling your current one, ‘bridging’ the gap until the sale closes.
Closing
The final step where documents are signed, funds change hands, and ownership (or a refinance) is recorded. Also called settlement.
Closing Costs
The fees to originate the loan and transfer the property, typically 2% to 5% of the loan amount, covering lender, third-party and government charges plus prepaid taxes and insurance.
Closing Disclosure
The final, binding statement of your loan terms and costs, provided at least three business days before closing so you can compare it to your Loan Estimate.
Conforming Loan
A conventional loan within the size limit set each year by the Federal Housing Finance Agency, which allows it to be sold to the government-sponsored agencies.
Conventional Loan
A mortgage not insured by a government agency. For strong credit it is usually the most efficient option, and its mortgage insurance is removable as you build equity.
Credit Score
A number summarizing your credit history that lenders use to gauge risk. Built mainly from payment history and amounts owed; different programs accept different minimums.
Debt Consolidation
Combining several higher-rate debts into one lower-rate, often home-secured, loan to reduce the monthly payment and total interest — effective only if the old balances stay paid off.
Debt-Service-Coverage Ratio (DSCR)
For investment loans, a property’s rental income divided by its total payment. A ratio of 1.0 means the rent exactly covers the payment; above 1.0 means it more than covers it.
Debt-to-Income Ratio (DTI)
Your monthly debt payments divided by your gross monthly income. Lenders use it to judge how much additional payment you can carry.
Down Payment
The portion of a home’s price you pay up front. Ranges from 0% on VA and USDA loans to 3% conventional, 3.5% FHA, and more on jumbo loans.
Down Payment Assistance (DPA)
A grant or second loan, often from a state or local program, that helps cover a buyer’s down payment or closing costs, usually aimed at first-time or moderate-income buyers.
Equity
The share of your home you truly own — its value minus what you owe. It grows as you pay down the loan and as the home appreciates.
Escrow
An account the lender uses to collect and pay your property taxes and homeowners insurance across your monthly payments, so the large annual bills do not land all at once. Also refers to the neutral third party in a closing.
Fixed-Rate Mortgage
A loan whose interest rate — and principal-and-interest payment — stays the same for the entire term, offering certainty against rising rates.
FHA Loan
A mortgage insured by the Federal Housing Administration, known for low down payments and flexible credit, in exchange for mortgage insurance premiums.
Forbearance
A temporary pause or reduction of mortgage payments granted during hardship. The paused amount is repaid later; it is a bridge, not forgiveness.
Funding Fee
A one-time fee on most VA loans, paid in place of monthly mortgage insurance and often financed into the loan. Many veterans with a service-connected disability are exempt.
Gift Funds
Money given by a family member toward a down payment or closing costs, allowed on many programs with a gift letter and a documented transfer.
HECM
Home Equity Conversion Mortgage — the FHA-insured reverse mortgage that lets homeowners 62 and older convert equity to cash with no required monthly payment.
Home Equity Investment (HEI)
A way to access equity in exchange for a share of the home’s future value, with no monthly payment — a different shape from a loan, useful when cash flow is the constraint.
Home Equity Line of Credit (HELOC)
A revolving line secured by your home that you draw from as needed. It sits behind your first mortgage, leaving that rate untouched, and is typically variable-rate.
Home Equity Loan
A fixed lump-sum second mortgage secured by your home, with a set rate and payment, that leaves your first mortgage in place.
Interest-Only Loan
A loan allowing payments of interest alone for an initial period, lowering the early payment. The balance is not reduced during that time, so plan for the later increase.
Jumbo Loan
A mortgage larger than the conforming limit, underwritten to each investor’s standards and typically calling for stronger credit and more reserves.
Lien
A legal claim against a property securing a debt. Your mortgage is a lien; a HELOC or home equity loan adds a second lien behind it.
Loan Estimate
A standardized three-page disclosure of your rate, payment and closing costs, provided within three business days of application so you can compare lenders.
Loan-to-Value (LTV)
The loan amount as a percentage of the home’s value. A lower LTV — a larger down payment or more equity — generally means better terms and no mortgage insurance.
Mortgage Insurance (PMI/MIP)
Insurance that protects the lender when the down payment is low. Conventional PMI is removable as equity grows; FHA’s MIP often lasts the life of the loan.
Non-QM Loan
A loan outside the narrow Qualified Mortgage rulebook, using alternative ways to document income or credit — a wider toolbox for strong borrowers with non-standard situations.
Non-Recourse
A feature of reverse mortgages meaning the borrower or heirs never owe more than the home is worth when the loan is repaid, even if the balance has grown past the value.
Origination
The process of creating a loan, from application through funding. An origination fee is the lender’s charge for that work.
Points (Discount Points)
Optional prepaid interest — each point is 1% of the loan — paid to lower your rate. Worth it only if you keep the loan past the break-even.
Pre-Approval
A verified commitment, based on reviewed documents and a credit check, stating how much you can borrow. It makes your offer credible to sellers.
Pre-Qualification
An informal, unverified estimate of what you might borrow, useful for early budgeting but carrying little weight with sellers.
Principal
The amount you borrowed and still owe, separate from interest. Each payment reduces the principal a little more as the loan amortizes.
Private Mortgage Insurance (PMI)
Mortgage insurance on a conventional loan with less than 20% down. It is removable as you approach 20% equity, so it is temporary.
Rate Lock
A lender’s guarantee to hold your interest rate for a set period while your loan closes, protecting you from market movement.
Recast
Re-amortizing your loan after a large principal payment to lower the monthly payment, while keeping your existing rate and payoff date. It does not change your rate.
Refinance
Replacing your existing mortgage with a new one — to lower the rate, shorten the term, leave an adjustable loan, or take cash out.
Reserves
Liquid savings left after your down payment and closing costs, measured in months of housing payments. They cushion you and strengthen your file.
Reverse Mortgage
A loan for homeowners 62 and older that converts equity to cash with no required monthly payment, repaid when the borrower sells, moves out, or passes away.
Seller Concession
An agreement for the seller to pay part of the buyer’s closing costs, within program limits — a common, negotiable term that reduces cash needed at closing.
Term
The length of a loan, commonly 15 or 30 years. A shorter term means higher payments but far less total interest and faster ownership.
Title
Legal ownership of a property. A title search confirms a clean chain of ownership, and title insurance protects against hidden defects in it.
Underwriting
The lender’s evaluation of your capacity, credit, collateral and capital to decide whether — and on what terms — to approve the loan.
URLA (Form 1003)
The Uniform Residential Loan Application — the standard application that captures your income, assets, debts and the property to formally begin your loan.
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs for eligible service members and veterans, offering 0% down and no monthly mortgage insurance.
Warrantable Condo
A condominium that meets agency standards for financing. Projects that do not are ‘non-warrantable’ and need specialized loans.