Every mortgage term defined in plain English — from ARM and amortization to USDA and underwriting. The comprehensive mortgage dictionary for homebuyers and homeowners.
The most comprehensive mortgage glossary on the web — 61 terms covering conventional loans, FHA, VA, USDA, refinancing, underwriting, and more. Click any letter to jump directly to terms beginning with that letter.
A mortgage with an interest rate that changes periodically based on a financial index, after an initial fixed period. ARMs are named by their fixed period and adjustment frequency: a 5/1 ARM is fixed for 5 years then adjusts annually.
The process of gradually paying off a loan through regular payments that cover both principal and interest. Early payments are mostly interest; later payments shift toward principal.
The total yearly cost of a mortgage expressed as a percentage, including the interest rate, points, mortgage insurance, and some fees. APR is always equal to or higher than the interest rate.
An independent estimate of a property's market value, conducted by a licensed appraiser. Required by lenders to ensure the property is worth at least the loan amount.
A mortgage that can be transferred from the seller to the buyer. VA and FHA loans are assumable; most conventional loans are not. When rates are rising, assuming a low-rate mortgage can be extremely valuable.
A loan with fixed payments for a set period (5–10 years), after which the entire remaining balance is due in a single 'balloon' payment. Risky unless you plan to sell or refinance before the balloon date.
One-hundredth of one percent (0.01%). Mortgage rates and bond yields are commonly quoted in basis points. A 25-basis-point rate increase equals 0.25%.
A short-term loan used to finance the purchase of a new home while waiting for the sale of an existing home. Higher rates and fees; typically 6–12 month terms.
Refinancing for more than the current mortgage balance and taking the difference as cash. The maximum cash-out is typically limited to 80% LTV (keeping 20% equity).
A document from the VA that proves a veteran's or service member's eligibility for VA loan benefits. Can be obtained online through the VA portal in minutes.
Lender notification that all underwriting conditions have been met and the loan is approved to proceed to closing. Typically issued 1–3 days before closing.
Fees and expenses paid at or before closing, typically 2–5% of the loan amount. Includes lender fees, title fees, escrow fees, prepaid taxes and insurance, and recording fees.
A five-page document provided to borrowers at least 3 business days before closing that shows final loan terms, monthly payment, and all closing costs.
A mortgage that meets Fannie Mae/Freddie Mac guidelines, including loan limits ($766,550 in most areas for 2024). Conforming loans are eligible for secondary market sale.
A short-term loan that finances the building of a home. Interest is paid on draws during construction; the loan converts to a permanent mortgage upon completion.
Any mortgage not backed by a government agency. Can be conforming (meets GSE guidelines) or non-conforming/jumbo (exceeds conforming limits).
A numerical representation of credit risk, typically ranging from 300–850. FICO Score 2, 4, and 5 are the specific models used in mortgage underwriting.
Monthly debt payments divided by gross monthly income. Lenders evaluate front-end DTI (housing costs only) and back-end DTI (all debts). Most loans cap back-end DTI at 43–50%.
In many states, a three-party mortgage document between borrower, lender, and trustee. The trustee holds legal title until the loan is paid off.
Prepaid interest used to permanently lower the mortgage interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%. Also called 'buying down the rate.'
The upfront cash payment toward the purchase price, not financed. The difference between purchase price and loan amount.
Good-faith deposit made by the buyer when an offer is accepted, typically 1–3% of purchase price. Applied to down payment at closing; may be forfeited if buyer backs out without contingency protection.
The difference between a home's current market value and the outstanding mortgage balance. Equity = Market Value − Mortgage Balance.
An account managed by the lender (or a third party) that holds monthly property tax and insurance contributions. Lender pays tax and insurance bills from this account.
A mortgage insured by the Federal Housing Administration. Allows lower credit scores (580+) and down payments (3.5%). Requires mortgage insurance premiums (MIP) for the life of most loans.
A mortgage with an interest rate that never changes for the life of the loan. Monthly principal and interest payments remain constant.
Required by lenders for homes in FEMA-designated Special Flood Hazard Areas (SFHA). Not covered by standard homeowner's insurance.
Pre-2015 disclosure of estimated mortgage costs. Replaced by the Loan Estimate under TRID (TILA-RESPA Integrated Disclosure) rules.
A revolving credit line secured by home equity. Draw period (typically 10 years) followed by repayment period (typically 20 years). Variable rate.
A fixed-rate lump-sum loan secured by home equity. Sometimes called a 'second mortgage.' Fixed payment; must be repaid regardless of market conditions.
An independent visual examination of a home's condition by a licensed inspector. Not required by lenders but strongly recommended for buyers.
Property insurance required by lenders covering the structure and personal liability. Typically costs $800–$2,000/year.
U.S. Department of Housing and Urban Development. Oversees FHA, USDA loans (some programs), fair housing laws, and affordable housing initiatives.
The financial benchmark an ARM rate is tied to. SOFR (Secured Overnight Financing Rate) replaced LIBOR as the primary ARM index in 2023.
A mortgage exceeding conforming loan limits ($766,550 in most counties for 2024). Not eligible for GSE purchase; requires stricter credit and larger down payments.
A standardized three-page disclosure provided within 3 business days of application, showing loan terms, estimated payment, and estimated closing costs.
Loan amount divided by appraised property value, expressed as a percentage. LTV of 80% means the loan is 80% of the home's value.
The fixed percentage added to the ARM index to determine the fully-indexed rate. Typical margins: 2.25%–3.5%. Set at origination and doesn't change.
FHA's version of mortgage insurance. Includes an upfront premium (1.75%) and annual premium (0.55% for most 30-year loans) paid monthly.
The legal document a borrower signs promising to repay the loan. Contains the interest rate, payment schedule, and terms.
A mortgage that doesn't meet Fannie Mae/Freddie Mac guidelines — most commonly because it exceeds conforming loan limits (jumbo loan).
Fee charged by a lender to process a mortgage application and create the loan. Typically 0.5–1.5% of the loan amount.
Abbreviation for Principal, Interest, Taxes, and Insurance — the four components of a complete monthly mortgage payment.
Insurance required on conventional loans when the down payment is less than 20%. Protects the lender; costs 0.5–1.5% of the loan annually. Cancels at 80% LTV.
See Discount Points. One point = 1% of loan amount. Can refer to both origination points (fees) and discount points (prepaid interest to lower rate).
Formal lender review of credit, income, and assets resulting in a conditional commitment to lend. Stronger than pre-qualification; involves a hard credit pull.
Informal estimate of how much you might be able to borrow based on self-reported information. No hard credit pull; not a commitment to lend.
The amount of the loan balance outstanding. The portion of each payment that reduces the balance (as opposed to interest).
See PMI above.
A lender guarantee that holds an interest rate for a specific period (typically 30–60 days) while your loan is processed. Protects against rate increases during processing.
Replacing an existing mortgage with a new one. Common reasons: lower rate, change term, switch loan type, or access equity (cash-out).
The money left after all monthly debt obligations and housing expenses are paid. Used by VA loan underwriters to assess a borrower's ability to sustain homeownership.
Any mortgage in addition to the primary (first) mortgage. Home equity loans and HELOCs are second mortgages. Higher rate due to subordinate lien position.
Funds paid by the seller toward the buyer's closing costs. Limits vary by loan type: 3–6% for conventional, 6% for FHA, 4% for VA.
Legal ownership of real property, evidenced by a deed recorded in public records.
Protects against past title defects (unpaid liens, ownership disputes, forgery). Lender's title insurance is required; owner's title insurance is recommended.
Research of public records to verify a property's legal ownership and identify any liens, easements, or encumbrances.
The lender's process of evaluating a borrower's risk and the property before approving or denying a loan. Reviews income, assets, credit, employment, and property value.
U.S. Department of Agriculture rural development mortgage. 0% down payment for eligible rural/suburban areas. Income limits apply.
Veterans Affairs-guaranteed mortgage for eligible service members, veterans, and surviving spouses. 0% down payment, no PMI, competitive rates.
A type of seller financing where the seller maintains their original mortgage and creates a new mortgage at a higher rate, 'wrapping around' the existing loan.