Homebuyers

Mortgage Terminology Explained: A Comprehensive Home Loan Dictionary

Whether you’re a first-time homebuyer or a seasoned homeowner, the home loan process can be both exciting—and confusing. There’s a maze of acronyms, abbreviations, and various other jargon that may seem like a foreign language.

Regardless of where you are in your home loan journey, it’s important to understand mortgage terminology. This can help you to understand what lenders are looking for in borrowers and what you’re signing up for so you can make informed decisions about your financial future.

Luckily, we’re here to help. In this guide, we’ll break down the most common mortgage terms and definitions, helping you navigate the mortgage process like a seasoned home loan professional.

Here’s a comprehensive list of mortgage terms and their definitions:

Adjustable-Rate Mortgage (ARM): A mortgage that typically offers lower mortgage interest rates for a fixed time period, usually five, seven, or 10 years. Then the rate changes periodically based on current rates, up to a certain cap. This means your monthly payment could go up or down.

Annual Percentage Rate (APR): The total cost of the loan, including interest and fees, expressed as a yearly rate. This helps you compare different loan offers.

Amortization: The process of paying off a mortgage through regular payments that cover both the interest you pay on a loan and the principal (the amount you borrowed.) Over time, the amount owed decreases.

Amortization schedule: A detailed plan that shows how mortgage payments are divided between interest and principal over time.

Appraisal: An independent evaluation of a property's value, typically required by lenders to ensure the property is not over or undervalued. It helps determine the property's market value and ensures that the sale price is reasonable.Top of Form

Basis point: A unit of measurement used to describe small changes in mortgage interest rates. One basis point equals one 100th of 1%, or 0.01%. For example, if an interest rate falls by 25 basis points, it decreases 0.25%.

Buydown: A way to lower the initial mortgage interest rate on a mortgage. In some cases, the lender or the borrower pays an upfront fee that lowers the interest rate. This results in lower monthly mortgage payments in the first few years of the loan.

Cash-out refinance: A refinance that allows you to tap into your home's equity by replacing your current mortgage with a new, larger one. You then receive the difference in cash. This can be a useful way to access funds for home improvements, debt consolidation, or other financial needs.

Closing costs: Fees associated with finalizing a mortgage, such as title insurance, appraisal fees, and attorney fees. These costs are typically paid at closing.

Collateral: An asset, such as a home, that is used to secure a loan. If the borrower defaults on the loan by stopping making payments, the lender can seize the collateral to recoup their losses.

Conforming loan: A mortgage that meets the lending standards set by government-sponsored enterprises like Fannie Mae and Freddie Mac. This can result in lower interest rates and better terms for borrowers.

Contingency: A condition that must be met before a real estate transaction can be completed, such as securing a mortgage selling an existing home. This allows buyers or sellers to back out if the condition is not met. It provides protection for both parties, helping ensure a smooth transaction.

Conventional loan: This is the most popular home loan. The mortgage is not insured by or guaranteed by the government through agencies like the FHA, VA, or USDA. Conventional loans are often sold to Fannie Mae or Freddie Mac.

Credit report: A record of your credit history, including your past borrowing and if you have repaid your debt on time. A credit report is used by lenders to assess your creditworthiness.

Credit score: A three-digit number that represents your creditworthiness. Lenders use it to determine the risk of lending to you.

Debt consolidation: Combining multiple debts into a single loan, often with a lower interest rate and monthly payment.

Debt-to-Income Ratio (DTI): A calculation of your monthly debt payments compared to your gross (before taxes) income. This is represented as a percentage and used to assess your creditworthiness. For example, lenders typically consider a DTI of 36% or less to be ideal for a home loan. That means that your total monthly debt payments shouldn't exceed 36% of your gross income. However, in some instances, Conventional loans permit up to 50% and FHA loans may go up to 55%.

Discount point: These are fees paid to the lender at closing in exchange for a lower interest rate.

Down payment: The initial amount paid when purchasing a home, usually a percentage of the purchase price. A larger down payment can help you qualify for more favorable loan terms, lower mortgage insurance costs, and can result in smaller monthly mortgage payments.

Earnest money: A deposit made by a homebuyer when they make an offer on a property. This demonstrates their commitment to purchasing the property. It is typically held in escrow until the sale is completed. 

Equity: The difference between the market value of your home and the outstanding mortgage balance. In simple terms, it’s the percentage of the property owned by the homeowner. As you pay down your mortgage and property values rise, you build equity.

Escrow: An account held by the lender to pay property taxes and insurance on your behalf. A portion of your monthly mortgage payment goes into escrow.

Fannie Mae: A government-sponsored enterprise that purchases and securitizes Conventional mortgages. This allows lenders to get their loans off the books, freeing up money they can use to make new loans. Fannie Mae and Freddie Mac back most of the mortgages in the U.S. They also help set lending standards due to their position in the market.

Federal Housing Administration (FHA): A division of the Department of Housing and Urban Development. The government agency insures mortgages, making it easier for people to qualify for home loans, especially first-time homebuyers, those with lower credit scores, or smaller down payments. FHA also sets standards for mortgages.

FHA loan: A mortgage insured by the Federal Housing Administration, often used by first-time homebuyers or those with lower credit scores. These loans are popular due to their low down payment and more flexible credit score requirements.

FICO score: A credit score developed by Fair Isaac Corporation. A credit score attempts to condense a borrower’s credit history in a single number.

Fixed-rate mortgage: A mortgage with an interest rate that remains the same for the entire length of the loan. This provides predictable monthly payments and stability for homeowners. The most popular fixed-rate mortgage is a 30-year loan, although some prefer a 15-year loan due to its lower interest rates and shorter loan term.

Foreclosure: The process by which a lender takes possession of a home when the borrower fails to make mortgage payments.

Freddie Mac: A government-sponsored enterprise that purchases and securitizes Conventional mortgages. This allows lenders to get their loans off the books, freeing up money they can use to make new loans. Freddie Mac and Fannie Mae back most of the mortgages in the U.S. They also help set lending standards due to their position in the market.

Home Equity Line of Credit (HELOC): A type of loan that allows you to borrow money using the equity in your home as collateral. This provides homeowners with a revolving credit line they can draw upon as needed. This can be a useful way to access funds for home improvements, debt consolidation, or other financial needs.

Home equity loan: Sometimes called a second mortgage, a home equity loan allows you to borrow a lump sum of money using the equity in your home as collateral. The loan provides a fixed amount of funds that can be used for various expenses. This type of loan is often used for home improvements, debt consolidation, or other major expenses.

Interest: The cost of borrowing money from a lender. It is typically referred to as a percentage of the overall loan amount and paid to the lender as a fee for using their money. Basically, it’s the price a homebuyer pays to be able to borrow money to buy a home.

Interest rate: The percentage of the loan amount charged as interest by the lender. A lower interest rate can save you money over the life of the loan.

Jumbo loan: A large mortgage that exceeds the conforming loan limits set by government-sponsored enterprises, Fannie Mae and Freddie Mac. These loans are typically used for luxury properties, high-end homes, or those in pricier markets. They also tend to require a stronger credit profile and a larger down payment than other loans.

Loan-to-Value Ratio (LTV): A calculation that compares the amount borrowed to the value of the property. This is expressed as a percentage and is calculated in relation to the down payment provided to the borrower. For example, if a borrower provides a 20% down payment, then the LTV ratio on their loan would be 80%. A lower LTV ratio generally means a lower risk for the lender and may result in better loan terms for the borrower.Top of Form

Lock: An agreement between a lender and borrower that guarantees a specific interest rate for a certain period of time. This protects the borrower from potential rate increases while their loan is being processed. 

Mortgage insurance: Insurance that protects the lender in case a borrower stops paying off their loan. This is often required for Conventional loans where homebuyers put down less than 20% of the sale price. It helps lenders manage risk and makes it easier for borrowers to qualify for a mortgage. Borrowers typically pay a mortgage insurance fee as part of their monthly mortgage payment.

Mortgage rate: The interest rate charged on a mortgage loan, determining how much the borrower will pay in addition to the borrowed amount over the life of the loan. It's a key factor in deciding the total cost of the loan and monthly payments.

Mortgage servicer: An organization that collects principal and interest payments from borrowers and manages borrower escrow accounts. In some cases, the lender also acts as the servicer.

Mortgage servicing: The administration of a home loan, including collecting monthly payments, handling customer inquiries, and managing escrow accounts.

Non-QM loan: A mortgage that doesn't meet standard Qualified Mortgage requirements, often used by borrowers with unique financial situations or non-traditional income sources. These are popular with entrepreneurs, freelance workers, and small business owners.

Origination fee: A fee charged by the lender for processing the mortgage application. It’s usually paid as part of the closing costs.

Preapproval: A letter from a lender stating the amount they're willing to lend you based on a thorough examination of your financial information. It helps you understand your budget and shows sellers that you are a serious buyer, increasing your chances of having your offer accepted.

Prequalification: An initial estimate from a lender of how much you may be able to borrow, based on a brief review of your financial information. It's not a guarantee of a loan, but rather a preliminary assessment that can help guide your home search.

Prepayment penalty: A fee charged by some lenders when a borrower pays off their mortgage early, either by refinancing or selling the home.

Principal: The amount borrowed on a loan, excluding interest. As you make mortgage payments, the principal balance decreases.

Private mortgage insurance (PMI): Insurance that protects the lender in case you default on the loan, often required for conventional loans with low down payments. This is typically paid monthly by the borrower as part of their mortgage payment.

Refinance: Replacing an existing mortgage with a new one, often to take advantage of lower interest rates, change the loan terms, or tap into home equity. This can help homeowners lower monthly payments, switch from an adjustable-rate to a fixed-rate loan, or access cash for other needs.Top of Form

Reverse mortgage: A special type of loan for homeowners age 62 and older, allowing them to convert part of their home equity into cash. This can be particularly useful for retirees looking to supplement their income and manage their finances more comfortably. 

Title: A document that designates legal ownership of a property, representing the rights and interests a homeowner has in their home. It confirms that they are the rightful owner and is typically verified during the homebuying process to ensure a smooth transfer of ownership.

Title insurance: Protects homeowners and lenders from potential risks and losses associated with the property's title, such as errors in public records or unknown heirs. It provides peace of mind and financial protection in case any title issues arise after the purchase of a home.

Underwriting: The process that a lender uses to evaluate a borrower’s creditworthiness and financial situation to determine whether to approve their mortgage application. It involves reviewing credit history, income, and other factors to assess the risk of lending.

USDA loan: A mortgage guaranteed by the U.S. Department of Agriculture, helping low-to-moderate-income borrowers buy homes in rural areas. These loans offer favorable terms, such as no down payment requirements, and promotes affordable housing in eligible rural areas.

U.S. Department of Veterans Affairs (VA): An agency of the federal government that provides services to veterans and their families. This includes guaranteeing low-or-no-down payment mortgages to eligible veterans and their families.

VA loan: A mortgage guaranteed by the U.S. Department of Veterans Affairs that is offered to eligible veterans, active-duty personnel, and surviving spouses. VA loans offer lower interest rates and no down payment requirement. The loans are designed to help those who have served or are serving in the military achieve homeownership.