Mortgage terminology can be confusing for a first-time homebuyer or a homeowner looking to refinance a current loan. From mortgage terms like amortization to PITI, chances are you’ll come across a term that you may not understand. Don’t worry, we’ve all been there. This mortgage dictionary explains the terms you’re most likely to see.
But, the more you know about mortgages, the better your chance at finding the best, most affordable home loan for you. To educate yourself (and potentially save some money), here are the most commonly used mortgage terms explained.
Number | A-C | D-F | G-I | J-L | M-O | P-R | S-T | U-Z
Mortgage Dictionary Terms and Definitions
Numbers
10/15/30-Year Fixed Mortgage: A fixed-rate home loan with terms lasting 10, 15, or 30 years, depending on which option you choose. The most common loan term is a 30-year fixed rate mortgage.
203k Loan: An FHA loan where financing goes toward buying a house and needed home improvements.
3/1 ARM: An adjustable-rate mortgage where the mortgage rate stays fixed for the first three years of the loan. Mortgage rates adjust annually after the third year.
5/1 ARM: An adjustable-rate mortgage that has a fixed mortgage rate for the first five years of the loan term. After, the mortgage rate adjusts annually for the remainder of the loan.
80/10/10, 80/15/5: See Piggyback Loan.
100% Loan: A loan that requires no down payment. VA and USDA loans are examples of 100% loans.
A-C
Adjustable-Rate Mortgage: Also known as an ARM, adjustable-rate mortgages have a variable interest rate. This means that the mortgage rate stays fixed for a set amount of time, then adjusts on a regular basis for the remainder of the loan.
Alt-A Mortgage: A historical loan category from before 2008 that fell somewhere in between “prime” and “subprime” in terms of risk. Alt-A homebuyers generally had higher loan-to-value (LTV) ratios, less income documentation, average credit scores, and additional properties.
Amortization: The way you pay off a loan one month at a time. With a mortgage, the principal amount paid each month increases, while the interest paid decreases. In other words, at the beginning of the loan, most of your payment is interest. At the end, the payment is mostly principal.
Annual Percentage Rate (APR): This is the rate that shows the true cost of borrowing. It factors in the interest rate of your loan, plus all the costs associated with obtaining the loan. Comparing APRs from various lenders is a useful way to see whose offer is best.
Appraisal: An evaluation of a home to determine its value.
Assumption: When one person or party takes on (assumes) an existing mortgage.
Average Prime Offer Rate (APOR): An annual percentage rate based on average rates offered to borrowers with strong credit, published weekly by federal regulators. Lenders compare a loan’s APR with the APOR to see whether the loan counts as “higher-priced.”
Balloon Mortgage to Buy-Down
Balloon Mortgage: A mortgage loan with lower monthly payments and a large sum due at the end of the loan period, as opposed to higher monthly payments with no money due at the end of the loan term.
Blanket Mortgage: A mortgage used to purchase more than one property. Buyers commonly use these for buying multiple pieces of land to develop, or for purchasing existing properties with the intent to rent.
Bridge Loan: A temporary loan used to “bridge” the time gap when you need financing but funds are not yet available. Homeowners commonly use these when they want to buy a new property but first need to sell their current property.
Buy-Down: A buy-down is when you pay your lender a premium in order to lower your mortgage rate.
Caps to Closing Disclosure
Caps: With ARMs, a cap is a limit to how much your mortgage rate can change. This protects homeowners from experiencing a sudden spike in mortgage payments.
Cash-Out Refinance: A refinance loan where the homeowner takes equity out of their home in the form of cash.
Certificate of Reasonable Value (CRV): The older name for the VA’s Notice of Value (NOV). After the VA home appraisal, the NOV states the home’s reasonable value. This value affects the size of the loan a VA homebuyer will be able to secure.
Closing: The last step of the homebuying process. This is where you sign your loan documents, release funds from escrow, and receive the keys to your new house.
Closing Costs: All the fees associated with the loan and purchasing the property. For instance, loan origination, title, escrow, appraisal, recording, and upfront mortgage insurance are all closing costs. You pay most closing costs out-of-pocket at closing unless the seller has agreed to pay them for you.
Closing Disclosure: The final cost form for your mortgage. Your lender must deliver it at least three business days before closing. It lists your final loan terms and closing costs, so compare it with your Loan Estimate.
Conforming Loan to Credit Score
Conforming Loan: A mortgage that meets the standards set by Fannie Mae and Freddie Mac, including the loan limit ($832,750 in 2026 in most areas). A conventional loan is any loan not insured by the government, so jumbo loans are conventional but not conforming.
Construction Loan: A short-term loan used to secure funding to build a home. These generally have higher interest rates, and borrowers often refinance them once the home is complete.
Contingency: This is basically an “out” written into your purchase contract. If conditions of the contingency are not met, you can back out of the transaction and keep your earnest money.
Example: An inspection contingency is common. If the inspection is not to your standards, then you can cancel your offer with no penalty.
Conventional Mortgage: A mortgage loan that the government doesn’t guarantee or insure. A conventional loan that meets Fannie Mae and Freddie Mac standards and limits is a conforming loan.
Credit Report: A summary of all your debts. Your credit report lists your creditors, balances, available credit, any late payments, and a number of other factors. Lenders review your credit report when considering you for a loan. You can check your credit report for free every week from each of the three nationwide credit bureaus at AnnualCreditReport.com. Federal law also guarantees one free report every 12 months from each bureau.
Credit Score: Your credit history and risk assessment expressed by a number. The three major credit bureaus (Experian, Equifax, and Transunion) have proprietary algorithms to determine your number. The lender uses your middle score for qualification.
- Example: Your scores from each bureau are 680, 690, and 700. The lender will use 690.
D-F
Debt-to-Income (DTI) Ratio: The percentage of your expenses compared to your gross income. The front-end ratio (or front ratio) is your proposed housing payment compared to your income. Your back-end ratio (or back ratio) is all your monthly debt payments, plus proposed housing payment compared to your income.
- Example: Your income before taxes is $5,000 per month, and your future house payment is $1,600 per month. You have a student loan payment of $100, a car payment of $200, and a credit card payment of $50. Your DTI is 39%. Your front-end ratio is 32% ($1,600 / $5,000) and your back-end ratio is 39% ($1,950 / $5,000). Another way of expressing your DTI is 32/39.
Deed-in-Lieu of Foreclosure: The borrower deeds the property to the lender in order to avoid foreclosure proceedings.
Deed Of Trust: The deed of trust acts as your loan’s security and becomes part of the public records. You often sign the deed of trust at closing.
Delinquency: When you don’t make a monthly payment on your mortgage. Continued delinquency can potentially lead to foreclosure.
Discount Point: This is similar to an origination point, but you pay it to lower your interest rate.
Down Payment: The amount you pay toward the purchase price of your home.
Earnest Money to Escrow Shortage
Earnest Money: This is the money you pay upfront to show the seller you are serious, or “earnest” about buying their home. The escrow company holds the money and applies it toward down payment and/or closing costs when the transaction closes. Usually earnest money is between 1% and 3% of the purchase price. You can lose your earnest money, but only by backing out of the purchase contract without the appropriate contingency.
Escrow: The company that holds and accepts money from all parties involved in the transaction, then distributes it appropriately at closing. You often sign final loan paperwork at the escrow office.
Escrow Shortage: A shortfall in your impound (escrow) account, which holds money for your property taxes and homeowners insurance. It usually happens when those bills go up. Your servicer may ask you to pay the shortage in a lump sum or add it to your monthly payment over time. See Impound Account.
Fannie Mae to Foreclosure
Fannie Mae: The Federal National Mortgage Association, often called Fannie Mae, is a government-sponsored enterprise that backs mortgages such as Conventional 97 and HomeReady.
Freddie Mac: The Federal Home Loan Mortgage Corporation, or Freddie Mac, is a government-sponsored enterprise that backs mortgages, like the Home Possible Advantage.
FHA Loan: A mortgage backed by the Federal Housing Administration. FHA loans were created to help lower income homebuyers afford homes.
First Mortgage: The primary mortgage on a home. Usually this term is only used when a borrower also has a second mortgage.
Fixed-rate Mortgage: A loan where the interest rate remains the same for the life of the mortgage.
Float: What happens before you lock your interest rate. When you float your interest rate, you actively watch interest rate fluctuations and wait for a time to lock. If you float your rate, your future monthly mortgage payment could go up if rates go up. Also see Lock.
Foreclosure: When someone fails to make mortgage payments, banks sell the property elsewhere. Foreclosure is the name for this legal process from start to finish.
G-I
Gift Money: The money you receive from an eligible source (family member, non-profit, etc.) to apply to use as a down payment. You can use gift money on any type of loan, but each loan has its own restrictions.
HARP Loan: A refinance program that helps homeowners with negative equity in their home. The program expired Dec. 31, 2018.
Hazard Insurance: See Homeowners Insurance.
Homeowners Association (HOA): The organization that creates and maintains the bylaws and rules for a specific housing development, such as a Planned Unit Development (PUD) or condominium project. Each homeowner within the community must pay dues to the HOA, usually monthly or yearly.
Homeowners Insurance: The insurance policy that insures the home you’re buying in the case of fire or other hazards.
HOA/HOA Dues: See Homeowners Association.
Home Equity to Investment Property
Home Equity: The total value of the property minus the amount currently owed. A $400,000 home with $300,000 remaining on the mortgage has earned $100,000 in home equity.
Home Equity Line of Credit (HELOC): A mortgage loan that is backed by the current equity in your home. Essentially, you can take money out of your home equity, but will need to repay it plus interest.
HUD/HUD1: A legacy settlement statement. The Closing Disclosure replaced the HUD-1 for most mortgages in 2015. See Closing Disclosure.
Impound Account: An account set up by a mortgage company to hold your tax and insurance payments.
Index: Rate averages that determine the interest rate of an ARM after the initial fixed period. See also ARM and Margin.
Interest-Only Mortgage: A mortgage where the homebuyer only pays interest and not principal for a fixed term. Once principal payments begin, the monthly payment will increase, sometimes significantly.
Investment Property: Property you own but don’t occupy, instead renting it out to generate income or preparing it to sell.
J-L
Jumbo Loan: A loan that exceeds the conforming loan limit set by the Federal Housing Finance Agency (FHFA), so Fannie Mae and Freddie Mac cannot buy it. Rather, private banks issue and approve jumbo loans.
Lender Credit: A credit given to the homebuyer from the lender in exchange for accepting a higher mortgage rate.
Lender-Paid Mortgage Insurance: Mortgage insurance that the lender covers in exchange for a higher mortgage rate.
Letter of Explanation: A document that provides the mortgage underwriter with extra information they may need for the mortgage to get approved.
Lien: The bank’s claim on a property until the borrower pays off the debt (aka the mortgage loan).
Loan Estimate: A three-page form your lender must deliver within three business days of your application. It details the loan terms, the APR, whether the loan has a prepayment penalty, and the estimated closing costs. It replaced the older Good Faith Estimate and Truth in Lending forms. Compare it with your Closing Disclosure to make sure the fees didn’t change dramatically.
Loan Officer: Acts as the liaison between the homebuyer and the bank. Their job is to ensure completion of the loan.
Loan Originator: Another term for a loan officer.
Loan Processor: The person who prepares and organizes the necessary files for the mortgage.
Loan-to-Value (LTV) Ratio: The percentage of your loan amount compared to the home’s value and/or purchase price.
- Example: If you put 5% down on a $200,000 home, then your loan amount is $190,000 and your LTV is 95%.
Lock: The act of securing an interest rate on a loan. After a lock, future rate fluctuations in the market won’t affect the interest rate on your loan. See also Float.
M-O
Margin: The amount of extra interest the lender charges when an ARM starts adjusting. The lender adds the margin and the index to determine the rate you pay when the ARM’s fixed period ends.
Mortgage: A loan on a property for which the payments will retire the debt at the end of the loan term.
Mortgage Banker/Mortgage Lender: Unlike a mortgage broker, this company actually lends the money for a mortgage loan, as well as takes the borrower’s application and processes the loan. See Mortgage Broker.
Mortgage Broker: A company or individual that takes a loan application then selects a bank to fund the loan. The broker sends the loan to a bank, and the bank lends the money. The bank pays the mortgage broker for sending the loan.
Mortgage Discount Points: Homebuyers can lower their mortgage rate at closing by paying mortgage discount points.
Mortgage Insurance: Most mortgages that don’t have a large enough down payment require loan insurance. VA loans do not require mortgage insurance, since the VA backs them. In some cases, mortgage insurance comes off the loan once you earn a specific amount of equity.
Mortgage Insurance Premium (MIP): The mortgage insurance premium on an FHA loan. FHA loans charge an upfront premium of 1.75% of the loan amount and an annual premium added to your monthly payment.
Mortgage Payment to Origination Point
Mortgage Payment: The monthly payment you make on your home loan, which includes principal, interest, taxes, and insurance. See PITI.
Mortgage Principal: The amount of the loan you have to pay back. It doesn’t include interest.
Mortgage Rate: The interest rate for your home loan.
Mortgage Rate Lock: Choosing a mortgage rate and locking it in so it won’t change. See Lock.
Mortgage Term: The length, or life, of the mortgage. Common loan terms are 15 or 30 years.
Mortgage Underwriter: Someone who works for the lender that decides whether to approve your home loan.
Origination Point: The fee you pay the lender for approving the loan. A point is equal to 1% of the loan amount, and you pay it at closing with your other closing costs. The seller may also pay it if you negotiate it into the purchase contract.
P-R
Pre-approval: This occurs after you submit a mortgage application and lets you know exactly how large a loan you qualify for.
Pre-qualification: The first step in the mortgage process where you supply information on your income, credit score, and debt to get a general idea of how large a loan you could qualify for.
P&I: The principal and interest payment on a home loan not including taxes, insurance, or HOA dues (if applicable).
Piggyback Loan: When a borrower opens a first and second mortgage simultaneously when buying a home, usually to avoid private mortgage insurance. See 80/10/10.
- Example: You buy a home for $200,000. You open a first mortgage for $160,000 and a second mortgage for $20,000, and put $20,000 down. Since your first mortgage is at 80% loan-to-value, you don’t need mortgage insurance.
PITI: This represents the homebuyer’s entire monthly payment. It stands for principal, interest, taxes, and insurance.
Prepayment Penalty: The penalty a borrower must pay if they pay off the loan within a short period of time. FHA, VA, USDA, and conventional mortgages typically do not have a prepayment penalty.
Private Mortgage Insurance (PMI): The insurance policy that covers your mortgage lender in case you default on the loan. If you put less than 20% down on a conventional mortgage, you usually pay for this policy monthly.
Processing: The loan processor puts your loan file together so that it is complete prior to the underwriting process. See Underwriting.
Reverse Mortgage: A loan where you can tap into your home equity without adding to monthly payments. You must be 62 years old or older to be eligible.
S-T
Second Mortgage: A lien that is second priority to a first mortgage on a home. Second mortgages usually have higher interest rates, since they are higher-risk loans. Borrowers often use them to avoid private mortgage insurance. See Piggyback Loan.
Short Sale: In lieu of a foreclosure the homeowner sells their home for less than the amount left on the mortgage.
Stated Income Mortgage: Bank-statement and other non-QM loans verify your income from bank statements or other documents. A stated-income loan with no income verification does not qualify as a Qualified Mortgage.
Streamline Refinance: A refinance that requires less documentation than other refinance options. You cannot take equity out as cash with a streamline refinance. For example, an FHA streamline refinance limits cash back to $500 at closing. See Cash-out Refinance.
Term: The length of the loan, expressed in years or months.
Title & Title Insurance: The title is the document that shows ownership history, the outstanding debts tied to the property, and current ownership. Title insurance protects you and the lender against any previous owner who claims rights to the property.
U-Z
Underwriting: The process of verifying that the borrower’s documentation adheres to a specific loan program’s guidelines.
USDA Loan: The US Department of Agriculture (USDA) loan, or Rural Housing Mortgage, is a loan with no down payment requirement. Homes must be in eligible rural areas, and borrowers must meet income limits.
VA Mortgage: The Veterans Affairs mortgage is a no-money down loan available to eligible veterans, service members, National Guard and Reserve members, and some surviving spouses. The VA backs the loan, and it does not require mortgage insurance.
Zero-down Mortgage: A mortgage that doesn’t require a down payment at closing.
